For the past week or two I have been enjoying reading Judy Estrin‘s Closing the Innovation Gap, in which she describes how key elements of the innovation ecosystem in the US are failing and suggests some actions to rectify the situation. As part of this endeavour she seeks to understand what it is that really drives innovation and how that is different from development and as such sets out the following framework for understanding the application of R&D resources:
- Current generation. Maintaining continual incremental improvement through product or process change required to meet existing customer needs. [NB This is the bare minumum to stay alive.]
- Next generation. Making advances in science and technology or business processes as required to maintain market leadership or to leapfrog competitors. These innovations might be incremental, orthogonal, or breakthrough. [NB This is the minimum steady state requirement for most high growth venture backed businesses.]
- Future growth. Even the most successful companies need to look beyond their current customers and markets to investigate potential areas of growth for the future. They also need to be prepared to take advantage of radical disruptions in their current markets. [NB This is where the opportunity to generate outsize returns lies, but there will be minimal short term return on investment.]
I like this framework for the way it sheds light on the detail of the returns from different areas of resource allocation within R&D budgets. Judy’s main point is that as a society we need to spending more on 3. Future growth which I agree with wholeheartedly, but the framework also has application in resource planning for individual companies, particularly when times are tough.
Depending on their profitability, cash resources and prospects for raising further money many small companies are having to ration resources. Analysing R&D spend using Judy’s approach will help if there are difficult decisions to be made – eating into 1. Current generation carries clear short term risks, sacrificing 2. Next generation might be sustainable for a short period of time but no longer if valuation progression (or even maintenance) remains a target, and any exciting long term plan probably needs to include 3. Future growth.