by Adam Hartung | Nov 5, 2012 | Defend & Extend, In the Swamp, Innovation, Lock-in, Science
Many people equate spending on R&D with investing in innovation. The logic goes that R&D spending is lab spending, and out of labs come innovations. Hence, those that spend a lot on R&D are innovative.
That is faulty logic.
This chart shows R&D spending from the top 20 companies in 2011:
Chart reproduced with permission of Business Insider
Think of your own list of companies that are providing innovations which change your work, or life. Would you include Apple? Amazon? Facebook? Google? Genentech? (Here's the link to Fast Company's 50 most innovative for 2012). Note that none of these companies appear on the list of top R&D spenders.
On the other hand, as you look at the big spender list some things might be apparent:
- Microsoft is #5, spending $9B and nearly 13% of revenue. Yet, for this money in 2012 the world received updates to their aging operating system and office automation software. Both of which failed to register favorable reviews by industry gurus, and are considered far from innovative. And Nokia, which is so floundering some consider it a likely bankruptcy candidate soon, is #7! Despite spending nearly $8B on R&D Nokia is now completely reliant on Microsoft if it is to even survive.
- Autos make up a big part of the group. Toyota, GM, Volkswagen, Honda and Daimler are all on the list, spending a whopping $36B. Yet, even though they give us improvements nobody considers them (especially GM) very innovative. That award would go to little Tesla Motors. Or maybe Tata Motors in India.
- Pharmaceuticals make up the dominant industry. Novartis, Roche, Pfizer, Merck, Johnson & Johnson, Sanofi, GlaxoSmithKline and AstraZeneca are all here – spending a cumulative $54B! Yet, they have all failed to give the world any incredible new drugs, all have profit struggles, and the industry is rife with discussions about weak product pipelines. The future of modern medicine increasingly is shifting to genetic solutions, biologics and more specific alternatives to the historical drug regimes from these aging pharma R&D programs.
Do you see the obvious pattern? Most big R&D spenders are not really seeking innovations. They are spending money on historical programs, following historical patterns and trying to defend and extend the historical business. In other words, they are spending vast sums attempting to sustain (or recapture) historical success. And, as the list shows, largely doing a pretty lousy job of it.
If you were given $10,000 to invest would you select these top 20 R&D spenders – or would you look for other, more innovative companies. From a profitability, rate of return and trend perspective, most of these companies look weak – or downright horrible.
Innovators don't focus on what they spend, but where they spend it.
The companies most known for innovation don't keep spending money year after year on their old business. Instead of digging deeper into what they already know, they invest laterally. They spend money putting the pieces together in new, unique ways. They try to find new solutions to old problems, using new – even fringe – technologies. They try to develop disruptive solutions that actually change the marketplace, rather than trying to make something that already exists better, faster or cheaper.
Lots of people like to think there is "scale" in research. Bigger is better. What's more important, for investors, is that there is "diminishing returns." The more you research an area the more you have to spend to find anything new. The costs keep escalating, as the gains shrink. After investing for a while, continuing to research an area is not a good investment (although it may be very intellectually interesting.)
Most of the companies on this list would be smarter to scrap their existing R&D programs, cut the budget in half (at least,) and then invest it somewhere very different. Instead of looking deeper, they need to look wider – broader. They need to investigate alternative solutions, rather than more of the same. They need to be putting more money on fringe opportunities, and a lot less into the core.
Until they do, few on this list are very good investment bets. You'll do better investing like, and in, the real innovators.
by Adam Hartung | May 13, 2009 | Current Affairs, General, In the Whirlpool, Leadership, Lifecycle
"Invest in America – but Savings Bonds." I grew up seeing those signs. Of course, I'm over 50. They came from the World War era, when America asked people to buy "war bonds" to pay for involvement. At the time, pre-Bretton Woods, America was still on a gold standard. The country couldn't tust print all the money it wanted. To pay for war goods, Americans were asked to buy bonds. Not for the rate of return – nor even for the eventual gain on principle. It was pure patriotism. Buy bonds to pay for the war. As the clock turned, this patriotic thinking migrated to buying government bonds to help pay for highways, bridges, dams and other projects to help grow America.
I was reminded of this when I saw the Marketwatch.com headline "Ford raises $1.4billion in stock offering". I thought to myself, why would anyone on earth buy newly issued shares in Ford? It's hard to conceive of buying shares in the company as it exists, what with its very long history of weak profits, tepid product lines, limited innovation and lack of attachment to market trends. But to give the company new money, in form of equity with guarantee of a return on or of your principle…. Why that is simply befuddling. This money is not intended to go for new products or improving the company's links to customers. Rather, it all is intended to pay for part of a health care trust that might assuage growing total labor costs. Sort of like paying for part of a clean up on a previous toxic spill. Not something that makes money.
Ford is a company in the Whirlpool. It's odds of surviving are low. It's odds of making high rates of return and being globally competitive are almost nonexistent. Ford wants people to help management defend its past actions – which won't even extend past horrible perfornce – much less improve it. None of this mone is for White Space to do anything new. There is nothing in this offering to make you think Ford will ever be able to repay your investment – or even ever pay a dividend on it.
So I was left thinking that I guess you could buy this offering because you are patriotic. Sort of "Defend America by Defending Ford" and it's management ability to keep running a company that doesn't meet customer, investor or employee expectations. Henry Ford advanced civilization with his ideas for automation and how he applied them at his company – so we need to keep his namesake company alive, I guess (and conveniently forget he was opposed to civil rights, opposed to women's rights and opposed to all forms of organized labor.) And perhaps you want to invest in defending & extending America's involvement in auto production – even though we have a long history of being #1 in making something before exiting it - like shipbuilding, steelmaking and television set production. And maybe you just feel like its your duty to give money to Ford because it represents a great American brand – like RCA, Woolworth's, Studebaker and Hotpoint once did.
Or we can realize this is simply an investment intended to keep Ford alive for another year or two. A form of corporate life support hoping something new comes along to save the patient. For most of us, we're better off with the mattress. There are pension funds out there that receive cash quarter after quarter. They are always looking for investments. Some have billions of newly arrived dollars to invest. And for many, investing that money is done by "rules" rather than analysis. They have to invest x% in equities, and that's allocated Y% and Z% and A% into specific categories. And they will probably buy these shares, after their fund managers have some greatly expensive steak dinnbrs courtesy of the underwriters. Unfortunately, that doesn't make our pensions funds any healthier – but we have little or nothing we can do to affect those decisions.
Keep your money in companies that have White Space. Companies that don't fear Disruption in order to keep themselves aligned with market shifts. Invest in companies that talk about the future, and how their new products will open new opportunities for their customers to accomplish new things. Pay attention to those with long track records of above-average performance – like Google, Apple, Cisco – or Nike, GE and Johnson & Johnson. Invest in the Disruptors that are going to grow the new economy, not those hoping to suck off its benefits with no innovation or other contribution. That will more likely get your 401K back where you want it.
PS – for regular readers – I opologize for being offline without comments for a few days. Computer gremlins attacked me and it's been a struggle to regain control of the machine. Hopefully I'm back on track.
