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How to make R&D pay

Why such low levels of R&D? And fancy a beating with a fence post?

We continue to beat ourselves up about the low levels of R&D in New Zealand. And we’re right to. Compared to Israel, Finland, Denmark, Taiwan, Australia and any country we’d love to thrash, we’re behind on almost every measure of business investment, R&D spend and innovative outputs.

Vincent Heeringa Idealog R&D

But after a thorough and well- deserved beating with a fencepost, we need to ask, what’s the remedy?

Money would help. The pool of investment is horribly shallow. Did you know that Australia has $1 trillion in superannuation looking for a place to invest? Norway announced last year it was spending $3 billion of public money on technology in the next five years. And Israel, well don’t start.

Money isn’t the only answer. Latest research into successful innovation gives strong weight to Ernest Rutherford’s much quoted aphorism, “We had no money so we had to think.”

The research comes from a seven-year, annual survey into 1,000 of the world’s most innovative companies, conducted by Booz and Company, a global consulting firm.

The survey is reported in the latest issue of Strategy+Business magazine. The 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. Many companies consistently underspend their peers on R&D investments while outperforming them on a broad range of measures of corporate success, such as revenue growth, profit growth, margins, and total shareholder return.”

That’s good news indeed for cash-strapped Kiwi firms. But how do these innovators succeed without spending more?

The study uncovers two main distinctions. First, alignment. Companies that outperform their peers have strong alignment between their day-to-day business and their innovation activities. In other words, innovation isn’t like some weird uncle in the corner at the family reunion. Instead, it’s ‘owned’ by the entire company with business strategy and innovation strategy one and same thing. This starts with small units and reaches up to the CEO. Booz sums it up by calling it cultural alignment.

The second is strategy. Booz divided its 1,000 companies into three main groups: Need Seekers – companies anticipating end-user needs. Market Readers – fast followers who monitor customers and competitors. Tech Drivers – using discovery to drive innovation and leadership.

Booz found that Need Seekers were ideally suited to benefit from innovation: they spent less on R&D and showed greater returns on investment (see right).

How is this relevant? Well, in my experience, Kiwi companies are strong in the former. Innovation is in our DNA; we love to tinker and our lack of formality means ideas can quickly filter their way to the top. But we are weak in the latter. Generating consumer insights is expensive and frankly it’s a bit academic. It requires research and all that pointy-headed stuff of behavioural psychology. We’d much rather build some cool stuff, right? Wrong!

It appears that combining our love for Kiwi ingenuity with 21st century ‘need seeking’ could be just the ticket for making R&D pay.

Global 1000 innovators

Vincent Heeringa is a co-founder of Idealog and likes fence posts.