The Hindu Business Line : R&D spending and corporate success

Writers on corporate themes invariably take a dim view of countries and businesses low in research and development (R&D), ranking them by the ratio of R&D allocations to the GDP or the organisational budget, as the case may be. There are think-tanks and universities which regularly bring out R&D scorecards on the patterns and trends in R&D expenditure on government and company accounts.

India has always been close to the bottom of the heap with around one per cent of the GNP in R&D expenditure, of which the government accounted for nearly 70-80 per cent, with the private sector coming as a distant second with the balance. This has been assumed to be one of the reasons for its ‘Hindu’ rate of growth in earlier years and its not being able to make it to the big league of developed countries.

The importance assigned to R&D arises from the commonly held belief that innovative capabilities of an organisation or a country are directly proportional to its investment in R&D.

Corporate success, in particular, measured in terms of growth, profitability, shareholder return, introduction of products and responsiveness to market dynamics is taken to be a function of R&D investment. There has so far been no study of the correlation, if any, between R&D and corporate success.

Booze Allen Hamilton has to a great extent filled this void with the Global Innovation 1000 study of 1,000 companies representing nearly 85 per cent of all R&D activity in the private sector worldwide and over 50 percent of all R&D efforts public or private. An extremely revealing overview of the results of the study is available in a write-up in strategy+business Web site at http://www.strategy-business.com/li/leadingideas/li00057 which runs in the face of conventional wisdom in this field.

Briefly, the findings are that there was no statistically significant correlation between R&D expenditure and corporate success. There was no doubt some backsliding by companies at the bottom 10 per cent of R&D investment, but other than that, the fact of a company being in the middle of the industry peer group or in the top 10 per cent had no real impact on performance. As per the study, “It is really not about how much a company spends on R&D. It is about how the company goes about doing it — the processes, the tools, the organisation, the culture, and the portfolio choices it makes.”

Critical determinant

Curiously, there were companies whose performance was superior even though their spending on R&D was less. Nor did the number of patents seem to have anything to do with the ability of the companies to scale new heights. The critical determinant of corporate success, as emerging from the study, is the ability of the corporate management to integrate its R&D with its business strategy itself so that it becomes a distinctly business-driven process — a proposition mooted as early as in 1999 by Dr.Ashok Ganguly, former Chairman of the Unilever Company of India and its Worldwide Director of R&D, and developed in his seminal book Business-driven Research & Development.

The Booze Allen Hamilton study divides companies into three groups: Need Seekers, which have a deep understanding of their customers’ needs and are the first to hit the market; Market Readers, which monitor not only their customers’ needs but also their competitors’ moves; and Technology Drivers, which have a greater focus on breakthrough technologies anticipating, and even shaping, the needs of the future.

We need not worry about nomenclature. What is of paramount importance is to take to heart the study’s lesson that the more a company relied on direct customer insight, the better it did, regardless of the nature of industries and models.

B. S. RAGHAVAN

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