Driving Growth in High Tech
High tech companies spend tons of money on R&D and often their overall image and market value hinge on successful innovation. Yet the most effective approach to product development isn’t always clear. Should high tech companies focus on achieving big breakthroughs? Or should they focus on incremental expansion of their existing products and services?
Here’s the debate.
Go big or go home.
“Breakthrough innovation is the key to successful growth in high tech.”
|Big breakthroughs are one way to achieve and sustain long-term growth and market leadership.||Betting our entire business on breakthrough innovations is too risky. It’s smarter to focus on what we know.|
|To hit home runs, we need to swing for the fence.||Home run hitters strike out a lot.|
Slow and steady wins the race.
“Incrementally building on our core business and existing products is the key to growth.”
|Our core business is a reliable growth engine that has served us well for years.||Even the top/leading growth engines eventually run out of gas. We need to be looking for our next core business.|
|Steady, predictable development is the most effective way to achieve sustained performance and success.||Slow and steady might work for tortoises in ancient fables. But it has nothing to do with the race we are in today.|
Mark Davis, Product Development Practice Leader, Principal, Deloitte Consulting LLP
The truth is most high tech companies must invest in both types of product development. They must protect and grow their core business through product extensions and incremental development. But they must also innovate and develop new breakthrough platforms to create their next core business.
A recent benchmark study by Deloitte and Oracle offers a number of useful insights on ways that companies can improve their product development performance and help boost their return on development. Although our pilot study centered around 14 organizations in the semiconductor sector, we feel the results are relevant for any company that relies heavily on product development and innovation.
A key take-away is that the two different development strategies – breakthrough platforms and incremental product extensions -- require different approaches. Companies that try to apply a one-size-fits-all approach to product development generally find themselves underperforming in one or both categories.
Breakthrough platforms. Among the companies we studied, the top performer in platforms outperforms the median by nearly double in terms of return on development and nearly triple in terms of top-line revenue growth -- with most of the growth coming from new products. Leading practices for top platform performers include:
- Using information technology to help define product requirements based on customer needs and to help manage those requirements throughout the development process.
- Collaborating with internal and external development resources/specialists, using stage gate management to drive effective governance.
- Leveraging lean techniques such as standardized development processes and agile development. For example, the top platform performer is a leader in reusing catalog components and core team members.
Incremental product extensions. The top company in this category outperforms the median on return on development by a factor of two. A focus on cost controls enables the organization to produce new versions of existing products quickly and efficiently. In fact, its development costs as a percentage of revenue are 42 percent lower than the median, while its ability to meet product cost targets is 88 percent higher. Other key practices include:
- Aggressively managing development costs. For example, process costs for the top performer are 78 percent lower than average.
- Leveraging common product platforms and intellectual property in new product designs, leading to reuse that is up to nine times higher.
- Effectively controlling engineering changes, especially in the early stages of development.
Although product development benchmarking does not provide all of the answers, what it does provide are practical, real-world insights that enable companies to understand their strengths and weaknesses relative to other organizations. Benchmarking also delivers tested ideas for improvement that can help a business achieve and sustain measurable performance gains.
A view from the Technology sector
Dave Couture, Consulting Technology Sector Leader, Principal, Deloitte Consulting, LLP
Innovation is the life blood of the High Tech industry. From 1965 through 2008 the industry has grown from $9.8 billion in annual revenues to over $1.3 trillion (with a CAGR of over 12 percent).1 Continuous growth has come as a result of extensive advancements in technologies throughout the value chain (from core infrastructure to edge applications) and market value hinges on the prospects of successful innovation. But one size does not fit all when it comes to research and development. The amount of investments companies make on R&D, their associated business models and the effectiveness in their ability to commercialize their efforts varies significantly. Data from Capital IQ highlights the broad range of R&D spend by company: Acer spends less than 1 percent of their revenues on R&D, Dell slightly more than 1 percent, HP has reduced their R&D spend to under 3 percent, Apple is just over 3 percent, IBM 6 percent, Microsoft and Cisco north of 13 percent and Juniper over 20 percent.2
The more the industry grows, the more business models vary. And, while innovation is a necessity, it isn’t always how much you spend that wins the game. Perhaps the most powerful form of innovation may be in the form of knowledge flows and maximizing the roles, relationships and contributions across extended ecosystems. As knowledge flows mature, the pace of global innovation will continue to accelerate.
Join the Debates
As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.
1 2009 Shift Index, Deloitte.
2 All data sourced from Capital IQ.