How Much is Enough?

By James Euchner, RTM Editor-in-Chief and VP, Global Innovation, Goodyear

“You can never be too rich or too thin.” —Wallis Simpson

Investment in R&D is critical for the long-term viability of industrial companies. But how much R&D is enough? It’s a question most CTOs face as they prepare budgets for another fiscal year. And there is no one good answer for it. Studies can be found to support any budget recommendation the CTO might choose to make.

In theory, a company should invest in R&D to the extent that the risk-adjusted returns exceed the cost of capital. In practice, it’s not that easy. The risks of the investment, the size of the hoped-for returns, the timing of the growth of the business, and the ability of the firm to pull through innovation are all difficult to assess. The decision must be made in the throes of short-term earnings pressure, other calls on available funds, and political considerations. Nor does investment necessarily equal performance: lists of the most innovative companies and the biggest investors in innovation overlap, but it’s not a strong correlation.

Faced with this complex of issues, companies make very different decisions about R&D spending. Some invest heavily in R&D, even in the face of criticism from Wall Street. Amazon.com is a prominent example. The company sees future opportunities so large that it is willing to bet on them, even at the expense of short-term returns to shareholders. Intel has been another. Even within an industry, it is not uncommon for one company to spend twice as much on R&D, as a percentage of sales, as its competitors do.

Others, some of them paragons of innovation, invest far less than their peers do in R&D. Apple is the most prominent example. Steve Jobs was once quoted in Forbes as saying, “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.” The company’s leadership reflects that belief in a relatively low R&D investment. And yet Apple undeniably succeeds, largely through vision, design, business model innovation, and an uncanny ability to monetize the innovation of partners.

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