the 2014 global innovation 1000 proven paths to … and innovation strategies over the next decade....

Proven paths to innovation success

The 2014 Global Innovation 1000

2 Strategy&

For the past 10 years, Strategy& has analyzed R&D investment at the 1,000 biggest-spending public companies in the world, and explored various innovation-related topics based on in depth interviews and surveys with innovation leaders. This year, we took a look at the last decade of innovation and what lies ahead in the next.

3Strategy&

R&D spending has reached an all-time high in 2014. With the exception of the year of the Great Recession, overall spending growth has never been lower. China and the software and Internet industry, however, continue to significantly increase their spending.

• R&DspendingbytheGlobalInnovation1000companiesin2014reachedarecordUS$647billion—thisrepresentsabout40percentoftotalinnovationspendingbyallpublic,privateandnot-for-profitorganizationsworldwide—butgrowthinspendingslowedtojust1.4%.

• Thecomputingandelectronicsindustryandthehealthcareindustrytogetherrepresent47percentofallR&Dspendingin2014,yetbothindustriesactuallyreducedtheirspendingthisyear,by1.8percentand1.2percentrespectively.

• ThesoftwareandInternetindustrywasoneoffourindustriestoincreaseitsR&Dspendingin2014,anditdidsoby16.5percent,thegreatestincreaseofanysector.

• CompaniesheadquarteredinNorthAmerica,Europe,andJapancontinuedtodominateR&Dspending,butwithsmallersharesoftheglobalspendthantheyhad10yearsago.

• Overthepastdecade,China’sshareofR&Dspendinghasgrownbyafactorof15whilethenumberofChina-basedcompaniesamongtheGlobalInnovation1000jumpedfromjusteightto114.

The companies that executives identified as the 10 Most Innovative companies in 2014 were not typically those that spent the most on R&D.

• AppleandGoogleremainatthetopofthe10MostInnovativecompanieslistthisyear;Amazoncontinueditsriseuptherankings,edgingSamsungoutofthirdplace.

• The10MostInnovativecompaniesoutperformedtheTop10R&DSpendersongrowthinmarketcapitalization,revenuegrowth,andprofitability.

• OnlyMicrosofthasbeenamongthe10MostInnovativecompaniesandTop10R&DSpendersineachofthepastfiveyears.

Companies overall believe they are getting better at innovation, with Need Seekers reporting the best innovation performance. However, there remains room for improvement for all.

• Morethanthree-quartersofinnovationleaders(76percent)saythattheyarebetteratinnovationtodaythantheywere10yearsago.However,only41percentsaytheircompaniesarehighlyproficientintheinnovationareasthattheyhavetriedtoimproveinthepast.

• Afull86percentofNeedSeekersreportbeingbetteratinnovationtodaythantheywere10yearsago,whereasonly73percentofeachMarketReadersandTechnologyDriversstatethesame.NeedSeekersalsomoreoftenreportthattheyoutperformtheirpeersfinancially.

• Accordingtosurveyrespondents,themostimportantelementtosuccesswillbealigningbusinessandinnovationstrategiesoverthenextdecade.

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R&D spending by the Global Innovation 1000 has reached its highest level ever, but spending growth is at a new post-recession low.

• R&Dspendinghasincreasedinnineoutofthelast10years,reachinganall-timehighof$647billionin2014.

• GrowthinR&DspendingbytheGlobalInnovation1000slowedsharplyto1.4percent,thesecond-lowestrateeverinthestudy’s

history.ButR&Dintensity–theratioofR&Dspendingtorevenue–remainsclosetothe10-yearaverageof3.7percent.

Global spending still rising, but pace has slowed

Our study has consistently shown that there is no statistically significant relationship between financial performance and R&D spending. With R&D intensity remaining relatively constant, the slowdown in R&D spending growth may be an indication that companies have realized that spending more doesn’t always yield better results. Improving how they spend delivers greater impact.Barry Jaruzelski, Senior Partner

Global Innovation 1000 R&D Spending US$ billions

Note: Historical data referenced in the 2014 and future studies will not always align with previously published figures for the 2005 through 2012 studies because of a methodology change implemented in 2013 that was applied to prior year data in 2014.

For more information, see methodology on p.14.

Sources: Bloomberg data; Capital IQ data; Strategy& analysis

9-year CAGR = 5.5%

$647$638$614

$560

$508$538

$501

$447

$409$400

2014201320062005 200920082007 201220112010Year-on-YearGrowth Rate 2.2% 9.3% 12.2% 7.3% -5.6% 10.3% 9.7% 3.8% 1.4%

Just four industry sectors drove R&D spending growth in 2014: software and Internet, chemicals and energy, industrials, and auto — more than making up for the declines in the five other industries examined.Barry Jaruzelski, Senior Partner

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2005-14 R&D Spending by Industry


The computing and electronics and healthcare industries have spent the most on R&D over the past 10 years.

• Thecomputingandelectronicsandhealthcareindustrieshavecontributed50percentoftotalR&DspendingoverthepastdecadeandhavealsospentthemostonR&Dineachofthoseyearsinabsolutedollars.

• In2014,boththecomputingandelectronicsandhealthcareindustriesreducedtheirspendingforthefirsttimesince2010,adeclineof1.8percentand1.2percent,respectively.

Smaller industries show bigger growth in spending

2% 1%3%

4%

7%

7%

10%

16%

22%

28%

TelecomConsumerAerospace and defenseChemicals and energySoftware and InternetIndustrialsAutoHealthcareComputing and electronics

Other

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The software and Internet industry has increased its spending at one of the fastest rates.

• ThesoftwareandInternetindustryhashadthegreatestgrowthinR&Dspendingoverthepast10years,11.7percent.Thisyear,onlysoftwareandInternet(16.5percent),chemicalsandenergy(4.2percent),industrials(4.1percent),andauto(2.1percent)sawgrowthincreases.

• In2014,R&DintensitywashighestinthesoftwareandInternetindustry(13.4percent),followedbyhealthcare(11.2percent)andcomputingandelectronics(6.7percent).

Percentage Change in R&D Spending by Industry 2013-14


-1.8%-1.8%-1.2%-0.5%

2.1%

4.2% 4.1%

16.5%

-10

-5

0

5

10

15

20

Chemicalsand

energy

Industrials

3.2%

OtherSoftwareand

Internet

Auto

%

Aerospaceand

defense

Health Computing and

electronics

Consumer

-7.5%

Telecom

Smaller industries show bigger growth in spending continued

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R&D Spending by Region


Firms headquartered in North America, Europe, and Japan continue to lead R&D spending, but China vastly outpaces all other regions in spending growth.

• NorthAmerica,Europe,andJapanhavetogetherspentthemostonR&Dineachofthepast10years,buttheirgrowthinspendinghassteadilyslowed.

• In2014,NorthAmericaincreaseditsspendingby3percentandEuropebyjust2percent;Japanactuallydecreaseditsspendingforthesecondyearinarow(down3percentin2013and14percentin2014.)

China escalates race to innovate

China is fertile ground for innovation. With its supportive business culture, market demand for solutions addressing the needs of its varying demographics, and expanding middle and upper class, R&D spending in the region will continue to grow — solidifying its place on the global competitive stage.Volker Staack, Partner

256.9

193.8

116.7

49.6

30.0

0

2040

6080

100120

140160

180200

220240

260

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

+3%

+13%

+2%

+46%

-14%

US$ billions

North America Europe Japan Rest of World China

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• Historically,ChinahasspenttheleastonR&Drelativetootherregions,butcompaniestherehaveconsistentlyincreasedtheirlevelandpaceofinvestment.Overthepast10years,Chinesecompanies’shareoftotalR&Dspendinghas

grownbyafactorof15.ThenumberofChinesecompaniesrepresentedamongtheGlobalInnovation1000jumpedfromjusteightto114inthesametimeperiod.Andinthepastyearalone,innovationspendinginChinaincreased46percent.

Percentage Change in Share of Total Number of Global Innovation 1000 Companies, R&D Spending, and Revenue by Region 2005-14


84%

1,325%

-31%

27%

-25%

158%

1,491%

-25%-1%-6%

136%

736%

-39%

11%

-26%

Japan China Rest of WorldEuropeNorth America

R&D spending

Number of companiesamong Global Innovation 1000

Revenue

China escalates race to innovate continued

9Strategy&

Source: Strategy& 2014 Global Innovation 1000 survey data and analysis

The majority of companies we surveyed (76 percent) report being better at innovating today than 10 years ago.

• ManycompanieshavestreamlinedtheirR&Dportfoliosandcreatedmoreefficientinnovationprocessesovertheyears.

• Morethanthree-quarters(78percent)

believetheyhavedevelopedamoredetailedunderstandingoftheircustomers’wantsandneeds.

• NeedSeekersreportsubstantiallyhigherimprovementoverthepastdecadethancompaniesinotherinnovationmodels(86percentofNeedSeekersversus73percentofbothMarketReadersandTechnologyDrivers).

Innovation in the past 10 years: A decade of progress

Although being a Need Seeker has been a successful innovation model for many companies, it is not necessarily the best strategy for all. Amazon, Samsung and Google — each one of the Most Innovative companies — all follow different innovation models. Since their respective models are well aligned with their strategy, each has achieved tremendous success.Barry Jaruzelski, Senior Partner

32%

44%

6%

18%

All

488

Technology Drivers

29%

44%

21%

6%180

27%

45%

20%

8%

Market Readers

186

43%

43%

11%

Need Seekers

1223%

Much better

Better

About the same

Worse

Self-Reported Degree of Innovation Improvement Compared to 10 Years ago, by Innovation Strategy Model 2014

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• CompaniesfollowingtheNeedSeekermodelstandoutinanumberofwaysintermsofhowtheyhaveimprovedtheirinnovationperformanceovertime:- 85percentofNeedSeekercompaniessaytheyhavehighlyalignedbusinessandinnovationstrategies,comparedwithjust55percentofMarketReadersand61percentofTechnologyDrivers.

- NeedSeekersmoreoftenreportthat

theyoutperformtheirpeersfinancially(58percentofNeedSeekerssaythat,versus45percentofMarketReadersand40percentofTechnologyDrivers).

- AhighershareofNeedSeekers(39percent)saytheyhavedevelopedamuchmoredetailedunderstandingofcustomerwantsandneedsovertime;just26percentofMarketReadersand21percentofTechnologyDriverssayso.

Our study classifies companies into one of three innovation models based on behaviors:

• Need Seekers:CompaniesthatareNeedSeekerstendtoengageconsumersdirectlytogeneratenewideas,andthendeveloporiginalproductsandservicesaddressingunarticulatedneedsandgetthemtomarketfirst.

• Market Readers:CompaniesdefinedasMarketReadersarefastfollowers.Theytypicallygenerateideasbycloselymonitoringtheirmarkets,customers,andcompetitors,focusinglargelyoncreatingvaluethroughincrementalinnovationstocurrentproducts.

• Technology Drivers: CompaniesthatareTechnologyDriversdependheavilyontheirinternaltechnologicalexpertisetodevelopnewproductsandservices,drivingbothbreakthroughinnovationandincrementalchangetomeettheneedsoftheircustomersvianewtechnology.

Innovation in the past 10 years: A decade of progress continued

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Despite their differences, companies operating under all innovation models believe there is room for improvement over the next 10 years.

• Only41percentsaytheyarehighlyproficientintheinnovationareasthattheyhavetriedtoimproveinthepast,andjust27percentbelievetheyaremasteringtheelementstheywillneedforinnovationsuccessoverthenext10years.

• Companiessaythey’lldirectmorespendingtoservicesR&D.Todaymostinnovationspending(52percent)goestoproducts.In10years,R&Dforserviceswilltakeup62percentofinnovationspending.

• Innovationleaderssaythat58percentofR&Dspendingtodayfocusesonincrementalorrenewalinnovations,i.e.,thoserelatingtocurrentproducts,28percentonnewinnovationsandonly14percentonbreakthroughinnovations.Tenyearsfromnow,theyexpecttheshareforincrementalinnovationstodropto43percentwhilesharesfornewandbreakthroughinnovationsclimbto35percentand22percent,respectively.

• Aligningbusinessandinnovationstrategiesisthetoppriorityamongstallinnovationmodels(20percent).Buildinginnovationcapabilities(18percent)andculturalalignmentwithinnovationstrategy(14percent)arethenext.

Over the next decade, innovation priorities will align

Source: Strategy& 2014 Global Innovation 1000 survey data and analysis

Priorities over the past 10 Years and next 10 Years for each Model 2014

Market Readers

Integrate functional,business, geographic

silos

Organization andprocesses

Align culturaland innovation

strategies

Externalnetwork

Businesscapabilities

Innovationcapabilities

Align businessand innovation

strategies

Need Seekers


strategies


silos


Align culturaland innovation

strategies

Externalnetwork



Technology Drivers


silos


Align cultural andinnovation strategies

Externalnetwork




strategies

Past 10 years

Next 10 years

12 Strategy&

The 10 Most Innovative companies were not typically the Top 10 R&D Spenders.

• Onceagain,AppleandGoogleareatthetopofthe10MostInnovativecompanieslist.Amazoncontinueditsriseuptherankings,edgingSamsungoutofthirdplace;Teslajumpedfrom9thplacein2013to5thin2014.

• VolkswagenandSamsungremaintheTopR&DSpendersin2014.IntelandMicrosoftincreasedtheirspendingtobecomethe3rdand4thhighestspenders,respectively.GooglereplacedPfizerintheTop10R&DSpenderslist.

• FouroftheTop10R&DSpendersin2014werehealthcarecompanies,butasinprioryears,nohealthcarecompanieswereamongthe10MostInnovative.

• Outofthecompaniesthathavebeenamongthe10MostInnovativecompaniesandtheTop10R&DSpendersinthepastfiveyears,onlyMicrosofthasbeenonbothlistseveryyear.

Even in innovation, less can be more

The 10 Most Innovative Companies 2014 The Top 10 R&D Spenders 2014

Source: Bloomberg data; Capital IQ data; Strategy& 2014 Global Innovation 1000 survey data and analysis

Company

Apple

Google

Amazon

Samsung

Tesla

3M

General Electric

Microsoft

IBM

Increase or decrease within top 10 ranking compared to 2013

Procter &Gamble

Industry

Computing andelectronics



Software andInternet



Auto

Industrials

Industrials

Consumer

2014 R&D Spending(US$ billion)

4.5

8.0

6.6

13.4

0.2

1.7

4.8

10.4

6.2

2.0NEW

Company 2014 R&D Spending(US$ billion)

Volkswagen

Samsung

Intel

Microsoft

Roche

Novartis

Toyota

Johnson &Johnson

Google

Merck & Co

Industry

Auto

Computingand electronics

Computingand electronicsSoftware and

Internet


Healthcare

Healthcare

Auto

Healthcare

Healthcare

13.5

13.4

10.6

10.4

10.0

9.9

9.1

8.2

8.0

7.5

13Strategy&

• Onceagain,the10MostInnovativecompaniesmarkedlyoutperformedtheTop10R&DSpendersonmarketcapitalizationandprofitability.

• Indexedrevenuegrowthissomewhathigherforthe10MostInnovativecompanies.

It’s not how much you spend but how you spend it

For the 10th year, our research demonstrates that there’s no correlation between how much you spend on innovation and how well you perform. You can’t just buy your way to the top.Barry Jaruzelski, Senior Partner

*Only 9 of the 10 Most Innovative companies were included in this analysis. Tesla was removed as it does not have Market Capitalization data spanning back 5 years.

Sources: Bloomberg data; Capital IQ data; Strategy& 2014 Global Innovation 1000 survey data and analysis

Top 10 R&D Spenders

10 Most Innovative companies

Market Cap growth(5-yr. CAGR)

EBITDA as a %of revenue(5-yr. Avg.)

Revenue growth(5-yr. CAGR)

51%

71%

33%

65%

0%

100%

50%

Highestpossible score:

Lowest possiblescore:

Normalizedperformance ofindustry peers: 47% 46%

Performance of 10 Most Innovative Companies* vs. Top 10 R&D Spenders, 2014

14 Strategy&

AswehaveineachofthepastnineeditionsoftheGlobalInnovation1000,thisyearStrategy&identifiedthe1,000publiccompaniesaroundtheworldthatspentthemostonR&Dduringthelastfiscalyear,asofJune30,2014.Tobeincluded,companieshadtomaketheirR&Dspendingnumberspublic.Subsidiariesthatweremorethan50percentownedbyasinglecorporateparentduringtheperiodwereexcludediftheirfinancialresultswereincludedintheparentcompany’sfinancials.TheGlobalInnovation1000companiescollectivelyaccountfor40percentoftheentireworld’sR&Dspending,whereasthenext1,000largestcorporatespendersrepresent3percent.

In2013,Strategy&madesomeadjustmentstothedatacollectionprocessinordertogainamoreaccurateandcompletepictureofinnovationspending.Inprioryears,bothcapitalizedandamortizedR&Dexpenditureswereexcluded.Startingin2013,weincludedthemostrecentfiscalyear’samortizationofcapitalizedR&DexpendituresincalculatingthetotalR&Dinvestment,whilecontinuingtoexcludeanynon-amortizedcapitalizedcosts.Wehavenowappliedthismethodologytoall10yearsofourdata,sohistoricaldatareferencedinthe2014andfuturestudieswillnotalwaysalignwithpreviouslypublishedfiguresforthe2005through2012studies.

Foreachofthetop1,000companies,weobtainedfromBloombergandCapitalIQthekeyfinancialmetricsfor2009through2014,includingsales,grossprofit,operatingprofit,netprofit,historicalR&Dexpenditures,andmarketcapitalization.AllsalesandR&DexpenditurefiguresinforeigncurrenciesweretranslatedintoU.S.dollarsaccordingtoanaverageoftheexchangerateovertherelevantperiod;fordataonshareprices,weusedtheexchangerateonthelastdayoftheperiod.

Allcompanieswerecodedintooneofnineindustrysectors(or“other”)accordingtoBloomberg’sindustrydesignations,andintooneoffiveregionaldesignations,asdeterminedbytheirreportedheadquarterslocations.Toenablemeaningfulcomparisonsacrossindustries,theR&Dspendinglevelsandfinancialperformancemetricsofeachcompanywereindexedagainsttheaveragevaluesinitsownindustry.

Tounderstandhowinnovationhaschangedatcompaniesoverthepast10yearsandwhattoexpectforthenextdecade,Strategy&conductedanonlinesurveyof505innovationleadersat467companiesaroundtheworld.ThecompaniesparticipatingrepresentedjustunderUS$130billioninR&Dspending,or20percentofthisyear’stotalGlobalInnovation1000R&Dspending,allnineoftheindustrysectors,andallfivegeographicregions.

Methodology

15Strategy&

[email protected]

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Barry Jaruzelski

Barry Jaruzelski isaseniorpartnerwithStrategy&inFlorhamPark,NJ,andthegloballeaderofthefirm’sengineeredproductsandservicespractice.HecreatedtheGlobalInnovation1000studyin2005,andcontinuestoleadtheresearch.Heworkswithhigh-techandindustrialclientsoncorporateandproductstrategyandthetransformationofcoreinnovationprocesses.

Volker Staack

Volker StaackisapartnerinChicago,ILintheoperationspractice,wherehefocusesontheengineeredproductsandservicesindustries.Hespecializesinstrategy,corporatefinance,turnaroundsituations,andimplementationofinternationalmergersandacquisitions,withparticularemphasisontheautomotiveandheavyequipmentindustries.

Brad Goehle

Brad GoehleisaprincipalintheWashington,D.C.officeintheoperationspractice,wherehefocusesontheaerospaceanddefense,automotive,andindustrialsectors.Hespecializesininnovationandproductdevelopment,withparticularemphasisonproductandportfoliostrategy,engineering,andfinancialtransformation.

About the authors

Contacts

Abu Dhabi

Joanne [email protected]

Amsterdam

Monique De [email protected]

London

Deirdre [email protected]

Munich

Davina Zenz-Spitzweg+49-89-54525-559davina.zenz-spitzweg@strategyand.pwc.com

New York City

Katrina [email protected]

Paris

Beatrice [email protected]

São Paulo

Deborah [email protected]

Shanghai

Michelle [email protected]

Sydney

Sarah [email protected]

Tokyo

Tomoko [email protected].

Zurich

Karla Schulze-Osthoff+41-43-268-2137karla.schulzeosthoff@strategyand.pwc.com

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the 2014 global innovation 1000 proven paths to … and innovation strategies over the next decade....

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