BCG Study Finds That a Significant Number of Companies Are Planning to Decrease Their Innovation Spending

BOSTON, MA--(Marketwire - April 13, 2009) - The Boston Consulting Group's (BCG's) sixth annual global survey and report on innovation, "Innovation 2009: Making Hard Decisions in the Downturn," reveals that, not surprisingly, economic concerns are weighing on many companies' innovation plans. A significant percentage of companies plan to reduce innovation investment in 2009 -- and the percentage that plan to increase spending is at its lowest point in the survey's history.

In parallel, many companies are changing the focus of their innovation efforts. Most visibly, they are strengthening their emphasis on innovation aimed at lowering production costs. Many companies are also looking to reduce the overall cost of their innovation activities -- by, for example, increasingly leveraging rapidly developing economies, which typically offer cost advantages.

To be sure, the survey confirmed, innovation remains a key focus for the majority of companies. Sixty-four percent of the more than 2,700 executives who responded said they consider innovation a top-three strategic priority, one critical to their company's long-term competitiveness. Consistent with that, more than half of the respondents said their company would increase innovation spending in 2009. And with good reason, it turns out: in 2008, for the fourth consecutive year, innovative companies handily outperformed their industry peers in terms of stock market performance.

But the survey revealed that executives are growing increasingly anxious. The percentage of respondents who said their company would raise innovation spending in the year ahead was 58, down from 63 in 2008. And a significant number of respondents -- 14 percent -- said their company would reduce innovation spending in 2009. North American executives were particularly bearish: a sizable 21 percent said their company would lower spending.

"Companies remain firm believers in the importance of innovation, but they can't ignore what is happening in the economy," says BCG senior partner James P. Andrew, lead author of the report. "So they are increasingly orienting their innovation efforts toward the here and now, emphasizing immediate sales and the reduction of costs and risk. And, for the most part, those moves make sense."

Andrew believes, however, that some companies will overreact and adopt too defensive a stance. "Cutting your commitment to innovation is always risky, but the effects often do not show up in the first year. We're really urging companies to take the opposite approach, where possible, and be opportunistic. Companies can make offensive moves in the downturn that will position them far ahead of their competitors when the recovery comes."

The report, which was based on a global survey of executives that BCG conducted in partnership with BusinessWeek in late 2008 and early 2009, addresses these and other topics central to the pursuit of effective -- that is, profitable -- innovation, including the establishment of meaningful objectives and the development of best-practice tactics and capabilities. Key findings of the report include the following:

Spending Plans

-- A significant number of companies (14 percent of survey respondents) plan to cut innovation spending in 2009. North American companies are the most cautious by region, with a sizable 21 percent expecting to cut investment. Most bearish by industry are travel, tourism, and hospitality companies (with 20 percent saying their company would cut spending) and financial services companies (19 percent).

-- The majority of companies (58 percent of survey respondents) will boost innovation spending in 2009. Asia-Pacific companies have the most aggressive plans, with 73 percent planning to increase spending and 35 percent planning to do so significantly (that is, by more than 10 percent). By industry, technology and telecommunications companies are the most bullish: 68 percent of respondents said their company would increase spending, and 32 percent said it would do so significantly.

Utilization of Rapidly Developing Economies

-- The percentage of companies that plan to make greater use of rapidly developing economies in their innovation activities in the year ahead jumped to 45 in 2009 from 37 in 2008, consistent with a growing sensitivity to costs. By region, Asia-Pacific companies have the most aggressive plans, with 70 percent expecting to increase their investment in RDEs. By industry, technology and telecommunications companies and industrial and manufacturing companies are the most bullish: 60 percent and 58 percent, respectively, said their company would increase its investment in R&D in these countries.

Perceived Strengths and Weaknesses

-- Executives consider ensuring executive-level sponsorship of projects (66 percent of respondents) and developing a deep understanding of customers (65 percent) to be their companies' greatest strengths in advancing their innovation efforts.

-- Companies' biggest hurdle is speed, or the time it takes to move from idea generation to initial sales. Forty-five percent of respondents identified speed as their greatest challenge. The second most commonly identified challenge (41 percent) was discipline -- the ability to strictly enforce timelines and milestones. Respondents have identified both as key challenges for the past several years, suggesting that companies are not making the right adjustments to their efforts in these areas.

Measuring Innovation

-- Customer satisfaction (tracked by 44 percent of companies, according to survey respondents) and overall revenue growth (tracked by 41 percent) are the two main gauges that companies use to determine the success of their innovation efforts. (For a detailed discussion of metrics and measurement, see BCG's companion report, "Measuring Innovation 2009: The Need for Action").

Innovation Success and Stock Market Performance

-- Innovative companies generate vastly superior total returns for shareholders. Globally, on an annualized basis, innovators outperformed their industry peers by 430 basis points over three years; over ten years, they outperformed them by 260 basis points. The pattern of superior performance for innovators held when viewed along regional lines as well.

Differences in Perception Regarding Innovation Efforts Within Companies

-- C-level executives are more satisfied with the return on innovation spending than the rest of the company. Sixty-three percent of C-level respondents said they were satisfied, versus 50 percent of vice presidents and managers and 47 percent of other employees.

The Role of M&A Activity in Innovation Strategies

-- M&A activity -- whether for gaining access to new markets, acquiring innovation-supporting technology, or securing innovative leaders and personnel -- plays a significant part in many companies' innovation strategies. As might be expected, it plays a particularly key role among pharmaceutical, biotechnology, and health care companies. (Only 19 percent of respondents from that industry said that M&A does not play a significant role in their innovation strategy.) And it plays an important role among European companies generally. (Only 24 percent of European respondents said it was not a major part of their company's innovation strategy.)

The Most Innovative Companies

-- For the third straight year, respondents ranked the "evergreens" -- Apple, Google, and Toyota -- the most innovative companies, with Apple once again the hands-down winner.

"Economic pressures are making companies rethink all aspects of their business, and innovation is certainly fair game," says Andrew. "But companies need to be smart about it. By thinking strategically, they can address near-term cost concerns without sacrificing the long term. The true innovation leaders are currently asking themselves, How can we use this opportunity to win? instead of How can we survive?"

To receive a copy of the report or to arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

About The Boston Consulting Group

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