Strategic Business Decisions on Research and Development (R&D)

Industrial research can have one of two fundamental orientations. First orientation is the scientific research, which is concerned with generating new concepts that may or may not have product applications. The second orientation is the commercial development – which can take several forms, but is essentially product, as opposed to concept, oriented. Thus commercial development is a more pragmatic and market-centered form of R&D effort than scientific research.

Research and Development strategy has four primary elements: R&D goals, extent of integration of the R&D function, amount of market coupling desired, and size of the budget.

1. Research and Development  Goals

Goals are needed to specify the purpose of R&D is used as part of product or market development or market-penetration business-level strategies, the firm’s desired competitive position can largely determine the amount and type of R&D needed. More specifically R&D can have one of four basic purposes that normally would be stated at the business level.

  1. First, industry leader positioning can require both scientific research and commercial development capabilities but research emphasis is important for consistent generation of new concepts with development potential. The industry leader has to maintain its product preeminence by outstripping its competitors’ new concept initiation rates. Thus the leader tends to have a high R&D expenditure-to-sales ratio and state-of-the-art research facilities. In addition its development capabilities must be effective and rapid. Effectiveness is largely a matter of production expertise, quality consistency, and marketing know-how. In brief, an industry leader, as one would expect, has to be good at everything and have the confidence to invest heavily in risky scientific research.
  2. Another R&D position is that of follower. A follower is described as a firm that essentially duplicates the product innovations of the industry leader. Such firms usually strive to under-price the leader by avoiding the overhead burden of a basic research function that maintains high quality. In return the follower sacrifices time, wide profit margins, and prestige by always having to wait for the leader to make a move. The more quickly a follower can respond to the leader’s new introductions, the more it can capitalize on the early adopter market. Thus the follower’s primary R&D capability has to be in competitive intelligence, market sensing, and development.
  3. The third R&D position is that of adapter. The adapter scans its competitors’ offerings, not just those of the leader, and then modifies selected ones to meet the needs of its market segments. It actually is not duplicating competitors’ products in a strict sense, but rather is adapting them to the specific requirements imposed by its customers. The adapter is not necessarily producing a lower-quality rendition. Adapters need strong developmental research capabilities and a keen understanding of market needs and sensitivities. Although the all-weather radial example demonstrates the essential characteristics of an adapter’s product relative to an industry leader’s, it fails in one important respect. Adapters modify products by means of strategic choice, not simply as part of a product development tactic. That is, they are adapters by choice, not incidentally. Consequently an adapter searches for products (among many competitors) to modify for its customers.
  4. The final position with R&D implications is that of copier. Copying in this sense usually involves price competition with a leader, follower, or even adapter, which is made possible by production efficiencies, often resulting in reductions in quality. For example, certain brands of wood stoves developed widespread reputations for heating efficiency, safety, and dependability. These features normally command high retail prices. Copies of some of the more popular high-priced, high-quality units appeared at prices far below those of the originals. They also tended to have shorter warranty terms and were rougher in appearance. Their smaller profit margins and lower prices required higher sales volume, and thus more widespread distribution. Also, copiers need accurate market information and process engineering capabilities sufficient to quickly produce a high volume of less costly copies.

2. Intensity of Research and Development

Realistically there are seven choices of levels of R&D involvement. Larger firms will tend to have more of the different levels of R&D activity and smaller ones fewer. The choices are as follows:

Level 1 Basic research is seeking new conceptual developments at the frontier of a discipline with little concern for product applications. Very few new concepts from basic research ever reach the market as successful products. Thus it is a risky and expensive type of research effort rarely pursued in-house by businesses. Much basic research is conducted by universities under federal or private grants.
Level 2
Applied research usually refers to problem-initiated research. These activities are focused on solving a problem whose nature has possible implications for the firm’s product lines or items.
Level 3 Advance development focuses on determining preliminary performance specifications for a new conceptual design that may have been produced by applied research. Output of this activity would be a detailed set of guidelines on how the new product should operate with tolerances and the necessary component configuration.
Level 4 Design engineering converts performance specifications into design specifications, which are used to make a prototype. With appropriate refinements these specifications are the plans used for manufacturing.
Level 5 Feasibility testing is analysis of financial or physical reasonableness of a product, process, or project.
Level 6 Equipment engineering results in the design and development of machinery and equipment peculiar to the manufacturing needs of a product or component.
Level 7 Process engineering is the design of production operations necessary to manufacture an item or to convert design specifications.

When creative R&D is required for a strategy, the tendency will be to implement an R&D program that consists of advance development or applied research. Conversely a strategy calling for merely copying another product would not require these high-level research functions. The firm could operate successfully with process, or possibly design, engineering functions alone. In terms of their relationships to the finished product, basic research is the most distant, and process engineering is the closest. Selection of the level of integration of R&D identifies the type of R&D effort appropriate for a business-level strategy.

3. Market and Production Coupling

Market and production coupling is the practice of controlling the output of an R&D operation by the input of marketing and production information. For example, an applied research group could be “managed” by systematically informing researchers of pertinent marketing data such as customers’ preferences and competitors’ product attributes, or production quality maintenance problems and cost structures. This should result in their work having market relevance and reflecting production realities. The information normally would be transmitted at regular meetings between appropriate managers and key R&D staff people.

Particularly at the basic research end of the system of R&D intensities, there is danger that researchers will pursue their own interests with limited market or production applicability. This could result in too few new product ideas even though the researchers’ professional development would be considerably enhanced. For example, development of esoteric propulsion systems by an automotive R&D group could be professionally satisfying to the researchers. However, the systems would be of little immediate value to the firm if customers would not buy them, or if they could not be produced. Firms investing large amounts in basic research programs can destroy their creative effectiveness, though, by too much market coupling. Thus the extent of coupling is a critical determination for the strategist in designing and managing an R&D program at all levels, not just in basic research.

The choices facing the strategist concerning coupling are straightforward. For each level of R&D activity, R&D strategy should specify (1) the presence or absence of a market and/or production information input system and (2) the type of data that should be so transmitted. Responsibility for designing and implementing this information system would normally be held by a functional manager.

4. Research and Development  Budget

Research and development goals and strategy should also specify the size of the R&D budget. An R&D budget, which can be viewed as a limit for R&D expenditures, is often expressed as a percentage of sales. However, this basis for R&D expenditures can lead to financial difficulties because it ignores consideration of whether there is sufficient profitability to cover R&D costs. Alternatively, the R&D budget could be a function of a profit measure.

An R&D budget can also be set according to industry practices. But the average R&D expenditure of competitors is a minimum below which management could find itself at a competitive disadvantage.

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