October 2016

2016 Global
Innovation 1000
Software-as-a-Catalyst
Introduction

R&D shifts

Innovation 1000 update

Strategy& | PwC 1
For the 12th year, Strategy& studied innovation trends and
spending at the world’s 1,000 largest publicly listed
corporate R&D spenders

2005: 2006: 2007: 2008: 2009: 2010:

Money isn't Smart The Beyond Profits down, How top
everything spenders customer borders spending innovators
connection steady keep winning

2011: 2012: 2013: 2014: 2015: 2016:

Why culture Making ideas Navigating Proven paths Innovation’s Software-as-
is key work the digital to innovation new world a-catalyst
future success order
Strategy& | PwC 2
The study has become a recognized contributor in better
understanding what drives success in R&D and innovation
• The Global Innovation 1000 study has
received significant media and academic Global Innovation 1000:
attention: Selected press coverage
– Called “the most comprehensive assessment
of the relationship between R&D investment
and corporate performance” by the
The Economist in 2009
– Given “2006 Special Achievement Award for
Advancing Innovation” by Innovate Forum
– Awarded Best of Visions award from
PDMA in 2009
– In 2011 and 2014, awarded Silver and Gold,
respectively, for original research by the
American Society of Business Press
Editors (“the Azbee”)
– Cited in more than 180 publications in
27 countries

Strategy& | PwC 3
Introduction

R&D shifts

Innovation 1000 update

Strategy& | PwC 4
Executive Summary
• Companies are shifting their R&D resources away from physical products to software and services
and this is paying off financially.
– The average allocation of R&D spending for software and services increased from 54% to 59%
between 2010 - 2015 and is expected to grow to 63% by 2020.
– The average allocation of R&D spending of product-based offerings fell to 41%(from 46% in 2010),
and is expected to fall to 37% by 2020 (decrease of 19% this decade).
• As R&D shifts to software and services, talent shifts as well. By 2020, the number of companies
reporting electrical engineers as their top employed engineering specialty will fall by 35% and the
proportion of companies who expect that data engineers will represent their largest group of
employed engineers will double from 8% to 16%.
• Regionally, companies in North America are making the strongest shift to software offerings—from
15% of total R&D spending in 2010 to 24% in 2020.
• In 2016 total R&D spending by the Global Innovation 1000 increased 0.04% to $679.8 B, essentially
unchanged from the previous year, as a result of fluctuations in foreign currencies.
• R&D intensity spiked to its all-time high of 4.2%, last seen in 2005, as revenue within most industries
decreased - especially Chemicals & Energy.
• Apple maintains it’s #1 position over Alphabet (Google) on the 10 Most Innovative Companies list,
3M jumped to #3, and Facebook rejoined the list for the first time since 2013.

Strategy& | PwC 5
In 2010, half of all companies reported allocating 50% or
more of their R&D spending to product-based offerings
Allocation of R&D spending to product-based offerings

50%
58%
68%

50%
42%
32%

2010 2015 2020

0–40% of total 50–100%

R&D allocation

Source: 2016 Global Innovation 1000 study

Q13) Please estimate your company’s allocation of R&D investment across these three offerings.
N = 466.

Strategy& | PwC 6
However, by 2020, companies will have shifted the majority
of their R&D from product offerings to software and services
Average allocation of R&D spending to Total R&D spending by type of offering
types of offerings US$ Billions

50% +21%
46% +36%
$280
45%
$257
41%
-19%
39% $232
40% 38%
37%
37% $188
35% +65%

$142
30%

25% 24% $86

21%
20% 43%
17%

0%
2010 2015 2020 Product-based offerings Service offerings Software offerings

Software offerings 2010

Service offerings 2015
Product-based offerings

Source: 2016 Global Innovation 1000 study

Q13) Please estimate your company’s allocation of R&D investment across these three offerings.
N = 466.

Strategy& | PwC 7
The top reason companies are shifting R&D budgets toward
software and services is the “need to stay competitive”
Top 5 drivers of change in R&D allocation
57%
54%

48%

41%

34%

Need to stay Need to increase Wish to keep up with Need for Desire to access
competitive revenue customer expectations higher margins untapped markets
generation/growth

Source: 2016 Global Innovation 1000 study

Q14) What is driving this change in the mix of your company’s R&D investment portfolio? (Please choose up to five reasons).
N = 466.

Strategy& | PwC 8
Companies that reported faster revenue growth than their
competitors allocated more R&D investment to software
Average allocation of R&D spending to software offerings
26%
26%

24%
24%

23%
22%
21%
21%
20% 25%

18%
18% 18%
17%

16%
15%

0%
2010 2015 2020

Slower revenue growth Same revenue growth Faster revenue growth relative
to key competitors

Source: 2016 Global Innovation 1000 study

Q11) How do you believe your company is performing in revenue growth relative to its key competitors?
Q13) Please estimate your company’s allocation of R&D investment across these three offerings.
N = 466.

Strategy& | PwC 9
To support the shift in R&D spend, companies are significantly
altering their engineering talent mix
Reported change in largest engineer employee group *
From 2010 to 2020, among companies
that employ electrical engineers, the
number of companies reporting that
electrical engineers are the largest
engineering group will fall by 35%.
+10%

31%
30%
29%
-35%
+92% -16% 20%
16% -11% 15% 15% 15%
12% 13%
10% 10% 10%
8% 9%

Data engineers Software engineers Systems engineers Mechanical engineers Electrical engineers

2010: Percentage of companies 2015 2020

where X engineers is the largest employee group

Source: 2016 Global Innovation 1000 study

*Industrial Engineers/Human Factors and Chemical Engineers/Bioengineers are not shown.
Q18) Which innovations below, if any, has your company applied to complement its business model(s)? (Please choose up to two options).
Q19) Please choose the top four types of engineers employed by your company during each of the time periods: (Rank from 1 to 4, where 1=largest number of
engineers employed).
N = 466.

Strategy& | PwC 10
Additionally, companies are acquiring service and software
firms and applying new innovation models
Type of company acquired in last five years Type of innovation applied to compliment
business model
43%

14%

15%
30%

33% 22%
20%

11%

38%

Company type Open Corporate Incubators Accelerators None

innovation venturing
Mechanical hardware firms Software firms
Electronic hardware firms Service firms

Source: 2016 Global Innovation 1000 study

Q18) Which innovations below, if any, has your company applied to complement its business model(s)? (Please choose up to two options).
Q21) Has your company acquired any of the following kinds of firms to augment its capabilities?
N = 466.

Strategy& | PwC 11
40% of companies cited “customer insight” as the top
challenge for developing new services compared to just
28% for software
Top 5 challenges companies experienced pursing service and software offerings
Service offerings Software offerings
40% 39% 33%
38%
30% 30%
33% 28%
32% 26%

Customer Cost control New Change in Project Cost control New Project Customer Managing the
insight capabilities culture from management capabilities management insight change in
being product- being culture from
required of focused to required of product-
staff (e.g., customer staff (e.g., focused to
sales, satisfaction- sales, service-
engineers) focused engineers) /software-
focused
Source: 2016 Global Innovation 1000 study
Q15) What are the biggest challenges your company has experienced while pursuing its service and software offerings? (Please choose up to five reasons for each offering).
N = 466.

Strategy& | PwC 12
We’ve identified three distinct innovation strategies that cut
across all industries

Need Seeker Market Reader Technology Driver

• Consistently strive to be 1st • Adopt a 2nd mover strategy • Drive innovation via
movers technological achievement for
• Focus on driving value through
both incremental and
• Proactively engage customers incremental change
breakthrough efforts
to determine needs and shape
• Innovations determined market
new innovations • Least proactive of 3
back
in directly engaging customers
• Identify unarticulated needs
• Equally concerned with
• Highest Beta strategy
• Determine new competitors actions
innovations market back

Company Examples Company Examples Company Examples

• Apple Inc. • Samsung Electronics Co Ltd • Alphabet Inc.

25% 40% 35%

Source: 2016 Global Innovation 1000 study

Strategy& | PwC 13
By 2020, Need Seekers will be allocating nearly a third of
their total R&D budget to software offering
Average allocation of R&D spending to software offerings

30%
29%
28%

26%
25%
50%
24%
23%
22%
20% 21% 21%
20%
19%
18% 18%
16%
14%
14%
0%
2010 2015 2020

Market Readers Tech Drivers Need Seekers

Source: 2016 Global Innovation 1000 study

Q11) How do you believe your company is performing in revenue growth relative to its key competitors?
Q13) Please estimate your company’s allocation of R&D investment across these three offerings.
N = 466.

Strategy& | PwC 14
Introduction

R&D shifts

Innovation 1000 update

Strategy& | PwC 15
In 2016, R&D spending of the top 1000 companies was flat as
a result of currency fluctuations – strong US$
Global Innovation 1000 R&D spending
2005–2016, US$ Billions

11-year CAGR = 4.94%

+70%

$680 $680
$638 $647
$614 0.04%
1.4% 5.1%
$560 3.8%
$538
$501 $508 9.7%
$447 7.3% -5.6% 10.3%
$400 $409
12.2%
2.2% 9.3%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: 2016 Global Innovation 1000 study

Strategy& | PwC 16
Total revenue for the Innovation 1000 fell by 11.8%

Global Innovation 1000 revenue

2005–2016, US$ Trillions

11-year CAGR = 4.93%

+70%
$18 $18
$18 $18
-1.0%
$16 1.3% 3.7% $16
$15
-11.8%
12.0%
$13 $13
$12 12.3% -10.4% 16.7%
$11
13.1%
$9
11.5%
11.7%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: 2016 Global Innovation 1000 study

Strategy& | PwC 17
Primarily due to a 31% decline in revenue in the Chemicals &
Energy industry
Revenue by industry
2005–2016, US$ Trillions
$5.0
4.7
4.6 4.5 4.5
$4.5
4.0
$4.0 3.8
-31%
$3.5 3.3
3.1
3.0 2.9 Chemicals and Energy
$3.0 2.8 Industrials
2.6 2.7
Auto
$2.5 2.4
Computing and Electronics
$2.0 1.8
Healthcare
$1.5 1.3 Consumer
1.2
$1.0 Telecom
0.7 Other
0.6
$0.5 Software and Internet
0.5
Aerospace and Defense
$0.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: 2016 Global Innovation 1000 study

Strategy& | PwC 18
Resulting in a spike in R&D intensity back to its all-time high
of 4.2%, last seen in 2005
Global Innovation 1000 R&D intensity
2005–2016

11-year CAGR = 0.01%

0%

4.2% 4.2%
3.9% 3.8% 3.8%
3.8% 3.7%
-8.5% 3.6% 3.6% 3.5% 3.6% 3.5%
-2.0% -0.8% 13.4%
-4.5% 5.3% -5.5% -2.2% 6.1%
-2.0% 2.5%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: 2016 Global Innovation 1000 study

Strategy& | PwC 19
Only three out of nine industries increased R&D spending

Change in R&D spending by industry

2015–2016

20%

15.4%
15%

10%

5% 3.6%

0.7%
0%

-1.8% -2.0%
-2.8% -3.3%
-5% -4.0%

-10%
-11.5%
-12.2%
-15%
Software Healthcare Consumer Computing Other Industrials Aerospace Auto Chemicals Telecom
and Internet and and Defense and
Electronics Energy

Source: 2016 Global Innovation 1000 study

Strategy& | PwC 20
By 2018, Software & Internet and Healthcare will be the first
and third largest industries by R&D spend
R&D spending by Top 5 industries
2005–2018, US$ Billions
$180 168 171 168 166 163 165
161 Healthcare
$160 154 150
150
142 145 159
137 138 137 157
$140 127 129 129
121 120 124
116 S&I
$120 110 114
109 105 105
103 105 105
98 99
$100 89 88 106
87 87 86 87
74 76 75 78
$80 70 71 69 73
68 64 66 75
56 60
$60 52 51 51
43 44 46 43
41
33 36
$40 29 32
22 22 26
$20

$0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
(est.) (est.)

Auto Computing and Electronics Healthcare Software and Internet Industrials

Source: 2016 Global Innovation 1000 study

Strategy& | PwC 21
Computing & Electronics, Healthcare, and Auto are the three
largest industries representing about 62% of total R&D spend
2016 R&D spending by industry
Total = $680 Billion

Telecom
Other Consumer
1.5% Aerospace and Defense
Computing and Electronics 1.6% Chemicals and Energy
24.0% 3.0% 5.5%
3.2%
Industrials
10.8%

12.9%
22.1% Software and Internet
Healthcare
15.4%
Auto

Source: 2016 Global Innovation 1000 study

Strategy& | PwC 22
R&D spending declined in Europe and Japan, but increased
in North America and China
R&D spending by region
2005–2016, US$ Billions
297
$300
North America
275 +8%

$250

201
$200
182 -9%
Europe

$150

109
101
Japan -8%
$100

54 53 -3%
Rest of World
$50
China +19%
47
39

$0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: 2016 Global Innovation 1000 study

Strategy& | PwC 23
For the first time in the study’s history, N. America increased
the number of companies in the top 1,000 – Up 9.5% y-o-y
Number of companies in the top 1,000 by region
2005–2016
500 372 of the 381 companies
in North America are
450 based in the U.S.

400 381
North America
348 9.5%
350

300

244
250 223
-9%
Europe
200 181
165
-9%
Japan
150 123 130
China +6%
100 Rest of World -3%
104 101
50

0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: 2016 Global Innovation 1000 study

Strategy& | PwC 24
US growth is driven by its large presence in high-growth
R&D industries of Software & Internet and Healthcare
Number of companies in top 5 industries by region
2016
93 175 103 164 228
6% 6% 7%
10%
2% 18% Rest of World
18% 10%
18%
29%
2% 11% China
12% 24% 12% 24%
15% Japan
30%
19%
13% 13% Europe

20% 62% 26% 26%

20%
56% 62% 56%
43% 43% North America

22% 19%
22% 19%

Auto Industrials Software and Internet Healthcare Computing and Electronics

Source: 2016 Global Innovation 1000 study

Strategy& | PwC 25
Bristol-Myers Squibb and Oracle joined the top 20 largest
R&D spenders and Apple moved up to 11th
Top 20 R&D Spenders
Rank Rank Change Company Geography Industry R&D spending Revenue R&D
2016 2015 (US$ Billions) (US$ Billions) intensity
1 1 NA Volkswagen AG Europe Auto 13.2 236.9 5.6%
2 2 NA Samsung Electronics Co Ltd South Korea Computing and Electronics 12.7 177.5 7.2%
3 7 +4 Amazon.com Inc North America Software and Internet 12.5 107.0 11.7%
4 6 +2 Alphabet Inc North America Software and Internet 12.3 75.0 16.4%
5 3 -2 Intel Corp North America Computing and Electronics 12.1 55.4 21.9%
6 4 -2 Microsoft Corp North America Software and Internet 12.0 93.6 12.9%
7 5 -2 Roche Holding AG Europe Healthcare 10.0 50.1 19.9%
8 9 +1 Novartis AG Europe Healthcare 9.5 49.4 19.2%
9 10 +1 Johnson & Johnson North America Healthcare 9.0 70.1 12.9%
10 8 -2 Toyota Motor Corp Japan Auto 8.8 236.8 3.7%
11 18 +7 Apple Inc North America Computing and Electronics 8.1 233.7 3.5%
12 11 -1 Pfizer Inc North America Healthcare 7.7 48.9 15.7%
13 13 NA General Motors Co North America Auto 7.5 152.4 4.9%
14 14 NA Merck & Co Inc North America Healthcare 6.7 39.5 17.0%
15 15 NA Ford Motor Co North America Auto 6.7 149.6 4.5%
16 12 -4 Daimler AG Europe Auto 6.6 166.0 4.0%
17 17 NA Cisco Systems Inc North America Computing and Electronics 6.2 49.2 12.6%
18 20 2 AstraZeneca PLC Europe Healthcare 6.0 24.7 24.3%
19 32 +13 Bristol-Myers Squibb Co NEW North America Healthcare 5.9 16.6 35.7%
20 22 +2 Oracle Corp NEW North America Software and Internet 5.8 37.0 15.6%
Total 179.4 2069.0 8.7%
Source: 2016 Global Innovation 1000 study

Strategy& | PwC 26
However, higher R&D spend doesn’t ensure performance

The performance disconnect

Example analysis showing relation between R&D & financial performance
5
~10,000 analyses found NO y = 0,032x + 1,2914
R² = 0,0114
statistical relationship
between R&D spend and

Indexed sales growth

• Sales growth
• Gross profit growth
• Operating profit growth 0
• Operating Margin
• Net profit growth
• Net Margin
• Market cap growth
• Total shareholder return
-5
0 1 2 3 4 5 6 7
Indexed R&D-to-sales ratio

Source: Strategy& Global Innovation 1000 study

Strategy& | PwC 27
Apple and Alphabet (Google) continue to lead the most
innovative list, while Facebook rejoined and 3M returned
to third
10 Most Innovative Companies

Rank 2010 2011 2012 2013 2014 2015 2016

1 Apple Apple Apple Apple Apple Apple Apple

2 Google Google Google Google Google Google Alphabet*

3 3M 3M 3M Samsung Amazon Tesla 3M

General General
4 Samsung Amazon Samsung Samsung Tesla
Electric Electric
General
5 Toyota Microsoft 3M Tesla Amazon Amazon
Electric
General
6 Microsoft IBM Microsoft 3M 3M Samsung
Electric
Procter & General General
7 Samsung Toyota Microsoft Facebook
Gamble Electric Electric
Procter & Procter &
8 IBM IBM Microsoft Microsoft Microsoft
Gamble Gamble
General
9 Samsung Toyota IBM Tesla IBM IBM
Electric
Procter &
10 Intel Facebook Amazon Facebook Toyota IBM
Gamble

Source: 2016 Global Innovation 1000 study. The 10 Most Innovative Companies are named by respondents to the 2016 survey of global innovation experts.
*In 2015, Google announced a corporate restructuring forming an umbrella company called Alphabet.

Strategy& | PwC 28
For seven straight years, the 10 Most Innovative Companies
have outperformed the Top 10 R&D Spenders
10 Most Innovative Companies* vs. Top 10 R&D Spenders

Rank 10 Most 2016 R&D R&D Top 10 R&D 2016 R&D Highest
Innovative spend intensity Spenders R&D intensity possible 100%
Companies (US$ Bn) spend score:
(US$ Bn)
1 Apple Inc 8.1 3.5% Volkswagen 13.2 5.6%
AG
2 Alphabet Inc 12.3 16.4% Samsung 12.7 7.2% 69%
Electronics 65%
Co Ltd
3 3M Co 1.8 5.8% Amazon.com 12.5 11.7%
Inc Normalized 50% 49%
17.7% 16.4% performance of 50%
4 Tesla Motors 0.7 Alphabet Inc 12.3
Inc industry peers: 40% 40%
5 Amazon.com 12.5 11.7% Intel Corp 12.1 21.9%
Inc
6 Samsung 12.7 7.2% Microsoft 12.0 12.9%
Electronics Corp
Co Ltd
7 Facebook Inc 4.8 26.9% Roche 10.0 19.9%
Holding AG Lowest
12.9% 19.2% possible 0%
8 Microsoft 12.0 Novartis AG 9.5
Corp score: Revenue EBITDA as a Market cap
9 General 4.2 3.7% Johnson & 9.0 12.9% growth % of revenue growth
Electric Co Johnson (5-yr. CAGR) (5-yr. Avg.) (5-yr. CAGR)
10 International 5.2 6,4% Toyota Motor 8.8 3.7%
Business Corp 10 Most Innovative Companies
Machines
Corp Top 10 R&D Spenders
Source: 2016 Global Innovation 1000 study. The 10 Most Innovative Companies are named by
respondents to the 2016 survey of global innovation experts.
*Facebook did not have Market Cap data spanning back 5 years.
Strategy& | PwC 29
 For the complete study and more
information on the annual
Strategy& Global Innovation 1000 study

Please visit:
http://www.strategyand.pwc.com/innovation1000

For media or other inquiries, please contact:

Kiran Chauhan
+1 416 890 8695
[email protected]

Strategy& | PwC 30
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