SOURCE: Strategy& (Formerly Booz & Company)

Strategy& (Formerly Booz & Company)

October 28, 2014 03:00 ET

Total R&D Spending Growth at Large Companies Fell Last Year to the Second Lowest Rate in a Decade, According to New Strategy& Study

Innovation Leaders Say They Are Better at Innovation Now Than They Were 10 Years Ago; the Most Successful Innovators Tap Customers' Unarticulated Wants and Needs

NEW YORK, NY--(Marketwired - Oct 28, 2014) - While total R&D spending at large companies rose to its highest level ever in 2014, the rate of growth was the second lowest in a decade, according to a new study from Strategy&, part of the PwC network.

The tenth annual Global Innovation 1000 Study, which analyzes the R&D investment at the 1,000 biggest-spending public companies in the world, found that R&D spending rose by only 1.4% last year -- a more modest increase than the 3.8% rise the year before and a marked drop from the 10-year average growth rate of 5.5%. R&D spending as a percentage of revenue (R&D intensity) fell by 17% between 2005 and 2014.

"Companies indicate they're better at innovating today than they were a decade ago," says Barry Jaruzelski, senior partner at Strategy&, formerly Booz & Company, and a co-author of the report. "It appears that companies can now do more with less, allowing them to moderate spending growth while still achieving results." (Click here for an overview of the study's findings.)

Software and Internet R&D Spending Growing Quickly -- but Still Far Below Other Industry Dollar Totals

The software and Internet industry generated the most rapid growth, 17%, in R&D spending in 2014. However, despite the industry's ongoing increase in R&D investment, software and Internet companies still accounted for just 9% of total corporate R&D spending in 2014. Meanwhile, the computing and electronics, and healthcare industries accounted together for 50% of total innovation spending over the same period -- though in 2014, those industries' R&D spending declined by 1.8% and 1.2%, respectively.

"It is striking that half the industries in the study saw a decline in R&D spending growth. Among them were two of the largest industries within the Global Innovation 1000, computing & electronics and healthcare. And yet, significant investments by smaller industries like software and Internet were large enough to compensate and even drive an overall positive R&D spending growth," said Jaruzelski.

Chinese Innovation Spending Growing Impressively

Companies headquartered in China generated a 46% increase in R&D spending last year, while North American and European companies increased spending by only 3.4% and 2.5%, respectively, and Japanese companies spent 14% less. Furthermore, the number of Chinese companies represented in the Global Innovation 1000 rose from only eight in 2005 to 114 in 2014 -- an increase of 1,325%.

Successful Companies Mine End-Users' Unarticulated Wants and Needs

Apple, Google, Amazon, Samsung and Tesla top the list of the 10 Most Innovative companies in 2014, as identified by survey respondents. Only three of those ten companies -- Google, Samsung and Microsoft -- are also on the Top 10 R&D Spenders list. In fact, over the past ten years only Microsoft has been among both the Top 10 R&D Spenders and Top 10 Most Innovative companies each year. And although four of the Top 10 R&D Spenders in 2014 were healthcare companies, not a single healthcare company was voted among the 10 Most Innovative, as identified by survey respondents. Volkswagen again tops the list of Top 10 R&D Spenders for the third year in a row.

"This goes to show that when it comes to innovation, it's not what you spend but how you spend it that counts," says Jaruzelski.

"What the most innovative companies have in common is not a high level of R&D spending relative to competitors, but a deep understanding of end-users' wants and needs," adds Jaruzelski. "Instead of relying on market research, these companies directly observe end users and innovate around their unarticulated needs."

Companies Believe They Are Getting Better at Innovation, but Admit They Need to Improve More

More than three-quarters of innovation leaders (76%) say that they are better at innovation today than they were 10 years ago, according to a survey of over 500 innovation leaders across nearly 500 companies. And about the same number (78%) also believes they have developed a more detailed understanding of their customers' wants and needs over the past decade.

Despite this strong sense of improvement, most surveyed innovation leaders believe they have room to improve further. Only 41% say their companies are highly proficient in the innovation areas that they have tried to improve in the past, and just 27% believe they are mastering the elements they will need for innovation success over the next 10 years.

Companies also anticipate shifting the goals of their future R&D investments, moving away from incremental innovations that tweak an existing product or service and focusing more on radical, breakthrough and industry-changing innovations. Innovation leaders say that over the next ten years they will reduce investments in incremental changes by about a quarter (26%), while increasing breakthrough innovation investments more than half (57%).

For more information on the study and its findings, including the innovation strategies that companies are pursuing, please click here.

To arrange an interview with one of the report's authors, contact Katarina Wenk-Bodenmiller, Sommerfield Communications, 212-255-8386 or Siobhan Ford, Strategy&, 212-551-6234.

Methodology

Strategy& identified the 1,000 public companies around the world that spent the most on R&D, as of June 30, 2014. The Global Innovation 1000 companies collectively account for about 40% of the entire world's R&D spending, while the next 1,000 largest corporate spenders only represent an additional 3%. For each of the top 1,000 companies, Strategy& obtained from Bloomberg and Capital IQ key financial metrics, including sales, gross profit, operating profit, net profit, historical R&D expenditures and market capitalization. To understand how innovation has changed at companies over the past 10 years and what to expect for the next decade, Strategy& conducted a separate online survey of 505 innovation leaders at 467 companies around the world. The companies participating in the survey represented just under US$130 billion in R&D spending, or 20% of this year's total Global Innovation 1000 R&D spending, all nine of the industry sectors and all five geographic regions.

About Strategy&

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