R&D

Money can't buy you successful business ideas

November 13, 2012: 11:14 AM ET

There is no correlation between how much a company spends on R&D and its overall financial performance. So what can help a company turn decent ideas into solid products?

By Barry Jaruzelski, John Loehr, and Richard Holman

FORTUNE -- Can companies learn to become better innovators? At a time when economic growth is stagnating in mature economies and slowing in developing ones, and experts far and wide are fretting over the degree and quality of innovation here and abroad, this has turned into a (multi) million-dollar question.

For the past eight years, our firm, Booz & Company, has conducted an annual study on R&D spending among the 1,000 public companies that spend the most on innovation. Every year, we affirm that there is no correlation between how much a company spends on R&D and its overall financial performance. Apple (AAPL), for instance, has consistently been named the most innovative company in our study, yet it spends just 2.2% of its revenue on R&D, well below the 6.5% of revenue spent by the computing and electronics industry as a whole.

Overall spending among all 1,000 companies increased by 9.6% in 2011 compared to the previous year, to $603 billion. But a great deal of that money is not being spent wisely. As part of this year's study, we surveyed and interviewed executives about their activities during the early stages of innovation, when companies generate and then vet the ideas that will eventually become new products and services. The results were not encouraging.

MORE: Corporate America: Don't give up on your workers

Forty-six percent of the executives we surveyed admitted that their efforts to generate good new ideas and move them into product development stage were only marginally effective, and just a quarter of them said their companies were good at both idea generation and development. These results vary considerably based on the strategy that these companies follow in developing new products and taking them to market.

Companies that directly engage customers in hopes of understanding their needs and wants, and then try to be first to market with their new products, tend to be more effective in their early-stage innovation efforts. More

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