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Effectiveness of R&D as a Percentage of Sales on Innovation

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Innovation as a positive change in business organizations. You may be interested to learn from an interesting article in Bloomberg Businessweek, where Bruce Nussbaum talks about how companies are funding innovation (or R&D). Typically, firms have used R&D spending as a percentage of sales to measure the cost of innovation. However, since innovation is a function of how people work, scaling R&D simply to match sales could be futile and possibly harmful as an organizational development change. Just because accounting usually measures R&D as a percentage of sales doesn't mean it should be managed that way, says Nussbaum.

He also mentions how companies---like Apple---are learning how to be more innovative with less money, e.g. through management innovation that ultimately leads to other kinds of innovation. Doing more (sales) with less (R&D investment) must be a good thing.

The comparison to other companies in Apple's industry is a good idea, but the comparison is restricted to R&D as a percentage of sales. It ignores the effectiveness of that R&D investment vs. other factors and the directionality of the R&D-to-sales relationship.

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Effectiveness of R&D as a percentage of sales on Innovation

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Every year companies spend significant amounts of resources dedicated to research and development as they view this as a very vital investment in a company's future performance. Measuring the overall success of Research and Development (R&D) though has been challenging due to the ineffectiveness of quantifying the exact impact of the R&D on a firm's performance taking into account other factors that may impact a firm's performance. Despite these challenges that are often presented in measuring the effectiveness of R&D most companies choose some quantitative measures such as return on investment or the percentage of R&D to sales in determining its effectiveness disregarding other factors that may have contributed to higher sales.

Determining how much R&D to spend is conventionally based on the revenues of the company and is often measured as a percentage of current revenue. Although this measure does not in real sense measure the R&D percentage to the expected revenues that is to be derived from the investment, it provides a reasonable approximation for most companies as companies have the tendency of investing a ...

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