Is R&D a rewarding investment for the world's largest companies? The question, at first glance, seems merely rhetorical. After all, U.S. companies will have spent more than $180 billion in 2004 on R&D, according to National Science Foundation data.
But have these sizable investments resulted in a significant stream of breakthrough innovations? The evidence is not overwhelming. An in-depth study of successful and unsuccessful innovation over the previous 40 years at Exxon Chemical (now ExxonMobil Chemical) revealed that the company's substantial R&D activities produced only two major breakthroughs during that entire period. Rather than big new ideas and products, the company generated mostly smaller, lower-value process innovations.
But Exxon was not alone. The same study found that commercialized R&D across the entire chemical industry had been declining for some time (1).
The pharmaceutical industry, one of the most reliant on breakthrough R&D, has been experiencing a similar innovation drought, despite huge investments. Between 1996 and 2002, major pharmaceutical companies doubled their annual research spending, reaching $32 billion. Yet during this same period, the number of new drugs brought to the market plunged from 53 to 17. GlaxoSmithKline, the Number 2 player in the industry, introduced just three new products in 2003, only one of which it discovered.
Are we witnessing a crisis in corporate R&D? Although the paucity of genuine breakthroughs seems extraordinary, Exxon, GlaxoSmithKline, and other research-dependent giants have suffered from what appears to be a common vicious cycle in corporate R&D environments. Under pressure to deliver consistent, predictable revenue growth, these companies add more projects to the R&D pipeline to compensate for low success rates. Research becomes fragmented and relatively small-bore projects receive support in order to maintain a full portfolio of growth options. Before long, resources, talent and focus are spread thinly. Meanwhile, the pace of commercialization slows, leading to the erroneous conclusion that still more projects are needed.
The Problem of Portfolios
This dismal chain of events didn't happen by accident. It seems to be an inevitable result of the portfolio model, long advocated by many prominent product development experts, in which a large number of research projects are rigorously managed through a series of stages and approval gates.
While the portfolio model has brought some discipline to the often-undisciplined world of research, the approach has failed to optimize R&D and spark innovation. There are several reasons why. Aggressive goals that underpin potential major innovations frequently look "impossible" at project outset, and therefore don't fit neatly into the typical stage-gate review process. The organization invariably shifts attention from the quality of projects to the quantity.
Even more seriously, there may be unintended shifts in what's driving innovation that elude any process of formal R&D management. The Exxon study revealed that a high percentage of commercialized innovations were motivated by "getting the ox out of the ditch" during hard times, not by proactive management of R&D--a mindset that yields more incremental improvements than blockbusters.
Innovation, when it comes, seems motivated by desperate acts to keep operations running, rather than by a creative environment that fosters ideas. R&D organizations soon focus more on surviving the next budget review than on inventing "the next big thing." While urgency often does spark creativity, tinder these circumstances, creativity is rarely applied to problems that will drive commercial breakthroughs.
Part of the problem is that the sheer number of projects intended to "balance" a portfolio may actually crowd out innovation. A paradoxical conclusion of the Exxon Chemical study was that fewer projects might have actually meant bolder discoveries. …