Engaging Customers Pays Dividends
Companies that directly involve their customers in developing their products and services are more successful than those that don’t. That is one of the findings of Booz Allen Hamilton’s latest annual survey of corporate R&D spending.
In 2006, as in the two previous years of the Booz Allen Hamilton Global Innovation 1000 — the 1,000 publicly held companies around the world that spent the most on research and development — overall corporate revenues among these companies increased 10%. However, as in years past, the study found no statistically significant connection between the amount of money a company spent on innovation and its financial performance.
The study identified three distinct innovation strategies:
Need Seekers: These companies actively engage current and potential customers to shape new products, services, and processes; they strive to be first to market with those products.
Market Readers: These companies watch their markets carefully, but they maintain a more cautious approach, focusing largely on creating value through incremental change.
Technology Drivers: These companies follow the direction suggested by their technological capabilities, leveraging their investment in research and development to drive breakthrough innovation and incremental change, often seeking to solve the unarticulated needs of their customers.
This year, for the first time, Booz Allen looked more directly into the connections between corporate and innovation strategy, and between innovation strategy and in-depth customer understanding.
The most significant performance differences correlated not with their innovation strategies but with strategic alignment and customer focus. Over the past three years, companies that say their innovation strategies are tightly aligned with overall corporate objectives boasted 40% higher growth in operating income and 100% higher total shareholder returns than those whose innovation strategies are less aligned.
Companies that directly engaged their customer base had twice the return on assets and triple the growth in operating income of the other survey respondents.
The 200 list of the Top 20 spenders on R&D showed little change from 2005. The only company new to the list is Merck, which increased R&D spending by more than 24%, while Sony fell out of the top 20 (to number 21). The Top 20 companies spent a total of $121 billion on R&D in 2006, up from $114 billion. That is the same as the increase of 5.8% in 2005, and is lower than the companies’ five-year average growth of 6.1%.
The relatively slow spending growth in this year’s Top 20 can be attributed in large part to companies in the automotive sector: The average spend among the group declined 0.2% this year. Meanwhile, R&D spending among health-care companies — which includes Pfizer, Johnson & Johnson, GlaxoSmithKline, Sanofi-Aventis, Novartis, Roche, and Merck — grew an average of 11.3%.
Despite the slowdown in R&D spending growth among this year’s Top 20, the group’s R&D spending-to-sales ratio held steady, at an average of 6.9% That’s still more than double the average R&D-to-sales ratio of 3.2 percent for the other 980 companies in the Global Innovation 1000 this year.
The study also includes a list of high-leverage innovators, companies that, compared to other companies in 2006, got a significantly bigger performance bang for their R&D buck.
The full article The Customer Connection: The Global Innovation 1000 is available on the Strategy + Business site. Strategy + Business is published by Booz Allen Hamilton.
You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
