You can't buy yourself an innovation

The expenses on R&D is the most popular indicator of company innovation level. And many organizations are following that. They dump money on R&D with the hope to innovate more. But the question is, Is there a correlation between innovation rank and R&D expenses? There is a lot of related information you can find on the web, we, however, made our own analysis that confirmed that high R&D spending does not mean high innovation level of a company. In short, you can’t buy yourself an innovation. High innovation rank at low R&D cost should be the preferable target for a company. The application of creative thinking approaches and problem-solving tools are necessary to achieve this target.

Increase in R&D expenses

So, what can we do to increase the innovation level of a company? In many cases, the recommendation will be to increase investment in innovation (or in R&D). And, this is what typically happens. Companies increase their investment in R&D year over year.

The chat below, show just some examples of companies with constantly increasing R&D expenses:

Ref: https://www.macrotrends.net/stocks/charts/INTC/intel/research-development-expenses and https://www.statista.com/

Innovation Rank versus R&D Spending

Since the companies are rated according to spending on R&D, is it good enough to spend more on R&D projects to be innovative? Not really. According to the analysis published in Innovation Versus R&D Spending the R&D spending is not the driver of innovation.

We performed the analysis impact of R&D spending on Innovation rank for 2018 (to avoid data bias by the pandemia). We took into account about 40 high-end innovation companies.

R&D spending in the form of R&D Intensity (percent share of R&D spending out of revenue): https://www.ideatovalue.com/inno/nickskillicorn/2019/08/top-1000-companies-that-spend-the-most-on-research-development-charts-and-analysis/
Innovation Rank: https://www.bcg.com/en-il/publications/2018/most-innovative-companies-2018-innovation . Innovation Rank calculation is not trivial, and currently out of our scope.

We incorporated all the data and built the chart showing Innovation Rank versus R&D Intensity (Annual R&D spending/Annual Revenue, in %).

As one can see, there is no real correlation. Let’s try, however, to make some more sense out of this chart.

Let’s modify the chart to make it useful for our analysis. If we apply logarithmic axes and invert Innovation Rank because low numbers correspond to better innovation performance (higher level of innovation), we will get the chart as shown below:

The chart separates all the companies into for groups.

The X-axis is R&D Intensity – R&D relative cost is separated into two parts:: Low R&D Cost (<10%) and High R&D Cost (>10%).
The Y-axis is Innovation Rank – separated into two parts: High Level (<10) and Low Level (>10)

Now, this chart looks more informative.

We split the entire area into four fields:

Top-Left field is the most preferable – High Innovation performance achieved with low cost – R&D is very effective
Top-Right field is less successful – High Innovation performance achieved with high cost – R&D is effective, but the cost can be reduced
Bottom-Left field is indifferent to innovation – Low Innovation performance with low cost – relevant strategic solutions are needed
Bottom-Right field is problematic – Low Innovation performance achieved with high cost – R&D is not effective and should be improved

To summarize, the recommendations for each field is shown below:

The chart below shows companies in the different groups according to the Innovation Level and R&D Cost:

How to improve R&D effectiveness

The top-left (green) field is the most preferable and profitable. The companies in this group manage the R&D very effectively.

So how do we move there? Well, it is necessary to make R&D less costly and more effective. But, how? A couple of recommendations here:

Continue investing in modern equipment, but do not forget to invest in the people. For instance, to make a new process or a new product it might happen that one engineer will need 10 cross-sections and TEM images, while another one will require 1000 to make the same work. It means that the second engineer will spend much more money – his work is less effective.
Invest money to engineers, spend money on education, make them problem solvers and innovators, provide them with problem-solving instruments and software as you give excel, JMP, or similar, to support their work on statistical analysis. Allow your engineers to use innovation platforms and tools that help them think, solve problems, and innovate.

Speedup your innovations

It is free!

Good Luck