Research and Development (R&D) | Overview & Process
Companies often spend resources on certain investigative undertakings in an effort to make discoveries that can help develop new products or way of doing things or work towards enhancing pre-existing products or processes. These activities come under the Research and Development (R&D) umbrella.
R&D is an important means for achieving future growth and maintaining a relevant product in the market. There is a misconception that R&D is the domain of high tech technology firms or the big pharmaceutical companies. In fact, most established consumer goods companies dedicate a significant part of their resources towards developing new versions of products or improving existing designs. However, where most other firms may only spend less than 5 percent of their revenue on research, industries such as pharmaceutical, software or high technology products need to spend significantly given the nature of their products.
In this article, we look at 1) types of R&D, 2) understanding similar terminology, 3) making the R&D decision, 4) basic R&D process, 5) creating an effective R&D process, 6) advantages of R&D, and 7) R&D challenges.
TYPES OF R&D
A US government agency, the National Science Foundation defines three types of R&D.
When research aims to understand a subject matter more completely and build on the body of knowledge relating to it, then it falls in the basic research category. This research does not have much practical or commercial application. The findings of such research may often be of potential interest to a company
Applied research has more specific and directed objectives. This type of research aims to determine methods to address a specific customer/industry need or requirement. These investigations are all focused on specific commercial objectives regarding products or processes.
Development is when findings of a research are utilized for the production of specific products including materials, systems and methods. Design and development of prototypes and processes are also part of this area. A vital differentiation at this point is between development and engineering or manufacturing. Development is research that generates requisite knowledge and designs for production and converts these into prototypes. Engineering is utilization of these plans and research to produce commercial products.
UNDERSTANDING SIMILAR TERMINOLOGY
There are a number of terms that are often used interchangeably. Thought there is often overlap in all of these processes, there still remains a considerable difference in what they represent. This is why it is important to understand these differences.
The creation of new body of knowledge about existing products or processes, or the creation of an entirely new product is called R&D. This is systematic creative work, and the resulting new knowledge is then used to formulate new materials or entire new products as well as to alter and improve existing ones
Innovation includes either of two events or a combination of both of them. These are either the exploitation of a new market opportunity or the development and subsequent marketing of a technical invention. A technical invention with no demand will not be an innovation.
New Product Development
This is a management or business term where there is some change in the appearance, materials or marketing of a product but no new invention. It is basically the conversion of a market need or opportunity into a new product or a product upgrade
When an idea is turned into information which can lead to a new product then it is called design. This term is interpreted differently from country to country and varies between analytical marketing approaches to a more creative process.
Misleadingly thought of as the superficial appearance of a product, product design actually encompasses a lot more. It is a cross functional process that includes market research, technical research, design of a concept, prototype creation, final product creation and launch. Usually, this is the refinement of an existing product rather than a new product.
MAKING THE R&D DECISION
Investment in R&D can be extensive and a long term commitment. Often, the required knowledge already exists and can be acquired for a price. Before committing to investment in R&D, a company needs to analyze whether it makes more sense to produce their own knowledge base or acquire existing work. The influence of the following factors can help make this decision.
If the nature of the research is such that it can be protected through patents or non-disclosure agreements, then this research becomes the sole property of the company undertaking it and becomes much more valuable. Patents can allow a company several years of a head start to maximize profits and cement its position in the market. This sort of situation justifies the cost of the R&D process. On the other hand, if the research cannot be protected, then it may be easily copied by a competitor with little or no monetary expense. In this case, it may be a good idea to acquire research.
Setting up a R&D wing only makes sense if the market growth rate is slow or relatively moderate. In a fast paced environment, competitors may rush ahead before research has been completed, making the entire process useless.
Because of its nature, R&D is not always a guaranteed success commercially. In this regard, it may be desirable to acquire the required research to convert it into necessary marketable products. There is significantly less risk in acquisition as there may be an opportunity to test the technology out before formally purchasing anything.
Considering the long term potential success of a product, acquiring technology is less risky but more costly than generating own research. This is because license fees or royalties may need to be paid and there may even be an arrangement that requires payments tied to sales figures and may continue for as long as the license period. There is also the danger of geographical limitations or other restrictive caveats. In addition, if the technology changes mid license, all the investment will become a sunk cost. Setting up R&D has its own costs associated with it. There needs to be massive initial investment that leads to negative cash flow for a long time. But it does protect the company from the rest of the limitations of acquiring research.
All these aspects need to be carefully assessed and a pros vs. cons assessment needs to be conducted before the make or buy decision is finalized.
BASIC R&D PROCESS
The R&D may take months or years to yield fruitful results. Manufacturers of a variety of products utilize this process for new product development and innovation. Though each company or industry may have its own unique research methodology, a basic research process will form the framework for it.
At this point the research team may sit down to brainstorm. The discussion may start with an understanding and itemization of the issues faced in their particular industry and then narrowed down to important or core areas of opportunity or concern.
The initial pool of ideas is vast and may be generic. The team will then sift through these and locate ideas with potential or those that do not have insurmountable limitations. At this point the team may look into existing products and assess how original a new idea is and how well it can be developed.
Once an idea has been thoroughly researched, it may be combined with a market survey to assess market readiness. Ideas with true potential are once again narrowed down and the process of turning research into a marketable commodity begins.
Prototypes and Trials
Researchers may work closely with product developers to understand and agree on how an idea may be turned into a practical product. As the process iterates, the prototype complexity may start to increase and issues such as mass production and sales tactics may begin to enter the process.
Regulatory, Marketing & Product Development Activities
As the product takes shape, the process that began with R&D divides into relevant areas necessary to bring the research product to the market. Regulatory aspects are assessed and work begins to meet all the criteria for approvals and launch. The marketing function begins developing strategies and preparing their materials while sales, pricing and distribution are also planned for.
The product that started as a research question will now be ready for its biggest test, the introduction to the market. The evaluation of the product continues at this stage and beyond, eventually leading to possible re-designs if needed.
At any point in this process the idea may be abandoned. Its feasibility may be questioned or the research may not reveal what the business hoped for. It is therefore important to analyze each idea critically at every stage and not become emotionally invested in anything.
CREATING AN EFFECTIVE R&D PROCESS
A formal R&D function adds great value to any organization. It can significantly contribute towards organizational growth and sustained market share. However, all business may not have the necessary resources to set up such a function. In such cases, or in organizations where a formal R&D function is not really required, it is a good idea to foster an R&D mindset. When all employees are encouraged to think creatively and with a research oriented thought process, they all feel invested in the business and there will be the possibility of innovation and unique ideas and solutions. This mindset can be slowly inculcated within the company by following the steps mentioned below.
Assess Customer Needs
It is a good idea to regularly scan and assess the market and identify whether the company’s offering is doing well or if it is in trouble. If it is successful, encourage employees to identify reasons for success so that these can then be used as benchmarks or best practices. If the product is not doing well, then encourage teams to research reasons why. Perhaps a competitor is offering a better solution or perhaps the product cannot meet the customer’s needs effectively.
Allow your employees to see clearly what the business objectives are. The end goal for a commercial enterprise is to enhance profits. If this is the case, then all research the employees engage in should focus on reaching this goal while fulfilling a customer need.
Define and Design Processes
A definite project management process helps keep formal and informal research programs on schedule. Realistic goals and targets help focus the process and ensures that relevant and realistic timelines are decided upon.
Create a Team
A team may need to be created if a specific project is on the agenda. This team should be cross functional and will be able to work towards a specific goal in a systematic manner. If the surrounding organizational environment also has a research mindset then they will be better prepared and suited to assist the core team when ever needed.
Whenever needed, it may be a good idea to outsource research projects. Universities and specific research organizations can help achieve research objectives that may not be manageable within a limited organizational budget.
ADVANTAGES OF R&D
Though setting up an R&D function is not an easy task by any means, it has its unique advantages for the organization. These include the following.
Research and Development expenses are often tax deductible. This depends on the country of operations of course but a significant write-off can be a great way to offset large initial investments. But it is important to understand what kind of research activities are deductible and which ones are not. Generally, things like market research or an assessment of historical information are not deductible.
A company can use research to identify leaner and more cost effective means of manufacturing. This reduction in cost can either help provide a more reasonably priced product to the customer or increase the profit margin.
When an investor sets out to put their resources into any company, they tend to prefer those who can become market leaders and innovate constantly. An effective R&D function goes a long way in helping to achieve these objectives for a company. Investors see this as a proactive approach to business and they may end up financing the costs associated with maintaining this R&D function.
Top talent is also attracted to innovative companies doing exciting things. With a successful Research and Development function, qualified candidates will be excited to join the company.
Through R&D based developments, companies can acquire patents for their products. These can help them gain market advantage and cement their position in the industry. This one time product development can lead to long term profits.
R&D also has many challenges associated with it. These may include the following.
Initial setup costs as well as continued investment are necessary to keep research work cutting edge and relevant. Not all companies may find it feasible to continue this expenditure.
Once a commitment to R&D is made, it may take many years for the actual product to reach the market and a number of years will be filled with no return on continued heavy investment.
Not all research that is undertaken yields results. Many ideas and solutions are scrapped midway and work has to start from the beginning.
There is always the danger that a significant new invention or innovation will render years of research obsolete and create setbacks in the industry with competitors becoming front runners for the customer’s business.
It is important for any business to understand the advantages and disadvantages of engaging in Research and Development activities. Once these are studied, then the step can be taken towards becoming and R&D organization.
In the meanwhile, it is good practice to inculcate a research mind set and research oriented thinking within all employees, no matter what their functional area of expertise. This will help bring about new ideas, new solutions and an innovative way of approaching all business problems, whether small or large.
Welcome to the 21st episode of our podcast with Scott Whitney from Actiance! You can download the …