Culture Is Key – Increased R&D Budget Won’t Help

The annual Global Innovation 1000 Study from Booz & Company shows that spending more on R&D won’t drive results. The most crucial factors are strategic alignment and a culture that supports innovation.

The elements that make up a truly innovative company are many: a focused innovation strategy, a winning overall business strategy, deep customer insight, great talent, and the right set of capabilities to achieve successful execution. More important than any of the individual elements, however, is the role played by corporate culture — the organization’s self-sustaining patterns of behaving, feeling, thinking, and believing — in tying them all together.

Yet according to the results of this year’s Global Innovation 1000 study, only about half of all companies say their corporate culture robustly supports their innovation strategy. Moreover, about the same proportion say their innovation strategy is inadequately aligned with their overall corporate strategy.

Companies with unsupportive cultures and poor strategic alignment significantly underperform their competitors.

This disconnect, as the saying goes, is both a problem and an opportunity. Our data shows that companies with unsupportive cultures and poor strategic alignment significantly underperform their competitors. Moreover, most executives understand what’s at stake and what matters, even if their companies don’t always seem to get it right.

Across the board, for example, respondents identified “superior product performance” and “superior product quality” as their top strategic goals. And they asserted that their two most important cultural attributes were “strong identification with the consumer/customer experience” and a “passion/pride in products.”

These assertions were confirmed by innovation executives we interviewed for the study. Fred Palensky, executive vice president of research and development and chief technology officer (CTO) at innovation leader 3M Company, for example, puts it this way:

“Our goal is to include the voice of the customer at the basic research level and throughout the product development cycle, to enable our technical people to actually see how their technologies work in various market conditions.”

If more companies could gain traction in closing both the strategic alignment and culture gaps to better realize these goals and attributes, not only would their financial performance improve, but the data suggests that the potential gains might be large enough to improve the overall growth rate of the global economy.

There is no statistically significant relationship between financial performance and innovation spending, in terms of either total R&D dollars or R&D as a percentage of revenues.

To that end, we continue to emphasize the key finding that our Global Innovation 1000 study of the world’s biggest spenders on research and development has reaffirmed in each of the past seven years: There is no statistically significant relationship between financial performance and innovation spending, in terms of either total R&D dollars or R&D as a percentage of revenues.

Many companies — notably, Apple — consistently underspend their peers on R&D investments while outperforming them on a broad range of measures of corporate success, such as revenue growth, profit growth, margins, and total shareholder return. Meanwhile, entire industries, such as pharmaceuticals, continue to devote relatively large shares of their resources to innovation, yet end up with much less to show for it than they — and their shareholders — might hope for.

Last year, we looked at the innovation capability sets companies put together, how they vary by innovation strategy, and which groups of capabilities can best enable companies to outperform their peers. This year, we took a different vantage point, analyzing the ways that critical organizational systems and cultural attributes support those capability sets that are most likely to promote innovation success.

The results suggest that the ways R&D managers and corporate decision makers think about their new products and services — and how they feel about intangibles such as risk, creativity, openness, and collaboration — are critical for success.

As part of this year’s study, we surveyed almost 600 innovation leaders in companies around the world, large and small, in every major industry sector. As noted, almost half of the companies reported inadequate strategic alignment and poor cultural support for their innovation strategies.

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