Feb 15, 2011

Nokia R&D spending - a lesson in Portfolio Balancing

In a previous post, I discussed how bureaucracy stifled innovation at Nokia.  I ventured a guess that a formalized R&D portfolio balancing process might have helped counteract the effects of bureaucracy.  An engadget post finally led me to an article with some concrete data and useful learnings for R&D managers.

First observation is that Nokia's  R&D budget was almost five times that of Apple in 2007.  Furthermore, Nokia is focused only on mobile communications, as opposed to Apple, which has significant markets outside of iPhone.  Hence, clearly, Nokia's problems with innovation did not come from lack of R&D budget.

Now lets look at the breakdown of R&D investments across the development portfolio:
It can be seen that Nokia invested as much in hardware development as on Symbian.  Each of these were as large as Apple's TOTAL R&D budget.  So there are three fundamental problems here:

  1. R&D budget is disproportionately large compared to competitors
  2. Spending on software and OS is much larger than competitors
  3. R&D investment is clearly NOT delivering the kind of performance competitors are able to get

The question Nokia should be asking when distributing R&D budgets are:

  • What is the right amount of R&D budget.  A bottoms up analysis is one way to get to an answer.  The other would be to compute affordability as a fraction of sales.  A competitive positioning graph such as the one above could provide some much needed perspective.
  • What should Nokia expect in return for the R&D investment?  It is absolutely critical to have CLEAR top level objectives and metrics.  These objectives can help focus R&D community and drive innovation.  A benchmarking study can help decide if the objectives are reasonable.  For example, if Apple can develop a hardware / software ecosystem for $300M / year, should it not be possible for Nokia to achieve at least as much (may be much more because of economies of scale).
  • How should the R&D budget bet distributed across different requirements - Hardware vs. software vs long-term research?  Again, a bottoms-up estimate can be a good starting point, but it has to be balanced by a external perspective.  If none of the Nokia competitors are spending $1.2B in software development, what is the business case for doing so at Nokia?  As we get into details, competitive information will be hard to find.  The answer is to set up some objectives / metrics and then track performance.  Many R&D managers do not track results because it might take a year or two to understand the consequences.  However, not tracking means there is no way to change the direction or even to gage if the investments are performing.  More on this later....  
In summary, R&D investments in this changing and highly competitive environment need to be guided by 1) clear objectives, 2) precise metrics for objectives (both qualitative and quantitative),  3) competitive benchmarking, and 4) longer-term metrics tracking.

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