Big Companies Expect Innovation Spending to Change Significantly Over Next Decade

Large multinational companies expect the focus of their innovation efforts and investments to change significantly over the next decade – moving toward a far greater emphasis on riskier initiatives and breakthrough innovations, according to the newly released, tenth annual 2014 Global Innovation 1000 Study from Strategy&, part of the PwC network.

Innovation leaders say that today most (58%) of R&D spending at their companies focuses on incremental or renewal innovations, such as those relating to current products, and just 28% on new or substantial innovations and only 14% on breakthrough or radical innovations.

Those same leaders say that in 10 years the share of innovation spending directed to new innovations will increase by a quarter, climbing to 35% and the portion for breakthrough innovations will jump by nearly a half to 22%. The amount focused on incremental innovations will drop by a quarter to 43%.

“Riskier, breakthrough innovations were de-prioritized in the midst of the financial crisis," says Barry Jaruzelski, a senior partner at Strategy&, formerly Booz & Company, and one of the study’s co-authors. "With the healthier market conditions, it is not surprising that business leaders say they plan to focus more on big breakthroughs. This will require companies to build new capabilities, an effort which they must not underestimate. It’s not by planning or shifting spending alone that they will achieve this.”

More R&D spending on services in the future, less on products

Companies indicate they intend to direct more spending to services R&D, at the expense of product R&D. Today most innovation spending (52%) goes to products. In 10 years, R&D for services will take up 62% of innovation spending, innovation leaders say.

“A great example is Visteon, traditionally an auto parts company. It is now exploring services related to internet-connected cars. For instance, it’s working toward wireless charging and wireless communication enabling cars to communicate with one another,” says Jaruzelski.

Companies know they need to align business and innovation strategies

Many companies say they see aligning business and innovation strategy (20%) and building select innovation capabilities (18%) as the most important priorities for innovation success over the next decade. In addition, many companies also plan to focus on aligning company culture (14%) with innovation strategies. Others (13%) plan to build external innovation networks.

Overall, nearly half of companies admit that they have not already focused on an innovation area they think will be most important for future innovation.

“The great disparities in innovation performance underscore that there are still tremendous opportunities for companies to get more from their R&D spending, and to enhance their competitive positions as well as financial performance,” says Jaruzelski.

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