Cutting R&D for short-term gain is Strategic Suicide & what you can do to avoid it

FOR SHORT-TERM GAIN IS STRATEGIC SUICIDEWHY CUTTING YOUR (And what you can do to avoid it)

Vendavo discussion papers / Pain points and how to solve them / No 1 Summer 2016

R&D

PAGE 2

Why cutting your R&D for short-term gain is strategic suicide. (And what you can do to avoid it.)

lThe world’s most successful companies invest hugely in Research & Development

lWhat you spend it on is as important as how you spend it

lCutting R&D delivers an immediate financial shot in the arm, but has devastating long term consequences

lInnovation is the only thing that sets you apart from the competition, and an R&D cut seriously compromises that

lThere are far more effective ways to boost profitability without impacting critical R&D spend

HERE’S A QUESTION FOR YOU. What do Microsoft, Samsung, Amazon and Google have in common? Or drug giants Novartis, Roche or Pfizer? Or VW, Daimler or GM? They’re all hugely successful companies, of course. They’re all household names, with enormous brand equity. They’ve all weathered economic downturns and a fiercely competitive market with relative ease.

But they have one more thing in common. They’re all big investors in research and development (R&D), figuring in PwC’s Global Innovation 1000 year after year.

It’s no coincidence that the world’s most successful companies are also the ones that invest heavily in R&D. And the figures are truly staggering: Microsoft spent $11bn in 2015, or 13% of revenue. Google spent almost $10bn, which comes in at 15% of its revenue.

QUALITY, NOT QUANTITYOf course, if increasing R&D were the recipe for success, then the companies that threw the most money at it would take all the prizes. But as with most things in life, the reality is a little more complicated.

R&D simply provides the resources to innovate and break new ground. If you don’t recruit the best and the brightest, and create an environment that encourages and fosters new ideas, all the money in the world won’t bring commercial success.

And then there are the companies that buck the trend. Just take a look at the PwC list, and you’ll see there’s one notable exception: Apple.

And yet it’s hard to argue that Apple isn’t innovative. In fact, it’s one of the world’s most successful brands, moving 231m iPhones in 2015 alone. And yet the Cupertino-based firm spends just 3.5% of its revenue on R&D.

MICROSOFT SPENT $11BN IN 2015, OR 13% OF REVENUE. GOOGLE SPENT ALMOST $10BN, WHICH COMES IN AT 15% OF ITS REVENUE.

PAGE 3


So spending less than your rivals R&D doesn’t necessarily mean you lag behind them. And Apple spends less than Microsoft, Samsung, Amazon and Google in percentage terms.

But Apple is the exception rather than the rule. And two things are worth noting: first, the company often relies on innovation among its hardware suppliers. And second, 3.5% is put into perspective when you realise it’s on sales of $233bn, which works out at $8.1bn. That’s three times what Facebook spends in dollar terms, and almost as much as Google.

And here’s the real takeaway: whether it’s a percentage or an actual, Apple has doubled its R&D spending since 2013. The fact that it’s had more bang for buck than its rivals just shows how ruthlessly focused they are, and how they spend their R&D dollars wisely.

SHORT-TERM GAIN, LONG-TERM PAINIn tough economic times, it’s tempting to think that cutting your R&D budget is a quick cure. And that may well be the case in the short term, but there’s a price to pay further down the line that far outweighs the upfront benefits.

Those tech and pharma giants may be spending more or less than each other, but one trend is consistent: none of them are cutting R&D for short-term gain.

Almost none. Back in 2013, Hewlett-Packard slashed R&D spending after a turbulent few years that had seen declining sales and profitability.

THE DEVIL IS IN THE DETAIL

When it comes to R&D, on size doesn’t fit all – just ask Anne Marie Knott of Olin Business School at Washington University in St Louis. She first floated the idea of the R&D Quotient (RQ for short) in her now-famous Harvard Business Review article The Trillion-Dollar R&D Fix back in 2012.

The RQ measures the effectiveness of R&D, to try and make sense of the figures when R&D spend isn’t directly correlated with growth. It’s designed to help companies identify their optimal R&D investment – so that they don’t over- or under-spend. Baidu topped the rankings in 2013, though its R&D spend is well below some of its rivals.

The takeaway is that increasing R&D doesn’t necessarily generate higher returns. As with Apple, it really depends what you do with it.

Knott says that this new measure should restore R&D’s role as the engine of economic growth.

But, she adds, “one thing impeding that has been that R&D spending is an easy target under investor pressure for quarterly earnings—cutting R&D increases profits immediately, but its benefits are uncertain now as well as in the future.”

PAGE 4


“Strategically, it’s suicidal,” said tech analyst Rob Enderle at the time. “What it means is, as other companies like Cisco and IBM continue to advance, they keep falling behind.”

Enderle’s bleak predictions were borne out in the figures, as Hewlett-Packard’s lacklustre performance continued. In November 2015, they were still in trouble, reporting a 7% drop in annual revenue.

HP are not alone in this approach. In one study, 26% of CFOs said they’d make a ‘moderate or large economic sacrifice’ – such as cutting R&D – to meet Wall Street’s quarterly earnings expectations.

Cutting R&D may be a short-term fix to keep analysts and shareholders happy. But it’s not a long-term strategy, as it’s simply not sustainable.

What’s more, it really isn’t necessary. And that’s where Vendavo comes in.

PROTECTING AND GROWING YOUR CRITICAL R&D SPENDVendavo helps companies generate cash faster than traditional cost-out measures.

• We analyse overall sales effectiveness, pinpointing immediate areas of improvement where margin can be recovered and/or maximised quickly.

• Through intelligent guidance, we ensure that sales forces are transparent on pricing, resist the temptation to heavily discount products in the market, and confidently close at a consistently higher profit margin.

• We also help companies develop a segmentation model to incorporate ‘value-based’ pricing versus traditional ‘cost-plus’. We then enable an efficient segmentation refresh to ensure best price and best margin opportunity at all times.

Vendavo can help you maximise your margins and profit, find your most profitable customers and drive more profit to every deal. By doing so, we can deliver improvements straight to your bottom line.

This highly customised, targeted approach allows you to protect and grow your all-important R&D spend. In a fiercely competitive market where innovation is a key differentiator, we’ll make sure you never have to choose between short-term gain and long-term, continued success.

26% OF CFOS SAID THEY’D MAKE A ‘MODERATE OR LARGE ECONOMIC SACRIFICE’ – SUCH AS CUTTING R&D

GET IN TOUCH TODAYContact us today for a FREE, no-obligation [email protected]