Nokia's head of research argues that it's critical to invest in R&D in an economic downturn
Almost two decades ago, Finland entered a horrible period of economic stress. Starting in 1990, despite a decade of investment in which the Finnish government made a concerted effort to refocus the nation toward high technology and modern industries, a global economic downturn caused Finland to enter a deep recession. From 1990 to 1993, gross domestic product fell more than 10%, 400,000 jobs were lost, and unemployment rose from 3.5% to 20%.
It was, you can imagine, a time of considerable consternation for a country of only 5 million people.
However, in 1991, in the deepest trough of the depression, the very first standardized mobile phone call was completed in Helsinki. Within a few years, Finland began to recover and so did investment—growing at 10% a year throughout the 1990s. Not surprisingly, investment in research and development surpassed 25% in the last half of the decade.
In fact, most economists agree that the R&D investment made in the 1980s, combined with a continued focus on higher education in the '90s, is what allowed Finland to make such a startling recovery. As more emphasis was placed on government investment in universities and more companies invested in R&D, more opportunities for more of the country's population began cropping up. A foundation was laid that allowed for consistent, high-quality innovation, and it continues to this day.
At Nokia (NOK), we've taken these lessons to heart. In a recent report from the European Union on R&D spending worldwide, Nokia ranked first in Europe and fifth overall (moving from 17th last year), behind Microsoft (MSFT), GM, Pfizer (PFE), and Toyota (TM). R&D is, to say the least, a vital part of our culture, and we believe it is one of the keys to a successful business practice. Research is what allows a company not only to survive economic turmoil but also to actually thrive once the market has stabilized again. Finland's history as a nation shows this. It's a lesson that needs to be remembered as the world once again transitions through a time of economic uncertainty.
A Steady Process
It has to be said that investment in research is not always a surefire bet or a silver bullet. It's a process, but it's a process critical to providing a steady flow of new products and services to the marketplace.
Each industry may vary slightly in how much it will invest in the research process. Johnson & Johnson (JNJ), for example, reportedly spends 10 cents per sales dollar on research. Pfizer spends 15%, and Cisco (CSCO) nearly 20%. Nevertheless, the common theme is the same: Without investing in research, future growth will be limited by stale, outdated products. Research is a strategic commitment, which is essential for growth.
According to the EU Commissioner of Science and Research, R&D investment by the world's top companies rose 9% during 2008, but that is shifting—downward. Sadly, it looks like the current global financial crisis is going to affect spending for the foreseeable future, because there's a high correlation between R&D spending and overall economic output. Even though R&D spending growth has outpaced GDP growth in the EU over the past few years, there's now a real risk of a major decline in spending, rather than just a slowdown.
This is precisely what companies should not do. Organizations that cut research too drastically are in danger of saving in the short term to the detriment of growth in the long term. The pressure to reduce investment during a downturn is great, but that pressure can be fought with a vision of the future and clear, strategic decisions.
Hedging Your Bets
To form a clear strategy around research, one first has to understand that there's a difference between "research" and "research and development." At Nokia, R&D is done within an existing scope of products and services. In other words, R&D looks at the shorter-term future.
Research, on the other hand, looks at the much longer term. It looks outside of the company's current business initiatives. In this sense, research can be considered an insurance policy whose premiums are paid during good economic times, hedging against uncertainties in the marketplace. It's a gamble—a bet that investment in research will eventually pay off in innovative new products and services that can be used to replace aging products and spur growth.
But just as professional gamblers know that it's better to play the odds than the individual hand, businesses should understand that it's important to respect and understand the system of research and to make changes with care. Years of research progress can be ruined in a single quarter. The tendency for many companies is to expand and contract research efforts based on economic conditions, speeding them up during robust times and slowing them down during economic downturns. This can be disastrous for any long-term research effort.
Yes, in an economic downturn fewer products are sold as demand weakens, so some overall cost-cutting is a practical and necessary reaction. However, making drastic cuts is shortsighted, because when the market turns around, the companies with new products coming out of the development pipeline will be better positioned to profit than the companies that slashed research.
This is not to say that research should never be affected by an economic downturn. On the contrary, when the belt-tightening occurs, it's a time when the spotlight will be shining the brightest on research and its voice the most loudly heard. Financial stress creates a focus on the essentials and creates clarity of vision that may not have previously existed. In good times, companies can afford to have many different projects, and a lack of focus, but when budgets get tighter, tough choices have to be made and changes implemented, even in research.
That said, this is a positive event, because the whole purpose of research is to give choices.
The question then becomes, which choices should be made? As in a game of speed chess, where players have to make their best move within a strict time limit, research teams working in a downturn must focus on choosing the best opportunities they have within the constraints presented to them. Teams have to start making optimal decisions based on short-term goals rather than long-term plans. Under this sort of pressure, a good, approximate decision is better than a great decision made at the expense of time. Most researchers have a tendency to go with the most optimal decision, but economic situations create a need to move fast. This means selecting the most promising and mature projects, and accelerating the most disruptive products as well.
There still is substantial risk in this process. People and companies are naturally impatient, and they don't tolerate failures before wins. But it still may take time for the efforts of research to come to fruition. For those organizations that have the discipline, however, the benefits can be enormous. Apple's iPod, for example, was developed and launched during an economic downturn, and it took several years before the product went mainstream. Patience with research is a virtue that should not be underestimated.
Microsoft recently announced Project Natal, a natural user interface that allows users to control their Xbox game console using gestures and spoken commands. The demo showed full-body 3-D motion capture, facial recognition, and voice recognition capabilities—a true leap forward in user interfaces, and one that was a direct result of Microsoft's huge investment in R&D over the past decade. Whether the final product will be successful has yet to be determined, but Natal is a clear indicator of the type of new products that can come to the fore during an economic downturn.
But what happens if your company understands the value and need for research, but may not have the staff or knowledge in place to effectively carry out a concerted effort? The answer may be a concept called Open Innovation, in which companies openly collaborate with universities, research institutions, and other third parties to multiply the efforts of their own research. Nokia researchers work with academic and corporate research groups to help create proposals, provide funding, share equipment and labs, and generally work to find areas where the projects are mutually beneficial to all parties.
Based on collaborations with universities such as Stanford, MIT, Cambridge, and Finland's TKK, Nokia has created deeply meaningful relationships with top researchers around the world, resulting in accelerated cycles and more diversified thinking about problems or efforts. Open Innovation has a multiplier effect on research efforts—every corporate researcher has dozens, if not hundreds, of peers worldwide. Tapping into this vast pool of talent can enhance individual productivity, stimulate new thought, and raise the quality of end results. It can also boost morale for all involved during periods of harsh economic conditions.
According to a recent study published in the Harvard Business Review, Procter & Gamble (PG) has 20 outside researchers for every internal one. In 2008, P&G reached its goal of having 50% of its innovations come from outside the company (up from 15% in 2000). The results for P&G were dramatic: a 60% leap in R&D productivity, twice the success rate for innovations, more than 100 products, and 6% organic growth (vs. an industry average of 2% to 3%). The return for opening up has obviously greatly outweighed any negatives that P&G may have experienced.
In order for Open Innovation to succeed, there has to be a culture shift away from the standard "Not Invented Here" mentality that currently dominates many corporate research efforts. Accepting that solutions to problems can be found elsewhere is the first step. The next step is focusing on the "why" around projects. Researchers are human, and therefore drawn to explore their own curiosities, but research has to be aligned with real business needs.
Researching For a Better Planet
For some, the term research conjures up images of university scientists conducting experiments in white lab coats. But research can also encompass work done in the field, in the communities that will be affected most by a product or service. Lots of research is now being done on the ground in developing countries. Even under economic stress, research should not be just about finding products that can sell in a market, but also about finding solutions for our fellow human beings who might find themselves in dire circumstances.
Approximately 80% of the African population, for example, lives in absolute poverty. Research can help companies and philanthropic organizations better understand these low-income communities and learn how to deliver devices and services that are affordable. The appearance of mobile phones in the hands of average Africans is already accelerating growth of grassroots economics, even though there are not that many services that are designed for local needs. Improved products could lead not only to an improvement in so-called microeconomies, but they can also help raise awareness of human rights and the need for better medical aid and jobs.
The world financial crisis will put undeniable pressure on many organizations and companies around the world, but by tapping into research efforts under way and by continuing to invest and believe in research, those companies that are able to focus their efforts and create innovative products will be best positioned as the situation improves. Like the economic depression that Finland experienced in the early 1990s, this current economic downturn will also pass, and those companies that have invested in research will be the ones to both survive and thrive in the coming years.