Innovation Spending on the Decline

The Boston Consulting Group’s (BCG’s) sixth annual global survey and report on innovation, Innovation 2009: Making Hard Decisions in the Downturn, reveals that, not surprisingly, economic concerns are weighing on many companies’ innovation plans. A significant percentage of companies plan to reduce innovation investment in 2009—and the percentage that plan to increase spending is at its lowest point in the survey’s history.

In parallel, many companies are changing the focus of their innovation efforts. Most visibly, they are strengthening their emphasis on innovation aimed at lowering production costs. Many companies are also looking to reduce the overall cost of their innovation activities by, for example, increasingly leveraging rapidly developing economies, which typically offer cost advantages.

To be sure, the survey confirmed, innovation remains a key focus for the majority of companies. Sixty-four percent (64%) of the more than 2,700 executives who responded said they consider innovation a top-three strategic priority, one critical to their company’s long-term competitiveness. Consistent with that, more than half of the respondents said their company would increase innovation spending in 2009. And with good reason. It turns out that in 2008, for the fourth consecutive year, innovative companies handily outperformed their industry peers in terms of stock market performance.

But the survey revealed that executives are growing increasingly anxious. The percentage of respondents who said their company would raise innovation spending in the year ahead was 58%, down from 63% in 2008. And a significant number of respondents, 14%, said their company would reduce innovation spending in 2009. North American executives were particularly bearish: a sizable 21% said their company would lower spending on innovation.

“Companies remain firm believers in the importance of innovation, but they can’t ignore what is happening in the economy,” says BCG senior partner James Andrew, lead author of the report in a press release. “So, they are increasingly orienting their innovation efforts toward the here and now, emphasizing immediate sales and the reduction of costs and risk. And, for the most part, those moves make sense.”

Andrew believes, however, that some companies will overreact and adopt too defensive a stance. “Cutting your commitment to innovation is always risky, but the effects often do not show up in the first year. We’re really urging companies to take the opposite approach, where possible, and be opportunistic. Companies can make offensive moves in the downturn that will position them far ahead of their competitors when the recovery comes.”

The report, which was based on a global survey of executives that BCG conducted in partnership with BusinessWeek in late 2008 and early 2009, addresses these and other topics central to the pursuit of effective—that is, profitable—innovation, including the establishment of meaningful objectives and the development of best-practice tactics and capabilities.

Key findings of the report include the following:

Spending Plans

A significant number of companies (14%) plan to cut innovation spending in 2009. North American companies are the most cautious by region, with a sizable 21% of North American respondents expecting to cut investment. Most bearish by industry are travel, tourism, and hospitality companies (with 20% saying their company would cut spending) and financial services companies (19% of respondents).

The majority of companies (58%) will boost innovation spending in 2009. Asia-Pacific companies have the most aggressive plans, with 73% of respondents planning to increase spending and 35% planning to do so significantly (that is, by more than 10%). By industry, technology and telecommunications companies are the most bullish: 68% of tech and telecom respondents said their company would increase spending, and 32% said it would do so significantly.