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The Innovation Dilemma:

How to Achieve High Performance through Superior Research


& Development

Part I: Where and How Much to Spend on R&D

An Accenture paper in co-operation with the Economist


Intelligence Unit.

Introduction
Improving product innovation has become vital for every corporation striving
for high performance—especially given the increasing pressures of low-cost
competition, shorter product life cycles, and investors demanding profit and
revenue growth, sometimes on a quarterly basis. Indeed, Accenture’s survey
into high-performance businesses has revealed that innovation and continuous
renewal is a key element of performance anatomy—one of the building blocks
of high performance. Yet most firms remain caught in a web of complex and
sometimes conflicting realities. Market pressures tend to focus available
resources on existing products and the near term, seldom leaving organizations
enough maneuvering room to develop game-changing innovations. At the
same time, executives seem skeptical about how much they can learn from
the various metrics that attempt to quantify returns on R&D investments.
Communications & High Tech

There is, of course, no formula for It’s an old adage in research and improve product development and
success. To understand better how development that companies know helped increase returns on R&D
companies view current trends in half their early-stage projects will spending. To accomplish those ends,
measuring return on R&D, Accenture fail; they just don’t know which companies first must address two
and the Economist Intelligence Unit half. There was a time when large critical factors:
surveyed more than 125 executives corporations could take a laissez- • How much to invest
in the United States, Europe, and
faire stance toward such uncertainty, • Where to invest it
Asia. All came from companies
leaving managers to their devices
with annual revenues greater than
$500 million. Survey data were and sometimes treating research Most survey respondents said their
supplemented by in-depth interviews as an isolated function. Minimal companies devoted a consistent
with R&D executives from seven competition, market dominance and percentage of annual revenues
leading firms worldwide. long product introduction cycles all to research and development, but
reduced the need to change the indicated that more budgets should
This paper is the first of three that system. Those days are gone. R&D be allocated. Sixty percent said their
explore the findings of our research. departments increasingly are expected firms devoted at least 5 percent of
In this first installment, we discuss to create more, with the same or fewer annual revenues to research and
the issue of the R&D budget: how resources. Efficiency and effectiveness development; 85 percent said they
much to spend, where to spend it, have become universal mantras. This spend at least 2 percent of annual
and when to expect a return.
change has sharpened the need to revenues (Figure 1). But roughly

Figure 1 Figure 2
Amount companies spend on Product development funding allocated toward
R&D as percentage of overall improving existing products versus creating new ones.
company revenue.
33% Less than 50%
Less than 2% 14%
2-4% 24% 34% 51–75%
5-7% 21%
8-10% 14% 23% 76–90%
More than 10% 26%
Don’t know 1% 3% 91–95%
Total 100%
8% 96–100%

5% Don’t know

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Communications & High Tech

two-thirds of that money goes to Mark Lewis, hopes to grow the EMC’s Stages of Research
improving existing products rather earliest stage, research, from almost Research consists of exploratory
than creating new ones (Figure 2). non-existent to between a half- work seeking entirely new products
And about two-thirds of R&D spend- percent and one percent of the or applications. Advanced develop-
ing is allocated to products scheduled company’s R&D budget. Although ment is defined as early-stage
to hit the market in less than three it has increased its budget slightly, development of prototypes. New
years. Indeed, increasing returns is EMC is trying to hold down costs, product development is full-scale
largely influenced by how much is chiefly by funding university research development of new products, as
invested in new products and product in fields of particular interest to the well as preparing for manufacturing,
areas and how much is allocated to company. Development and sustaining testing and so forth. Product
keeping current products at the top engineering make up roughly 90 development refers to the develop-
of their game. These two areas can percent of EMC’s R&D budget. Lewis ment of the latest versions of
involve different types of personnel, wants to trim spending in those areas existing products and product
timelines, and metrics for determining and devote more funds to advanced lines. Sustaining engineering refers
success. Executives contacted for this development and new product to refining products already on
survey clearly prefer to boost creation development—the areas that produce the market, such as security
of new products while shrinking the the company’s highest returns on updates for software.
resources used to maintain and R&D spending. “If we could get to
extend existing ones. One-third of 5 percent on that, we’d be pretty
respondents said they devoted more good,” he says.
than half their product development
funding to creating new products; New product development is a
two-thirds spend at least a quarter particular focus for EMC, which is
of their budget trying to create concentrating on new products aimed
something new. at breaking into new markets. To that
end, last year it formed a Technology
EMC Corporation, for example, Ventures group to foster internal ideas
typically spends between 10 percent for new products and new product
and 12percent of its revenues on areas. Lewis says that to date, the
R&D (the company reported revenues company has secured most of its new
of $11.2 billion in 2006, of which products through acquisitions, adding
$1.3 billion went to research and that EMC is trying to generate more
development). As part of its budgeting new products internally. HP takes a
process, EMC identifies five areas different approach to allocating R&D
for potential investment: research, resources. It creates a two-by-two
advanced development, new product matrix with current and emerging
development, product development markets on one axis and current and
and sustaining engineering. (See emerging technologies on the other. It
sidebar, “EMC’s Stages of Research.”) then apportions its R&D monies into
EMC’s chief development officer, the resulting four quadrants (Figure 3).

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Communications & High Tech

The lower left corner, current The other quadrants represent departure from what the firm has
technologies and current markets, extending current technologies done in the past. Few organizations
more or less represents maintenance into new markets, or using new can afford to support long-term
spending on items such as ink-jet technologies to create product ventures based on basic science such
printers or PCs. The upper right improvements for current markets. as HP’s foray into nanotechnology.
quadrant represents risky bets on “We parse amounts in those four Companies like Siemens all pursue
things like nanoscale electronics quadrants,” says George Dies of such work, but even they have scaled
with immense potential for future HP Labs. “Everybody wants to drive back their efforts in the past 15 to
growth. Sometimes these bets pay more into the new areas—new 20 years. At Siemens, for instance,
off: In January, after years of support- markets or new technologies—and the “R” part of its R&D portfolio is
ing basic nanotechnology research, less on maintaining the current.” conducted by Corporate Research
HP announced it had discovered a and Technologies, which employs
way to increase up to eight-fold the Yet despite most companies’ desire 1,900 people at 10 labs worldwide
number of transistors it could fit to create something truly new, and is responsible 5% of a total $5.7
on programmable semiconductor organizations tend to focus on billion R&D budget. Yet even at this
chips, while simultaneously lowering short-term goals. That emphasis on major research organization, only
energy consumption. the here-and-now lowers the odds of about one-third of the work is
producing a radical, game-changing devoted to long-term projects

Figure 3
Hewlett-Packard’s Approach to R&D Allocation.

Emerging Extending current Placing bets on


Markets technologies to new unproven technologies
markets for new markets

Current Maintaining existing Improving existing


Markets products in current products with new
markets technologies

Current Technologies Emerging Technologies

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Communications & High Tech

more than five years down the road, “there are very, very different half as much and takes us half as long
says Reinhold Achatz. Another third approaches based on the product,” to get things to market.” Virgin Mobile
targets today’s products or the next says Corporate Vice President Will Australia keeps a separate capital
generation of products just one to Swope. For instance, he notes, the expenditure budget from Optus. Less
two years out, while the remainder company is already actively designing than a year into its new role, Virgin
is focused on generations two to its 2011 microprocessor, which has Mobile Australia successfully launched
five years away. a roughly five-year time horizon. an innovative product called Bean
Meanwhile, Intel maintains a shorter Counter. An online-only service for
A firm’s ability to sustain investiga- development schedule for chipsets pre-paid cell phone users, it sells
tions further out depends in part on and graphics engines, averaging about minutes cheaply and lets customers
its profitability or cash flow. Other two years. Virgin Mobile Australia track their usage, top off credit cards
factors are more structural, such as is responsible for all of the firm’s and perform other tasks. Virgin Mobile
whether the research arm gets at telecom efforts in that country. Peter Australia delivered the product in
least some of its funding from central Bithos, director of strategy and new about two-and-a-half months. “To
coffers, as opposed to contracts with markets, says nearly all product get flow-through from network to
business units. The more central development funding goes toward billing system to Web in real time—
funding it receives, the more likely it efforts that will hit the market in for a major telco to do that, that’s
is to pursue longer-term, open-ended less than two years. Most of those a major effort,” Bithos says.
investigations. “Having the ability products, Bithos notes, should
to differentiate and allocate funding actually reach the market in less In our next installment in this series,
from a centralized repository to fur- than one year. we will explore how companies are
ther its R&D unfettered by short-term tapping into alternative sources of
product requirements is one of the But these short timelines reflect the R&D, as well as the importance of
key drivers of high performance,” says rapid pace of the telecommunications standardizing R&D processes to
AJ Gupta, global product innovation industry, not an aversion to long-term drive innovation sustainability
lead at Accenture. product development. In fact, the and repeatability.
thirst for new and improved ways to
Since financial returns aren’t create novel products is keener than
expected for years, a company taking ever. As an executive at Australian
a long-term approach to innovation telco Optus, Bithos helped engineer
also takes a much different view his firm’s acquisition last year of
toward measuring the returns on this Virgin Mobile Australia (VMA). He
investment than it does with other then moved over to the newly
products, gauging progress by such acquired entity, championing the small
measures as technical milestones organization as “a low-cost innovation
achieved, scientific papers published, lab” that could try out new products
and the like (we will cover measuring more readily than a big telco. “Our
the returns of R&D investment in role is now to try new things and to
more detail in the third installment bring new things to market,” he says.
of this series). “Without touching legacy systems
of the mother ship, we can innovate
To a large degree, the time horizon and try new things with less cap-ex
of a company’s product development [capital expenditures]. At a company
efforts is industry- and product- level, if you have an entity like that,
dependent. At chipmaker Intel, that’s a very good thing. It costs us

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For further information or to Kevin Prendeville, Senior Executive Pat Weir, Senior Manager,
discuss these survey results in charge of Product Innovation and Product Innovation Initiative
please contact: PLM for Electronics and High Tech
Pat focuses on engineering process
A.J. Gupta, Accenture Managing Kevin Prendeville joined Accenture improvement and application
Director and Global Lead for Product in 1994. His main area of functional outsourcing. Examples of his
Innovation and PLM for Accenture expertise is in Product Development main clients are: Pratt & Whitney,
and Product Lifecycle Management Applied Materials, Raytheon, Sun
A. J. Gupta joined Accenture in 1996. efficiency and effectiveness. Client Microsystems, Cisco Systems Inc.
The main area of his functional work includes Sun, Boston Scientific, Email Pat at patrick.e.weir@
experience is in Product Development Cisco, Google, Applied Materials. accenture.com
and Product Lifecycle Management. He can be reached at kevin.p.
Examples of his main clients are: prendeville@accenture.com
Raytheon, Harley-Davidson, TSMC,
Motorola, EMC, Siemens, BSC, DLA.
He can be contacted at
a.j.gupta@accenture.com

Copyright © 2007 Accenture About Accenture Methodology


All rights reserved. Accenture is a global management In February 2007 the Accenture and
consulting, technology services and the Economist Intelligence Unit
Accenture, its logo, and outsourcing company. Committed conducted an online survey of 126
High Performance Delivered to delivering innovation, Accenture senior global executives, asking how
are trademarks of Accenture. collaborates with its clients to help their companies assessed returns
them become high-performance achieved on R&D spending. More
businesses and governments. With than half of respondents were
deep industry and business process C-level executives or held the title
expertise, broad global resources and VP, SVP, or Director. More than half
a proven track record, Accenture can worked in aerospace/defense; computer
mobilize the right people, skills and hardware, software, media, and enter-
technologies to help clients improve tainment; IT; telecommunications
their performance. With more than equipment; and electronic components
158,000 people in 49 countries, the manufacturing. Just under 40 percent
company generated net revenues of were located in Western Europe, while
US$16.65 billion for the fiscal year 27 percent were in the Asia-Pacific
ended Aug. 31, 2006. Its home page region and 18 percent were in
is www.accenture.com. North America. All executives
surveyed worked for companies
reporting annual revenues of more
than US $500 million. In addition
to the survey, we conducted seven
interviews with senior executives
in Europe, the Americas and the
Asia-Pacific region.