The 2012 Global Innovation 1000 Key Findings

Transcription

1 Perspective Barry Jaruzelski John Loehr Richard Holman The 2012 Global Innovation 1000 Key Findings

2 INTRODUCTION AND KEY FINDINGS The 2012 Global Innovation 1000: Introduction and Key Findings Every year since 2005, has conducted the Global Innovation 1000 study, which investigates the relationship between how much companies spend on R&D and their overall financial performance and long-term financial success and every year, the study reinforces the conclusion that there is no correlation between the two. Instead, it is how companies leverage their R&D investments in conjunction with other resources and internal structures such as personnel, capabilities, and decision-making processes that determines their ability to execute their innovation agendas. In our eighth annual study of the world s 1,000 largest corporate R&D spenders, we focus on the fuzzy front end of the innovation process the tools, mechanisms, and networks companies use to generate ideas and effectively convert them to commercialized products. We surveyed nearly 700 companies and interviewed 12 senior innovation executives and chief technology officers at leading companies to gain insights into the early stages of innovation, as well as to understand which companies they viewed as the most innovative in the world. This year, we ve identified five key themes from the Global Innovation 1000 study: The World s Top 10 Most Innovative Companies Are Changing Samsung continues its steady rise as Facebook falls. R&D Spending is in Recovery After the recession, R&D is back on a solid growth trend. Spending Innovation More dollars spent doesn t guarantee innovation success. We ve Got No Idea Nearly half of the organizations surveyed believe they are only marginally effective at both idea generation and conversion. Tried and True Rules The most successful innovators employ traditional methods for innovation success. 2

3 The World s Top 10 Most Innovative Companies Are Changing CHANGE IN THE TOP 10 MOST INNOVATIVE COMPANIES st Apple Apple Apple 2 nd Google Google Google 3 rd 3M 3M 3M 4 th GE GE Samsung 5 th Toyota Microsoft GE 6 th Microsoft IBM Microsoft 7 th P&G Samsung Toyota 8 th 9 th IBM Samsung P&G Toyota P&G IBM Tie 10 th Intel Facebook Amazon This year Amazon joined the Top 10 Most Innovative Companies ranking (#10), bumping Facebook from the list. For the second straight year, Samsung rose in rank (now ranked #4). Apple, Google, and 3M kept their 1st, 2nd, and 3rd positions, respectively. 3

4 Barry Jaruzelski, senior partner at : Facebook s drop from the Top 10 Most Innovative Companies list may suggest that social media companies have lost some of their initial luster. In contrast, Amazon s first-time appearance on the list suggests that both the R&D community and consumers recognize companies as providing superior value when they offer products and services in creative new ways that meet customer needs through technical innovation. 4

5 R&D Spending Is In Recovery R&D spend grew 9.6% in 2011, continuing 2010's strong growth after the 2009 decline THE GLOBAL INNOVATION 1000 R&D SPEND ; $BILLION $603 $353 $355 $369 $391 $ year CAGR = 6% $450 $495 $521 $503 $550 3-year CAGR =9.5% 3-year CAGR = 3.5% Annual Growth 0.6% 3.7% 6.2% 6.5% 7.9% 10.0% 5.4% -3.5% 9.3% 9.6% In 2011, corporate spending among the Global Innovation 1000 reached an all-time high of $603 billion, an increase of 9.6 percent from the previous year. R&D spend increased in 2011 across most industry sectors and geographies. This is the second strong increase of R&D spending in a row (there was a 9.3 percent increase in 2010), following a brief decline ( 3.5 percent) in The recovery in R&D spend after the worst recession in generations is much faster than it was after the dot-com bust at the beginning of this century. Although companies are still feeling the lingering effects of the global economic downturn, many seem to recognize the long-term value associated with R&D investment. This strong R&D recovery ($100 billion increase in the past two years alone) may signal a jobs recovery, especially in North America, where the largest portion of the absolute spending growth originates. 5

6 R&D Spending Is In Recovery (continued) Automotive Gains, Health Loses in the Top 20 R&D Spenders THE 2012 TOP 20 R&D SPENDERS 2012 Rank Company Geography Industry 2011 R&D Exp.; $Bn Toyota Novartis Roche Holding Pfizer Microsoft Samsung Merck Intel General Motors Nokia Volkswagen Johnson & Johnson Sanofi Panasonic Honda GlaxoSmithKline IBM Cisco Systems Daimler AstraZeneca Japan North America North America Asia North America North America North America North America Japan Japan North America North America Auto Healthcare Healthcare Healthcare Software and Internet Computing and Electronics Healthcare Computing and Electronics Auto Computing and Electronics Auto Healthcare Healthcare Computing and Electronics Auto Healthcare Computing and Electronics Computing and Electronics Auto Healthcare TOTAL $9.9 $9.6 $9.4 $9.1 $9.0 $9.0 $8.5 $8.4 $8.1 $7.8 $7.7 $7.5 $6.7 $6.6 $6.6 $6.3 $6.3 $5.8 $5.8 $5.5 $153.6 The top 20 R&D spenders collectively invested $154 billion on R&D in percent of the Global Innovation 1000 spend. Auto companies increased their rank in the top spender list: - The auto companies among the top 20 spenders in 2010 either moved up in the rankings or stayed the same in R&D investment is becoming more critical as auto companies seek to meet ever more stringent fuel economy standards, boost the electronics in their cars, develop common platforms around the globe, and attract younger buyers. Although the healthcare companies dominate the list, they have decreased their rank in the top spender list: - Of the eight healthcare companies in the top 20 spenders in 2010, all but Novartis and Sanofi fell in the rankings in Given the recent dearth of successful product introductions, many healthcare companies are hesitant to continue investing in innovation, choosing instead to steer profits to shareholders. Regulatory uncertainty has also taken its toll: large pharmaceutical companies appear reluctant to invest in R&D without a clear path to market. 6

7 R&D Spending Is In Recovery (continued) Computing and Electronics, Healthcare, and Auto Industries Top R&D Spending Aerospace and Defense 4% 2011 R&D SPEND BY INDUSTRY ($603 BILLION TOTAL) Telecom 2% Other 2% Consumer 3% Software and Internet 7% Chemicals and Energy 7% Computing and Electronics 28% Industrials 10% Auto 16% Healthcare 21% The top three industries with the greatest R&D investment continued to be: - Computing and Electronics (28 percent of total Global Innovation 1000 spend) - Healthcare (21 percent of total Global Innovation 1000 spend) - Auto (16 percent of total Global Innovation 1000 spend) 7

8 R&D Spending Is In Recovery (continued) Two-thirds of the $53 billion spending increase came from the Computing and Electronics, Auto, and Industrials sectors Spend ) While Healthcare is the third largest While Health is the third largest spender, Industrials experienced the spender, third largest Industrials absolute experienced spend increase the third largest absolute spend increase CHANGE IN R&D SPEND BY INDUSTRY; $MILLION $6,229 $6,037 $3,607 $1,718 $1,655 $352 $1,487 $52,632 $7,867 $13,214 Increases $13,440 Represents 66% of total R&D spend increase Decreases Computing and Electronics Auto Industrials Software and Internet Healthcare Chemicals and Energy Other Consumer Telecom Aerospace and Defense Total Sources: Bloomberg data; Innovation 1000 articles in strategy + business; analysis 65 percent of the overall $53 billion growth in R&D spend in 2011 came from the Computing and Electronics, Auto, and Industrials sectors. Though Healthcare was the second-largest spender on R&D in the Global Innovation 1000, it experienced only the fifth-largest increase in spend. 8

9 R&D Spending Is In Recovery (continued) India and China Outpace Other Regions in R&D Spend Growth, Though from a Small Base 2011 R&D SPEND BY REGION $603 BILLION TOTAL India/China 2.7% Rest of World 6.1% Japan 23.3% North America 37.9% 29.9% Nearly 70 percent of the total Global Innovation 1000 spend is concentrated in North America and. India and China, with 3 percent of the total R&D spend, play a minor but growing role. 9

10 spender, America Industrials experienced experienced the largest the third largest absolute absolute spend spend increase increase Increases Decreases R&D Spending Is In Recovery (continued) CHANGE IN R&D SPEND BY REGION; $MILLION CHANGE (%) IN R&D SPEND BY REGION While India/China experienced the greatest percentage increase in R&D spend, North America experienced the largest absolute spend increase $12,424 $3,912 $3,434 $52,632 28% 24% 27.2% $14,736 20% 16% $18,126 12% 8% 12.2% 9.7% 5.4% Average 9.6% 4% 2.4% North America Japan India/ China Rest of World Total 0% India/ China Rest of World North America Japan Sources: Bloomberg data; Innovation 1000 articles strategy+business; analysis North America and were the largest contributors to the overall R&D spend growth in 2011; more than 60 percent of the increase came from these regions. India and China contributed 7 percent to the overall R&D spend increase. India and China had the strongest relative growth in R&D spending. North America was above average, while and Japan lagged behind. - India- and China-based firms increased R&D spend by a phenomenal 27 percent over the previous year, albeit from a small spend base. It is also worth noting that their combined rate of growth was down from 38.5 percent in 2010, which may reflect the cooling down of the Chinese economy. - Companies headquartered in North America grew their R&D spending at a slightly above-average rate of 9.7 percent. - and Japan grew at below-average rates of 5.4 percent and 2.4 percent, respectively. 10

11 R&D Spending Is In Recovery (continued) India and China have been steadily gaining share in R&D spending but are gaining revenue share at an even faster rate GLOBAL INNOVATION 1000 COMPANY R&D SPEND AND REVENUE BY REGION % 4.9% 24.4% 4.3% 9.5% 21.3% 1.5% 5.3% 22.6% 4.2% 9.6% 21.7% 2.3% 6.1% 23.3% 7.3% 11.7% 21.1% 2.7% 6.1% 23.3% 8.5% 10.5% 20.1% India/China 31.1% 35.0% 32.1% 34.5% 30.1% 32.4% 29.9% 33.6% Rest of World Japan North America 38.6% 29.9% 38.5% 30.0% 38.3% 27.4% 37.9% 27.3% in 000 R&D Revenue Spend 2008 R&D Revenue Spend 2009 R&D Revenue Spend 2010 R&D Revenue Spend 2011 China HQ India HQ India and China are steadily gaining share in R&D spending, at a faster year-on-year rate than their proportionate gain in revenue. In 2008, India- and China-based firms Sources: Bloomberg data; accounted Innovation 1000 for articles 4.3 in percent strategy + business; of the revenue generated analysis by the Global Innovation 1000 companies; today that number has risen to 8.5 percent. Because China s economy is much larger than India s, and far more of its companies appear in the Global Innovation 1000 (47 companies from China, compared with just nine from India), China accounted for more than 90 percent of the two countries spending. More than half of all the Global Innovation 1000 companies that are headquartered in India and China are from the Chemicals, Energy, Construction, and Mining sectors all historically low spenders on R&D. The high growth rates of R&D spending in India and China may well continue (or even accelerate) as these countries continue to develop more R&D-intensive sectors such as Computing and Electronics or Auto. 11

12 Spending Innovation PERFORMANCE OF THE TOP 10 MOST INNOVATIVE COMPANIES VS. TOP R&D SPENDERS Highest Possible Score: 100% 68% 65% 62% Normalized Performance of Industry Peers: 50% 54% 40% 45% Lowest Possible Score: 0% Revenue Growth 5-yr. CAGR EBITDA as % of Revenue 5-yr. Avg. Market Cap Growth 5-yr. CAGR Top 10 Most Innovative Top 10 R&D Spenders Source: Bloomberg data, Once again, there are significant differences in performance between the Top 10 Most Innovative Companies and the top 10 R&D spenders. The 10 Most Innovative Companies outpace the top 10 R&D spenders on three key financial metrics: revenue growth, market cap growth, and EBITDA as a percent of revenue. The top 10 R&D spenders also lag their industry peers in the Global Innovation 1000 GLOBAL INNOVATION 1000 COMPANY R&D SPEND AND REVENUE BY REGION on revenue growth and market cap growth. 1.0% 4.9% 24.4% 31.1% 38.6% 4.3% Interesting 1.5% 5.3% to note 4.2% is the limited 2.3% overlap 2.7% 6.1% 7.3% between the top 10 R&D 6.1% 8.5% spenders and the % Most Innovative 9.6% Companies list: 11.7% 10.5% - Only 22.6% Toyota, Microsoft, and 23.3% Samsung are among both 23.3% the Top10 Most Innovative 21.3% Companies and 21.7% the top 10 R&D spenders. 21.1% 20.1% - Although there are four healthcare companies among the top 10 spenders India/China (Novartis, Roche, Pfizer, and Merck), no healthcare organization made it into the % Rest Most of World 30.1% 29.9% 35.0% Innovative Companies. 34.5% Japan 32.4% 33.6% This reinforces our long-standing finding that a company s financial performance and North America innovativeness do not correlate with how much it spends on R&D, but rather with how well it executes 38.5% its innovation strategy. 38.3% 37.9% 29.9% 30.0% 27.4% 27.3% # Companies in Innovation 1000 R&D 2008 Revenue 2008 R&D 2009 Revenue 2009 R&D 2010 Revenue 2010 R&D 2011 Revenue 2011 China HQ India HQ Sources: Bloomberg data; Innovation 1000 articles in strategy + business; analysis 12

13 We ve Got No Idea Performance at Idea Generation and Idea Conversion Highly Effective 11% 25% Idea Conversion Marginally Effective 46% 18% Marginally Effective Highly Effective Idea Generation Perhaps the most surprising result of this year s study of the front-end of the innovation process is just how many companies say they simply aren t very good at it. A full 46 percent of respondents say their companies are just marginally effective or average at generating ideas and converting them to commercial projects. A similar proportion (40 percent) told us last year that their company s culture did not support efforts to come up with new ideas. It is clear that many companies have yet to master the right mix of factors to foster sustained innovation. 13

14 Matthew Ganz, vice president and general manager of research and technology at the Boeing Company: If you have a creative idea and it doesn t create value, it s not technology. It s art. If you re all about value creation with no creativity, the accountants are going to take over. You need to prime the pump with creative ideas, and then you need to have rigorous processes in place to turn those ideas into dollars. 14

15 We ve Got No Idea (continued) Source: Bloomberg data, Top 10 Most Innovative Top 10 R&D Spenders Financial Success vs. Idea-Generation Performance Highest Possible Score: 100% FINANCIAL COMPARISON OF IDEA GENERATION PERFORMANCE FINANCIAL COMPARISON OF IDEA CONVERSION PERFORMANCE Normalized Performance of Industry Peers: 50% 46% 45% 65% 50% 52% 54% 50% 42% 60% 56% 58% 49% Lowest Possible Score: 0% Revenue Growth 5-yr. CAGR EBITDA as % of Revenue 5-yr. Avg. Market Cap Growth 5-yr. CAGR Revenue Growth 5-yr. CAGR EBITDA as % of Revenue 5-yr. Avg. Market Cap Growth 5-yr. CAGR Strongly Effective Marginally Effective Strongly Effective Marginally Effective Most of the 25 percent of survey respondents who said their companies were highly effective at both ideation and conversion also reported that they outperformed their peers on three important financial measures revenue growth, market cap growth, and EBITDA as a percentage of revenue. This correlation between effectiveness at the early stages of innovation and superior financial performance is a worrisome finding for the many companies that struggle at the front end. 15

16 Conversion Isn t Easy Majority of Ideas Don t Take Off PERCENTAGE OF IDEAS THAT MOVE TO DEVELOPMENT AND FULL COMMERCIALIZATION Approximately what percentage of your organization s ideas become product or service concepts that move to full development projects? Approximately what percentage of your organization s product or service development projects are launched into the market? 12% 70% 100% of ideas 23% 70% 100% of ideas 38% 30% 60% of ideas 33% 30% 60% of ideas 49% 1% 20% of ideas 43% 1% 20% of ideas The process of choosing which ideas to convert to full-scale product development is perhaps even more critical to a company s innovation success than the actual generation of ideas. The conversion stage is the point at which companies use all the processes and tools at their command to decide whether a given idea in the pipeline is a go or a nogo for a full-scale commercialization project. In the view of many innovation experts, this is where the most value is added. Nearly half of respondents reported that fewer than 20 percent of their projects were converted to full development projects. Of the projects that do move to full development, fewer than 20 percent are converted into commercialized projects, according to 43 percent of survey respondents. Survey results show that the smaller companies in the Global Innovation 1000 (those ranked ) rank themselves twice as effective at the twice as effective at the conversion stage as the top 100 spenders likely due to these organizations having an easier time converting ideas since they are smaller, more focused organizations. 16

17 Darlene Solomon, chief technology officer of the measurement company Agilent Technologies: In managing the conversion funnel, we re constantly asking ourselves, What have we learned about the technology that makes it more or less attractive than a year ago? What have we learned about the market and the competition that might help us decide whether the technology is even more valuable or more of a me-too technology now? What s changed within Agilent in terms of our business priorities, and how might this influence whether this is something that we want to continue investing in? 17

18 Tried and True Rules TOP 5 RANKING FOR WHICH OF THE FOLLOWING TOOLS AND MECHANISMS, IF ANY, DOES YOUR ORGANIZATION USE TO GENERATE NEW IDEAS? ALL RESPONDENTS (N = 685) Recoded Mean 45% 42% 40% 35% 30% 31% Includes "social media network mining", "seed funding for exploratory research", "external idea scouting", and "cross business unit communities/sharing 25% 20% 15% 22% 19% 18% 15% 10% 5% 0% Direct Customer Observation Traditional Market Research Feedback from Sales and Customer Support Idea Work-Out Sessions Technology Road Mapping All other categories (<15% each) Few companies succeed at innovation without ensuring that adequate processes are in place to generate new ideas, and that those processes are followed in a disciplined fashion. Despite recent high-profile coverage of companies seeking innovative ideas from social networks, the wisdom of crowds, and open innovation contests, in reality, the majority of new ideas still come from traditional sources. By far the most popular method for generating ideas is direct customer observation (ranked as one of the Top 5 most used methods by 42 percent of survey respondents). Other categories that were cited by less than 15% of respondents included tools such "social media network mining", "seed funding for exploratory research", "external idea scouting", and "cross business unit communities/sharing". 18

19 Tried and True Rules (continued) Social Networks are the least influential idea generation mechanisms for engineered products industries like Auto, Industrials, and Aerospace and Defense INDUSTRY BREAKOUT OF RESPONDENTS RANKING SOCIAL NETWORKS WITHIN THE TWO MOST USED TOOLS FOR GENERATING IDEAS Recoded Mean 15% 15% 11% 10% 10% Average Across Industries >10% 7% 6% 5% 3% 3% 2% 0% Software and Internet Healthcare Chemicals and Energy Computing and Electronics Consumer 0% Auto Industrials Telecom Aerospace and Defense Social Networks were ranked among the least commonly used "tools and mechanisms" for generating ideas; fewer than 10 percent of respondents ranked it among their top tools for idea generation. Highly engineered products industries like Auto, Industrials, and Aerospace and Defense were the least likely to use these mechanisms. 19

20 Innovation Strategy Models Five years ago, s research showed that nearly every company follows one of three fundamental innovation strategy models they are Need Seekers, Market Readers, and Technology Drivers and each model has its own distinct approach to the innovation process and to the customers and markets the companies serve. INNOVATION STRATEGY MODELS NEED SEEKERS Need Seekers, such as Apple and Procter & Gamble, make a point of engaging customers directly to generate new ideas and help shape new products and services based on superior end-user understanding. Their goal: to seek out both articulated and unarticulated needs, and then to try to get their new products to market first. MARKET READERS Market Readers, such as Hyundai and Caterpillar, use a variety of means to generate ideas by closely monitoring their markets, customers, and competitors, focusing largely on creating value through incremental innovations to their products. This implies a more cautious approach, one that depends on being fast followers in the marketplace. TECHNOLOGY DRIVERS Technology Drivers, such as Google and Bosch, depend more on their internal technological capabilities to develop new products and services, leveraging their R&D investments to drive both breakthrough innovation and incremental change, in hopes of meeting the known and unknown needs of their customers via new technology. The types of techniques and tools companies employ to convert ideas depend in large part on each company s innovation strategy. FRONT-END TOOLS, MECHANISMS, AND STRUCTURES EMPLOYED BY COMPANIES Top Ranked Front-End Mechanisms - Sales & Customer Support Feedback - Traditional Market Research Market Readers Top Ranked Internal Network Structures - Communities of Practice - Organized Conferences w/technical staff Need Seekers Top Ranked Front-End Mechanisms - Idea Work-out Sessions - End-user focus groups Top Ranked Internal Network Structure - Focused Technical Innovation Networks across the business No distinct difference in External networks by strategy model All Three Top Ranked Front-End Mechanism - Direct Customer Observation Top Ranked Internal Network Structures - Innovation Champions - Cross-unit Staffing (non-rotational) Top Ranked External Network Structures - Customers - Channel Partners & Suppliers Tech Drivers Top Ranked Front-End Mechanisms - Technology Road-mapping - Meetings w/ External Technical Community Top Ranked Internal Network Structures - IT Collaboration Tools - Facilities Layout Respondents from companies identified as following a Need Seekers strategy reported to be the most effective among the strategy models at both the idea-generation and conversion stages. - A full 50 percent of Need Seekers reported being highly effective at both. - Just 12 percent of Market Readers and 20 percent of Technology Drivers reported being highly effective at both. It is important to remember that companies can significantly outperform their peers no matter which of the three strategies they follow. A far more critical factor is how well they follow their chosen innovation strategy. Companies that align their innovation strategy to their business strategy, capabilities, internal cultural support for innovation, and front-end processes have a distinct advantage in the race for new ideas, products, and services. 20

21 METHODOLOGY identified the 1,000 public companies around the world that spent the most on research and development in 2011 (companies for which public data on R&D spending was available). To be included, companies had to make data on their R&D spending public; all analysis is based on the most recent annual financial data published as of June 30, Subsidiaries that were more than 50 percent owned by a single corporate parent were excluded if their financial results were included in the parent company s financials. This is the same approach used in the previous seven years in which the study was conducted. analyzed key financial metrics for each of the top 1,000 companies over the past decade including sales, gross profit, operating profit, net profit, R&D expenditure, and market capitalization. All foreign currency sales and R&D expenditure figures prior to 2011 were translated into U.S. dollars according to the average exchange rate in Each company was coded into one of nine industry sectors (or other ) according to Bloomberg s industry designations and into one of five regions as determined by each company s reported headquarters location. To enable meaningful comparisons across industries, indexed the R&D spending levels and financial performance metrics for each company against the industry group s median values. Figures for total shareholder return were gathered and adjusted to reflect each company s total shareholder return in its local market and to control for local market performance fluctuations. conducted a separate online survey of nearly 700 innovation leaders in companies around the world to explore how companies employ various tools, processes, mechanisms, and networks in the front-end phases of innovation as they relate to successful innovation and financial performance. Survey respondents were also asked a series of questions to help classify their companies into one of our three innovation strategy models: Need Seekers, Market Readers, or Technology Drivers. The classification of each company into one of these three models is based on an algorithm applied to their answers to our four profiling questions. 21

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