Navigating the digital future

Ninth Annual Global Innovation 1000 Study ranks one Mid East company

What is a digital enabler?

An electronic tool, or process supported by an electronic tool, that improves speed, cost, quality and/or complexity. Examples relating to innovation: visual simulation, rapid prototyping/3D printing, computer-aided design, customer relationship management system.

Yearly research and development (R&D) spending among the world’s 1,000 largest public corporate R&D spenders has hit a record high of US$638 billion, according to global management consulting firm Booz & Company in its ninth annual Global Innovation 1000 study.

However, despite the sustained overall increase in R&D budgets over the last decade, this year’s findings show once again that higher spending does not guarantee bigger payoffs. Indeed, the 10 most innovative companies our study identified this year financially outperformed the world’s top 10 spenders, despite actually spending significantly less on R&D. Additionally, the study shows that companies are spending 8.1 percent of their R&D budgets on digital tools to enable their innovation process—either to boost productivity or to improve their ability to gain better insight into customer needs.  

“The 22 percent boost in R&D spending in software and Internet may be a sign that the tide is turning in favor of technologies that run our increasingly digitized world. In fact, software and Internet added the greatest number of companies to this year’s Global Innovation 1000 list,” Richard Holman, Partner at Booz & Company noted.

Saudi Arabia’s Saudi Basic Industries Corp. (SABIC) is the only publicly listed company in the Middle East to make it into the Global Innovation 1000 list this year. SABIC ranked 304th out of the 1,000-strong list of innovative companies. The company’s ranking this year is an improvement over last year’s 416 position. Total R&D spend by SABIC in 2012 was $371 million, a 69 percent increase from $219 million in 2011. Although chemical and energy companies in the Global Innovation 1000 list maintained their average R&D intensity at 0.9 percent for the second consecutive year, SABIC’s average R&D intensity increased from 0.43 percent in 2011 to 0.7 percent in 2012.

10 Most Innovative Companies: Apple and Google Reign; Tesla Debuts

Apple and Google took top honors for the fourth consecutive year, but there were some noticeable shake-ups on the latest Global Innovation 1000 study’s survey ranking of the 10 most innovative companies. Samsung displaced 3M from the number three spot for the first time, capping its steady rise in the rankings, and Amazon also made a significant move up, jumping six spots into fourth place. New to the list this year was Tesla, making its debut in the number nine slot, and Facebook returned at number 10 after a hiatus last year. The full list can be found at:

10 Most Innovative Companies Outperform Top R&D Spenders—Again

Google and Sony joined the top 20 R&D spenders list this year, at number 12 and number 20, respectively. The vast majority of the companies on the list—18 in total—were from the software & Internet, healthcare, and automotive industries, industries that, combined, accounted for nearly three-quarters of worldwide R&D spending growth in 2013.

“The 22 percent increase in R&D spending among software and internet companies is likely driven by an increasing demand for digital products and services,  creating  more opportunities for cutting edge innovation,” said Richard Holman, a partner at Booz & Company and coauthor of the study. 

Higher R&D spending is no guarantee of better financial performance. This year’s 10 most innovative companies outperformed the top 10 spenders on both five-year revenue and market-cap growth averages.  “For the ninth straight year, our research has demonstrated that there is no correlation between how much you spend and how well you perform over the long term,” said Barry Jaruzelski, senior partner at Booz & Company and global leader of the Engineered Products and Services practice. “It has been proven time and time again that you can’t buy your way to the top. When it comes to innovation, how you spend is much more important than how much you spend.”

Today’s Digital Innovation Tools: Must-Have Enablers and Much-Needed Experimentation

Each year, the Global Innovation 1000 study examines trends in how companies innovate. This year’s study explores how companies are driving innovation using digital tools, including (1) productivity enablers such as rapid prototyping/3D printing (found to be the most effective tool for the ideation phase of the innovation process), simulation tools, and project management tools, as well as (2) market and customer insight enablers, such as discussion platforms, monitoring tools, and usage monitoring sensors. The global R&D executives surveyed as part of the study said their companies allocated an average of 8.1 percent of the R&D budget to digital tools, which suggests spending of about $52 billion when extrapolated to the top 1,000 R&D spenders.

The study also found that respondents whose companies made significant use of these digital enablers were much more likely to report that they outperformed competitors financially than were those who employed enablers more moderately.

 “There are a whole slew of digital tools available today. Productivity enablers like computer aided design and project management are must-haves for any competitive innovator and their use among our survey respondents has reached maturity. More recent tools, such as big data, social voting and usage sensors are focused on generating deep customer insights to help create more compelling products. While these are still pretty new, they are beginning to prove their value in multiple industries,” said Rasheed Eltayeb, Principal with Booz & Company. “It’s still a risk to invest in them, but one everyone will have to take to stay at the forefront of innovation.”   

R&D spending in 2013 rose by 5.8 percent from the previous year, signaling a return to the long-term growth trend after two years of faster growth following the recession.  Though the U.S. still dominates in R&D spending, regionally, the rate of R&D spending increased most for companies headquartered in China, rising 35.8 percent from 2012 to 2013. Although China’s spending growth rate remains significantly higher than that of any other region, this is the second-lowest increase for the country in the last five years.

Nevertheless, 90 percent of R&D spending worldwide in 2013 was from companies headquartered in North America, Europe, and Japan. R&D spending in Europe grew by 4.5 percent despite the region’s ongoing economic pressures, slower than the global average. Meanwhile Japan’s R&D spending decreased by 3.6 percent in 2013, marking the first time since the 2008–09 recession that any major economy reported a decrease in R&D spending.

“Not only do the largest spenders fail to perform better than the most innovative companies, they also lag behind the average of their industry peers on the Global Innovation 1000 list on both revenue growth and market cap growth,” John Loehr Partner at Booz & Company said.

Computers and electronics, healthcare, and automotive remained the three largest industries in terms of total R&D spend in 2013, representing 65 percent of the global total.

Lessons to be learned: Digitial enablers boost performance

“With all the talk out there about digital enablers, more companies should be making significant use of them. It’s good news for innovation that some companies have found the tools that contribute to higher performance— the rest should follow their lead,” Holman commented.

Less than half of respondents say their companies use digital enablers to a significant extent, but those that do are 77 percent more likely to report that they financially outperform competitors than are those that use enablers to a low or moderate extent.

However, perhaps confusingly, only 49 percent of respondents say their companies are spending on digital enablers that they rated as highly effective. Digital enablers varied among industries according to their needs, mostly likely linked to the effectiveness of the technology for each company. Aerospace and defense respondents, for instance, relied heavily on CAD software and visual simulation, whereas respondents from the software and Internet sector naturally made extensive use of social media.

“We’ve proven time and again that the amount you spend on R&D doesn’t matter; how you spend it does. This year, we’ve seen that spending on digital enablers matters,” Jaruzelski, commented on the report.

How the GCC can make the most of ICT

Booz & Company recently published a report specifically highlighting GCC government need for digital innovation. Titled “Fast, Lean, and Agile: How GCC Governments can make the most of ICT Investments” the study by Ramez Shehadi, Jad Bitar and Raymond Khoury pointed to infrastructure alterations that could improve government service.

“Despite progress, many GCC governments still face critical challenges in further increasing the adoption and effectiveness of ICT. Low Internet penetration rates, the absence of supporting legal frameworks, an inability to recruit skilled personnel, and a host of other constraints have combined to prevent governments in the region from fully realizing the promise of ICT,” the study noted.

They also advised that “GCC governments must also ensure that they have key resources in place to execute their transformation, including people, processes, technology, and governance mechanisms.”

While the study focused on government resources for ICT development, the link to R&D spending by both public and private sector is integral to key ICT investments. 

About Booz & Company Booz & Company (booz.com) is a leading global management consulting firm focused on serving and shaping the senior agenda of the world’s leading institutions. Drawing on the talents and insights of more than 3,000 people in 57 offices around the world, we help our clients achieve essential advantage by working with them to identify and build the differentiating capabilities they need to outperform. 

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