Return to the steak or what is your innovation strategy?December 2014
It's not a coincidence that such brands as Apple, Google, Microsoft and IBM are nowadays not only in the top ten of the strongest brands according to Interbrand raking, but also in the most valuable brands according to Brand Z rank. They are also among the top ten brands perceived as the most innovative according to Strategy+Business magazine. You can add Amazon (3rd in innovative rank, 10th in value rank and 15th in the ranking of strength), Samsung (4th – innovations, 7th – strength, 29th – value) or GE (7th – innovations, 6th – strength, 12th – value) and it occurs that brands' power and value is strongly linked with their innovativeness.
What's the link between the steak and R&D?
Someone cleverly joked that marketing specialists became so effective in selling sounds of frying that they forgot about... the steak. Fortunately customers definitely won't forget. And the reason why they will love your brand should be just your product, not marketing halo. The companies mentioned above prove this theory and their managers seem to understand it very well. So they build the brands based on developing innovative solutions.
We can learn from them how to carry out research and development. New article in „Strategy+Business” magazine with symptomatic title „Proven Paths to Innovation Success” is the best summary of their experiences in this area.
A thousand companies with the largest R&D budgets spend over 600 billion USD yearly on research of new products. It is on average 3,5 % of their turnovers, but in such areas as pharmaceutics or new technologies this rate exceeds 10%. For example Intel spends on R&D over 1/5 of its revenues. Two of the above-mentioned areas of industry plus automotive industry accumulate altogether two third of global spendings on research and development. Geographically 40% of global spendings on R&D comes from USA and 30% from Europe. But the market with the biggest growth is China – with the growth of 45% in 2014! Success of Chinese companies and Chinese brands is easy to spot on the market of smartphones where Xiaomi, Huawei or Lenovo successfully fight for the third place on the global market – just behind Samsung and Apple.
But it's not only the money
However different analysis show that the amount of the budget is not the most important issue. There is no proven relation between company's R&D budget (or the part of this budget in the company's turnover) and its sales volume, level of growth, profits or market value. After all, Apple spends on R&D only (?) 2,6% of its turnover. As Steve Jobs explained: „Innovation has nothing to do with how many R&D dollars you have. When Apple came up with the Mac, IBM was spending at least 100 times more on R&D. It’s not about money. It’s about the people you have, how you’re led, and how much you get it.”
Authors of publication in „Strategy+Business” claim that key issue is listening to the customers' needs. In the last three years companies which were able to reach customers' needs and expectations achieved 3 times bigger growth of income and 2 times bigger return on investment than the companies which recognize customers' needs and expectations indirectly (e.g. they ascertain the evaluations of agents or keep watching the trends)
Companies which look for market innovations do it in three different ways.
Companies such as Apple, Procter&Gamble or Tesla are called Need Seekers. They mostly use customers' insights to generate new ideas. They are involved in direct engagement with customers and also, through other means, use analysis of big data. Their goal is to find the unstated customer needs of the future, and they want to be the first to address them. Market strategies of Need Seekers are linked with their innovation strategies and their corporate cultures are opened for innovations. They also have managers who are responsible for these activities and who report directly to the CEO's. In these companies key positions in organizational structures keep managers responsible for development of products. About one in four companies which spend most money on R&D can be called Need Seekers whereas in Sillicon Valley almost half of all firms follow a Need Seekers model.
40% of the global biggest R&D spenders are Market Readers, with Samsung or Caterpillar among them. Market Readers focus on incremental innovations and improvements of their products which are already approved by the market. They are monitoring their markets, competitors and customers. But their approach is more cautious and they accept being second mover on the marketplace. Market Readers' competitive advantage is customizing products and services for local markets.
„Technology Drivers” are companies (over one third of companies with highest R&D budgets) which develop new products based on internal resources and skills (for example: Google, Bosch or Siemens). They believe that their products will naturally find customers because they response to their needs. The main goal is to achieve technological advantage and their internal cultures reflect reverence first of all for technical knowledge.
Every way of „returning to the steak” is correct if only at the end you can find hungry gourmand. We have to remember that the mere sound of sizzling and the most appetizing aromas are no longer enough.