Whether more R&D Investments brings more Innovation Output – part 1

Common sense says that if one wants to improve the innovation output, one needs to either (a) increase the size of the opportunity set that goes in the so called 'Innovation Funnel' ; (b) Speed up the throughput of the 'Innovation Funnel' and/or (c) improve the variety of the opportunity set passing through the 'Innovation Funnel'.

Here I would like to emphasise two points (a) Innovation Funnel itself is a misnomer in Innovation Parlance as in a funnel whatever comes in goes out- this is not true as opportunities coming in are extensively filtered and only a limited few make to the end of the innovation pipeline and (b) Innovation is not an invention- it’s a product or service that actually solves a problem and eventually creates a business impact.

Typically the length of the throughput process (which many call the innovation funnel)  depends on the technology life cycle of the industry which can be 2-3 years for a software firm, 8-10 years for a pharmaceutical firm, 0,5 to 1 year for an Animation Studio and anywhere between 0,5-2 years for a consumer products firm. I believe the market complexity (pull) tends to shorten the life cycle whereas the inherent organisational complexity where there is a technological push tends to lengthen the life cycle. Both the push and the pull also determine the payoffs with respect to the respective products and services which again justify the investments in terms of resources committed over the life cycle.  Similarly the size of the opportunity set also depends on the industry.

In a paper in Research and Technology Management, Stevens and Burley, ‘ 3000 ideas = 1 commercial success’ chart down the mouth of the funnel or the size of the opportunity set for different industries. Pharmaceutical industry on an average for instance starts with around 10000 compounds to come out with one successful new molecular entity ( I knowingly am refraining from using the term ‘blockbuster’ as i don’t think over the last 5-7 years any pharmaceutical company has come up with any true blockbuster); Venture Capital Firms start with around 3000 prospective investments to eventually to find one profitable idea; consumer products companies work with 500-600 product ideas anytime to come out with one successful products etc.

The third element – improving the variety of the opportunity set can be achieved by either improving (a) diversity in the R&D organisation (b) having a global spread with respect to the R&D organisation or (c) Collaborative Innovation, procuring product ideas through an innovation ecosystem.

It is interesting to see that many companies even now believe that they can improve the chances of success with respect to innovation just by increasing their R&D investments. My research shows that majority of the R&D intensities (R&D investments as a percentage of Revenues)  in several industries are (a) grossly ineffective and (b) follow a zigzag pattern- first is increased for a couple of years; once a successful product comes out is again slashed down.

The Zigzag pattern is not typical of one industry and companies do slash R&D investments whenever products do well in general-notwithstanding the fact that a dollar spent today in R&D doesn’t bring revenues today but after some time. Most of the companies henceforth don’t have a R&D Governance in their organisations- they think they have but in fact they don’t.

For example if you look at Apple- it certainly does not have the highest level of R&D investments in its peer group then too it’s the most successful. Apple has built an R&D organisation which plays a technology broker. This enables Apple to source in product ideas from the outside ecosystem very fast.  Big R&D commitments actually sometimes hamper innovation as they (a) make people to run behind the ‘knowns’ rather than the ‘unknowns’ (b) people start framing problems in technological terms rather than what customers really want or need and (c) they make it more difficult for innovators to kill projects ( sunk costs become an irrational liability)  and also deincentivise collaboration (why should I collaborate with a garage start-up when I have a couple of billions earmarked to do crazy tests).

Motorola already sunk billions of dollars to support its Iridium project even though there were enough signals to show it did not have a market. Similarly stories of arm-twisting suppliers on the name of collaboration in automotive industry are common. Similarly size in other industries plays a key role in determining whether a collaboration is a collaboration on equal terms. In fact, collaboration between various organisations in ‘lead markets’ or ‘ cross-breed technologies or markets’ such as e-mobility is more equitable. There an automotive OEM cannot dictate terms to a utility OEM- both need to respect the expectations of each other.

Another reason is that a lot of process knowhow or product knowhow in patents is never monetised when R&D commitments are substantially larger as there is a big throughput pressure. It’s good to have a blockbuster out of 10000 NMEs (New molecular entitities)  tested- but are all of 9999 NMEs useless for any product use in any industry?

What about even a larger number of patents which researchers laboriously file? Some protect the IP around the drug that is launched, what happens to the auxiliary ones? Are they put to use in any form? 8-10 years of product development life cycle, 10000 NMEs, thousands of research papers, hundreds of patents and R&D investment worth billion(s)- just for one drug that might bring back billion(s) invested? Are we stuck in a box where we are made to think this is the only way it could work, only model of doing business?

R&D investments can improve the correlation to innovation input- however through some radical changes. I will talk about those changes in my next blog.

About Gunjan Bhardwaj

Gunjan Bhardwaj, advisor, senior editor and member of the editorial board. Gunjan is the leader of the Global Business Performance Think-tank of Ernst&Young. He is also the solution champion for Pricing strategy and effectiveness as well as Innovation management in the advisory services of Ernst & Young with a focus on Pharmaceutical and FMCG sector.

Gunjan is also a guest professor for Growth and Innovation management at European Business School (EBS) in Germany and a member of the scientific advisory board of Plexus Institute in the US which researches on complexity in health sciences.

Gunjan has published a number of papers and articles in various Journals and magazines and has been a frequent speaker in conferences on marketing and innovation related topics. He is also the chief editor of the quarterly journal of Ernst & Young’s advisory practice called Performance.
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