Increase Your ROI on R&D
In a recent McKinsey survey, 84 percent of global executives reported that innovation is important to growth strategy.
Yet only 6 percent are satisfied with their innovation performance. That’s a staggering 94 percent dissatisfied rate — worse than Congress!
Perhaps even more disheartening is the finding that very few of these global executives know how to improve the situation.
Another study conducted annually for the past 11 years by Strategy&, a PWC company, analyzed the global innovation top 1000 research and development (R&D) spending. After conducting more than 10,000 analyses on all types of financial metrics, they have repeatedly found that there is no statistical correlation between financial performance and R&D spending, neither as a percentage of revenue or the amount spent. No impact on sales growth, profit growth, market capitalization growth, total shareholder return, or any other meaningful financial metric.
The top global 1000 R&D spenders spent $680 billion on R&D in 2015 alone — more than two-thirds of a trillion dollars — and yet failed to deliver any financial improvement as a result. Hundreds of billions of dollars are being wasted every year. This is a stunning illustration of how broken innovation and R&D are in most companies today. Perhaps companies should close down their R&D departments and send everyone to Vegas? While some individual companies are successful at innovation, the vast majority are not. But there is hope.
Building stuff no one wants
The problem is that companies are making stuff no one wants. It is estimated that about 90 percent of new product and new business failures are attributable to building something that no one wants. (Furr and Ahlstrom, Nail It Then Scale It, p. 26).
Study after study has revealed that the key to innovation success is understanding customer needs, but most companies don’t know what a customer need really is.
Most companies incorrectly think that customers cannot tell us what they want. This misbelief is the result of confusing customer ‘needs’ with ‘solutions.’ Theodore Levitt taught us that “the drill is not the hole.” It turns out customers can tell us what they want if we ask them what they want to accomplish (make a 1/4″ hole) rather than what product or service specifications they want. Getting this distinction clear is absolutely essential for success at R&D and will dramatically improve the return on R&D investments.
Defining customer needs
For the purposes of innovation, the best definition for a customer need is “a functional, personal or social task customers want to get done.” For example, chief financial officers don’t want to purchase accounting services; they want to get financial and accounting tasks done, such as:
- Create financial statements (functional task).
- Feel confident that the statements meet all generally-accepted accounting principles (personal task).
- Be perceived as excellent leaders (social task).
All three types of tasks are important because they explain why people purchase what they do.
People don’t want to buy your product or mine; they want to get their tasks done. They don’t care if we sell a product, service, or technology; they want to get their tasks done. And people don’t care if the solution is digital or traditional retail; they just want to get their tasks done.
If you focus on discovering your target customers’ important unsatisfied tasks first, then you are in a great position to help them get those tasks done better and thereby create a winning new or improved offering.
Helping customers get their tasks done should be the initial focus of all R&D efforts, not making “better solutions.” There’s a reason why doctors conduct a diagnosis before developing a treatment plan: because it dramatically increases success rates. Without knowing what customers want to get done and how they measure success first, our perception of a “better solution” is just a guess and, based on experience, it’s usually wrong.
(A version of this article first appeared in The Business Journals, October 6, 2016.)
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