Where Are All the High-Leverage Innovators?

Many studies have shown various positive relationships between R&D investment and business performance, and a summary of some of these together with new results was published recently in RTM (1). However, Booz Allen Hamilton (BAH) surprised many industrialists with the assertion in their 2006 commentary on the top 1,000 R&D investors that there is a sizeable group of 94 "High Leverage Innovators. " These HLIs apparently achieve leading business performance but with below-average R&D intensity (R&D as % sales) for their sector (2). The next BAH report-on the consulting firm's 2007 R&D 1,000-then listed 118 HLIs or nearly 12 percent of the total 1,000 companies (3). The rest of this article analyzes the concept of an HLI and examines the companies cited by BAH as HLIs to see whether their designation as HLIs is robust. My conclusion is that it is not. Genuine high-leverage innovators would be expected to satisfy at least the following three conditions: * They should be from a sector where R&D is one of the most important competitive factors so that business performance might be expected to show a clear positive relationship to R&D. In cases where R&D is only one of the key factors, high investment in another factor such as Capex (capital expenditure), brands or market development may in fact determine business performance. * The R&D intensity should be defined as "low" or "high" relative to directly comparable companies in a reasonably narrowly defined sector or subsector rather than to the average intensity of a wide range of different companies in a very broadly defined "sector. " * Companies should be HLIs consistently so that they meet the HLI criteria for several years in succession-better business performance and lower R&D intensity for only one or two years is not sufficient, particularly where new product cycles are longer than this. The crucial test is the maintenance of HLI status over many years. How Robust? I now examine some of the BAH HLI companies under these three headings to see how robust their proposed classification is. There are many HLIs in the BAH publications (2,3) which do not meet these three conditions. For example: * In the BAH 2007 list of 118 HLIs there are 15 from the oil & gas and mining sectors where R&D intensity averages well below 1 percent and R&D is certainly not the key competitive factor. The same is true of fixed-line telecoms and tobacco, which account for two more companies. The R&D intensity for industrial metals firms and food processors is around 1 percent but still far from being the key competitive factor. In total, these sectors account for 24 companies or over one-fifth of the total HLIs. * It was pointed out in an earlier publication (1) that BAH defined only 10 sectors as opposed to the 39 ICB sectors (4) used in most R&D Scoreboards (5,6). For example, the "health" sector defined by BAH includes both the ICB health and pharmaceutical sectors. The ICB health sector has an average R&D intensity on the order of 6 percent compared to the pharmaceutical sector at about 15 percent. This means that most health companies in the combined sector will appear to have below-average intensity. It is therefore not surprising that BAH include 11 health companies in their 2007 list and 12 in the 2006 report as HLIs. Of the 12 pharmaceutical firms in the 2007 list, 8 specialize wholly or partly in generics and thus by definition are in a subsector of lower-than-average R&D intensity. * BAH identified 118 HLIs in their 2007 report but only 58 of them appeared as HLIs in the 2006 report. …