COLUMBUS, Ohio -- Large, diversified companies are just as innovative as more focused firms in creating new products for the marketplace, according to a new study.
Results showed that diversified firms produce as many new products for each dollar spent on research and development as do companies with more limited product lines. In fact, among U.S. firms spending the most on R&D, six of the 10 leaders in product innovations are diversified corporations (see chart, p. 3).
"Critics miss the mark when they say large conglomerates are not conducive to innovation," said Tim Opler, co-author of the study and assistant professor of finance at Ohio State University's Max M. Fisher College of Business.
Some critics argue that large conglomerates are inefficient at creating new products because they are too focused on short-term profits and are strangled by unwieldy bureaucracies, Opler said. And diversified firms, because they produce so many different kinds of goods, are supposedly less aggressive than
smaller, non-diversified companies about developing new products.
But diversified firms have found ways to overcome these problems and compete effectively, he said. For example, the study found that diversified firms were more likely than focused companies to have separate R&D centers.
"Research centers may actually help diversified firms be more innovative because they concentrate resources and talent in one area," he said.
Opler conducted the study with Laura Cardinal of Texas Tech University. Their findings were published in a recent issue of the Journal of Accounting and Economics.
The researchers studied 706 U.S.-based firms that reported at least $10 million in R&D expenses per year at some point from 1981 to 1988.
They separated those firms into diversified and non-diversified companies. Diversity was determined by a formula that examined the proportion of a firm's sales that was generated by a single line of business, such as computers, pharmaceuticals or photo equipment. The more lines of business within a company, the more it is diversified.
Finally, they looked at how many new products each company produced from 1981 to 1988, as reported in the Wall Street Journal.
Opler said the study provides evidence that leaders of large conglomerates are not as short-sighted as some critics charge.
"The managers of most diversified companies are smart enough to realize that they have to be innovative to be successful. They find ways to provide incentives for managers who are innovative and creative," he said.
Contact: Tim Opler, (614) 292-5026
Written by Jeff Grabmeier, (614) 292-8457
New Product Leaders
Of the 20 leading U.S. firms in R&D spending from 1981 to 1988, these were the 10 companies that had the most new product announcements. (See text for details.)
FIRM NEW TOTAL R&D COMPANY TYPE PRODUCTS EXPENSES (In Billions of Dollars) IBM 86 $25.2 Non-Diversified Eastman Kodak 44 7.1 Diversified Digital 32 5.5 Diversified Eqiuipment Corp. Hewlett 32 5.3 Diversified Packard AT&T 26 13.9 Non-Diversified Northern 24 2.9 Diversified Telecom Merck 17 3.5 Non-Diversified Xerox 14 5.0 Diversified Proctor & 12 3.3 Diversified Gamble Unisys 12 2.9 Non-Diversified
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