The Promise of Targeted Innovation

Who are the kings of R&D spending? High tech and health care, of course. These sectors each account for nearly one-quarter of global R&D.1 Consumer goods companies? They’re near the bottom, at just less than 3%.2 But what they do spend is hardly trivial. The largest consumer goods companies each lay out more than $1 billion annually. Spending by one of the biggest, Procter & Gamble, has averaged about $2 billion per year for the past decade.3

What have these behemoths gotten in return for their hefty R&D outlays? Virtually nothing from a sales perspective. In an industry analysis, we found that the consumer packaged goods sector’s biggest R&D spenders saw no appreciable impact on revenue. That’s troubling for companies whose growth has plateaued over the past five years, as new competitors have challenged established brands.

At the company level, however, the picture is more nuanced: Even though (true to the industry average) companies that spent heavily on R&D — such as P&G and Unilever — saw no measurable impact on sales, some outfits that spent less on R&D showed a significant positive correlation. For example, Henkel and Beiersdorf, both in Germany, enjoyed a revenue boost, as did L’Oreal of France and Reckitt Benckiser in the United Kingdom. We’d term Henkel and L’Oreal, which have roots in the chemical industry, as medium spenders and the others as modest spenders.

It turns out, as economist E.F. Schumacher wrote, small really can be beautiful.4 Of course, incremental innovation — reaping healthy returns with small, iterative improvements — isn’t a new idea. Apple has famously boosted sales of its iPhones with incremental tweaks in each product cycle, and brand-name prescription drugs sometimes offer modest upgrades over prior treatments or generic alternatives. But conventional management wisdom, based on years of research, still holds that R&D productivity depends on industrial might: Big companies can spend more on innovation, and as a result, they innovate more — and better.5 In the consumer products world, at least, our analysis suggests that’s not the case.

Different Spending Patterns

To better understand this puzzle, let’s examine two consumer goods companies with starkly different levels of investment in R&D: P&G and Reckitt Benckiser.