Sources of business innovations: beyond R&D
While the level of R&D spending remains a popular proxy for innovativeness among economists, policy-makers and some managers, there is ample evidence that the amount a firm spends on R&D is a poor indicator of how much it innovates and an even worse one of how well it innovates.
Indeed, there are many very innovative firms that do not invest significantly in R&D. In fact, from a quantitative point of view, R&D is not even the most important innovation input – it is the level of investment in capital equipment related to the introduction of new products.4
Furthermore, across sectors, higher R&D spending does not ensure higher performance, be it in terms of growth, profitability or shareholder returns. Multiple studies have found no discernible statistical relationship between the level of R&D spending and various measures of business success.
As an example, Dell revolutionized the personal computer industry while spending much less (in absolute and relative terms) than its main competitors. Similarly, large pharmaceutical firms dwarf small biotech firms in terms of R&D expenditure but tend to be much less effective, taking into account the number of drugs that reach regulatory approval. Finally, the US firm that had the highest level of R&D spending during the twenty-five years up to 2010 is… General motors (GM), which was on the brink of bankruptcy in 2010 and had to be bailed out by the government.
One potential explanation for this apparent disconnect between R&D spending and business performance is related to poor R&D management, as R&D investments can be wasted on unsuccessful or irrelevant projects. But thirty years of improvements in the way that R&D is managed across firms has not resolved this apparent paradox, and it would be very bold to assume that R&D is still poorly managed in the majority of firms.
An alternative explanation is that there are many other sources of innovation beyond R&D, either in other parts of the organization or outside it. Firms can therefore be successful by leveraging those other sources. Conversely, firms that fail to do so might lose their competitive edge even if they have strong R&D capabilities.
There are indeed various types of discontinuities that can trigger the emergence of an innovation, hence various directions inn which to look for innovation opportunities. These are detailed below and can relate to challenges, evolutions or revolutions.
The first category of sources of innovate on relates to challenges to received wisdom or existing assumptions. Such challenges might result from the unexpected success or failure of a project or experiment. From whisky to X-rays, history is indeed full of accidental discoveries.
Such challenges can also be caused by an unexpected market reaction, when an offer provides different benefits than those for which it was designed. As an example, several drugs having positive side-effects became successes based on the side-effects rather than on their initial purpose (see the short case in Chapter 7). Another example is the first interactive cell-phone services, which were aimed at affluent businessmen but were in fact adopted by teenagers and gamers.
In this situation, the issue for the organization is to recognize in such an unexpected event an opportunity to be explored, rather than a deviation from predefined plans or objectives. This is