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The Innovation Dilemma:How to Achieve High Performance through Superior Research

& Development

Part I: Where and How Much to Spend on R&D

An Accenture paper in co-operation with the Economist

Intelligence Unit.

Introduction

Improving product innovation has become vital for every corporation striving

for high performanceespecially given the increasing pressures of low-cost

competition, shorter product life cycles, and investors demanding profit and

revenue growth, sometimes on a quarterly basis. Indeed, Accentures survey

into high-performance businesses has revealed that innovation and continuous

renewal is a key element of performance anatomyone of the building blocks

of high performance. Yet most firms remain caught in a web of complex andsometimes conflicting realities. Market pressures tend to focus available

resources on existing products and the near term, seldom leaving organizations

enough maneuvering room to develop game-changing innovations. At the

same time, executives seem skeptical about how much they can learn from

the various metrics that attempt to quantify returns on R&D investments.


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Communications & High Tech

Its an old adage in research and

development that companies knowhalf their early-stage projects will

fail; they just dont know which

half. There was a time when large

corporations could take a laissez-

faire stance toward such uncertainty,

leaving managers to their devices

and sometimes treating research

as an isolated function. Minimal

competition, market dominance and

long product introduction cycles all

reduced the need to change the

system. Those days are gone. R&D

departments increasingly are expected

to create more, with the same or fewer

resources. Efficiency and effectiveness

have become universal mantras. This

change has sharpened the need to

improve product development and

helped increase returns on R&Dspending. To accomplish those ends,

companies first must address two

critical factors:

How much to invest

Where to invest it

Most survey respondents said their

companies devoted a consistent

percentage of annual revenues

to research and development, but

indicated that more budgets should

be allocated. Sixty percent said their

firms devoted at least 5 percent of

annual revenues to research and

development; 85 percent said they

spend at least 2 percent of annual

revenues (Figure 1). But roughly

2

There is, of course, no formula for

success. To understand better howcompanies view current trends inmeasuring return on R&D, Accentureand the Economist Intelligence Unitsurveyed more than 125 executivesin the United States, Europe, andAsia. All came from companieswith annual revenues greater than$500 million. Survey data weresupplemented by in-depth interviewswith R&D executives from sevenleading firms worldwide.

This paper is the first of three thatexplore the findings of our research.In this first installment, we discussthe issue of the R&D budget: howmuch to spend, where to spend it,and when to expect a return.

Figure 2

Product development funding allocated toward

improving existing products versus creating new ones.

33%

34% 5175%

23% 7690%

3% 9195%

8% 96100%

5% Dont know

Less than 50%

Less than 2% 14%

2-4% 24%

5-7% 21%

8-10% 14%

More than 10% 26%

Dont know 1%

Total 100%

Figure 1

Amount companies spend on

R&D as percentage of overall

company revenue.


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two-thirds of that money goes to

improving existing products ratherthan creating new ones (Figure 2).

And about two-thirds of R&D spend-

ing is allocated to products scheduled

to hit the market in less than three

years. Indeed, increasing returns is

largely influenced by how much is

invested in new products and product

areas and how much is allocated to

keeping current products at the top

of their game. These two areas can

involve different types of personnel,

timelines, and metrics for determining

success. Executives contacted for this

survey clearly prefer to boost creation

of new products while shrinking the

resources used to maintain and

extend existing ones. One-third of

respondents said they devoted more

than half their product development

funding to creating new products;

two-thirds spend at least a quarter

of their budget trying to create

something new.

EMC Corporation, for example,

typically spends between 10 percent

and 12percent of its revenues on

R&D (the company reported revenues

of $11.2 billion in 2006, of which

$1.3 billion went to research and

development). As part of its budgeting

process, EMC identifies five areas

for potential investment: research,

advanced development, new product

development, product developmentand sustaining engineering. (See

sidebar, EMCs Stages of Research.)

EMCs chief development officer,

Mark Lewis, hopes to grow the

earliest stage, research, from almostnon-existent to between a half-

percent and one percent of the

companys R&D budget. Although

it has increased its budget slightly,

EMC is trying to hold down costs,

chiefly by funding university research

in fields of particular interest to the

company. Development and sustaining

engineering make up roughly 90

percent of EMCs R&D budget. Lewis

wants to trim spending in those areas

and devote more funds to advanced

development and new product

developmentthe areas that produce

the companys highest returns on

R&D spending. If we could get to

5 percent on that, wed be pretty

good, he says.

New product development is a

particular focus for EMC, which is

concentrating on new products aimed

at breaking into new markets. To thatend, last year it formed a Technology

Ventures group to foster internal ideas

for new products and new product

areas. Lewis says that to date, the

company has secured most of its new

products through acquisitions, adding

that EMC is trying to generate more

new products internally. HP takes a

different approach to allocating R&D

resources. It creates a two-by-two

matrix with current and emerging

markets on one axis and current andemerging technologies on the other. It

then apportions its R&D monies into

the resulting four quadrants (Figure 3).

EMCs Stages of Research

Research consists of exploratorywork seeking entirely new products

or applications. Advanced develop-

ment is defined as early-stage

development of prototypes. New

product development is full-scale

development of new products, as

well as preparing for manufacturing,

testing and so forth. Product

development refers to the develop-

ment of the latest versions of

existing products and product

lines. Sustaining engineering refers

to refining products already on

the market, such as security

updates for software.


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The other quadrants represent

extending current technologiesinto new markets, or using new

technologies to create product

improvements for current markets.

We parse amounts in those four

quadrants, says George Dies of

HP Labs. Everybody wants to drive

more into the new areasnew

markets or new technologiesand

less on maintaining the current.

Yet despite most companies desire

to create something truly new,

organizations tend to focus on

short-term goals. That emphasis on

the here-and-now lowers the odds of

producing a radical, game-changing

departure from what the firm has

done in the past. Few organizationscan afford to support long-term

ventures based on basic science such

as HPs foray into nanotechnology.

Companies like Siemens all pursue

such work, but even they have scaled

back their efforts in the past 15 to

20 years. At Siemens, for instance,

the R part of its R&D portfolio is

conducted by Corporate Research

and Technologies, which employs

1,900 people at 10 labs worldwide

and is responsible 5% of a total $5.7

billion R&D budget. Yet even at this

major research organization, only

about one-third of the work is

devoted to long-term projects

The lower left corner, current

technologies and current markets,more or less represents maintenance

spending on items such as ink-jet

printers or PCs. The upper right

quadrant represents risky bets on

things like nanoscale electronics

with immense potential for future

growth. Sometimes these bets pay

off: In January, after years of support-

ing basic nanotechnology research,

HP announced it had discovered a

way to increase up to eight-fold the

number of transistors it could fit

on programmable semiconductor

chips, while simultaneously lowering

energy consumption.

Figure 3

Hewlett-Packards Approach to R&D Allocation.

Extending current

technologies to new

markets

Placing bets on

unproven technologies

for new markets

Maintaining existing

products in current

markets

Improving existing

products with new

technologies

Emerging TechnologiesCurrent Technologies

Emerging

Markets

Current

Markets


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there are very, very different

approaches based on the product,says Corporate Vice President Will

Swope. For instance, he notes, the

company is already actively designing

its 2011 microprocessor, which has

a roughly five-year time horizon.

Meanwhile, Intel maintains a shorter

development schedule for chipsets

and graphics engines, averaging about

two years. Virgin Mobile Australia

is responsible for all of the firms

telecom efforts in that country. Peter

Bithos, director of strategy and new

markets, says nearly all product

development funding goes toward

efforts that will hit the market in

less than two years. Most of those

products, Bithos notes, should

actually reach the market in less

than one year.

But these short timelines reflect the

rapid pace of the telecommunications

industry, not an aversion to long-termproduct development. In fact, the

thirst for new and improved ways to

create novel products is keener than

ever. As an executive at Australian

telco Optus, Bithos helped engineer

his firms acquisition last year of

Virgin Mobile Australia (VMA). He

then moved over to the newly

acquired entity, championing the small

organization as a low-cost innovation

lab that could try out new products

more readily than a big telco. Ourrole is now to try new things and to

bring new things to market, he says.

Without touching legacy systems

of the mother ship, we can innovate

and try new things with less cap-ex

[capital expenditures]. At a company

level, if you have an entity like that,

thats a very good thing. It costs us

half as much and takes us half as long

to get things to market. Virgin MobileAustralia keeps a separate capital

expenditure budget from Optus. Less

than a year into its new role, Virgin

Mobile Australia successfully launched

an innovative product called Bean

Counter. An online-only service for

pre-paid cell phone users, it sells

minutes cheaply and lets customers

track their usage, top off credit cards

and perform other tasks. Virgin Mobile

Australia delivered the product in

about two-and-a-half months. To

get flow-through from network to

billing system to Web in real time

for a major telco to do that, thats

a major effort, Bithos says.

In our next installment in this series,

we will explore how companies are

tapping into alternative sources of

R&D, as well as the importance of

standardizing R&D processes to

drive innovation sustainabilityand repeatability.

more than five years down the road,

says Reinhold Achatz. Another thirdtargets todays products or the next

generation of products just one to

two years out, while the remainder

is focused on generations two to

five years away.

A firms ability to sustain investiga-

tions further out depends in part on

its profitability or cash flow. Other

factors are more structural, such as

whether the research arm gets at

least some of its funding from central

coffers, as opposed to contracts with

business units. The more central

funding it receives, the more likely it

is to pursue longer-term, open-ended

investigations. Having the ability

to differentiate and allocate funding

from a centralized repository to fur-

ther its R&D unfettered by short-term

product requirements is one of the

key drivers of high performance, says

AJ Gupta, global product innovationlead at Accenture.

Since financial returns arent

expected for years, a company taking

a long-term approach to innovation

also takes a much different view

toward measuring the returns on this

investment than it does with other

products, gauging progress by such

measures as technical milestones

achieved, scientific papers published,

and the like (we will cover measuringthe returns of R&D investment in

more detail in the third installment

of this series).

To a large degree, the time horizon

of a companys product development

efforts is industry- and product-

dependent. At chipmaker Intel,


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Copyright 2007 Accenture

All rights reserved.

Accenture, its logo, and

High Performance Deliveredare trademarks of Accenture.

About AccentureAccenture is a global management

consulting, technology services and

outsourcing company. Committed

to delivering innovation, Accenture

collaborates with its clients to help

them become high-performance

businesses and governments. With

deep industry and business process

expertise, broad global resources and

a proven track record, Accenture can

mobilize the right people, skills and

technologies to help clients improve

their performance. With more than

158,000 people in 49 countries, the

company generated net revenues ofUS$16.65 billion for the fiscal year

ended Aug. 31, 2006. Its home page

is www.accenture.com.

MethodologyIn February 2007 the Accenture and

the Economist Intelligence Unit

conducted an online survey of 126

senior global executives, asking how

their companies assessed returns

achieved on R&D spending. More

than half of respondents were

C-level executives or held the title

VP, SVP, or Director. More than half

worked in aerospace/defense; computer

hardware, software, media, and enter-

tainment; IT; telecommunications

equipment; and electronic components

manufacturing. Just under 40 percent

were located in Western Europe, while27 percent were in the Asia-Pacific

region and 18 percent were in

North America. All executives

surveyed worked for companies

reporting annual revenues of more

than US $500 million. In addition

to the survey, we conducted seven

interviews with senior executives

in Europe, the Americas and the

Asia-Pacific region.

For further information or todiscuss these survey resultsplease contact:

A.J. Gupta, Accenture Managing

Director and Global Lead for Product

Innovation and PLM for Accenture

A. J. Gupta joined Accenture in 1996.The main area of his functional

experience is in Product Development

and Product Lifecycle Management.

Examples of his main clients are:

Raytheon, Harley-Davidson, TSMC,

Motorola, EMC, Siemens, BSC, DLA.

He can be contacted at

[email protected]

Kevin Prendeville, Senior Executive

in charge of Product Innovation and

PLM for Electronics and High Tech

Kevin Prendeville joined Accenture

in 1994. His main area of functional

expertise is in Product Development

and Product Lifecycle Management

efficiency and effectiveness. Clientwork includes Sun, Boston Scientific,

Cisco, Google, Applied Materials.

He can be reached at kevin.p.

[email protected]

Pat Weir, Senior Manager,

Product Innovation Initiative

Pat focuses on engineering process

improvement and application

outsourcing. Examples of his

main clients are: Pratt & Whitney,

Applied Materials, Raytheon, Sun

Microsystems, Cisco Systems Inc.Email Pat at patrick.e.weir@

accenture.com

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