August 2010

Many organizations conduct research each year to determine the absolute and relative levels of R&D Spending. Many writers and editors use this research as a barometer of the health of companies and industries. These activities are essential and should not be diminished in any way. Equally important, but much less often investigated, is the allocation of funds within an R&D budget. These changing allocations are every bit the barometer as overall R&D Spending, but are harder to research and therefore to quantify. In short, for the past few years, researchers and authors have been “flowing” with the environment of these economic times. It is popular and noncontroversial to say, “companies are being more prudent with their R&D dollars and are allocating them to shorter term incremental product additions and upgrades to existing products and product lines.” This is safe to write and it feels good to read. It is practical and Wall Street likes it, especially in difficult economic times.

What we are seeing however is profoundly different. We are seeing a clear trend, since FY2005, that companies are shifting more monies to earlier stages of development in the hope of achieving more innovative products with higher margins. Our barometer, which is the “absence or presence of processes to direct and manage earlier stage activities,” is on the rise. Primary research conducted by GGI between August 2007 and February 2008, published May 15, 2008, indicates a significant growth in “process-ware” for development activities that precede product development. Expressed as a continuum, Basic Research is followed by Applied Research is followed by Advanced Development is followed by Product Development. For most companies in most industries, the lion’s share of the budget goes to Product Development. Without being too exact or industry-specific, single digit percentages of R&D Budgets usually go to the three pre-product development activities. It doesn’t take too much financial reallocation to essentially double the budget of these three earlier activities, without significantly affecting the overall budget for Product Development. This is what we see, serious process-ware is being developed as the budgets for these three earlier stages are experiencing significant growth relative to their historical baseline. Some 75% of companies in our statistically valid primary research now have one or more tailored processes to facilitate management’s ability to direct earlier-stage innovation.

It is hard to reconcile the research of the “big houses” that report budgets being focused on incremental, enhanced, and portfolio-fill products versus our own research. If they are not incorrect and we are not incorrect, then it possibly means that a sort of bimodal distribution of R&D spending is developing. Companies are making sure there is something new each year to keep their sizzle in the marketplace while investing more than they have in the past to improve their chances of bigger bangs in the future. In baseball terms, singles, triples, and home runs are a likely future with a drop in the number of doubles being hit by the company teams.

The mix and allocation of spending is equally important to the overall level of spending when it comes to the subject of innovative products that command price premiums.

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