Why do we take non-productive decisions? This is a question easy to hear nowadays. I believe one of the answers (probably the most important one) comes from a Market Research Executive Board report: almost all executives agree that customer focus is critical to their company’s success – yet only 40% of senior executives feel that they have the support and tools that they need to be customer focused.
And why is that? – we may ask. Well, research into the customer decision-making environment reveals that the Research function—the organizational owner of customer knowledge, one of three components of customer focus – is currently set up to impact only 10% of the company’s customer-facing decisions. This leaves 90% of decisions being made based on “gut instinct” and/ or insights and information provided by other sources.
Not long ago I realised the importance of client facing behaviour – more details in this article – and decisions inside the firm will definetly impact this behaviour directly.
Research and development has risen sharply on the corporate agenda in the wake of the global economic crisis, a McKinsey survey finds. Four in ten respondents report that both R&D budgets and activity levels are up this year relative to 2009. What’s more, executives are remarkably optimistic that the R&D moves their companies made during the downturn will serve them well in the coming three to five years.
Moreover, nearly 60% of executives say R&D will be either the top priority or among the top three priorities this year – significantly higher than the 47% of executives who said the same last year. Despite the increased levels of spending and activity, companies are taking a wait-and-see approach to R&D hiring. Relatively few respondents say their companies are hiring or firing; the most common approach is a focus on retention.
Executives recognize that delaying, reducing, and eliminating R&D projects can limit long term competitiveness. Still, 42% of respondents say their organizations cut R&D costs in 2009, perhaps reflecting the lengths to which some companies needed to go in order to survive the recent economic turmoil. Further, when compared to the moves companies had made in spring 2009 (when McKinsey’s first R&D survey was conducted) with the moves they made by year’s end, it becomes clear that for many R&D organizations, conditions worsened steadily. Far more companies eliminated projects, delayed spending, and instituted hiring freezes as the year progressed.
These actions may well haunt some companies for years to come. A significant share of executives whose companies cut costs expect that these moves will have adverse effects in the coming three to five years. The problems respondents are most likely to expect include reduced market share, a loss of technological ground to competitors, a weaker R&D talent pool, a loss of institutional knowledge, and damage to morale.
Meanwhile, a significant number of companies appear to have used the downturn as an opportunity to add a measure of discipline to their R&D organizations, infrastructure, or processes. Among the most frequent changes in 2009 were increased accountability for performance and spending, increased collaboration with outside R&D groups, increased use of global R&D resources, and the streamlining of core R&D processes. All these moves should help companies innovate more effectively over the long term.
Moreover, high performers in the survey appear more attuned to the “softer” aspects of R&D than other companies are. Executives at high-performing companies, for instance, are significantly more likely to say their organizations are focusing on retention of key employees (40% versus 29%). And while the majority of high-performing companies didn’t cut R&D costs in 2009 — 63% of high performers didn’t, versus 56% of the others — those that did are far more likely than other companies to fear weaker R&D talent pools, a loss of institutional knowledge, and damage to company morale. Finally, high-performing companies appear to be markedly more proactive than the others in two operational areas that represent significant long-term investments: the streamlining of core R&D processes and the expansion of R&D infrastructure.
The McKinsey Quarterly surveyed 494 senior executives around the world in February and March 2009. Results show that research and development remains a strategic priority for executives, even in turbulent times: 40% of the respondents say their companies are actively seeking to reduce R&D costs – far fewer than are cutting operational costs overall (according to other McKinsey research). Some 34% of the executives report that R&D budgets are lower in 2009 than they were in 2008. Further, a large majority indicate that their companies are taking a new approach to R&D in the current economic circumstances; many are turning to shorter-term, lower-risk projects or focusing on minor changes to existing products.
While this tendency toward caution is understandable, other findings indicate that many companies may be overlooking longer-term opportunities to innovate. Notably, the companies that get the greatest benefit from innovation appear to be taking a different approach. The respondents from them not only indicate that, during the past 5 years, they have had high rates of organic growth as compared with competitors but also attribute more than 30% of that growth to new products developed in house. In the areas just described, these high performers are taking a very different approach – one that seems intended to fortify their existing competitive advantages.
Respondents at high-performing innovators are nearly twice as likely as the others to regard the current economic situation as an opportunity to upgrade R&D (24%, compared to 14%) and are more likely to say their companies are expanding some R&D activities (30% versus 21%). Indeed, they are more than twice as likely as other respondents to report that their companies’ R&D budgets are either “higher” or “much higher” this year than last (35% versus 17%). As for setting R&D goals, executives at these companies are more likely than others to say they are focused on creating new products to meet changing consumer needs and new products or services to take advantage of competitors’ weaknesses. Most notably, these companies are more than twice as likely as the others to seek projects that combine higher risks with higher returns.
R&D trends based on survey results:
Although the urge to reduce R&D costs is understandable, not all cuts are created equal. Top companies save money by optimizing and upgrading R&D processes and making them leaner – a path that improves the bottom line while raising productivity and speed to market.
A rigorous portfolio approach to managing R&D projects helps senior executives focus on strategically promising efforts while uncovering moribund projects that may otherwise go undermanaged – or even unnoticed.
Widespread layoffs and industry restructuring, though painful, offer opportunities too. An unprecedented pool of specialist engineering talent – for example, in the automotive industry – is available for companies looking to steal a march on competitors.