The Secret to Increasing Growth without Increasing R&D Spending

One of the great things about the technology business is that you invent your company’s assets by harnessing the global brain power of your enterprise. A few years back, Strategy+Business published their annual survey of the 1000 companies in the world that spent the most on R&D. What they found has important implications for innovators who want to outperform their peers:

S+B found that spending more on R&D did not equate to increased financial performance.

This study represented $182 billion in spending among the biggest and the best companies. How could there not be some effect?

The expected output of more spending would have been a waterfall of new and innovative products emerging from these companies, yet from this large statistical sample, this was not the case. In engineering, we call this decoupling. The analogy here is from electronics: when the interaction between two circuit elements is so weak that they’re unable to pass energy to each other, they are said to be decoupled. In this case, when more spending in R&D fails to result in the passing of “energy” to the cash-generating operating groups of the business, it’s a very big deal.

So what is driving results? An excellent Operating System.

S+B pinpointed the pattern of success to a combination of culture and alignment. Specifically, this means creating a culture consistent with the overall innovation strategy of the organization; think of this as your company’s operating system (OS). The S+B researchers grouped respondents into three different OS types:

  • Tech Drivers: These companies drive innovation via technological achievement. By design, this is the least pro-active at engaging the customer.
  • Market Readers: These have a fast-follower strategy, and favor a “baby steps” approach via small, low-risk projects when possible.
  • Need Seekers: These organizations strive to be the first movers by pro-active customer engagement.

Need seekers far outperformed their peers in both enterprise value and profitability. Need seekers live to find what I describe in my ebook as the Growth Zone. This is the innovation area where customer information is mined to find your next set of product requirements.

  • The cultural attribute that drives need seeking is openness.  It is openness to ideas from customers, suppliers, competitors and other industries. Many organizations find that once they open their research filters to look for the “aberrant” customer requirements, there is customer investment, which has already largely validated the business case for the next product. Finding and capitalizing on these emergent needs leads to high ROI’s and efficient market discovery.
  • Need seeking creates highly-correlated business cases for the organization to build into.  It is much easier for the enterprise to make the necessary investments when all the stakeholders can read the well documented needs of key customers and see how meeting that need will result in a well received and profitable new event. It relieves the R&D team from the tyranny of never being able to “sell” their project to product operations teams.
  • Need seeking is what gets you from breakthrough to breakthrough. There is a time and a place for tech drivers to revolutionize the industry and take the customer to a place they never imagined. Bell Labs took us there, Noyce took us there. It is difficult to capture the impact of the integrated circuit in a year-by-year survey. Somewhere on the globe, a group of researchers is developing the next enormous industry inflection (for instance, in biotech). Between these seminal peaks, there is much value for the need seekers to capture.

 Upgrading your OS: the culture-strategy connection

Over half the companies in the S+B survey reported that their innovation strategy was misaligned with their business strategy. Need seeker companies, on the other hand, had innovation strategies that were driven from the highest levels in the organization. This emphasis naturally led to a highly coherent agenda of innovation between research teams and product operations, allowing extremely efficient utilization of research resources.

What does this mean for leaders?

It means getting serious about the culture-strategy connection — in many cases your organization’s OS may not be functioning at its best. Here are four ways to give your company’s OS an upgrade:

  • Culture trumps investment, so invest in culture. There are certain capital-intensive or highly-regulated industries that will always require larger investments to play, but a remarkable number of industries are now more accessible to disruptive startups than ever before. This means that culture is the differentiator and should be built as carefully as any other intellectual asset.
  • Take the alignment between R&D and the rest of the organization seriously. There is tremendous value in managing this boundary well, so invest significant time in moderating the discussion between your research teams and product teams and there will be a tremendous payoff. Too small to have in house R&D? No issue, in this day of open innovation – there is solid research and lessons learned from the open source community that can help you get engaged.
  • Endorse some decoupled efforts. There are times when the R&D team must pursue an agenda different from the business team, such as when passing through market inflection points as described by Christensen et. al. These times should be the exception and not the rule.
  • Get everyone on the same page. When you have locked in your innovation agenda, talk about it everywhere and all the time. Talk about it at all hands meetings, in your written employee updates and newsletters. This will allow everyone in the organization to make great trade off decisions – key to new product cycle time.

Culture is a high-stakes balancing act.

Every day the operational team makes key tradeoff decisions. The manner in which those decisions are made reveal the true culture, regardless of what it says on the wall in the conference room.

There will always be strong tensions between researchers and product operations personnel — they have distinctly different missions and motivations. An overly-aligned R&D lab becomes a very expensive product development operation. A decoupled R&D lab might as well be a university. Keeping the agendas and egos sufficiently aligned and in service of the customer’s needs is a knife-edge balancing act that requires constant calibration.

Enterprises that do this serially build massive value for their participants, customers and shareholders — be one of them.  Please send me a tweet @scottpropp or drop me an email.

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