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Which Innovation Efforts Will Pay?
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By Alexander Kandybin
Fall 2009
Reprint 51115
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Volume 51, Number 1, pages 53-60, 8 pages
Primary Topic: Technology and Innovation
Secondary Topic: Corporate Strategy
SummarySuccessful innovation — the kind that leads to customer engagement and profits — is rare and hard to
achieve, or so one might conclude from observing the results of many companies’ innovation efforts.
Some have tried investing intensively in research and development. But the author recently studied public
companies representing almost 60% of global R&D expenditures and found that above a certain
minimal level, there is generally no correlation between R&D spending and financial metrics such as
sales or profit growth.
For many companies, developing new products is hit-or-miss. But according to the author’s research,
successful innovation is not magical. It comes from careful attention to a small number of important
criteria. The key question isn’t how much to spend, but how to spend. The author introduces a “return
on innovation investment,” or ROI2, methodology that correlates directly with organic growth and links
innovation spending with financial performance in ways that can lead decision makers to generate
higher, more reliable returns on innovation and R&D. The ROI2 approach is based on a series of innovation
studies conducted during the past seven years with companies in the consumer products, health
care and chemical industries.
To become more effective, a company needs to diagnose its innovation practices and capabilities. The
diagnosis can be quite different from one company to the next, and that is why adopting industry
benchmarks doesn’t work. The individual innovation profile represents the value and quality of a company’s
innovation portfolio and can be clearly expressed as an “innovation effectiveness curve.” This
curve lets companies plot annual spending on innovation projects against the financial returns from
those projects — and “solve for growth.” |
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