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R&D boost

CW looks at Booz & Company's latest report on global R&D spend

India and China, with 3% of the total R&D spend, play a minor but increasingly important role.
India and China, with 3% of the total R&D spend, play a minor but increasingly important role.

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At number 416, Saudi’s SABIC is the only GCC company on the 2012 Global Innovation 1000 listing. CW looks at Booz & Company’s latest report on global R&D spend.

After growing almost 10% for the second consecutive year, total R&D investment among the world’s top innovation spenders continues to grow robustly, according to the 2012 Global Innovation 1000 study. This eighth annual analysis of corporate R&D spending has been released by global management consulting firm Booz & Company.

The study examined the 1,000 public companies that spent the most on R&D in 2011, and found that innovation spending reached an all-time high of $603bn during the year, up from $550bn in 2010. This is an increase of 9.6% over 2010, and is the second consecutive year of growth. The rebound comes after spending dropped 3.5% between 2008 and 2009 during the height of the recession.

“Saudi Arabia’s Saudi Basic Industries Corporation (SABIC) is the only company headquartered in the GCC to make it onto the Global Innovation 1000 list since 2008,” said Chadi Moujaes, partner with Booz & Company.

“This year, SABIC ranked 416th out of the 1,000-strong list of innovative companies, and is one of the world’s top spenders in R&D, outperforming many of its competitors. Moreover, the company’s ranking this year is an improvement over last year’s 471th position.

Total R&D spend by SABIC in 2011 was $219m, a 26% increase from $174m in 2010”. Overall, chemical and energy companies in the Global Innovation 1000 list maintained their R&D spend during the course of the year. Likewise, SABIC’s R&D intensity remained at 0.43% for a second consecutive year.

Booz & Company also surveyed nearly 700 innovation leaders from companies worldwide to determine which companies those leaders see as the most innovative companies in the world.

Apple, Google and 3M topped the list for the third consecutive year. The most innovative companies are seldom the biggest spenders, the study confirms.

When compared to the ten companies that spend the most on R&D, the top ten most innovative companies outperformed across key financial metrics, including revenue growth, market cap growth and profit as a percentage of revenue.

“Consistent with our study findings from previous years, there is no long-term correlation between the amount spent on innovation and an organisation’s overall financial success,” said Barry Jaruzelski, senior partner at Booz & Company, and global leader of the Engineered Products & Services practice.

He also noted that “what really matters is not the amount spent, but how those R&D funds are invested in talent, processes and tools.”

“R&D spending does not ensure increased financial gains, nor does it guarantee innovation success,” added John Loehr, a partner at Booz & Company and global leader of the firm’s Innovation practice. “Case in point: Apple, Google and 3M ranked 53rd, 26th, and 86th, respectively, in R&D spending among the Global Innovation 1000 companies.”

“In addition to the R&D spending data trend analysis, this year’s study also examined the early stages of innovation, specifically looking at the tools, processes and mechanisms companies use to generate ideas and how they take those ideas to market,” said Rasheed El Tayeb, principal with Booz & Company.

Nearly half of those surveyed said their organisations were just average or marginally effective at generating new ideas and converting them into potential future products.

Meanwhile, the 25% of companies that reported being “highly effective” at both idea generation and conversion outperformed their peers on three important financial measures: revenue, market cap growth and EBITDA (earnings before interest, taxes, depreciation and amortization) as a percentage of revenue.

Although innovation tools like social network data mining, crowdsourcing and seed funding have been much hyped in recent years, companies themselves reported a much greater focus on traditional idea-generation tools.

The most common mechanism for developing new ideas, by a substantial margin, was direct observation of customers, which was ranked number one by 42% of all respondents. Traditional market research was ranked second, with 31% of respondents ranking it among their top five mechanisms.

However, companies in more consumer-oriented industries, including software and internet, computing and electronics and consumer goods, were twice as likely to employ social media in their search for new ideas than were companies in more industrial sectors such as chemicals and energy, where such methods seem to have less efficacy.

“Companies’ reliance on traditional sources for the majority of new ideas, despite the attention paid in recent years to more open innovation processes, is one of the more interesting discoveries from this year’s study,” said Richard Holman, partner at Booz & Company.

“The key takeaway for businesses is that the most successful innovators in all industries employ ideation practices that are well-aligned with their innovation strategies.”

The recovery in R&D spending after the worst recession in generations is much faster than it was after the dot-com bust at the beginning of this century. Although companies are still feeling the after-effects, many recognise the long-term value of R&D investment.

To view the Global Innovation 1000 study, visit www.booz.com/innovation1000.

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