Booz Allen Hamilton's Global Innovation Study

"There is no discernible relationship between [R&D] spending levels and most measures of business success."

--Booz Allen Hamilton

Wow, I just put down the 2005 BAH study of the world's 1000 top R&D spenders ("Money Isn't Everything: Lavish R&D Budgets Don't Guarantee Performance"), and it's a great read. The authors are Barry Jaruzelski, Kevin Dehoff, and Rakesh Bordia. The study takes aim at the notion that the more companies spend on R&D, the proportionately richer they'll become. Except at the extremes (companies who deviate way outside industry averages) the authors found no such relationship. What mattered more than the size of the budget was the ability to coherently integrate R&D efforts with strategy -- in other words, not to innovate for the sake of innovation, but innovate to capitalize on a clear marketplace advantage, either one that exists already or one that has a reasonable chance of occurring.

Examples cited include Toyota, which is only the third highest spender in the auto industry, yet has a market cap bigger than its next three competitors combined. Another example is Apple which at 148, ranks well behind Microsoft, which is number 1 (but, many would argue, is not ahead of Apple in its ability to turn innovations into profits).

A couple of observations: First, I would have been interested in hearing what the authors have to say about inovations like Motorola's Razr -- which -- if press reports are to be believed -- succeeded precisely because it was not on people's radar screen at Motorola at the time it was being developed and therefore could not have been part of the master plan. I think that a lot of the really successful innovations happen despite rather than because of official policy or strategy.

My second observation is that what this really boils down to is values. Toyota cares passionately about the quality of its cars. Apple cares passionately about the user experience of its customers. Those values drive everything else. If company leaders are only passionate about growth, they may not be as personally invested in the value proposition that drives growth. That's when -- as with Razr -- innovation success is a one-off that happens because someone outside the leadership got passionate about something that mattered to the customer.

A third observation: The authors say that scale is an advantage because big companies do better by spending proportionately less on R&D. But the authors also say that what ultimately counts is good ideas and that, happily for smaller companies, scale does not give big companies a lock on ideas. Witness Google, which is big now, and is casting about the industry to buy small engineering-driven companies (what Google use to be) so it can refuel its innovation engine.