ALKHOBAR/CAMBRIDGE: Apple is frequently cited as one of the most innovative companies in the world, yet it only spends around three percent of its yearly revenue on R&D. This is in contrast with Micosoft’s 2007 R&D spending of 12.8 percent of its revenue. According to research by MIT Sloan School of Management Senior Lecturer Michael Davies, for greatest success, more companies should follow Apple’s lead and adopt a “less is more” approach. By rationalizing R&D costs, he found that companies can actually accelerate innovation, boost growth and increase profits. The research focused on high-tech industries where companies offer portfolios of products which must be periodically renewed.

Conventional wisdom is to invest a lot of money on in-house R&D, maximizing utilization of resources to produce many products with many features. However, there appears to be no link between spending a lot of money on R&D and success, advised Davies. In fact, his research, “Less is More: How shipping fewer, simpler products and doing less work can drive growth and profitability,” shows that companies can increase market share in the short term and customer satisfaction in the long term by offering fewer product choices with more streamlined, useful features. Companies that offer too many products make customers unhappy, and products with too many features risk long-term customer dissatisfaction.

“People respond much more strongly to losses than to gains, a phenomenon known as ‘loss aversion,’” Davies noted. “As a result, as the number of possible choices increase, at some point the increasing unhappiness from the opportunity cost of the choices forgone outweighs the benefits of having more choices.”

The research found that customers do want to have choices – within reason. Four initial choices were the minimum number that preserved a meaningful choice when the extreme selections at the top and bottom were eliminated. Five or six initial product choices would result in three or four meaningful choices. Companies need to align the product choices well so that the tradeoffs involved in making a selection minimize the regret at not selecting certain of the products.

Differentiation among a company’s products should focus on the few key attributes that matter most to customers. This should be reflected in how the products are positioned within the company’s portfolio and how the differentiators are communicated to customers. Davies remarked that many companies group product differentiation, portfolio management and customer communications under the banner of marketing and they keep their marketing operations far removed from R&D. However for a company to be profitable, R&D and marketing must work hand in hand. Instead of asking how to best allocate available resources to increase product pipelines and portfolios, managers should be asking different and more fundamental questions, such as how small the product portfolio can be, how few choices customers need and how little can be spent on in-house R&D.

Davies found that Apple excels in product differentiation, portfolio management and customer communication. It offers only five products within three laptop families, and another five products within three desktop families. Compare that to a competing computer company which offers at least 26 possible choices within six laptop families and two desktop families.

The realities of how customers think about product offerings and features suggest that a significant shift in product management or “portfolio inversion,” is required. “This involves moving from many diverse and feature-rich products that confront customers with overwhelming complexity and choice, to a small, sparse core of really excellent and well-aligned products that emphasize elegance and ease-of-use, complemented by creative experiments that extend the design space and explore emerging and evolving consumer preferences,” Davies stated.

Companies should focus in-house R&D activities on three areas only: architecture; absorptive capacity; and ‘bottleneck’ activities, those that have greatest impact on what really matters to customers. Moreover, because R&D and innovation is inherently uncertain, there should be fewer projects in the product pipeline.

“I hope this research leads more companies to take a long hard look at the confusion and anxiety they may be inducing in customers and to focus on a less is more approach where they make fewer, better products,” said Davies. “They need to focus intently on things that really matter to customers and spend money on understanding the overall product architecture and how all of the pieces will be put together and used. A few great products, simplified to their essence, are the foundation of long-term success, and much greater R&D productivity.”

It must be pointed out though that focusing and perhaps limiting spending on R&D, does not mean that a company can spend nothing at all in this area and still thrive. Davies’ current research deals with companies who are wasting their R&D funds. But he claims that there is a “much worse case” regards those companies who invest no money at all in product development.

“If you don’t spend any money at all, it’s actually very hard to differentiate your products or come up with new products,” Davies said. “You can be a trader but at the end of the day that’s a very tough existence because it’s not one which creates new value. It’s also not one which enables you most of the time to hold on to any value, because anybody else can imitate what you do. Companies in the Middle East can sell goods, but actually the margin or markup on those goods will be poor and business growth will be limited. The greatest part of the profitability associated with those goods will be for the company that did the hard work, the ones who actually did the R&D. A trader won’t be able to tap into that.”

As for governmental efforts to support R&D through the establishment of King Abdullah University of Science and Technology (KAUST), and other university associate research efforts, Davies applauded these moves but asserted that this did not absolve Saudi businesses from investing in R&D.

“Government support is essential. But for companies, we are talking about a move towards focusing on what you’re good at and having absorptive capacity to work with external sources,” Davies said. “The external sources have to be there, but the tragic thing is that research doesn’t actually trickle down very well from them. Companies need to spend the money so they can actually make sense of this research. Research from universities doesn’t trickle down into companies naturally. If you don’t have somebody good in your organization, who you are paying to do R&D in this field, then you don’t have any basis for figuring out what’s useful or even for having an effective conversation with outside researchers.”

There’s simply no way around it. For the Kingdom, having a great science and technology university will be a huge step forward, but Saudi companies are also going to have to make the matching, targeted investments so that they can capitalize on government funded research initiatives.

Davies emphasized that the public-private partnership in R&D is akin to “the sound of two hands clapping - if you don’t have both of these then not much happens.”

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