Profits Down, Spending Steady: The

Global Innovation 1000

Booz & Company’s annual study of the world’s biggest corporate R&D spenders finds that most companies
have stuck with their innovation programs despite the recession — and many are boosting spending to
compete more effectively in the upturn.

by Barry Jaruzelski and Kevin Dehoff

One of m any unknowns as the economy plunged into the Great Recession
was whether corporate leaders would put their money where their m ouths
were regarding research and development. For years, m anagers have
m aintained that R&D spending is a com petitive necessity — not a
discretionary activity that could be cut to prop up earnings during hard
tim es. Skeptics, on the other hand, suspected that companies would cut
their R&D budgets at the first sign of red ink. This year’s Global
Innov ation 1000 survey provides the first com prehensive empirical
answer to the question: The world’s biggest innovation spenders indeed
walked the walk in 2 008. R&D spending rose 5.7 percent in 2008, a
slower rate of growth than the prior year’s 10 percent increase, but in line
with the group’s 6 .5 percent increase in worldwide sales. (See Exhibit 1.)
And that increase in spending looks ev en m ore impressive given that
operating income for the group fell 8.6 percent in 2 008, and net income
plummeted 34 percent.

More than two-thirds of the com panies included in this year’s Global Inno
v ation 1000 m aintained or increased R&D spending in 2008, and even
though a third of the companies reported a financial loss for the year, we
found no correlation between financial losses and reductions in R&D
spending. Furthermore, our analysis
rev ealed that innovation investment is
increasingly viewed as essential to
corporate strategy: More than 9 0
percent of executives we surveyed said
innovation is critical as they prepare for
the upturn, and a majority have
m aintained or expanded their portfolios
and are pursuing new products to
im prove growth and m argins. (See
Exhibit 2.)

“Innovation is what drives our

com petitive position in all three of our
m arkets — automotive, professional,
and consumer — and therefore we can’t
back off,” says Robert Lardon, corporate
v ice president for strategy and inv estor
relations at Harman International
Indus tries Inc. Adalio Sanchez, general
m anager of IBM’s Sy stem X server
business, echoes that point of v iew: “I would argue that the recession is a catalyst for in creased innovation.”

These anecdotal observations confirm the data in this year’s Global Innovation 1000, the fifth of our annual analyses
of corporate spending on innovation and its connection to corporate performance. As in previous years, we identified
the 1 ,000 public corporations worldwide that spen t the m ost on researching and developing products and services for
their m arketplace. In addition, this year we conducted a special survey of nearly 3 00 senior managers and R&D
leaders from 230 com panies, which collectively spent more than
US$2 3 0 billion on R&D in 2 008, asking them detailed questions
about their companies’ response to the recession, and followed up
with in-depth interviews with a number of top R&D executives.

Not all com panies, of course, maintained or boosted R&D spending.

More than a quarter of the Global In novation 1000 cut their
innovation budgets in 2008. And m any companies were cautious:
The top 2 0 innovation spenders increased research and
dev elopment by only 3 .2 percent, compared with 10.7 percent for
these com panies in the previou s year. Further m ore, the early
ev idence indicates that as com panies entered 2009, spending on
innovation slowed further. Again, however, that slowdown came in
the face of ev en steeper declines in sales and income: Among the
52 2 companies reporting results for the first quarter of 2 009, R&D
spending decreased by 7.4 percent — which is still less than half the
rate of their 1 8.5 percent decline in sales. Also noteworthy is that as
the biggest R&D spenders have evaluated their investment
strategies in the dow nturn, they have continued to invest in R&D at
a higher rate than they have in capital expenditures. (See Exhibit 3.)

We believ e there are three primary reasons com panies are so

reluctant to cut innovation spending when times are extremely
tough.

1 . Innovation has becom e a core component of ov erall corporate

strategy. Given the fierce nature of business com petition in recent
y ears, a reduction in innovation efforts would be akin to unilateral
disarmament in wartime.

2 . Com panies in m ost sectors are ty pically committed to product

dev elopment cycles that extend for m any years — well beyond the
length of an average recession. If they are suppliers, they have often
already contracted to help develop their customers’ next new m odel; if they sell to consumer s, m issing an innovation
cy cle can mean being put out of the game entirely.

3 . Many companies see the recession as an op portunity to build their advantage over their com petitors — especially
weaker ones that may have to skimp on R&D for financial reasons. If the stronger companies can m aintain the pace of
innovation, the thinking goes, they may be able to gain market share quickly once the upturn gets under way in
earnest.

At the same time, even com panies that are m aintaining or increasing R&D spending are responding to the effects of
the recession. Every one of the top executives we interviewed said their companies are working hard to spend sm arter
— to get m ore bang for their R&D buck. We see three general trends that have either originated with the re cession or
accelerated during its course.
  As a rule, com panies are performing less pure and applied research. Instead, they are concentrating their
R&D budgets on product development and engineering. This has been a trend for several years — indeed, 44
percent of survey respondents said they spend less than 2 0 percent of their R&D budget on basic research
and advanced development — but it became even m ore pronounced during the recession. Managers hope to
bring new products to m arket to take advantage of the upcoming recovery. Nearly 40 percent of respondents
said their companies are shifting re sources from basic research in order to prioritize new product launches.
 The downturn has encouraged many companies — 4 0 percent, in our survey — to speed up their efforts to
m ake the innovation process m ore efficient.
 In response to the downturn, companies have become m ore risk averse; nearly half of survey respondents
say that their companies are now more conservative than before. Com panies are changing the criteria they
use when giving new products the green light, tightening their relationships with customers and consumers,
and watching their com petitors, and the marketplace, more carefully.

Although the downturn’s effects on global innovation efforts have thus been m ixed, m any companies clearly expect
that by standing fast, they can gain a significant competitive edge ov er their more cautious rivals, both now and in the
com ing recovery.

PROFILING THE 2008 GLOBAL INNOVATION 1000

Ev en during the recession, the com panies in this year’s Global Innovation 1000 study increased their R&D
spending in 2 008 by 5.7 percent, to US$532 billion. This is significantly less than 2 007’s 10 percent increase over
the prior year, but it is close to the 7.1 percent five-year com pound annual growth rate for the Global Innovation
1 000. R&D spending rose in 2008 despite the fact that almost a third of the companies in our study reported n et
losses for the y ear, and overall sales were up just 6.5 percent, considerably less than the prior year’s 1 0 percent
increase. R&D in tensity in 2008 — the percentage of sales devoted to R&D — rem ained the same as in 2007 for
these com panies, at 3 .6 percent. We estimate that this year’s total spend of the Global Innovation 1000 com panies
represents 81 percent of global corporate R&D spending of approximately $660 billion, and a little m ore than 50
percent of total worldwide R&D spending, including that of governments, of $1 .05 trillion. (See Exhibit 4 .)
The Toy ota Motor Corporation was the #1 spender on R&D for the third straight year, with a budget of just under
$9 billion. The company maintained its rank despite its first-ever loss, m ore than $4 .3 billion in 2008. Toyota’s
R&D spending was 5.7 percent lower, however, than it was in 2007. The #1000 com pany on our list was the Laird
Group PLC, a London-based m aker of electronics equipment, which spent $58 million on R&D. The top 2 0
com panies in creased R&D spending just 3 .2 percent in 2 008, com pared to 1 0.7 percent in the prior year — no
doubt because net income among the 20 fell from $115 billion in 2 007 to just $75 billion in 2 008, a startling 3 5
percent drop. (Even subtracting the General Motors Cor poration’s 2 008 loss of m ore than $3 0 billion, net income
for the group fell 9 percent.) Still, the top 2 0 spenders accounted for 26 percent of spending by the entire Global
Inno v ation 1 000. Three companies fell out of the top 2 0: Matsushita was ac quired by Pana sonic; Merck and Sony
were replaced by Siemens and Cisco Systems, both of which boosted R&D spending in 2 008 by m ore than 10
percent. (See Exhibit 5.)

The com puting and electronics industry retained its top spot in R&D spending among the industry sectors,
spending $149 billion, accounting for 2 8 percent of the total spend. As in previous years, health care and auto came
in second and third, spending 2 3 percent and 16 percent, respectively. Notwithstanding the massive decline in sales
that the auto industry has faced since the spring of 2 008, R&D spending in the industry increased, but only by 0.6
percent. Aerospace and defense was the only industry to see R&D spending fall, by 2 .3 percent for the companies
on this y ear’s list. Changes in R&D intensity, however, varied: Five industries — auto, computing and electronics,
consum er, industrials, and health care — increased their R&D intensity, while telecom , software and Internet,
aerospace and defense, and chemicals and energy decreased theirs. A 1.4 percent in crease in intensity, to 12
percent, allowed health care to take ov er the top spot in R&D intensity this year, and chemicals and energy de
creased its intensity by 10.4 percent, to 0.9 percent, the lowest of all the industries. (See Exhibit 6.)
 Com panies headquartered in the three major regions — North Amer ica, Europe, and Japan — continued to
account for 94 percent of t he total R&D spending of the Global In novation 1000, and every region, in cluding
China and India and the rest of the world, increased its spending. However, the rates of regional spending growth
were slower. Japan increased its spending by just 0.5 percent, Europe by 6.3 percent, and North America by 6.5
percent; the global five-year compound annual growth rate was 7.2 percent. (See Exhibit 7.) Overall, the recession
has had a noticeable, but relatively m ild, effect on R&D spending thus far. Given the weak growth in both ov erall
sales and net incom e, it’s no surprise that companies are spending som ewhat more cautiously on innovation. But if
that m eans the downturn is forcing companies to spend those innovation dollars m ore effectively, that’s all for the
better.

— B.J. and K.D.

Recessionary Effects
The downturn has taken a major toll on the worldwide economy, and the com panies that m ake up the Global
Innov ation 1000 have certainly not been immune to its impact. Overall, they spent $532 billion on R&D in 2 008, a
healthy 5.7 percent increase over 2007, but well below t he 10 percent increase from 2 006 to 2 007. Total sales were up
6 .5 percent, to $15 trillion — but again, it was a significantly sm aller increase than the 10 percent gain this same group
registered between 2 006 and 2 007. Thus the group’s R&D intensity — innovation spending as a percentage of sales —
rem ained the same at 3 .6 percent. And our analysis shows, as it has every year over the last five years, that the
am ount of m oney com panies spend on R&D bears no relationship to ov erall corporate performance.

The effect of the downturn varied significantly by industry, and no industry has felt the pain more than autos. Nine
out of the top 1 0 R&D spenders in the automotive sector cut their innovation outlays in 2008; the Toyota Motor
Corporation, for instance, which suffered the first loss in its history, reduced its R&D spending by nearly 6 percent,
though it still maintains its position as the #1 global spender on innovation. The software and Internet sector, on the
other hand, clearly sees the recession as an opportunity. Fully eight out of the industry’s top 1 0 innovation spenders
increased their R&D spending in 2008. And innovation spending in the computing and electronics industry was up
m ore than 4 percent, though the proportion of com panies that increased R&D spending was essentially un changed
from last year.

Ev en companies that are losing m oney are not necessarily cutting back on their R&D spending. Almost a third of the
com panies in the Global Innovation 1000 reported losses in 2 008, yet those companies were slightly less likely to
decrease R&D spending than they were to increase it. (See Exhibit 8.) No m atter what the impact of the recession, a
large percentage of the 1,000 companies we analyzed continue to view their efforts to innovate as a critical elemen t of
their ov erall corporate strategy.

The St rategic Imperative

The results of this year’s additional survey of 2 90 senior executives and R&D leaders confirm the vital role that
innovation plays in corporate strategy, and suggest that in novation spending is likely to hold up through 2 009 as
well. Fully 70 percent of respondents said their com panies were planning to either m aintain or increase their
spending on research and development during 2 009, and nearly three-quarters reported that they had maintained or
expanded their innovation portfolios during the recession.

In sev eral cases, the loom ing specter of recession became an inducement to greater innovation efforts. The $6.3
billion m ail services com pany Pitney Bowes Inc., for example, made a decision to invest m ore in innovation in the
m onths leading up to the downturn. Managers concluded that the com pany’s financial strength would allow it to
increase R&D spending, and they knew that doing so would put Pitney Bowes in an even better com petitive position
once the recovery began. (See “ Integrated Innovation at Pitney Bowes,” by David Dobson.)

Ev en companies facing business challenges feel they cannot back off on their innovation efforts. Hans Stork, who
ov ersees innovation at Applied Materials Inc.’s silicon unit, which m akes equipment used to m anufacture
sem iconductors, says his revenues are down significantly this year. Yet his customers continue to demand innovative
new products to m aintain their own competitive positions. “Our customers don’t seem to slow down,” he says. “One
would think that if there is less dem and and less m oney available, that som ewhere things would have to slow down.
But their com petitive nature plays tricks with that. The stronger companies want to stay on the same innovation page
so that at the end of the cycle, they have a stronger competitive position.”

Indeed, for m any com panies, the recession has catalyzed innovation, by forcing them to think more carefully about
their new product portfolios and their innovation processes and c osts. Notes IBM’s Sanchez: “When you’re in a
situation where you’ve really got to be judicious, to do m ore with less, that really drives a need for innovation and a
lev el of creativity that you m ight not otherwise have in normal times. Increased innovation doesn’t always have to be
about m ore dollars. It’s about how you use those dollars and how you accelerate som e products just to bring them
out.”
Product s and Cy cles
Ev ery innovation executive we interviewed cited the constraints of the product development life cycle as an additional
reason that R&D spending could not be cut in the short term. The reason is simple: The length of time it takes to
dev elop a new product varies significantly from industry to industry, but it is m easured in years rather than mon ths.
A new car, for example, can take up to four years, and a new drug more than a decade. Yet the typical recession rarely
lasts m ore than a year. That dynamic has been a significant force in m itigating the negative impact of this recession
on innov ation spending. (See Exhibit 9 .)

Harman International is a $3 billion m aker of high-end car audio and “infotainment” systems, as well as professional
and consumer audio equipment, with 75 percent of its sales com ing from the automakers. As the com pany entered the
recession, it was in the process of dev eloping 13 different car systems for automakers, none of which could be delayed.
“Through this downturn, we’ve had more engineering in terms of new infotainment platforms than in the history of
any infotainment supplier,” says Harman’s Lardon. “These programs have to be started from one to three years in
adv ance of their actual launch. The number of cars sold, of course, is down, and that’s been reflected in our top -line
rev enue. But that didn’t mean that we could reduce the engineering during this time. We had to get these th ings out to
launch.”

The com petitive dynamics of the computer and electronics sector can be even more intense. IBM’s Sanchez, who runs
the unit that makes Intel-based servers, notes that the product generations in his business som etimes take longer to
dev elop than the products themselves last in the market, so the product development cycle dem ands constant
refreshment. “You cannot all of a sudden just dry up the investment pipeline,” he says, “because in this particular
segm ent of the marketplace, if y ou miss a cycle, you’re out of the market.”

That doesn’t mean, however, that product development cycles can’t be shifted in response to the economic cycle. Alan
Grant, senior vice president for R&D in developing m arkets at Kraft Foods Inc., concurs with the vie w that
dev elopment cycles can be inflexible — ev en in consumer packaged goods, where companies develop thousands of
products every year. “The reality is that given the retail cycle, our [corporate] customers — if not our consumers —
expect us to bring to the m arket som e level of innovation in core categories at various times of the year,” he notes. At
the sam e time, however, the downturn has forced Kraft to m ake smarter decisions about the timing of product
launches. “Before the recession,” says Grant, “some of our developing-m arket businesses were considering som e new
prem ium initiatives. We never actually stopped development work on these products, but in som e cases we chose to
delay their launch and focus instead on launching more price-sensitive products to deal with the drop in consumer
purchasing power.”

Innovating for t he Upt urn

Ultim ately, to be sure, the global economy will recover; som e economic forecasters argue that the recovery began in
the summer of 2 009. The executives we spoke with emphasized the need to remain com petitive, and to m ake sure
they’re ready for the recovery. That’s when those com panies that have succeeded in m aintaining the pace of
innovation, such as Harman International, will find themselves at a real competitive advantage. Says Harman VP
Lardon, “When we emerge from this downturn, we will em erge leaner, more efficient, and more technologically
capable. This has been both a business m andate and a cultural imperative for us. Being an innovation leader and
having a best-in-class cost structure are not mutually exclusive.”

To that end, during the recession, Harman — whose branded car audio and premium infotainment systems have been
designed primarily for the high-end auto m arket — turned to its Chinese and Indian R&D teams to help bu ild a new,
“clean sheet” mid-priced infotainment system. It was developed independently of any auto manufacturer, in record
tim e, at substantially lower cost. The system can be incorporated into a new vehicle within a year, com pared to the
two to three years the process usually takes, speeding time-to-m arket and saving considerable expense. Lardon
believes the new system will position his com pany particularly well to profit from the recovery in the auto industry,
especially in Asia, whose auto m arkets have strong growth prospects.

The General Motors Corporation, despite all its struggles in the past year, is also looking to the future. As it came out
of bankruptcy in the summer of 2 009, the com pany had to significantly cut back on R&D, in part because it so
radically slimmed down its brand lineup. Still, says Alan Taub, who as GM’s v ice president of global research and
dev elopment has responsibility for the com pany’s advanced research, “doing so gave us the opportunity to clean up
our priorities. We’ve done t hat, and now we’re back to executing.” What Taub’s group is executing on, however, has
changed as well. As GM looks to shift its cultural focus from products to consumers, Taub’s team is at the center of the
cultural shift, working not just on the total vehicle experience, but also on how better to understand what GM’s
custom ers want.

The ROI of Innovation

Despite the opportunities the downturn has opened up for stronger players, nearly every company has been affected
by the slowdown in som e way. Even those companies that have not cut innovation spending dramatically are
trimming here and there, tightening management processes and reassessing their product development portfolios.
More than 4 0 percent of the respondents to our survey said they have become mor e conservative in their approach to
innovation, and 70 percent reported that they were adjusting their strategy to better capture changing customer
requirements.

The goal for nearly all the R&D executives we spoke with is to im prove the returns on their innovation investments, in
both the short term and the long. More than 40 percent of survey respondents said their companies were focusing on
process im provements to change R&D spend during the downturn, and a similar number reported that they were
getting better at killing bad projects. More than a third of com panies surveyed, for instance, said they were
terminating more exploratory projects that lacked specific timelines, and more than 40 percent said their com panies
were focusing more on newer products that have the potential to grow faster. “For the past two or three years, we
have been looking at our R&D portfolio, focusing on fewer, bigger ideas as opposed to lots of incremental little
things,” says Kraft Foods’ Alan Grant. “What the recession has done is change the filters through which we view the
portfolio. Which of these products might we bring to the front and which m ight we choose to backpedal on, given the
challenging economic times?”

Or consider the case of Applied Materials, which faces an unusually difficult innovation environment. Thanks to the
recession, quarterly revenues for all the top manufacturers of wafer equipment dropped by nearly 80 percent from
their peak quarter in 2 007 to their bottom quarter in 2009. As a result, nearly every comp any’s R&D spending has
rapidly outpaced revenues, and now companies must either bring that R&D spending down dramatically or grow
rev enue quickly. Meanwhile, the pressure to innovate in the chip business keeps increasing as the size of
sem iconductors becomes ever sm aller, and Applied Materials’ silicon group finds itself having to spend more and
m ore m oney on R&D to get the same results.

In response, the company has pulled all the internal levers it can, cutting back on controllable expenditures, paring
down low -priority projects, and focusing more on its m ost significant customers. Ultimately, however, that won’t be
enough, says innovation leader Stork. Under these circumstances, survival is m ore a m atter of the economics of
com petition. “R&D is not only a function of revenue but also of what your competitors do,” he says, “and that changes
how y ou look at the m etrics that relate to innovation ROI [return on investment]. How large is the market? What
m arket share do y ou have today? What growth is there in the market itself? How is y our competitor positioned? Do
y ou have a chance to grow there? All of the strong players in this recession are looking ov er their shoulders at what
the other guys are doing.”

Few com panies face Applied Materials’ combination of ext reme pressure to innovate and significantly declining
rev enues. So the company’s decision to diversify into other businesses, most notably solar panels, is especially
fortuitous. Doing so, Stork notes, allows Applied Materials to transfer its R&D expertise in silicon to other
technologies with similar requirements. That kind of thinking is critical in an economic environment that rewards
getting that slight extra boost from your R&D efforts.

The Downt urn’s Upside

Judging from the data in this year’s study, the results of our survey, and our conversations with executives, the
recession’s effect on innovation activity has not been as severe as som e observers of the business scene might have
anticipated. Innovation has become central to every company’s efforts to com pete, and the degree of com petition has
been in no sense reduced by the downturn; if anything, it has been heightened. Long product development cycles have
forced com panies to m aintain their R&D spending even when revenues decline. And most com panies are fully aware
of the need to be in position to profit from the com ing upturn.

In m any ways, the recession has forced the corporate sector to improve its approach to innovation. Virtually all the
com panies we contacted noted that they have learned to streamline R&D processes, to m ake sure their product
dev elopment filters m ore effectively reflect economic reality, to m ake sm art bets on advantaged technologies, and to
kill weak projects m ore quickly. All these changes should help them get more from their R&D investments ov er time.

As we head into a better business environment, sm art companies will see this recession as a learning experience.
Ev ery com pany should take the time to assess the strengths and weaknesses of its innovation systems and processes.
The downturn no doubt revealed som e m ajor gaps in innovation capabilities. Fix them now. Doing so right away will
pay dividends in terms of speed-to-m arket, quality of execution, and capacity — both in the com ing upturn and well
into the future.

BOOZ & COMPANY GLOBAL INNOVATION 1000: M ETHODOL OGY

Booz & Com pany identified the 1,000 public com panies around the world that spent the most on research and
dev elopment in 2 008. To be included, com panies had to m ake data on their R&D spending public; all data is based
on the last full-year data reported by June 3 0, 2 009. Subsidiaries m ore than 50 percent owned by a single
corporate parent were excluded because their financial results are included in the parent company’s reporting. This
is the same core approach we have used in the previous four years of the study.

For each of the top 1 ,000 companies, we obtained key financial metrics for 2 001 through 2008, including sales,
gross profit, operating profit, net profit, R&D expenditures, and m arket capitalization. All foreign currency sales
and R&D expenditure figures through 2 008 were translated into U.S. dollars at the average exchange rate for the
respective year. In addition, total shareholder return was gathered and adjusted for each company’s corresponding
local m arket. Exchange rate fluctuations in the list itself may affect com parison with prior years’ studies.

Each com pany was coded into one of nine industry sectors (or “other”) according to Bloom berg’s industry
designations, and into one of fiv e regional designations as determined by each com pany’s reported headquarters
location. To enable m eaningful comparisons across industries, we indexed the R&D spending levels and financial
performance metrics of each company against its industry group’s m edian values.

To understand more about the impact of the recent economic downturn on innovation spending and strategy, we
also conducted a Web-based survey of m ore than 290 senior managers and R&D professionals from 230 different
com panies around the globe. The companies participating represented m ore than US$230 billion in R&D spending,
or 4 4 percent of the total Global Innovation 1000 R&D spending for 2 008. Respondents came f rom all the industry
 sectors; geographically, 4 9 percent came from North America, 3 8 percent from Europe, 13 percent from Asia, and
less than 1 percent from the rest of the world.

Reprint No. 09404

AUTHOR PROFILES:

 Barry Jaruzelski is a partner with Booz & Company in Florham Park, N.J., who leads the firm’s work for high -technology and
industrial clients. He has spent more than 20 years working with clients, specializing in corporate and product strat egy, pr oduct development
efficiency and effectiveness, and the transformation of core innovation processes.

 Kev in Dehoff is a partner with Booz & Company in Florham Park, N.J., and is the global leader of the firm’s in novation business.
He has spent more than 15 years helping clients drive growth and improve perfor mance through innovation, in areas including research and
development, technology management, product planning, and new product development.

 Also contributing to this article was consulting editor Edward H. Baker.

Источник: Strategy+Business