Freedom, Inc_ - Brian M. Carney [20]
Our rowboat is a metaphor, but it highlights an important literal issue: Do traditional bureaucracies, with rules and procedures designed to substitute for lack of skill or motivation, make up for the weight penalty of all that control with better results? It’s time for a deeper consideration of this question. Let’s first take a look at the top line—the revenues—and then at the costs.
DO “HOW” COMPANIES SHOW GREAT ORGANIC
GROWTH THROUGH INNOVATION?
As we discussed earlier in the chapter, there are many examples of traditional command-and-control bureaucracies that have had long spells of admirable revenue growth. Pharmaceutical giants Merck and Pfizer are two good examples. How much of that growth is organic and how much is driven by acquisitions is not always easy to sort out, given the rate at which these companies reshuffle divisions and business units. But in those firms where there has been real, organic growth, one feature is usually present—innovation. When it is mentioned, most traditional bureaucracies put two cards on the table—their substantial research and development budgets and their patents. Unfortunately these plays don’t have numbers to back them up.
Many companies talk up a large R&D budget, which has the same relation to innovative product sales as the scouting budget of the New York Knicks—the NBA team with the largest payroll—has to its dismal performance between 2002 and 2009. In the United States, big pharmaceutical companies have the highest R&D budgets relative to sales of any industry. Between 1991 and 2001, total research spending rose to $30.3 billion from $9.7 billion, while at the same time the number of new drugs introduced each year dropped to twenty-four from thirty.14 Money can’t buy you love, and a big budget alone can’t buy you the next Viagra. As a matter of fact, Pfizer’s R&D budget couldn’t even buy the first Viagra. The drug’s benefit was discovered by pure accident when a number of patients in a heart-disease drug trial—all of them male—reported a strange, but not unpleasant, side effect. Thus, a multibillion-dollar industry was born.
Then there are patent portfolios. Research shows that patents themselves have no effect on a company’s revenue: Only 5 percent to 10 percent of patents have any market relevance, and only 1 percent of them actually bring in any profits.15 Even though it might seem counterintuitive, what really matters when it comes to patents is the number of times they are cited by others. Having a portfolio of frequently cited patents does correlate with sales of innovative products.16 Think of it this way: A patent is like a pass in basketball. By itself, it doesn’t help your team win. But a patent that is valuable to others, as shown by the number of times people cite it, is like an assist—a pass that leads to a basket. Those do help your team win in a direct way. The logic behind this is simple: Only those company’s patents that are cited by other firms’ patent filings have some business value in their eyes, and vice versa; if a patent is never cited by other firms, it can be intriguing for science but of no value to business. But while the NBA carefully tracks players’ assists, few companies measure the citation rate of their patent portfolios, preferring to trumpet the size of the portfolio itself. It’s as if Steve Nash, the NBA’s best point guard in recent years, went around bragging about how many passes he made the night before. In the late 1990s, IBM boasted the world’s largest patent portfolio. But