For the past four years, Booz & Company, a global management consulting firm, has been conducting its Global Innovation 1000 study, in which it examines the research and development (R&D) spending by public companies. The top 1,000 spenders make the list.

Which makes it somewhat unusual to hear Barry Jaruzelski, a partner at Booz, who works on the Global Innovation 1000 study, say that when it comes to R&D, it isn’t about the money. Not really. “It is not about how much money you throw at the problem,” Jaruzelski says, flying in the face of reports that seem to make higher spending not merely a virtue, but a lock on success. “The only thing we’ve found is that within your competitive set”—companies are segmented by industries and regions—“there is a minimal threshold.” That is, if your company spends in the bottom 10%, then it seems that you will “compromise the enterprise.”

“But the difference between the top 10% and the middle 75% in terms of spending? There is no statistically significant difference as to how well you perform in terms of revenue growth, profitability, shareholder returns, margins, what have you.”

Fast for Stealth
Jaruzelski cites several examples, including the F-117, the Stealth fighter. “It was done in a very unconventional way,” one of the projects that came out of the “Skunk Works,” or the Lockheed Martin Advanced Development Program. “The whole program was done for much less than conventional aircraft. There was a totally new airframe, new principles, but it was done in a very focused way, with a rigorous focus on meeting the requirements. They used off-the-shelf technology for anything that wasn’t supporting the development of the new airframe, and they actually built it for less than it cost to build new conventional aircraft. It wasn’t about how much money they had.” And it is worth noting that the program was done fast: from the time they decided to go for full-scale development to a Stealth in the sky in 1981, a mere 31 months passed. New model car programs take longer, and most cars don’t have their start in a Russian mathematician’s paper titled “Method of Edge Waves in the Physical Theory of Diffraction.” There is a greater likelihood that Henry Ford could readily understand any car on the road than Orville Wright could suss out the F-117.

Jaruzelski says that they’ve run the numbers on the Innovation 1000 companies, trying to determine whether there are companies that “spend modestly” yet which consistently outperform the median of their industries against a basket of seven performance vectors (e.g., revenue growth, profit, shareholder return). These so-called “high-leverage innovators” include companies like Toyota, Google, Yahoo!, Christian Dior, and adidas. And, of course, Apple.

Size vs. Money.
Before looking at Apple, it is worth getting a few things about R&D spending addressed. First and foremost, money matters, but perhaps not in the way that you think it does. That is, it isn’t money vis-à-vis the amount spent as much as it is the footprint of the corporation behind the innovations. “Here in the U.S.,” Jaruzelski notes, “we always celebrate the entrepreneur.” You know, the guys in the garage who create some wonderful invention. This is not to deny the likes of Jobs and Wozniak, Gates and Allen, or even Hewlett and Packard. “But if you look more broadly, out of high tech, for the past 1,000 years, some of the most significant technical innovations came from large companies.” Thomas Edison was a bright man, but when General Electric was a figurative (and perhaps literal) dynamo, then those thousands of patents really started working. The advent of mainframe computing was really the result of IBM, a big company.

Plenty of people wrote about getting to the moon, but it wasn’t until NASA was established that anyone got there. And while we all may laud the guys in the garages of Silicon Valley for their development of the PC, many of the ideas that they worked with were developed at Xerox PARC—a classic big company R&D facility. Jaruzelski’s point is that it takes serious resources to go from the idea—which may come out of the legendary garage—to a product.
He points out that if you take out developments for the Internet or software, there are few notable developments that aren’t developed by large corporations. “I don’t think there are many innovations in internal combustion engines coming out of anything but engine companies and car companies. There are a few things in alternative powertrains, but where is most of the energy around them? At the Toyotas of the world. What’s the big problem with electric cars? Batteries. And the battery innovations are coming from big battery and chemical companies—or at least the attempts are.

“All these things are very big, very difficult, very expensive.” Which means that they are not the sorts of things that can be developed outside of large corporations. And think only about the challenges faced in developing pharmaceuticals.

Patents and Processes.
Then there is the consideration of patents. Jaruzelski acknowledges, “If your objective is patents, then the more money you spend the more patents you will get.” But then there is a cautionary note: “There isn’t any statistically significant relationship between how many patents you have and how well you perform.” He explains, “The patent may be technically significant, but not financially significant. Patents are like novels: not that many of them are best sellers.”

And another point that he puts to rest is about the innovation process: “There is sometimes an arm-chair view that chaos causes innovation.” He thinks that the truly successful innovators are those that have a rigorous portfolio management process. He cites as an example what happens at Google. When you open the home page, you are presented with a comparatively stark screen (compare, for example, even Microsoft’s newest search engine, Bing; www.bing.com). He says that Marissa Mayer, Google vice president of Search Product and User Experience, carefully controls what goes on to any of Google’s pages, that there are set rules and methods that are rigorously deployed. “Repeatable successful innovation necessitates process discipline,” Jaruzelski states, adding, “Process discipline is not the same thing as bureaucracy.” So while it’s not “anything goes,” it is also not like the classic Department of Motor Vehicles office, either.

There are three key aspects to successful R&D. In attention to the aforementioned process, there are also the organization’s culture and its talent. Good people are needed to do creative work with a method within a supportive culture. Sounds simple. Which it may be. But it also isn’t easy. “Talent is very important,” he insists. “One of the things that companies should be focusing on is building a core cadre of talent. Everybody in the organization doesn’t have to be a world-beater, but you need that core that is setting the stage, setting the direction, providing the oversight. The process matters.”

Which brings us to what is arguably the poster child for innovation, Apple. Isn’t its success predicated on preternatural talent of Steve Jobs? Jaruzelski dismisses that: “Apple is not one man, but an institution,” but acknowledges, “He had an incredible role in the culture.”

Apple’s Secret Revealed.
So how does Apple do it? Jaruzelski references a study that they conducted on a subset of the Innovation 1000 companies. They looked at how tightly aligned their business strategy is with their innovation strategy. They looked at how these companies got customer—and end-user—insight. What they discovered was that tight alignment between R&D and business strategy was more important than spending. “You might say, ‘That’s obvious,’ but it is surprising how often technology development plans are not aligned with business strategy.” Apple is a company that has exemplary alignment.

And if there is a secret to its success, it may come down to this: “Almost unmatched insight into how average people use technology, and the ability to convert that superior end-user understanding into software and industrial design,” says Jaruzelski. Then the other shoe drops: “And, frankly, very ruthless portfolio management.”

According to Jaruzelski, at Apple they have a funnel—“a very aggressive funnel”—where multiple ideas start but then are “ruthlessly cut” as they go through the R&D pipeline. “Only a handful makes it out at the end.” In effect, they are placing their bets on a few things, big bets, but because of their customer insight, they are confident in them. Contrast that with other companies that put out a multitude of products and hope that there is customer acceptance. Apple’s approach has allowed it to historically spend less on development than its major competitors.

“Having good, deep access to the people who will be using your products and a systematic process to capture and reflect it in what you’re developing is a bigger swinger in overall performance than your budget. Within reason. You can’t do things for free. But the difference between being in the middle of the pack and the 90th percentile in spending doesn’t reflect any difference in performance,” Jaruzelski says.

The User Matters.
He says that it is better to have direct access to the end-user than it is to have third-party research. Note that there are “customers” and there are “end-users,” and the two may be entirely separate. He points out that the customers for a consumer electronics company are the big retailers and cell phone manufacturers have the wireless providers as their customers. So even though you may be buying that computer or cell phone, you aren’t the developers’ customer. Part of the tremendous success of the Apple iPhone, Jaruzelski suggests, is that it “is one of the rare occasions where the manufacturer”—Apple—“controlled the requirements of what the product was going to do, not the mobile service provider. Apple had unprecedented control of what the device would do and how it would do it.” It gets back to the end-user insight. The iPod? “Was it really a great innovations, or was it iTunes?” he rhetorically answers. “Granted, the iPod was a superlative execution of hardware and software and ease of use, but the real innovation was the business model: one price, one-stop shopping across six music labels. You could just download the thing, and it was simple.” In the second quarter of 2009, over 11-million iPods were sold—more than in the second quarter of ’08—and Apple has approximately 70% of the digital music player market, and this despite the fact that there had been MP3 players available before there was the iPod.

Given the prevailing economic conditions, it might seem that R&D and innovations will diminish. Jaruzelski doesn’t think so. “Technological development doesn’t stop dead. Science continues to move forward. Companies go under, people lose their jobs, but entrepreneurs and technologists may be freed up.” Sort of a variant on Schumpeters’s “creative destruction.” He suggests that it may slow the broad-scale adoption of innovations, but that they will continue.

He points out that during the Great Depression, during the 1930s, there were a number of innovations, from the jet aircraft engine to packaged chocolate chip cookies.