Academic journal article Research-Technology Management

Maximizing Return on Innovation Investment: Spending More on Innovation Does Not Necessarily Translate into Accelerating Sales, Market Share or Profit. Here's How Three Organizations Would Remedy This

Academic journal article Research-Technology Management

Maximizing Return on Innovation Investment: Spending More on Innovation Does Not Necessarily Translate into Accelerating Sales, Market Share or Profit. Here's How Three Organizations Would Remedy This

Article excerpt

OVERVIEW: "How does the level of business innovation investment really impact company growth and performance?" This question was put to an Industrial Research Institute panel for discussion at its annual meeting, May 2006. The panelists" were also asked to comment on an initial hypothesis presented in strategy + business by Alexander Kandybin and Martin Kihn, of Booz Allen Hamilton, that there is no broad correlation between innovation investment and growth. In their responses, panelists from Air Products' and Chemicals; Procter & Gamble and The Monitor Group suggest ways to move forward.

KEY CONCEPTS: R&D investment, business innovation, return on innovation, metrics.

Raising Returns on Innovation, by Miles Drake

Return on investment is an ever-growing concern at my company as it is, I'm sure, at many others. Few activities in the corporate world, however, resist the business leader's attempts to gauge return on investment more than innovation. Most of what is done under the innovation banner may be scientific, but judgments about the results of those efforts are often more a matter of faith. Innovation is broader than research and development, of course, but for this discussion I shall narrow the subject to R&D. Specifically, I shall focus on the following three questions:

* How surprised should we be that there seems to be little correlation between R&D expenditure (absolute or relative to sales) and business performance?

* How do we know when we are investing enough in R&D?

* Is there an appropriate R&D/sales target for a business?

In sharing some of our experience at Air Products and Chemicals, I shall draw on internal company data gathered over many years from our portfolio of businesses. Air Products is a Fortune 500 company and a global supplier of industrial gases, chemicals, equipment, and services. In 2006 we will have about $8 billion in sales, with operations in more than 30 countries and 20,000 employees worldwide. We are an industry leader in safety and have a reputation for both an innovative culture and strong operational excellence. We have managed to create global leadership positions in many diverse businesses.

In R&D, we track inputs and outputs for our businesses: inputs are dollars invested in R&D; outputs are new operating income derived from innovations passing through our formal pipeline of new products and technologies. We have a number of years of consistent data.

Within our businesses we operate an integrated planning system that extends from strategy development through short-term operating plan. This incorporates R&D projects and expenditures in a consistent manner. We do have natural boundaries on R&D expenditures set by business returns and performance, but we do not set formal R&D targets in either expected growth or in R&D/sales. Therefore, to a certain extent our R&D investment is an emergent quantity.

When we compare internally, some striking differences are evident and the businesses in the Air Products portfolio have very different R&D/sales. Some of our findings: generally, R&D/sales tends to be consistent with external benchmarks for similar businesses; our performance chemicals or materials businesses have a relatively high R&D intensity; our businesses engaged in supplying large-scale gases or chemicals on long-term contracts have low R&D/sales, more in tune with a utility company. Here are our major observations:

* Business Model Drives R&D/Sales

This is not surprising. In a performance materials business in which there is constant pressure to upgrade products and reduce costs as products mature, there is a need for R&D investment to create, develop and sustain multiple new products. The business may require a high rate of new product chum (percent of sales less than 5 years old) to remain competitive and grow profitably. …

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