Tech company CEOs regularly tout innovation as a critical factor in improved financial performance and competitive position.
As such, comparisons are often made with industry leaders like Apple, Facebook, Intel, Qualcomm, Google, and Microsoft.
But in truth, most companies will fail to make significant improvements in performance because of confusion between evolutionary improvements and disruptive behaviour.
A recent study from research analyst firm Strategy Analytics explored the relationships between Research and Development, innovation, and financial performance in the high tech, digital products and services sector.
And the results?
“Most high tech companies rely on their R&D efforts to yield evolutionary, incremental improvements in value propositions,” says Harvey Cohen, President, Strategy Analytics.
“While important to maintaining current profitability, these improvements have a poor track record for significantly improving financial performance.
“With Net Margins in the five percent to nine percent for typical high tech manufacturers, attempting to improve performance through R&D alone against the performance of Intellectual Property-rich firms like Apple with a Net Margin of 23 percent, without examining the risk-taking culture of these firms leads to erroneous conclusions and misaligned strategies.”
For Bob Wasson, Senior Consultant at nu-Angle Consulting - a collaborator on the report - tech firms must constantly upgrade their technology to maintain their competitiveness, making effective R&D activity a crucial key success factor.
“However, even the effects of these upgrade R&D investments will not generally be seen in financial performance for several years,” Wasson counters.
“Investing in evolutionary technology R&D will not necessarily lead to significantly improved financial performance.”
Looking ahead, Wasson believes managers should be careful not to create investor expectations that R&D investment can provide quick benefits to financial results.
“Managers must avoid creating confusion regarding which investments are likely to maintain business competitiveness versus those that have the potential for dramatic improvements in profitability through disruption with higher risks,” he adds.