Nine in 10 Companies Cite Innovation as “Critical” to Preparing for Upturn
NEW YORK--(BUSINESS WIRE)--In the face of a severe global recession, the world’s 1,000 largest publicly traded corporate research and development spenders increased spending on R&D in 2008, affirming the critical importance of innovation to their corporate strategies, according to global management consulting firm Booz & Company’s fifth annual analysis of global innovation spending, released today. R&D outlays for these companies rose by 5.7 percent to US$532 billion, even as sales were up only 6.5 percent. While the increase in 2008 R&D spend was less dramatic than 2007's gain of 10 percent, it was just slightly less than the 7.1 percent global five-year compound annual growth rate (CAGR) for R&D.
Overall, more than two thirds of companies maintained or increased their R&D spending in 2008, despite more than a third (34 percent) reporting that net income plummeted last year, according to the study. More than a quarter of companies decreased their R&D allocation in 2008.
Booz & Company analyzed the world’s top 1,000 public corporate research and development spenders &ndash the Booz & Company Global Innovation 1000 &ndash in what continues to be the most comprehensive effort to assess the link between R&D and corporate performance. The study looked at R&D spending and its link to corporate performance, uncovering insights into how organizations can get the greatest return on their innovation investment. New to the study this year is an in-depth survey of nearly 300 senior managers and R&D professionals from 250 companies around the globe that probes the impact of the downturn on innovation spending and strategy.
Key findings of the report include:
Innovation is viewed as increasingly vital to corporate strategy. More than 90 percent of those surveyed say that innovation is critical as their companies prepare for the upturn, and fully 70 percent of respondents state their companies are either maintaining or increasing their spending on R&D in 2009, according to Booz & Company. Furthermore, the top 100 companies in the Innovation 1000 clearly signaled their investment priorities by increasing R&D spending by 3.2 percent while reducing overall capital expenditures by one percent.
“Reducing efforts on innovation would be similar to unilateral disarmament in wartime,” said Barry Jaruzelski, Partner at Booz & Company. “Now is an opportune time to build advantage over competitors, especially weaker ones that may have to skimp on R&D for financial reasons. Overall, the study demonstrates an optimistic outlook on the part of the companies in the Innovation 1000.“
Companies are spending more, but more wisely. “One result of the recession is that it has forced companies to think more carefully about their innovation processes and portfolios &ndash for both good times as well as bad,” observed Kevin Dehoff, a Booz & Company Partner. “This held true through the most turbulent quarters these companies have navigated, indicating they’re ready to make smart bets that will pay dividends in the coming upturn.” Accordingly, the survey of senior managers and R&D directors reveals that seven in 10 companies are now adjusting their strategies to better capture changing customer requirements. Nearly half of the respondents report becoming more risk averse in their approach to innovation, changing the filters they apply when green lighting new R&D projects. More than 40 percent said their companies are focusing on process improvements to change R&D spend during the downturn, and a similar number say they’re getting better at killing bad projects, as well as focusing more on newer products that have the potential to grow faster.
The top 20 innovation spenders increased their budgets by just 3.2 percent. This gain is less than one-third the 10.7 percent rise in 2007 and was the result of a precipitous 35 percent drop in net income among the 20 companies, which fell from $115 billion in 2007 to just $75 billion in 2008. Still, the top 20 spenders accounted for 26 percent of spending by the entire Innovation 1000.
Recession’s impacts on R&D vary widely by industry. In 2008, as last year, two-thirds of R&D spending was concentrated in three industries: computing and electronics (28 percent), health (23 percent), and automotive (16 percent).
Every global region increased its spending. North American, European, and Japan-based companies retained their 94 percent share of the global 1000 innovation spend. Every region, including China and India, increased its expenditures, though they did so at slower rates. Japan upped its allocations by just 0.5 percent, Europe by 6.3 percent and North America, 6.5 percent. These levels were below the global five-year CAGR of 7.2 percent.
Additional study findings include:
Booz & Company Global Innovation 1000: Study Methodology
Booz & Company identified the 1,000 public companies around the world that spent the most on research and development in 2008 (companies for which public data on R&D spending was available).
Booz & Company analyzed key financial metrics for each of the top 1,000 companies for 2001 through 2008 — sales, gross profit, operating profit, net profit, R&D expenditures, and market capitalization. All expenditure figures were translated into U.S. dollars according to the average exchange rate for the year. In addition, total shareholder return was gathered and adjusted for each company’s corresponding local market total shareholder return.
Each company was coded into one of 10 industry sectors (or “other”) according to Bloomberg’s industry designations, and into one of five regional designations according to reported headquarters locations for each company. To enable meaningful comparisons across industries on R&D spending levels, Booz & Company indexed the R&D spending level and financial performance metrics for each company against the median R&D spending level for that industry.
Booz & Company also conducted a web-based survey of over 300 senior managers and R&D professionals from 250 different companies around the globe in order to better understand the recession’s impact on R&D spending and strategy. The companies participating represented more than $230 billion in R&D spending, or 44 percent of the total Innovation 1000 R&D spending for 2008. Respondents came from all 10 industry sectors; geographically, 49 percent came from North America, 38 percent from Europe, 13 percent from Asia, and less than 1 percent from the rest of the world.
The Global Innovation 1000 study is available online at http://www.booz.com/media/uploads/Innovation_1000-2009.pdf
About Booz & Company
Booz & Company is a leading global management consulting firm, helping the world’s top businesses, governments, and organizations.
Our founder, Edwin Booz, defined the profession when he established the first management consulting firm in 1914.
Today, with more than 3,300 people in 58 offices around the world, we bring foresight and knowledge, deep functional expertise, and a practical approach to building capabilities and delivering real impact. We work closely with our clients to create and deliver essential advantage.
For our management magazine strategy+business, visit www.strategy-business.com.
Visit www.booz.com to learn more about Booz & Company.
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