MIT Sloan Lecturer Finds That Cutting R&D Costs Can Accelerate Innovation

Apple is frequently cited as one of the most innovative companies in the world yet it only spends around 3% of its yearly revenue on R&D. According to research by MIT Sloan School of Management Senior Lecturer Michael Davies, more companies should follow Apple's lead by adopting a "less is more" approach. By cutting R&D costs, he found that companies can actually accelerate innovation, boost growth, and increase profits.

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, said Davies.

In fact, his studies show 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,'" he wrote. "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."

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 they can spend on in-house R&D, Davies said.

He added that the relationship among those choices is equally important. "If your product line is well-aligned, so that products vary along a single attribute, such as size, speed, or capacity, then increasing the number of products offered can increase the likelihood of purchase," wrote Davies.

Another significant factor is the balance between ease-of-use of the product and the number of features. Customers tend to "over-feature" at initial purchase and later regret their choices, he explained. So while a higher number of features may maximize the initial sale, those features don't facilitate long-term satisfaction, the propensity for repeat purchases, or customer recommendations. Moreover, if those features make the product harder to use, then the effect of initial errors is persistent. Customers who have made mistakes with a product in initial use may become skilled at using it, but their loyalty is fatally compromised. Customer value is optimized instead when companies strike the right balance between enough features to drive initial sales and simplicity and ease-of-use to drive long-term satisfaction.

Apple excels in striking this balance, said Davies, noting that 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. "And if you look at GM's demise, it's almost impossible to make sense of its portfolio or figure out how customers would choose among their seven families of cars offering more than 20 possible choices with several different brands," he said.

The realities of how customers think about product offerings and features suggest that a significant shift in product management - "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," he wrote.

"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."

Posted to the site on 9th June 2009