Innovation Culture Eats R&D for Breakfast

By: Hutch Carpenter | October 27, 2011

Research and development is a mainstay of the innovation strategy for companies. And with good reason. R&D can invent new products and technologies that redefine markets. Think electricity, telephones, airplanes, semiconductors, the Internet. R&D can pave the way for whole new industries. Exciting, for sure!

But there’s a problem. Too many companies treat R&D as their fundamental innovation strategy. R&D as the source of market differentiation and financial results, an “invent your way to prosperity” mentality. It’s a technology-led view of innovation.

Booz & Company tackles this issue head-on in its just-released annual report on the Global Innovation 1000, titled “Why Culture Is Key”. The report compares the R&D spend of companies to innovation performance. It draws the following conclusion:

There is no statistically significant relationship between financial performance and innovation spending, in terms of either total R&D dollars or R&D as a percentage of revenues.

Spending more on R&D won’t drive results. The most crucial factors are strategic alignment and a culture that supports innovation.

Nothing like a data-driven view about what drives innovation, eh? Let’s put it another way. The strategy of relegating innovation to a small, specialized sub-group of employees is a dead-end. R&D has a place in developing high potential new technologies, but it cannot be the sole basis of innovation.

Note what Booz found to work: “a culture that supports innovation”. In other words, freeing innovation from its technology-centric domain, and expanding to include those who spend time with customers, or who work with the product, services and operations. These folks generally feel pain points or sense opportunities in the natural course of their activities.

This is not technology-led innovation. It’s need-driven. And it makes a big difference.

Three Different Innovation Approaches

Booz segmented the companies in its survey according to their innovation approach:
  • Need Seekers – think in terms of what their customers’ needs are
  • Market Readers – watch customers and competitors, are more fast followers
  • Technology Drivers – innovation is based on their technological capabilities

All three approaches can deliver innovation results. But one strategy provides a competitive advantage over the other two: Need Seekers. Organizations pursuing the Need Seeker approach outperform others financially. And interestingly, 41% of Need Seeker organizations report an innovation culture aligned with their innovation strategy, vs. only 7% of Market Readers, and 14% of Technology Drivers.

Companies that step out of the R&D-dominated approach to innovation are generating better financial results.

Top Innovators, Lower R&D Spend

Booz analyzed the R&D spend of 1,000 companies. That provides a “classic” view of which firms are investing in innovation. The researchers then asked survey participants to identify the companies that are demonstrating the most innovation in the market. The results are eye-opening:

When Booz states that there is no statistically correlation between R&D spend and innovation, the table above makes this dry observation more tangible. So from where does innovation emanate when it’s not R&D? From a Wall Street Journal article covering the Booz report, Harvard professor Rosabeth Moss Kanter observes:

The biggest innovators involve employees company-wide to help generate ideas. They might hold interdepartmental brainstorming sessions, provide a Web forum for recommendations or offer funding for creative projects.

See that? Innovation is broadly dispersed, and becomes part of the culture of the organization.

Innovation Is Everyone’s Responsibility

Aside from the excellent analysis by Booz, others are finding that innovation is a holistic process focused on customers, not an R&D activity limited to a select few. See the observations on customer-centricity as the basis for innovation from four different leaders:

Steve Jobs made his observation way back in 1997 at WWDC (video), before he had actually turned Apple around. Which makes his point of view particularly powerful.

Jeff Bezos has successfully navigated Amazon into a number of fields outside the sales of books by thinking in terms of customer needs first (article).

Paul Graham is upending the venture capital business through Y Combinator, funding start-ups with a strong customer focus (tweet).

Steve Blank, professor at Stanford, is a serial entrepreneur with eight different start-ups. In his book The Four Steps to the Epiphany, he lays out the benefits and basis for focusing on customer needs before committing to technology.

The point of the above quotes, and the Booz report as well, is this. The trend lines in terms of innovation are clearly moving toward a broader participation dynamic. One in which the direct experience of those who work with products, services and operations gain a larger say in innovations. The benefits are becoming clearer (e.g. financial ones). And society itself is moving toward a participation ethos, change from the bottom-up, and greater transparency. It is into this slipstream that leading organizations are moving.

Final note. In case the title of this post sounds funny, it’s a play on management guru Peter Drucker’s quote, “Culture eats strategy for breakfast.” Good observation, and it works here as well, albeit from a different angle.