Nine in 10 Companies Cite Innovation as "Critical" to Preparing for Upturn
Corporations Are Getting Better at Killing Bad Projects
NEW YORK--(Business Wire)--
In the face of a severe global recession, the world`s 1,000 largest publicly
traded corporate research and development spenders increased spending on R&D in
2008, affirming the critical importance of innovation to their corporate
strategies, according to global management consulting firm Booz & Company`s
fifth annual analysis of global innovation spending, released today. R&D outlays
for these companies rose by 5.7 percent to US$532 billion, even as sales were up
only 6.5 percent. While the increase in 2008 R&D spend was less dramatic than
2007's gain of 10 percent, it was just slightly less than the 7.1 percent global
five-year compound annual growth rate (CAGR) for R&D.
Overall, more than two thirds of companies maintained or increased their R&D
spending in 2008, despite more than a third (34 percent) reporting that net
income plummeted last year, according to the study. More than a quarter of
companies decreased their R&D allocation in 2008.
Booz & Company analyzed the world`s top 1,000 public corporate research and
development spenders - the Booz & Company Global Innovation 1000 - in what
continues to be the most comprehensive effort to assess the link between R&D and
corporate performance. The study looked at R&D spending and its link to
corporate performance, uncovering insights into how organizations can get the
greatest return on their innovation investment. New to the study this year is an
in-depth survey of nearly 300 senior managers and R&D professionals from 250
companies around the globe that probes the impact of the downturn on innovation
spending and strategy.
Key findings of the report include:
Innovation is viewed as increasingly vital to corporate strategy. More than 90
percent of those surveyed say that innovation is critical as their companies
prepare for the upturn, and fully 70 percent of respondents state their
companies are either maintaining or increasing their spending on R&D in 2009,
according to Booz & Company. Furthermore, the top 100 companies in the
Innovation 1000 clearly signaled their investment priorities by increasing R&D
spending by 3.2 percent while reducing overall capital expenditures by one
percent.
"Reducing efforts on innovation would be similar to unilateral disarmament in
wartime," said Barry Jaruzelski, Partner at Booz & Company. "Now is an opportune
time to build advantage over competitors, especially weaker ones that may have
to skimp on R&D for financial reasons. Overall, the study demonstrates an
optimistic outlook on the part of the companies in the Innovation 1000."
Companies are spending more, but more wisely. "One result of the recession is
that it has forced companies to think more carefully about their innovation
processes and portfolios - for both good times as well as bad," observed Kevin
Dehoff, a Booz & Company Partner. "This held true through the most turbulent
quarters these companies have navigated, indicating they`re ready to make smart
bets that will pay dividends in the coming upturn." Accordingly, the survey of
senior managers and R&D directors reveals that seven in 10 companies are now
adjusting their strategies to better capture changing customer requirements.
Nearly half of the respondents report becoming more risk averse in their
approach to innovation, changing the filters they apply when green lighting new
R&D projects. More than 40 percent said their companies are focusing on process
improvements to change R&D spend during the downturn, and a similar number say
they`re getting better at killing bad projects, as well as focusing more on
newer products that have the potential to grow faster.
The top 20 innovation spenders increased their budgets by just 3.2 percent. This
gain is less than one-third the 10.7 percent rise in 2007 and was the result of
a precipitous 35 percent drop in net income among the 20 companies, which fell
from $115 billion in 2007 to just $75 billion in 2008. Still, the top 20
spenders accounted for 26 percent of spending by the entire Innovation 1000.
Recession`s impacts on R&D vary widely by industry. In 2008, as last year,
two-thirds of R&D spending was concentrated in three industries: computing and
electronics (28 percent), health (23 percent), and automotive (16 percent).
* No industry felt the pain more than auto with nine out of the top 10 R&D
spenders in the category cutting their innovation outlays in 2008. Overall, 60
percent of auto companies in the Global Innovation 1000 decreased R&D spending,
compared with 25 percent who decreased R&D last year. Yet the remaining 40
percent of auto companies on the list increased spending enough that the auto
sector on a net basis slightly increased R&D spending overall by 0.6 percent.
* The Software and Internet sector, on the other hand, clearly has seen the
recession as an opportunity. Eight out of the industry`s top 10 R&D spenders
increased their R&D spending last year.
* R&D spending in the computing and electronics industry was up more than 4
percent, though the proportion of companies that increased R&D spending was
essentially unchanged from last year.
* Healthcare companies spent the most on R&D as a percentage of sales -- 12
percent -- followed by Software and Internet (11.4 percent). In contrast
Telecom, and Chemicals and Energy, spent the least, 1.4 percent and 0.9 percent,
respectively.
* Aerospace and Defense was the only industry to see innovation spending sink,
down 2.3 percent.
Every global region increased its spending. North American, European, and
Japan-based companies retained their 94 percent share of the global 1000
innovation spend. Every region, including China and India, increased its
expenditures, though they did so at slower rates. Japan upped its allocations by
just 0.5 percent, Europe by 6.3 percent and North America, 6.5 percent. These
levels were below the global five-year CAGR of 7.2 percent.
Additional study findings include:
* The top 10 global R&D spenders in 2008 were, in descending order: Toyota,
Nokia, Roche Holding, Microsoft, General Motors, Pfizer, Johnson & Johnson,
Ford, Novartis and sanofi-Aventis.
* R&D spending among the Global Innovation 1000 ranged from just under $9
billion spent by #1 Toyota to the $58 million spent by #1000 Laird PLC, a
London-based maker of electronics equipment, a wide range that explains why the
top 100 companies account for fully 62 percent of the total R&D spend of the
Innovation 1000.
* Sales of the Global Innovation 1000 grew 6.5 percent to $15 trillion in 2008,
a significantly smaller increase than the 10 percent increase this group
registered in 2007, and R&D spending as a percentage of sales remained the same
as the previous year, 3.6 percent.
* North American-headquartered companies on this year`s list spent 4.6 percent
of sales on R&D, a slight decrease compared with 2007, while
Japanese-headquartered companies spent 3.7 percent of sales, significantly up
from last year, and European-headquartered companies spent 3.2 percent, a
decrease from the prior year.
* Booz & Company estimates that the Global Innovation 1000 accounts for 81
percent of 2008 total global corporate R&D spending of $660 billion.
Booz & Company Global Innovation 1000:Study Methodology
Booz & Company identified the 1,000 public companies around the world that spent
the most on research and development in 2008 (companies for which public data on
R&D spending was available).
Booz & Company analyzed key financial metrics for each of the top 1,000
companies for 2001 through 2008 - sales, gross profit, operating profit, net
profit, R&D expenditures, and market capitalization. All expenditure figures
were translated into U.S. dollars according to the average exchange rate for the
year. In addition, total shareholder return was gathered and adjusted for each
company`s corresponding local market total shareholder return.
Each company was coded into one of 10 industry sectors (or "other") according to
Bloomberg`s industry designations, and into one of five regional designations
according to reported headquarters locations for each company. To enable
meaningful comparisons across industries on R&D spending levels, Booz & Company
indexed the R&D spending level and financial performance metrics for each
company against the median R&D spending level for that industry.
Booz & Company also conducted a web-based survey of over 300 senior managers and
R&D professionals from 250 different companies around the globe in order to
better understand the recession`s impact on R&D spending and strategy. The
companies participating represented more than $230 billion in R&D spending, or
44 percent of the total Innovation 1000 R&D spending for 2008. Respondents came
from all 10 industry sectors; geographically, 49 percent came from North
America, 38 percent from Europe, 13 percent from Asia, and less than 1 percent
from the rest of the world.
The Global Innovation 1000 study is available online at
http://www.booz.com/media/uploads/Innovation_1000-2009.pdf
About Booz & Company
Booz & Company is a leading global management consulting firm, helping the
world`s top businesses, governments, and organizations.
Our founder, Edwin Booz, defined the profession when he established the first
management consulting firm in 1914.
Today, with more than 3,300 people in 58 offices around the world, we bring
foresight and knowledge, deep functional expertise, and a practical approach to
building capabilities and delivering real impact. We work closely with our
clients to create and deliver essential advantage.
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