ShareThisBy TOM ABATE
Tuesday, November 14, 2006
At Google, engineers are encouraged to spend a good portion of their time coming up with ideas. At Apple Computer, the focus is on catering to the customer with industrial design. SanDisk has found a way to make falling prices a competitive advantage.
All three are examples of companies that spend less than their peers on research and development but get more in return.
The premise of spending less and getting more is the key finding to emerge from a study released Monday by the Booz Allen Hamilton consulting firm. Titled "Smart Spenders," the report identified the R&D practices that produced the best revenue, profit and stock price appreciation while keeping research outlays as a percentage of sales below the averages for any given industry.
"It's not about how much you spend," said principal author Barry Jaruzelski, "it's how you go about spending it."
According to the study, the companies that got the most bang for their R&D buck shared a series of traits: They had processes for generating and tracking ideas, systems for selecting which projects to fund, and mechanisms to take projects through product development to successful commercialization.
Jaruzelski led a team of consultants who spent six months scouring public records to assess the R&D spending of more than 1,000 of the world's largest public companies. They then ran a series of calculations to measure the impact of R&D spending on financial performance indicators.
"We tortured the data to within an inch of their life," he quipped.
In this way, Booz Allen identified 94 firms that outperformed the rest of the thousand companies in sales and profit growth while spending less on R&D as a percentage of sales.
Companies on this list of efficient R&D spenders include Apple Computer, eBay, Google, Yahoo, and SanDisk.
For instance, the study noted that Google excels at idea generation in part because it encourages its staff, notably engineers, to spend up to 30 percent of their time thinking up new things. The report cited Apple for its "keen understanding of its customer" as well as its legendary industrial design.
Less well known and therefore more instructive were the report's findings on SanDisk. Based in Milpitas, Calif., SanDisk makes flash memory, a type of storage chip found in everything from digital cameras to MP3 music players.
The study noted that flash memory prices fall with brutal regularity. Booz Allen said SanDisk has used that trend to its advantage.
Case in point: In 2004, as flash memory became cheap enough to replace the hard disk drive as the storage medium for music files, SanDisk decided to make an MP3 music player. It introduced a device called the Sansa that has quickly become the second-best-selling music player behind Apple's iPod, the study said.
"SanDisk has created a culture of frugality across the board," Jaruzelski.
R&D by the numbers:
A study looked at global research and development spending to learn how to get the best financial payoff for the lowest outlays as a percentage of sales.
1,000 _ Companies in survey
$407 billion _ Their total R&D spending in 2005
3.5 percent _ Median R&D spending of top 500 top companies as a percentage of sales
7.6 percent _ Median R&D spending of next 500 companies as percentage of sales
94 _ Companies that got the best bang for the buck
Source: Booz Allen Hamilton
