Renewing R&D
Like so much else in business, corporate spending on research and development (R&D) tends to be cyclical. After falling off in the last U.S. recession, overall R&D expenditures are on the upswing again. But there’s more to this cycle than meets the eye. R&D spending is not just rising; the focus and methods of R&D are shifting.
In 2006, R&D expenditures geared toward the support of new businesses are expected to rise even as they decline somewhat for the support of existing businesses, according to the 22nd “IRI Trends Forecast.” There’s also a greater emphasis on R&D talent, with companies doing more to hire new graduates and R&D professionals. There’s a greater emphasis on leveraging external resources to boost innovation via outsourcing R&D, giving grants and contracts for the purpose of research at universities and increasing “participation in consortia for pre-competitive university research” (Ayers, 2006).
Another study, this one by the Battelle Memorial Institute in partnership with R&D Magazine, notes that “during the past few years there have been significant changes in the manner in which U.S. companies acquire their technological assets, with major changes in the distribution of research dollars” (Duga, Studt, & Dearing, 2006). One aspect of these changes involves the globalization of R&D spending.
Over half of companies surveyed in 2004 said that they planned to increase investments in overseas R&D, and in the past few years a large amount of R&D funding has been sent to China and India. What began as a tentative move to see how things would go has become a real trend as companies develop significant R&D capabilities abroad.
Eli Lilly, for example, “is moving its research and development, including clinical trials, to China, India, and the former Soviet bloc,” reports BusinessWeek. Part of the goal, of course, is to lower the cost of developing new drugs, each one of which has a price tag of about $1.1 billion. Lilly’s leadership believes the organization can cut that down to $800 million by doing more R&D work abroad.
Another part of the rationale is to improve aspects of R&D. Lilly’s chief executive, Sidney Taurel, states, “The medical systems in some of these countries are really very sophisticated. The physicians in India are very sophisticated. The number of patients available for some of these trials is very substantial” (Arndt, 2006).
Such overseas endeavors are a sign of the times. With the global economy still in fairly good shape, more companies are sowing the seeds of innovation that, they hope, will spring up into new business opportunities in the not-so-distant future. They’re building new R&D facilities abroad, hiring new talent, boosting support to basic R&D, and participating in more alliances and consortia.
It makes sense that businesses are working to make R&D more effective and efficient. After all, there are not very strong correlations between R&D spending and most measures of business success, according to a recent Booz Allen Hamilton study of the 1,000 publicly held companies that spent the most on R&D in 2004. It’s true that companies that are in the bottom 10% of indexed R&D-to-sales ratios tend to suffer poor performance compared with that of other companies on the list, so it’s possible to spend too little on R&D. But simply spending more doesn’t necessarily lead to success. “R&D spending levels within the Global Innovation 1000 had no apparent impact on sales growth, gross profit, operating profit, enterprise profit, market capitalization, or total shareholder return,” notes strategy+business magazine.
The analysis of the Booz Allen Hamilton study suggests that today’s corporate leaders simply don’t have a clear understanding of what’s driving R&D performance and that, among all core functions, “innovation may be managed with the least consistency and discipline” (Jaruzelski, Dehoff, & Bordia, 2005).
Cost-effective and successful innovation is, of course, becoming more important in today’s fast-changing marketplace, where disruptive new products have the potential to wreak havoc on whole industries. It’s likely that businesses will be placing a greater emphasis on boosting efforts at innovation even while revising and revamping their R&D processes. After all, learning to manage innovation well will need to become a core competency at many businesses in what former Fed Chairman Alan Greenspan (2000) has called the “new conceptual-based economy.”
For more on the Booz Allen Hamilton study, please click here.
To read “Lilly’s Labs Go Global,” click here.
Documents used in the preparation of this TrendWatcher include:
Arndt, Michael. “Lilly’s Labs Go Global.” BusinessWeek Online, January 30, 2006.
Ayers, Alan D. “Industrial Research Institute’s R&D Trends Forecast for 2006.” Research Technology Management, ABI/INFORM Global, January/February 2006.
Duga, Jules, Tim Studt, and Andrew Dearing. “The State of Global R&D.” R&D, ABI/INFORM Global, September 2005, pp. G1-G16.
Greenspan, Alan. “Structural Change in the New Economy.” Federal Reserve Board, July 11, 2000.
Jaruzelski, Barry, Kevin Dehoff, and Rakesh Bordia. “Money Isn’t Everything.” strategy+business, Winter 2005, pp. 54-67.
In 2006, R&D expenditures geared toward the support of new businesses are expected to rise even as they decline somewhat for the support of existing businesses, according to the 22nd “IRI Trends Forecast.” There’s also a greater emphasis on R&D talent, with companies doing more to hire new graduates and R&D professionals. There’s a greater emphasis on leveraging external resources to boost innovation via outsourcing R&D, giving grants and contracts for the purpose of research at universities and increasing “participation in consortia for pre-competitive university research” (Ayers, 2006).
Another study, this one by the Battelle Memorial Institute in partnership with R&D Magazine, notes that “during the past few years there have been significant changes in the manner in which U.S. companies acquire their technological assets, with major changes in the distribution of research dollars” (Duga, Studt, & Dearing, 2006). One aspect of these changes involves the globalization of R&D spending.
Over half of companies surveyed in 2004 said that they planned to increase investments in overseas R&D, and in the past few years a large amount of R&D funding has been sent to China and India. What began as a tentative move to see how things would go has become a real trend as companies develop significant R&D capabilities abroad.
Eli Lilly, for example, “is moving its research and development, including clinical trials, to China, India, and the former Soviet bloc,” reports BusinessWeek. Part of the goal, of course, is to lower the cost of developing new drugs, each one of which has a price tag of about $1.1 billion. Lilly’s leadership believes the organization can cut that down to $800 million by doing more R&D work abroad.
Another part of the rationale is to improve aspects of R&D. Lilly’s chief executive, Sidney Taurel, states, “The medical systems in some of these countries are really very sophisticated. The physicians in India are very sophisticated. The number of patients available for some of these trials is very substantial” (Arndt, 2006).
Such overseas endeavors are a sign of the times. With the global economy still in fairly good shape, more companies are sowing the seeds of innovation that, they hope, will spring up into new business opportunities in the not-so-distant future. They’re building new R&D facilities abroad, hiring new talent, boosting support to basic R&D, and participating in more alliances and consortia.
It makes sense that businesses are working to make R&D more effective and efficient. After all, there are not very strong correlations between R&D spending and most measures of business success, according to a recent Booz Allen Hamilton study of the 1,000 publicly held companies that spent the most on R&D in 2004. It’s true that companies that are in the bottom 10% of indexed R&D-to-sales ratios tend to suffer poor performance compared with that of other companies on the list, so it’s possible to spend too little on R&D. But simply spending more doesn’t necessarily lead to success. “R&D spending levels within the Global Innovation 1000 had no apparent impact on sales growth, gross profit, operating profit, enterprise profit, market capitalization, or total shareholder return,” notes strategy+business magazine.
The analysis of the Booz Allen Hamilton study suggests that today’s corporate leaders simply don’t have a clear understanding of what’s driving R&D performance and that, among all core functions, “innovation may be managed with the least consistency and discipline” (Jaruzelski, Dehoff, & Bordia, 2005).
Cost-effective and successful innovation is, of course, becoming more important in today’s fast-changing marketplace, where disruptive new products have the potential to wreak havoc on whole industries. It’s likely that businesses will be placing a greater emphasis on boosting efforts at innovation even while revising and revamping their R&D processes. After all, learning to manage innovation well will need to become a core competency at many businesses in what former Fed Chairman Alan Greenspan (2000) has called the “new conceptual-based economy.”
For more on the Booz Allen Hamilton study, please click here.
To read “Lilly’s Labs Go Global,” click here.
Documents used in the preparation of this TrendWatcher include:
Arndt, Michael. “Lilly’s Labs Go Global.” BusinessWeek Online, January 30, 2006.
Ayers, Alan D. “Industrial Research Institute’s R&D Trends Forecast for 2006.” Research Technology Management, ABI/INFORM Global, January/February 2006.
Duga, Jules, Tim Studt, and Andrew Dearing. “The State of Global R&D.” R&D, ABI/INFORM Global, September 2005, pp. G1-G16.
Greenspan, Alan. “Structural Change in the New Economy.” Federal Reserve Board, July 11, 2000.
Jaruzelski, Barry, Kevin Dehoff, and Rakesh Bordia. “Money Isn’t Everything.” strategy+business, Winter 2005, pp. 54-67.