The Link Between R&D Spending and Innovation

November 12th, 2008

In this article, we examine the prevailing management belief that more research leads to more innovation.

What’s the relationship between research spend, innovation and business performance?

The Fortune 500 are by far the biggest marketing research spenders in the U.S., consuming the majority of $7 billion in research services annually. Several years ago, we hypothesized that companies among the Fortune 500 would remain preeminent from decade to decade given their advantage of large research budgets. So, we tracked them.

We started with the Fortune 500 list for the year 1990 and then looked at the list ten years later. We expected to see some churn, but not at the level we found. In those ten years, about forty percent of the firms on the 1990 list disappeared. About 200 firms had been displaced, absorbed or tanked at the hands of competitors. In the next four years, between 2000 and 2004, twenty-five percent of the Fortune 500 had churned. These were household names; GTE, Hasbro, Ingersoll Rand, Nabisco Holdings, Paine Weber and Ralston Purina. (Whyze Group internal research, 2005).

While our findings weren’t conclusive, it raised challenges to the notion that more research leads to meaningful innovation and business results.

Later in 2005, Booz Allen completed a study of the top 1,000 R&D spenders among public companies globally. Based on Booz Allen’s analysis, they concluded, “Contrary to conventional assumptions, R&D spending levels within the Global Innovation 1000 had no apparent impact on sales growth, gross profit, operating profit, enterprise profit, market capitalization, or total shareholder return.” (Bordia, R., Dehoff, K., Jurelzekski, B., “The Booz Allen Hamilton Global Innovation 1000: Money Isn’t Everything”, Strategy + Business, Winter 2005, p. 5)

The belief that there is a relationship between research spend and business performance persists, but a growing body of empirical evidence runs contrary to this perception. Another question we asked is, “What’s missing when research fails to improve business performance?”

Why Doesn’t More Research Produce Better Business Results?

We asked managers in client organizations and colleagues in a variety of research firms to give us their perspectives. Among the questions we asked was, “What percentage of marketing research findings are actually applied?” While the answers varied, the most common response from research suppliers and clients alike was, “fifty percent”.

This is consistent with what we see at nearly every client organization that has asked us to facilitate our Customer Experience Management Audit with their management teams.

Most corporate libraries contain reams of well-executed marketing research studies. Most contain nuggets of insight that seem valuable on the surface. To understand the value of these studies, we needed get a view of the context in which these studies were commissioned.

What we found when interviewing managers at these firms is that these research reports often misaddressed key issues that managers were wrestling with at the time. In some instances, we found that the research was misapplied, leading to dangerous actions.

One example was a company that had commissioned dial testing of its new TV advertisements. Dial testing shows how viewers are responding to audio-visual advertisements on a second-by-second basis. It shows emotional high and low points as the ad is being absorbed. What it doesn’t show, and what managers needed to know at the time, was how well this ad positioned the company against its competitors. The dial testing showed high points in the ads where managers wanted them and company made significant media buys. The ad tanked and was pulled at a cost of millions of dollars to this company.

Malcolm Baldrige Stocks Return 300% More than the S&P: Suggests Application of Findings is Key

Our convictions about how customer data translate into improved customer experiences and business performance coalesced further when we looked at the performance of Malcolm Baldrige National Quality Award winners.

Malcolm Baldrige winners achieve superior business results. During a ten-year period, the portfolio of Malcolm Baldrige winners’ stocks outperformed the S&P 500 by a margin of 3-to-1. The graph below compares the 10-year returns on investments of $5,291 in the S&P and in the portfolio of Baldrige award winners.

The Malcolm Baldrige Award isn’t given to companies that conduct the most customer research. It’s awarded to companies that excel at applying what they learn.

There are hundreds of questions in the Malcolm Baldrige application that pertain to how companies apply what they learn. An example of the questions that Malcolm Baldrige applicants answer is, “How do you use voice-of-the-customer information and feedback to become more customer-focused, to better satisfy customer needs and desires, and to identify opportunities for innovation?”

We even interviewed Rick Kolster, Quality Manager at Solectron, a Malcolm Baldrige winner. Rick gave us a ton of insights into what made Solectron a leader in its field. In short, there was a process by which managers were imbued not only with customer intelligence, but a means of applying it over and over again.

Over the last decade, we at Whyze Group have evolved our thinking and our services. This journal is an opportunity for us to continue learning and to share perspectives with our colleagues around the world. This particular article serves as foundation for a more expansive white paper on the subject of organizational learning and innovation.

We welcome your reactions, points of view and criticisms.

• Customer Experience Mapping. Whyze Group pioneered the process of integrating multiple sources of insight in a representation that gives managers a more holistic and empathetic understanding of customers’ experiences.
• Marketing ROI scenario modeling. In the late 90’s, we were among the first to apply ROI scenario modeling outside the context of direct marketing.
• Training for corporate innovators. One example is our workshop, Influencing Organizational Change with Market Intelligence, which we delivered at several national conferences and for consulting clients.
• Open innovation. We began participating in social innovation networks long before this became vogue. This has led to highly productive partnerships, intellectual capital and value for our clients.

Tags: business performance, innovation, Malcolm Baldrige, marketing research, Research spending, Whyze Group

Entry Filed under: Change management, Researching the Experience