In "Why Big Companies Can't Invent," venture capitalist Howard Anderson asserts that in recent years corporate R&D has not worked well, if at all (1). His article cites how companies like IBM, Apple and Xerox have invested in R&D without reaping significant benefits while being outperformed by competitors with more meager R&D budgets. Factors that have eroded R&D effectiveness in recent years, the article contends, include the inability of firms to nurture and exploit disruptive technologies, the availability of venture capital to fund startups and poor corporate execution, including insufficient corporate incentives.
We certainly agree with the assertion of the value that startups bring to innovation. We even agree that corporate R&D is overdue for revitalization in many firms. However, R&D is still alive and well at big companies, providing value both within the firms conducting the R&D and in society at large. While "Why Big Companies Can't Invent" cites some valid examples of corporate R&D failures, as we discuss below, it overlooks the evidence of recent corporate R&D successes.
So why do some companies succeed where others fail? We believe the answer lies in a firm's ability to establish an integrated innovation strategy for managing multiple sources of innovation (i.e., internal R&D, acquisitions, joint ventures and licensing) as a portfolio of opportunities.
Corporate R&D Successes
Although Anderson cites some valid examples of corporate R&D failures, one would be remiss to overlook the evidence of recent corporate R&D successes. For example, Eli Lilly generates one-third of its $12 billion in annual sales from Zyprexa, a drug for schizophrenia and bipolar disorders, which was developed through internal R&D. Glaxo, now part of GlaxoSmithKline, developed Flonase, a steroid for treating nasal allergies that has captured a 45-percent market share. General Electric developed LightSpeed, a revolutionary imaging technology that accounts for nearly 80 percent of revenues in GE's CT-scanning unit (2).
And although Apple is called out as having a poor R&D record, its iTunes Music Store (Time's Invention of 2003) reportedly sold 1 million music tracks within the first week of product launch, sold 85 million tracks within the first year and currently sells nearly 2.5 million tracks per week as it expands beyond the U.S. market (3). Apple's iTunes is supported by iPod, already a pop culture icon that is boosting Apple's revenues and brand.
Successes such as these will continue to drive corporations to increase their investments in R&D. Granted, industrial R&D investments have experienced a short-term drop, which is to be expected given the recent recession. However, surveys show that leading companies intend to increase R&D spending as the market improves. For example, GE, widely regarded as one of the best-managed companies in the world, committed $2.7 billion to R&D in 2003, representing a steady increase from the previous two years. CEO Jeff Immelt is making R&D his first major initiative after succeeding Jack Welch.
Cisco Systems is another example. Cisco did not invest heavily in internal R&D during its growth phase in the late 1990s. Instead, with its stock-rich positioning in the market, the company grew via acquisitions. However, internal R&D now has become an important part of Cisco's innovation portfolio. Its R&D-to-sales ratio of 18 percent gives Cisco the highest R&D intensity of the top 17 R&D-investing firms in 2002.
Similarly, Oracle and EMC were cited in "Why Big Companies Can't Invent" as examples of young firms, without significant R&D, stealing market share from IBM. In 2002, however, the R&D-to-sales activity for both Oracle and EMC exceeded that of IBM by a factor of two on average (4). In fact, industry continues to supply 63 percent of total U. …