How Innovation Really Works, Using the Trillion-Dollar R & D Fix to Drive Growth, by Anne Marie Knott, McGraw-Hill, 2017
If your CEO or the Board could exactly predict how much innovation would come from every increased dollar spent on R & D, wouldn't the company hustle up just the right amount to crank it up? Of course! But then the dollar relationship between spending on R & D and receiving increased revenues and profits is not clear, or is it?
It turns out author Knott worked at Hughes Aircraft in missile guidance systems development. And she feared that changes in government contracting and management changes following the acquisition by GM would degrade Hughes' R & D capabilities. "But at the time, I couldn't demonstrate my concerns were valid, because there wasn't a good measure of R & D capability, " Her solution, dubbed RQ for Research Quotient, "solves that problem," she says.
US companies' R & D productivity has fallen "65% over the past several decades, despite spending 1/2 trillion dollars on R & D each year... I believe low RQ is the root of anemic growth, and restoring RQ the solution...."
But does spending more, especially as a large company, guarantee more productive R &D? Not necessarily says Knott. She proves this point with an appendix listing the RQ50, an index of 50 publicly traded U.S. companies investing $100 million or more in R & D, ranked according to their RQ. According to Knott, there is very little overlap between RQ50 and other innovation rankings. McKesson ranks number 1 with $190884 million in sales and R & D at $392M. Amazon is ranked 20 and Apple 41.
Along the way Knott takes on seven common misconceptions about R & D and spending, including:
MISCONCEPTION 1. Small companies are more innovative.
FACT: Scale and scope in large companies facilitate innovation.
MISCONCEPTION 2. Uncontested Markets are good for innovation.
FACT: Monopolies lead to high profits, but low levels of innovation and low RQ.
MISCONCEPTION 3. Spending more on R & D increased innovation.
FACT: Nearly 2/3 of companies over-invest in R & D - their R & D exceeds the gross profits it generates.
MISCONCEPTION 4. Companies need more radical innovation.
FACT: Radical innovations typcally have lower returns than incremental innovations because they are more difficult to commercialize.
MISCONCEPTION 5. Open innovation turbocharges R & D.
FACT: Outsourced R & D accounts for much of the 65 percent decline in R & D productivity.
MISCONCEPTION 6. R & D needs to be more relevant
FACT: Companies with centralized R & D have higher RQ than companies where R & D is controlled by division managers.
MISCONCEPTION 7. Wall Street rewards innovation.
FACT: Most shareholders don't know how R & D investment translated into market value, and therefore companies may not have the discretion to optimize R & D investment.