Each year, Booz & Company examines the top global R&D investors to decipher the reasons behind their continual success in innovation. What’s their formula? They excel in the crucial areas, rather than trying to be perfect in all.

What Drives Consistent Innovation in Top Companies?

Why do certain businesses consistently generate and launch innovative and lucrative products and services, while others falter? It’s not tied to the volume of R&D expenditure. Indeed, our yearly Global Innovation 1000 research consistently reveals that there isn’t a meaningful correlation between innovation spending and financial success, whether viewed in terms of overall R&D expenditure or as a percentage of revenue.

The critical factor is a unique blend of expertise, talent, team dynamics, methodologies, and tools—the inherent capabilities—that top innovators employ to drive their creative endeavors. As a result, they can introduce viable products and services to the marketplace. This iteration, the sixth of our Global Innovation 1000 study, dives deep into the capability systems employed by premier innovators. It emphasizes how they harmonize these capabilities with their overarching business objectives. Those innovators reaching this synergy, our research indicates, consistently surpass their competitors across various financial metrics.

This timely assessment of core innovative capabilities becomes even more crucial given current economic conditions. Notably, for the first time in the decade-plus that we’ve monitored global R&D expenditure, we’ve seen a drop: from $521 billion in 2008 to $503 billion in 2009, a decline of 3.5%. The global downturn, having spared the innovation sector in 2008, eventually made its presence felt the following year. This downturn underscores the urgency of judicious R&D expenditure. Our aim is to spotlight essential capabilities for amplifying a firm’s innovative efficacy in both prosperous and challenging times. Furthermore, we emphasize the dividends of concentrating on the select capabilities that provide a competitive edge, ensuring that innovation decisions echo the company’s holistic capability framework and direction.

Innovation Strategies and Core Abilities

In 2007, our annual examination of innovation centered on the unique strategies businesses employ to devise and market their products. We discerned that almost every firm adhered to one of three primary innovation approaches:

1. Need Seekers: They engage with current and prospective customers, designing novel products and services rooted in a profound understanding of the end-user. Their objective is market leadership with fresh offerings.
2. Market Readers: These businesses are vigilant observers of customers and competitors. Their primary thrust is on deriving value from minor changes and banking on validated market trends.
3. Technology Drivers: Guided by their technological prowess, they harness R&D investments to stimulate both revolutionary and evolutionary innovations. Often, their goal is to cater to the latent desires of consumers via technological advancements.

It’s noteworthy that no single strategy consistently outshone the others in ensuring lasting financial excellence. However, companies within each strategic bracket exhibited varying levels of performance. The efficacy of these strategies hinges on how seamlessly a company’s innovation approach aligns with its business blueprint, coupled with the effort channeled into grasping end-user requirements.

Our current research had dual objectives: First, to determine the most pivotal capabilities for each of the three aforementioned strategies. Second, to ascertain if companies centering on these vital capabilities experienced enhanced financial outcomes. Our underlying assumption: Firms that adeptly tailor their innovation capabilities to their distinct innovation strategy—and synchronize them with their holistic business capabilities and objectives—are poised to realize optimal ROI on innovation investments.

Innovation capabilities empower firms to function effectively across the entire R&D spectrum—from ideation and project vetting to product creation and market introduction. We solicited input from this year’s Global Innovation 1000 survey participants regarding the most crucial capabilities for successful innovation. We further analyzed the top-performing quartile within each innovation strategy group to gain deeper insights into the capabilities worth investing in.

Regardless of which innovation pathway they adopted, the triumphant firms all leaned on a foundational set of innovation skills. These encompass understanding customer needs, recognizing emerging technological potentials during ideation, actively engaging customers to validate concepts during development, and collaborating with pilot users during product commercialization.

Besides these shared competencies, the top-performing quartile within each strategic classification leans on unique abilities they deem essential for triumph. The pinnacle of success, we discovered, is reserved for firms emphasizing a select blend of common and specialized skills, tailoring them to bolster their chosen approach.

Insights from the 2009 Innovation Giants

In 2009, the global economic slump finally cast its shadow over the world’s innovation vanguard. After a resilient 2008 where R&D expenditure defied economic challenges, the top 1,000 R&D spenders trimmed their budgets by 3.5%, landing at $503 billion.

Witnessing the inaugural drop in R&D investments in over a decade, the downturn’s brunt was evident. Revenue for these innovation giants nosedived by 11%, transitioning from $15.1 trillion in 2008 to $13.4 trillion in 2009. This rate of decline overshadowed the reduction in R&D budgets, suggesting firms were still prioritizing innovation as a growth catalyst. Relative to the R&D cuts, these firms slashed deeper into administrative expenses and capital expenditures.

But, the R&D cuts weren’t universal. The majority of the reductions were localized to three sectors: automotive, computing & electronics, and industrial sectors. The automotive sector, grappling with its unique challenges in 2009, bore the lion’s share of the R&D cuts. Computing and electronics mirrored similar, albeit less severe, patterns. Amidst this, healthcare, the second-largest spender, bolstered its R&D investments.

Regions hardest hit by the recession recorded the most significant R&D cuts. Japan experienced the steepest plunge, followed by North America and Europe. Contrarily, companies from China and India ramped up their R&D investments.

Notable changes also surfaced in the top 20 R&D spenders. Toyota Motor Corporation, relinquishing its top position, paved the way for pharmaceutical behemoth Roche Holding Ltd. The overall reshuffling highlighted the prominence of healthcare companies in the top echelons of R&D spenders.

In retrospect, the 2009 R&D cutbacks seemed an inevitable outcome of the severe economic conditions. Nevertheless, firms’ reluctance to proportionally trim R&D outlays attests to innovation’s stature as a growth engine. As the economic climate stabilizes, 2010 will serve as a litmus test for companies’ innovative resilience.

Understanding the Need Seekers

The modus operandi of Need Seekers revolves around discerning and addressing customer needs, pioneering market solutions. Key capabilities span ideation where open innovation and profound customer insights merge with a grasp of evolving technologies.

Stanley Black & Decker’s DeWalt division exemplifies this approach. Ground-level research and iterative development processes, marked by continuous customer engagement, underscore its innovation journey.

A Glimpse into Market Readers

Operating more conservatively, Market Readers innovate stepwise, keeping tabs on competitors. Their mission: deliver distinct products timed impeccably. To achieve this, meticulous market readings and collaboration are paramount, as showcased by Visteon and Parker Hannifin Corporation. As markets evolve, these firms must fine-tune their capabilities to navigate diverse terrains successfully.

For Technology Drivers, the journey of innovation starts differently. Their technological strength fuels product creation that sometimes even surprises consumers. The inception or ideation phase is pivotal. Embracing an open-minded approach to innovation, without being tethered by the “in-house only” mindset, is essential. Keeping an ear to the ground for new tech trends further fuels their creative thinking. The famed “70-20-10” rule of Google exemplifies this, allowing their technical wizards the freedom to dream beyond the norm.

Different companies harness varied methodologies. Siemens AG, a tech powerhouse from Germany, allocates 5% of its R&D budget for future-focused planning. This involves crafting detailed technological roadmaps and predicting futuristic trends. Siemens’ methodology has allowed it to venture into fresh territories, like personalized healthcare, tracing back to insights from their innovation nucleus.

Masco Corporation’s approach is more spontaneous. Always on the lookout to exploit fresh tech avenues, a chance encounter with a unique wireless switch technology at a trade fair led to a new line of programmable lighting products, Verve Living Systems, in 2009. “It’s about identifying the problem, then brainstorming solutions,” says Thom Nealssohn of Masco. Success lies in anticipating tomorrow’s problems based on today’s world observations.

Given the technological nature of their offerings, rigorous pilot-user testing and comprehensive product life-cycle management are non-negotiable for these innovators. Masco’s philosophy is that everyone in the supply chain must benefit. Hence, a product’s success is not solely dependent on end-consumer demand; intermediaries like distributors and home builders must also see its value.

A systematic set of capabilities underpins each innovation strategy. Contrasting the sharp focus of top innovators like Apple, Google, Xerox, Visteon, and Siemens, the underperformers spread their efforts thinly across capabilities.

Lower-tier companies, irrespective of their chosen strategy, primarily underscore three capabilities: early consumer insights, potential market evaluation during project choice, and customer engagement during development. Alone, these aren’t enough; they must integrate with unique capabilities, like technology trend awareness and product platform management. Their scattered approach is, perhaps, their Achilles’ heel.

For companies, the real task is to hone their vital capabilities and implement them effectively. Our analysis hints at an underwhelming performance during the product commercialization phase, even if they excel in ideation, project selection, and development. There’s a distinct chasm between the knack for innovating and successfully launching them.

In the commercialization realm, the top tier excel in global product launches and pilot-user programs. Since commercialization inherently bridges multiple functions like manufacturing, logistics, and marketing, its proficiency is crucial. As Xerox’s Hoover emphasizes, the intricacies of product launch processes can make or break the innovation’s value.

Strategizing Beyond Innovation

While focused innovation capabilities propel companies ahead, it’s not the sole success recipe. Commercialization serves as a testament. Innovation, while crucial, is just one facet of a company’s market success strategy. They must shine in realms beyond R&D – manufacturing, logistics, marketing, and HR. Aligning their innovation pursuits with the overarching company strategy is paramount. This equilibrium ensures that their innovation arsenal complements their broader business vision.

Innovation Titans: Who’s Leading the Charge?

The annual Global Innovation 1000 study never ceases to excite, tracking the high-rollers of innovation. This year, we quizzed innovation executives on who they deemed the trailblazers. The survey, which connected with over 450 leaders across 400 companies and 10 industries, aimed to pin down the global top three innovators.

Apple, in no surprise, leads the pack, with an overwhelming 79% of the votes, trailed by Google (49%) and 3M (20%). Apple’s success is a testament that innovation isn’t about splurging on R&D, but how you allocate those funds. Investing only 3.1% of its revenues in R&D, Apple has consistently managed to redefine markets. Its financial feats include a 63% five-year total shareholder return (TSR). Google’s numbers are even more staggering: a 102% five-year TSR and an R&D intensity at 12%. 3M, with its long-standing innovative reputation, has a close to 50% five-year TSR.

Notably, only Toyota, Microsoft, and Samsung made it to both “most innovative” and the top R&D spenders list. When comparing financial metrics, it becomes evident that innovators are not just those who shell out the most but those who make every penny count. Apple, Google, and 3M, for instance, achieve innovation without straining their wallets.

Coherence: The True Mark of Innovation Success

Focusing on capabilities is only half the battle. True success lies in ensuring these capabilities resonate with the overall corporate strategy. When this alignment is achieved, companies witness what we term a “coherence premium”. Our analysis revealed that companies with the highest coherence had margins 22% higher on average than their counterparts. A strong coherence also resulted in a 18% rise in market capitalization growth.

What gives coherence its potency? Focusing on essential capabilities, it enables companies to innovate more effectively while minimizing costs. The stock market, rewarding this coherence, factors it into the company’s share pricing. Apple’s story is illustrative. Its vast resources were once scattered across failed products, but under Steve Jobs’ leadership, it began to prioritize capabilities, culminating in their legendary products.

Beyond Spending: What Really Makes an Innovator

Innovation isn’t just about possessing a certain capability. It’s about knowing what to focus on for stellar performance. Companies must decide which capabilities differentiate them in their market, giving them an edge. This clarity and focus equate to better performance, which is, after all, the endgame of innovation and corporate strategy.

Unraveling the Global Innovation 1000 Methodology

Booz & Company meticulously identified the top 1,000 public companies worldwide in terms of R&D expenditure for 2009. The criteria were simple: their R&D spending details must be public and up to date. This methodology has been consistent for the past five years.

Key metrics, such as sales, gross profit, net profit, R&D expenditures, and market capitalization, were extracted for these companies from 2002 to 2009. Exchange rates were standardized to the 2009 U.S. dollar.

To glean a deeper understanding of the relationship between innovation strategy and capabilities, an online survey was conducted, covering over 450 senior managers and R&D professionals from over 400 global companies. This diverse cohort represented an R&D spending of over US$150 billion, encompassing 40% of the total Global Innovation 1000 R&D expenditure for 2009. The insights garnered were invaluable in associating survey responses with company performance. By normalizing financial performance by industry, we were able to see the effect of capability coherence both within and across companies.

Author profiles:

• Barry Jaruzelski is a partner with Booz & Company in Florham Park, N.J., and is the global leader of the firm’s innovation practice. He has spent more than 20 years working with high-tech and industrial clients on corporate and product strategy, product development efficiency and effectiveness, and the transformation of core innovation processes.
• Kevin Dehoff is a partner with Booz & Company in Florham Park, N.J., and is the global leader of the firm’s engineered products and services business. He has spent nearly 20 years helping clients drive growth and improve innovation performance in areas including research and development, technology management, product planning, and new product development.
• Also contributing to this article were s+b contributing editor Edward H. Baker and Booz & Company Principal Lisa Mitchell.

Resources

1. Barry Jaruzelski and Kevin Dehoff, “Profits Down, Spending Steady: The Global Innovation 1000,” s+b, Winter 2009: Last year’s study showed that most companies were sticking with their innovation programs in the early stages of the recession — and many were boosting spending to compete in the upturn.
2. Barry Jaruzelski and Kevin Dehoff, “Beyond Borders: The Global Innovation 1000,” s+b, Winter 2008: This study revealed for the first time how R&D money is benefiting most parts of the world.
3. Barry Jaruzelski and Kevin Dehoff, “The Customer Connection: The Global Innovation 1000,” s+b, Winter 2007: This study identified the three distinct innovation strategies: Need Seekers, Market Readers, and Technology Drivers.
4. Barry Jaruzelski and Richard Holman, “Innovating through the Downturn: A Memo to the Chief Innovation Officer,” Booz & Company white paper, March 2009 (PDF): How companies can tailor their product and technology initiatives to new market realities and refocus their investments on their core R&D and innovation capabilities.
5. Zia Kahn and Jon Katzenbach, “Are You Killing Enough Ideas?” s+b, Autumn 2009: How companies can improve their innovation performance by getting their formal and informal organizations in sync.
6. Alexander Kandybin, “Which Innovation Efforts Will Pay?” MIT Sloan Management Review, October 1, 2009: How companies can use an incisive analytic tool to gauge their overall R&D effectiveness.
7. Paul Leinwand and Cesare Mainardi, “The Coherence Premium,” Harvard Business Review, June 2010: The power of capabilities-driven strategy.
8. For more thought leadership on this topic, see the s+b website at: www.strategy-business.com/innovation.