When Apple came up with Mac, IBM was investing 100 times more in R&D than Apple... when Xerox was spending billions at its PARC research centre, others were becoming market leaders in laser printers and mouse, which Xerox invented... and now, when western CEOs are shying away from billion dollar R&D investments, Indian CEOs have began to pour in more and more... and that’s for a reason for sure!
Research & Die! That’s exactly what we said in 2006 (see 4Ps B&M issue dated September 14, 2006) when we argued that those prodigious commentaries on R&D’s capacious contributions to top & bottomlines, and those golden treatises on the voluminous powers of R&D were equivalent to one huge and most impressive looking word: Balderdash!
It all started at the start of this century when Dr. Scott J. Wallsten of Stanford wrote a paper titled ‘The R&D Boondoggle’, where he very strongly commented that internationally, leading firms have started investing lesser and lesser in R&D. And the reason, he deliberated, was that in general R&D spenders had received considerably lesser benefits than all others around them... Since then, time and again, researches have kept proving how even in the industries where R&D was supposed to provide the biggest benefits, it has gone on and accumulated losses that are statistically significant and not ignorable. What can be better examples than Sun Microsystems and Xerox, two prolific R&D investors? After investing over $2 billion in R&D every year for a decade and wiping out a large share of investors’ money, while the former finally got sold to Oracle, Xerox, which kept investing in R&D through its PARC research centre, failed to make money on its patents; even the laser printer and mouse, two of Xerox inventions, are now cash cows in the hands of competitors.
Unarguably, the devastation that the spectacularly researched Resilience Report (2005) of Booz Allen Hamilton, which surveyed the top 1,000 R&D spenders across the world (who constitute around 90% of the global corporate R&D spending) over six years, caused on the world of R&D remains unequalled till date. The report undertook the most massive correlation analysis between R&D and performance. We note here two statements from the report that have attained significance at least in contemporary history. The report statistically proved that “lavish R&D budgets don’t guarantee performance.” In fact, statistically again, the report turned the R&D world around with the statement that there existed “no correlation” between R&D spend and any performance factor (sales, profitability, shareholder return...). “No Correlation!”
To reconfirm if the trend sighted by the research still prevails, when we at B&E, with the statistical and research support of the IIPM Think Tank, carried out a similar correlation test on the top 20 R&D spenders in 2010 among the Fortune 500 companies (US) including the likes of Microsoft, Intel, Apple and IBM, the results came out to be even more shocking. The results indicate that over the past 5 years CAGR growth in R&D expenditure as a percentage of revenue has resulted in a decrease in revenue as well as profit and market capitalisation of these companies as they bear a negative correlation of 0.50, 0.64 and 0.36 respectively (see table below). Justifying the fact in a more intriguing manner Steve Ballmer, CEO, Microsoft, once said, “The lifeblood of our business is that R&D spend. There’s nothing that flows through a pipe or down a wire or anything else. We have to continuously create new innovation that lets people do something they didn’t think they could do the day before.” Microsoft under Ballmer has seen its m-cap destroyed from $580 billion at the start of this century to $230 billion right now (as on January 20, 2011). Despite his public statements, a fire-fighting Ballmer has reduced the company’s R&D billings as a percentage of revenue by 0.92% from 14.87% in 2006 to 13.95% in 2010. On similar lines, HP too brought down its R&D spend as a percentage of revenue by 1.57% between 2006 and 2010. Microsoft and HP managed to uplift their turnover by 41% to $62.4 billion and 37.5% to $126 billion respectively during the period R&D spend was reduced.
On the other hand, despite doubling up its R&D expenses from 4.11% of revenue to 9.53%, revenue per R&D dollar spent by Boeing has fallen dramatically to $10.50 in 2010 from $24.30 in 2006. The situation is no different for companies like Merck and Cheveron, which opted the R&D root to add to their top-lines over the past 5 years. In fact Merck, after investing more than $5 billion annually in R&D, with approximately 10,000 people, and with thousands of patents filed every year, has been able to introduce less than half a dozen new products in as many years. And their heart stopping story of Vioxx is a fable!
These results leave no doubt as to which way CEOs need to go when it’s about spending on R&D and the rate of acceptance of the fact is certainly improving at a smart rate. Be it MIT’s ‘Corporate R&D Scorecard’ – which proved how the top 150 corporate R&D spenders were investing significantly lesser and lesser in R&D – or the recently published (Winter 2010) Booz and Company report titled “The Global Innovation 1000” for 2010 – which indicated how the top 1000 R&D spenders of the world have cut down on their allocations on the front by 3.5%, to $503 billion in 2009 – they all stand tall vowing for the changing mindset. For that matter, over 55% of the global CEOs, who participated in 2010 NYSE Euronext CEO Report gave a huge thumbs down to any increase in R&D spending.
Research & Die! That’s exactly what we said in 2006 (see 4Ps B&M issue dated September 14, 2006) when we argued that those prodigious commentaries on R&D’s capacious contributions to top & bottomlines, and those golden treatises on the voluminous powers of R&D were equivalent to one huge and most impressive looking word: Balderdash!
It all started at the start of this century when Dr. Scott J. Wallsten of Stanford wrote a paper titled ‘The R&D Boondoggle’, where he very strongly commented that internationally, leading firms have started investing lesser and lesser in R&D. And the reason, he deliberated, was that in general R&D spenders had received considerably lesser benefits than all others around them... Since then, time and again, researches have kept proving how even in the industries where R&D was supposed to provide the biggest benefits, it has gone on and accumulated losses that are statistically significant and not ignorable. What can be better examples than Sun Microsystems and Xerox, two prolific R&D investors? After investing over $2 billion in R&D every year for a decade and wiping out a large share of investors’ money, while the former finally got sold to Oracle, Xerox, which kept investing in R&D through its PARC research centre, failed to make money on its patents; even the laser printer and mouse, two of Xerox inventions, are now cash cows in the hands of competitors.
Unarguably, the devastation that the spectacularly researched Resilience Report (2005) of Booz Allen Hamilton, which surveyed the top 1,000 R&D spenders across the world (who constitute around 90% of the global corporate R&D spending) over six years, caused on the world of R&D remains unequalled till date. The report undertook the most massive correlation analysis between R&D and performance. We note here two statements from the report that have attained significance at least in contemporary history. The report statistically proved that “lavish R&D budgets don’t guarantee performance.” In fact, statistically again, the report turned the R&D world around with the statement that there existed “no correlation” between R&D spend and any performance factor (sales, profitability, shareholder return...). “No Correlation!”
To reconfirm if the trend sighted by the research still prevails, when we at B&E, with the statistical and research support of the IIPM Think Tank, carried out a similar correlation test on the top 20 R&D spenders in 2010 among the Fortune 500 companies (US) including the likes of Microsoft, Intel, Apple and IBM, the results came out to be even more shocking. The results indicate that over the past 5 years CAGR growth in R&D expenditure as a percentage of revenue has resulted in a decrease in revenue as well as profit and market capitalisation of these companies as they bear a negative correlation of 0.50, 0.64 and 0.36 respectively (see table below). Justifying the fact in a more intriguing manner Steve Ballmer, CEO, Microsoft, once said, “The lifeblood of our business is that R&D spend. There’s nothing that flows through a pipe or down a wire or anything else. We have to continuously create new innovation that lets people do something they didn’t think they could do the day before.” Microsoft under Ballmer has seen its m-cap destroyed from $580 billion at the start of this century to $230 billion right now (as on January 20, 2011). Despite his public statements, a fire-fighting Ballmer has reduced the company’s R&D billings as a percentage of revenue by 0.92% from 14.87% in 2006 to 13.95% in 2010. On similar lines, HP too brought down its R&D spend as a percentage of revenue by 1.57% between 2006 and 2010. Microsoft and HP managed to uplift their turnover by 41% to $62.4 billion and 37.5% to $126 billion respectively during the period R&D spend was reduced.
On the other hand, despite doubling up its R&D expenses from 4.11% of revenue to 9.53%, revenue per R&D dollar spent by Boeing has fallen dramatically to $10.50 in 2010 from $24.30 in 2006. The situation is no different for companies like Merck and Cheveron, which opted the R&D root to add to their top-lines over the past 5 years. In fact Merck, after investing more than $5 billion annually in R&D, with approximately 10,000 people, and with thousands of patents filed every year, has been able to introduce less than half a dozen new products in as many years. And their heart stopping story of Vioxx is a fable!
These results leave no doubt as to which way CEOs need to go when it’s about spending on R&D and the rate of acceptance of the fact is certainly improving at a smart rate. Be it MIT’s ‘Corporate R&D Scorecard’ – which proved how the top 150 corporate R&D spenders were investing significantly lesser and lesser in R&D – or the recently published (Winter 2010) Booz and Company report titled “The Global Innovation 1000” for 2010 – which indicated how the top 1000 R&D spenders of the world have cut down on their allocations on the front by 3.5%, to $503 billion in 2009 – they all stand tall vowing for the changing mindset. For that matter, over 55% of the global CEOs, who participated in 2010 NYSE Euronext CEO Report gave a huge thumbs down to any increase in R&D spending.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
