Future Growth And The Future of Innovation.

Spring is a time of optimism, growth and new beginnings.  Except, it appears, when it comes to innovation.

Returns on R&D have been declining. Given that innovation is a huge priority for every industry, that’s alarming.

The question the experts are asking is, “Is innovation becoming more difficult or are we getting worse at it?

A recent article by Anne Marie Knott in the Harvard Business Review explores the statistics behind this question and comes up with an optimistic answer.

In an increasingly lean and competitive global business environment, more companies are spending more on R&D than ever before.  While the number of scientists and engineers involved has increased by 250%, the return on investment has decreased by 65% according to Knott’s research.

Innovation and Growth - RQ across industires 1

There have been 2 major opinions as to the cause of the decline.

One is that there are less viable, quality ideas out there to be discovered by an individual researcher given the increase in the number of researchers. The other is that there are simply a decreasing number of innovations left to be discovered.

What causes Knott to question both these theories is a comparison of the ‘RQ’ or ‘Research Quotient,” her quantification of R&D productivity.

Based on current industry statistics, when comparing top RQ companies from previous years to the current year’s top RQ companies, one would expect to see the same RQ  decline.  While this is true for industries as a whole, it’s not true of individual companies.  The RQ for the current top companies has actually increased over previous top companies. This holds true when comparing year to year over the past 4 decades.

Once this anomaly was uncovered, Knott then examined the RQ of specific industry segments at the company level. At the narrowest level across industries, the RQ did, in fact, decrease.

Innovation and Growth - RQ across industires 1

This is a good thing, postulates Knott, “The implications of the pattern are actually pretty exciting. What the pattern suggests is that while opportunities within industries decline over time, as they do, companies respond by creating new industries with greater technological opportunity. Once I saw this pattern it was easy to think of examples. In fact, many of these examples are referenced in the current debate on disruption. Some common examples are the death of the typewriter and its replacement by personal computers, and the death of landlines and their replacement by cell phones. While there are numerous other examples, what is true in the two cases that came to mind, is that the market for the new technology was actually much broader than that for the technology it replaced.

The good news is that while industries may decline, companies need not.

The lesson, according to Knott, is for companies to look beyond their industry for future growth.  While industry opportunities may decline, companies that focus on exploring new horizons and evolving beyond their current industry, can expect to enjoy growth.  This approach will ensure their survival as well as have a significantly positive impact on the economy.