Page 26 - Harvard Business Review, Sep/Oct 2018

New Thinking, Research in Progress

In Theory

REEVALUATING the CPG firms, R&D spending did not drive
The industry analysis showed that in

INCREMENTAL sales; marketing spending seemed to be the
primary driver. But in the pharmaceutical
industry, the researchers found strong
and significant gains from both R&D and
INNOVATION marketing spending.
Turning to individual CPG companies,
the researchers discovered a distinction
between those with relatively large R&D
Swinging for the budgets and those with smaller ones.
The former (including Procter & Gamble,
whose $2 billion R&D budget is the world’s
largest) saw no measurable relationship
fences can yield between that investment and sales.
The latter (including Henkel, L’Oréal,
Beiersdorf, and Reckitt Benckiser) did see
a correlation.
lower returns. interviewing experienced R&D executives,
After studying the pattern and
the researchers concluded that companies
with very large R&D budgets are
incentivized to pursue expensive, large-
scale innovation efforts that have the
A companies in R&D spending, some do products—and that those projects receive
potential to become blockbuster new
the bulk of R&D funding. The problem
decade ago INSEAD marketing
with this high-risk, high-reward strategy is
devote more than $1 billion a year to R&D.
professor Marcel Corstjens was
that it may not pay off. “Despite spending
Corstjens wondered: What kinds of returns
consulting with employees at a
multinational consumer packaged
the past 15 years, P&G has had far more
goods company about ways to rejuvenate are they getting? on average $2 billion per year on R&D for
To find out, he and two colleagues
one of its biggest brands. During three conducted a statistical analysis of R&D failures than hits,” the researchers write.
days of meetings, he found a one-hour spending and growth, using data on the “Simply put: The company has bet big
presentation by the company’s R&D team world’s top 2,500 firms. After excluding and lost big.”
deeply fascinating. But no one else did. companies with less than $1 billion in The researchers found that, in contrast,
“There were many ideas that could have revenue, they examined the relationship Reckitt Benckiser—the British firm whose
been developed,” he says, “but at the end of between sales and a number of variables: brands include Clearasil, Lysol, and
the R&D session everyone said, ‘OK, let’s get R&D spending, labor costs, capital Woolite—exemplifies a more profitable
back to the communications and advertising expenditures, and marketing spending strategy of pursuing less ambitious
issues,’ and nobody ever talked about the (using selling, general, and administrative innovations that, without fanfare, drive
R&D again.” It’s no secret that large CPG expenses as a proxy). They then calculated sales higher. They call this the Lorenzian
companies are marketing powerhouses, each variable’s effect on sales growth. They strategy, after the MIT mathematician
but this apparent disregard for R&D insights conducted their analysis first by industry, Edward Lorenz, who described how a
stuck with him. Although CPG companies focusing on pharmaceuticals, food, and small action (such as a butterfly’s flapping
rank far behind high-tech and health care CPG, and then by company. its wings) can lead to an improbably

22 HARVARD BUSINESS REVIEW SEPTEMBER–OCTOBER 2018