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.
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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.
1. “Percentage of global research and development spending in 2017, by industry,” Statista, 2018.
3. The 2016 EU Industrial R&D Investment Scoreboard, European Commission, Joint Research Centre, 2016.
4. E.F. Schumacher, “Small Is Beautiful: A Study of Economics as if People Mattered” (London: Blond & Briggs, 1973).
5. E.M. Mendigorri, T.G. Valderrama, and V.R. Cornejo, “Measuring the Effectiveness of R&D Activities: Empirical Validation of a Scale in the Spanish Pharmaceutical Sector,” Management Decision 54, no. 2 (March 2016), 321-362.
6. J. Reingold, “Can P&G Find Its Aim Again,” Fortune, June 9, 2016.
7. Reuters data services.
8. From the authors’ interviews with Reckitt Benckiser executives and “Transforming Reckitt Benckiser,” by M.T. Hansen, H. Ibarra, and N. von Bernuth, INSEAD case study no. 04/2011-5686.
9. E.M. Mendigorri et al., “Measuring the Effectiveness of R&D Activities.”
10. A. Fotheringham, “‘Head of Marginal Gains’ Helps GB Gold Machine Stay in Front,” The Independent, Aug. 7, 2012.
11. M. Lewis, “Moneyball: The Art of Winning an Unfair Game” (New York: W.W. Norton & Co., 2003).
12. P. Nunes and T. Breene, “Jumping the S-Curve: How to Beat the Growth Cycle, Get on Top, and Stay There” (Boston: Harvard Business Review Press, 2011).
13. C. Christensen, “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail” (Boston: Harvard Business Review Press, 1997).
14. A. Buvailo, “Pharma R&D Outsourcing Is on the Rise,” BiopharmaTrend, Aug. 13, 2018.
15. C. Gretler and L. Du, “Nestlé Debuts Natural Ruby Chocolate in KitKat-Crazed Japan,” Bloomberg, Jan. 17, 2018.
16. B. Jaruzelski, J. Loehr, and R. Holman, “The Global Innovation 100: Why Culture is Key,” Strategy + Business, Oct. 25, 2011.
17. A.M. Brandenburger and B. Nalebuff, “Inside Intel,” Harvard Business Review, November-December 1996 issue.