Annual worldwide corporate R&D spending increased by 11% in 2018, totaling US$782bn in annual investment, based on an annual analysis of the 1000 largest global public companies by R&D spend conducted by PwC’s Strategy&.
The 14th edition of PwC’s Strategy& Global Innovation 1000 Study shows how innovation investment is related to long-term growth strategies and confidence, with R&D spending increasing across all regions and nearly all industries.
Globally, all regions saw an increase in R&D spend, most notably China (+34%) and Europe (14%) where spending grew by double digit rates, while North America (+7.8%) and Japan (+9.3%) saw only single digits increases in R&D. Overall R&D intensity – the measure of R&D spending relative to sales – remains at an all-time high of 4.5%.
Barry Jaruzelski, Principal, PwC US, Strategy&, comments:“The standard of innovation excellence has been rising as businesses have become more competitive in the 21st century. Despite the record high levels of investment, the study’s findings are a further confirmation that innovation excellence isn’t something that can be bought by simply spending more on R&D. Rather, it’s the result of painstaking attention to strategy, culture, senior executive involvement, deep customer insights, and disciplined execution across the innovation cycle.”
In a five-year study of company performance and innovation investment relative to industry peers as part of this year’s report, 88 companies world-wide, across all regions and industries, were assessed as ‘high-leverage innovators’.
These companies outperformed their industry groups on seven key measures of financial success for a sustained five-year period, while at the same time spending less than the median of their industry peers on R&D as a percentage of sales. The basket of seven metrics of financial success include revenue growth, market capitalization growth, operating margin, gross margin, operating profit growth, gross profit growth, and total shareholder return (TSR).
While high-leverage innovators had similar operating and gross margins as other Global Innovation 1000 companies for the five years ending in 2017, the companies demonstrated sales growth which was 2.6 times greater than other companies on the Global Innovation 1000 list and with growth in market capitalization that was 2.9 times higher. High-leverage innovator firms achieved performance at least twice as high as other firms on all other metrics examined. They achieved this sustained superior performance while spending less that the median of their industry peer group on R&D as a percentage of sales for the entire five-year period.
Common characteristics of this set of high-growth companies include:
Alignment: 77% of fastest growing firms say their innovation strategies are highly aligned with their business strategies, compared with 54% of respondents that report the same growth, and 32% of respondents that report slower growth.
Culture: 71% of respondents that report their companies’ revenues are growing faster than competitors say their corporate cultures are highly aligned with their innovation strategy, compared with 53% of companies that report the same growth, and 33% of companies that report slower growth.
Leadership: 78% of companies reporting higher than peer revenue growth say their executive team is highly or closely aligned with R&D investment and innovation strategy, compared with 62% for same-growth companies, and 53% for slower-growth companies.
Regionally, the list reflects the continued dramatic rise of China-based companies — from 3% in the first High-leverage Innovators assessment in 2007 to 17% in 2017. Europe too increased significantly from 18% in 2007 to 30% in 2017. The number of high-leverage innovators fell 45% for North American companies and 8% for Japanese companies.
By industry, the number of high-leverage innovators rose from 2007 to 2017 in telecommunications, consumer, healthcare, industrials, autos, and aerospace and defence, while the numbers fell in chemicals and energy, computing and electronics, and software and internet.
Of over 1,000 companies examined across three distinct five-year periods ending in 2007, 2012 and 2017; only two companies attained the status of high-leverage innovator across the entire 15-year period: Apple and Stanley Black & Decker.
Barry Jaruzelski, Principal, PwC US, Strategy& comments:“The success of these high-leverage innovators reaffirms a consistent finding of our study over time: there is no long-term correlation between the amount of money a company spends on its innovation efforts and its overall financial performance. Instead, what matters is how companies use that money and other resources, as well as the quality of their talent, processes, and decision making, to create products and services that connect with their customers unarticulated needs.”
Global Innovation 1000
The Strategy& Global Innovation 1000 study analyses spending at the world’s 1000 largest publicly-listed corporate R&D spenders and is now in its 14th year. Other key findings include:
- Amazon maintained the top spot as the largest spender on R&D in the Global Innovation 1000 study, for the second year in a row. Sanofi and Siemens rejoined the Top 20 spenders globally.
- Apple regains the top rank as the world’s most innovative company from Alphabet, while Netflix joins the top 10 most innovative companies list for the first time, according to a global survey of R&D leaders and managers.
- The consumer industry overtook the software & internet industry for the first time in five years, experiencing fastest year-on-year growth in R&D spending (26% vs 20.6%)
- Healthcare industry in on track to become the biggest R&D spending sector by 2020.
- Computing & electronics, healthcare and automotive industries together represent 60% of global corporate R&D spending in 2018.
- China and Europe saw increases in the number of companies in the Top 1000, while North America (-5%), Japan (-6%) saw decreases.
Oil Market Report: Heeding the warnings
In last month’s Report, we noted that since the middle of the year oil supply had increased sharply, with gains in the Middle East, Russia and the United States more than compensating for falls in production in Iran, Venezuela and elsewhere. New data show that the pace has accelerated, and this higher output, in combination with Iranian sanctions waivers issued by the US and steady demand growth, implies a stock build in 4Q18 of 0.7 mb/d. Already, OECD stocks have increased for four months in a row, with products back above the five-year average. In 1H19, based on our outlook for non-OPEC production and global demand, and assuming flat OPEC production (i.e. losses from Iran/Venezuela are offset by others), the implied stock build is currently 2 mb/d.
In the August edition of this Report we described the replacement of Iranian and Venezuelan barrels as “challenging”, and that there was a danger of prices rising too high too fast. Producers have heeded the warnings and more than met the challenge and today, the Big Three, Russia, Saudi Arabia and the United States, all see output at record levels. Total non-OPEC production in August, the latest month for which we have consolidated data, was 3.5 mb/d higher than a year ago, with the United States contributing an extraordinary 3.0 mb/d. Russia’s crude output has hit a new record of 11.4 mb/d, with companies suggesting that they could produce even more.
In early October, the price of Brent crude oil reached a four-year high above $86/bbl, reflecting the legitimate fears of market tightness. In our view, this was a dangerous “red zone” and it justified calls for producers to raise output. Today, the price has fallen to a more reasonable level close to $70/bbl, well below where it was in May before the US announced its change of policy on Iran. Lower prices are clearly a benefit to consumers, especially hard-pressed ones in developing countries that are suffering from the additional handicap of weak national currencies. For now, forecasts of oil demand growth remain solid with an increase of 1.3 mb/d this year and an increase to 1.4 mb/d in 2019, even though the macro-economic outlook is uncertain.
We should also recognise the interests of the producers. For many countries, even though their output might have increased, prices falling too far are unwelcome. Ministers from the Vienna Agreement countries will meet in early December, but we have already seen suggestions from leading producers that supply could be cut soon if customers, seeing ample supply, rising stocks, and slumping refining margins, request lower volumes.
Although the oil market appears to be more relaxed than it was a few weeks ago, and there might be a sense of “mission accomplished” that producers have met the challenge of replacing lost barrels, such is the volatility of events that rising stocks should be welcomed as a form of insurance, rather than a threat. The United States remains committed to reducing Iranian oil exports to zero from the 1.8 mb/d seen today; there are concerns as to the stability of production in Libya, Nigeria and Venezuela; and the tanker collision last week in Norwegian waters, although modest in impact, is another reminder of the vulnerability of the system to accidents.
The response to the call by the IEA and others to increase production is a reminder that the oil industry works best when it works together. Regular contacts between key players are essential in creating understanding, and even though oil diplomacy has succeeded so far this year, it needs to be maintained to ensure market stability.
Organisations are not doing enough to prepare for the future of work
While the majority of businesses recognise which capabilities are important for their future success, many are failing to take the actions needed today to build or even introduce them into their organisations. These actions include using data analytics to make workforce decisions and creating a compelling work experience for employees.
This gap will put them at risk in the future when it comes to attracting, developing and retaining the talent they need to succeed.
These are some of the key findings of PwC’s latest Future of Work report, produced in collaboration with Lynda Gratton, Professor of Management Practice at London Business School. The report is based on a survey of 1,246 business and HR leaders from 79 countries. It focuses on 45 capabilities and identifies where organisations are most ‘at risk’ by looking at the number of respondents who say a capability is important to the future of their business but indicate that they’re are not yet taking action.
Carol Stubbings, Joint Global Leader, People and Organisation, PwC UK, says:“Technology and trends such as rising life expectancy, social and environmental pressures and the gig economy are transforming the world of work. Companies that understand and act on these workforce changes now will be the ones that thrive in the future.”
The untapped potential of data and analytics
The survey finds that companies are struggling to use data and advanced analytics to make better decisions about the workforce. The top three ‘at risk’ capabilities all relate to workforce analytics and their use in improving the working environment and people’s behaviours.
Although more than 60% of respondents say using data analytics in workforce decisions is important, only 27% actually use it. In addition, only 38% use data analytics to predict and monitor skills gaps in the workforce, while just 31% use sophisticated workforce planning and predictive analytics and only 28% use data analytics to help limit bias in hiring and to craft incentives tailored to individuals.
Participants in North America report stronger progress than their counterparts in other parts of the world, especially Asia and Western Europe. Almost all industries are finding it difficult to make headway with data and analytics. The exception is health where data is used in skills identification and tackling biases in hiring and reward.
Bhushan Sethi, Joint Global Leader, People and Organisation, PwC US, says:“Companies are increasingly pursuing data-driven talent decisions, whether it’s to anticipate and remediate skills gaps, eliminate bias in hiring or performance and rewards decisions, or leverage business scenario planning to ultimately determine the workforce mix.
“The survey findings highlight the need for organisations to invest in digital tools to drive people decisions. We see this as a ‘no regrets’ move in preparing for the future. But this requires the baseline data to be accurate, and the challenge today is that jobs don’t reflect what people do. Many companies don’t have accurate data on who does what and where, and few have an inventory of their people’s skills for development purposes. This is where using data and analytics can make a real difference.”
Creating the right people experience is vital
Six of the top ten ‘at risk’ capabilities relate to the people experience. One area organisations can do more is around managing workloads. While 76% of respondents believe this is important, only 50% say they are doing something about it – making this the #6 ‘at risk’ capability globally. This is particularly an issue in the Middle East and North America where it tops the list, and Asia where it ranks #3. It is much less of a risk in Western Europe (11th).
Many people work in extremely demanding work cultures. While the corporate response in recent years has been to provide company wellness initiatives, sustainable change will only occur if work itself is redesigned so that it delivers vitality and an environment conducive to maintaining productive energy levels.
Organisations should also focus on easing concerns around the future of work. Carol Stubbings comments:“With all the talk about artificial intelligence, automation and robots taking jobs, many people are anxious and forming their own narrative around the future of work. Organisations should take the lead and own the story, by creating and communicating a strong narrative that covers what the future of work means for the company and its people, and how they will be more transparent around plans and decisions based on purpose.”
Some of the other ‘at risk’ capabilities that relate to the people experience include:
- Adaptability and agility: while 78% of respondents believe that developing adaptability and agility in their workers is important, just 52% say their talent practices are designed to nurture this. This will be increasingly important as workers will need to adapt to and thrive through change.
- Intrapreneurship: Only 56% of respondents say they have avenues present for employees to offer innovative ideas and support them in turning these ideas into action. Organisations that fail to create opportunities for their ‘intrapreneurs’ risk losing innovative team members and their ideas.
- Autonomy: Providing autonomy over where and when people work is increasingly important in attracting and retaining talent. While 70% of respondents believe this is important, only 45% currently give their employees a high degree of autonomy.
The report warns organisations need to be mindful of unintended consequences. Bhushan Sethi explains:“Organisations must think carefully about the impact of initiatives such as encouraging off-site working. In some cases, this can result in employees feeling they need to be on call 24/7 to prove themselves. There can also be a fine line between autonomy and isolation. Getting this wrong will sap vitality and social resilience. At the same time, too much surveillance can erode autonomy and trust.”
Missing out on good ideas and flexible talent
The way people work and their relationships with organisations are becoming more fluid. The numbers of contractors, freelancers and portfolio workers are on the rise, and more and more partnerships between large organisations and smaller start-ups are providing ready access to innovation and talent on demand.
Identifying where and how to engage this flexible talent will become increasingly important for organisations, yet few are prepared for this shift. Only 8% of respondents strongly agree their organisations are able to engage easily with this valuable resource as and when they are needed. In addition, 58% of respondents say they have no capability to use open innovation and crowdsourced ideas and only 9% agree strongly that they can do this.
It’s clear that organisations need to do more to take advantage of the ideas and skills from the wider market – not just from their traditional employee base.
Other key findings from PwC’s Workforce of the Future report include:
- HR leaders are more comfortable about their efforts to prepare the workforce of the future compared to non-HR leaders. In 42 of the 45 capabilities, a higher percentage of business leaders than HR saw their organisation at risk.
- HR’s ability to navigate the technology landscape is a top ‘at risk’ capability for organisations. But HR and other leaders don’t see it the same way: 41% of HR Leaders are confident that their HR departments are up to speed in this area, but only a quarter of business leaders agree.
- The good news is that the capabilities that respondents rate as the most important are the ones where they are taking the most action. There is no overlap between the top ten ‘at risk’ capabilities and the top ten considered extremely high in importance.
Making power systems more flexible as global energy transition accelerates
The global energy landscape is witnessing a rapid and disruptive change driven by an unprecedented growth in renewables. Last year alone, a record-breaking 168 GW of renewable energy capacity were added globally – the sixth consecutive year in which additions from renewables have exceeded those from conventional sources. Today, a quarter of the world’s electricity comes from renewables.
But, the recent IPCC report has sent a clear signal and called for a scaling up of renewables both in the power and in end use sectors such as transport and buildings. This echoes IRENA’s own analysis which estimates that avoiding the worst effects of global warming will require to source 85% of global power and two-thirds of total energy supply from renewables by 2050. Around 60% of electricity would come from so called variable renewable energy (VRE) like solar and wind.
Experiences from frontrunner countries show that flexibility in the power system can help integrating solar and wind into the market.
Flexibility can be found in different parts of the power system including generation, grid, storage and end-users.
With today’s report on Power system flexibility for the energy transition and a new tool to assess the flexibility of the power system – the FlexTool – IRENA opens a new work stream that support its members in finding the most cost-effective mix of flexibility solutions. The tool has been applied jointly with IRENA members Colombia, Panama, Uruguay and Thailand to assess the flexibility of their power system based on the latest national plans.
Figure 1. Flexible Power System – Accelerated uptake of wind and solar
Claudia Cabrera from the Ministry of Industry, Energy and Mining (MIEM) of Uruguay, who presented the Uruguayan FlexTool analysis during the 16th meeting of the IRENA Council, said: “The FlexTool can assess in an integrated manner sector coupling alternatives, which is an aspect of great importance in an electric system like the Uruguayan characterized by energy surpluses. Therefore, the IRENA FlexTool can complement the existing planning toolkit by providing additional insights on flexibility and options to further increase it.” The Uruguayan FlexTool analysis concluded that Uruguay’s power system is flexible enough to accommodate the actual and future deployment of VRE resulting from the country’s long-term generation expansion plan.
Dolf Gielen, Director of IRENA’s Innovation and Technology Center added: “The new report showcases flexibility in all parts of the energy system. Findings show that the smooth integration of variable renewable energy into power systems requires innovations. Beyond technological solutions, flexibility can be unlocked through market design, operational practices and new business models.”
Demand has a significant potential to contribute to the flexibility of the power system – from quickly responding to supply shortages to following price signals in order to consume energy when it is cheaper, and the grid does not face congestion. A central element of flexibility is sector-coupling, the coupling of energy demand for heat, fuels and mobility by using power to heat (e.g. heat pumps), power to gas (e.g. hydrogen from renewable electricity) and power to mobility. Electric vehicles for example can act as battery storage devices if regulations and technologies are aligned and provide short term storage and grid services.
For more information, see Power system flexibility for the energy transition, including an Overview for Policy Makers, IRENA Flextool Methodology (coming soon) and two case studies.
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