Why do firms do research and development (R & D)?
R & D is a major source of rejuvenation and growth for organizations, providing an important contribution to innovation and competitive advantage. Businesses invests heavily in R & D because it generates high expectations. According to a research conducted in the USA by NSB in 2006, the business sector spent over $350 billion on R & D in the Organization for Economic Co-operation and Development (OECD) nations, accounting for over 69% of their total R & D expenditures. Companies in industries such as pharmaceuticals and IT commonly spend over 10 percent of their annual sales on R & D, which may constitute a significant proportion of a company’s activities. The high levels of investment in R & D and anticipation of and pressure for its results are the major reasons why R & D is a significant issue for businesses. In this article, I will share with you the essence of R & D for businesses. Firms undertake R & D for a variety of reasons, including;
Supporting existing business activities
Business activities include any activity engaged in the primary purpose of making profit. This is a general term that encompasses all the economic activities carried out by a company during the course of business. Business activities, including operating, investing and financing activities, are ongoing and focused on creating value for shareholders. Every business has series of business activities that it undertakes to make sure the business achieve it overall goals. Failing to organize the activities can cost the business a lot including losing customers, reduction in sales and ultimately reduction in profit margins. The explanation given above proves that a business activity is key to an organization’s success. It therefore proves that businesses invest resources into their activities. Most businesses undertake R & D activities just to support their existing business activities. Market leaders invest in R & D so their findings can aid them to continue leading. Some market followers do R & D to sustain themselves and also how they can increase their effort and overtake the market leader. Businesses that do R & D to support their activities stay innovative. They always get new ways to stay abreast with the competition. Such exercises also help them to prepare towards the future.
Establishing new business developments
Business development (BD) comprises a number of tasks and processes generally aiming at developing and implementing growth opportunities within and between organizations. It is a subset of the fields of business, commerce and organizational theory. Business development is the creation of long-term value for an organization from customers, markets, and relationships. Some business undertakes R & D with the sole objective of establishing new business developments. When businesses do R & D, it equips them with new ideas that when they ponder on it well they can develop areas such as new product, more innovative ways to serve customers and better ways to undertake other activities.
Facilitating related business diversification
Diversification is about building new products, exploring new markets, and taking new risks. Companies sometimes diversify their business activities to manage risk by minimizing potential harm to the business during economic downturns or expand into new markets. The basic plan is to expand into a business activity that doesn’t negatively react to the same economic downturns as your current business activity. Most companies diversify for two main reasons; one, as a growth strategy and two, to help offset the losses and keep the existing company viable. For a company to diversify and gets it correct in the first time it needs the help of R & D. Businesses undertake R & D to know the right new products to develop, the possible areas to target and who their potential customers will be. Businesses that do not undergo some sort of R & D activities before diversifying stand a great chance of losing their investment.
Selling R & D services to other companies
This kind of services is mostly rendered by big organizations and in most cases multinational organizations. Conducting R & D services requires resources which most especially, small businesses can’t partake because they don’t have what it takes to conduct a research and development. Some businesses with enough resources conduct R & D services and sell to those that can’t undertake it themselves. It’s a strategy they use to mobilize revenue because, most businesses prefer outsourcing some aspect of their research and development especially in areas they have less technical know-how. A company that conducts R & D and sells to others stand the chance of gaining knowledge in other areas. Such knowledge guides them in making better decisions when considering growth strategies and diversification.
Providing the skills to help ‘reverse engineer’ competitors’ products and services
At the organizational level, being able to just look at another organizations products/services and identifying how they were made up is a huge task. What normally becomes clear to every business and users is how the product/service work. Businesses therefore undertake R & D activities to see how their competitors’ product/services work and how they were made. The R & D provides the skills to help decode the processes that were used in putting up the product/service. When a company is able to decode the steps used by another firm in coming out with a product/service, it gives them an opportunity to study the processes and come out with either a similar product or an improved version.
Help to predict future technological trends
Being able to predict what might happen in the future is an advantage to businesses that conduct research and development (R & D). Technological trends are very essential and cannot be predicted without research. R & D helps businesses to know the future trends of industries and what they can do technologically to position themselves in various industries. Technological trends most of the time collapse businesses that are not able to adapt to the new changes it brings. Future technological trends may be thought of as either leading edge or “bleeding edge” technology in that this cutting edge is not without its trials and tribulations. For instance, for investors, pouring speculative money into predictions that emerging technology will pay off may not yield results for decades if ever.
Complying with regulations & social and political expectations
Some businesses undertake R & D activities so as to comply with regulations, social and political expectations. Though we are in a global economy what is permitted in country A might not be permitted in country B. For instance, in Ghana the color red signifies danger and anytime you see people in red then something negative has happened. In China, the same red signifies happiness and so during their spring festival in the month of February and national holidays in October, the red color is used in decorating major places, families decorate their homes and doors with red paper cut styles and some tie the red clothes on their cars and move around. If any company wants to trade between these two countries, a thorough search must be done knowing these differences in the way of life of the company. Change in governments causes some companies to underperform. Government A can have influential policies that might protect businesses but government B can revise the policies that will go against the businesses. Because of all these expectations, businesses undertake R & D to enable them comply with every regulation and expectation the policy makers might introduce.
Participating in research networks
As businesses continue to undertake R & D activities they get to a point where they become known to other research and development departments who are into similar business. As time goes on the connection becomes great and some goes into alliances, partnerships and networks. Networks and projects often share core facilities and techniques that not only help to accelerate progress toward a research goal, but also to ensure that a study is large enough to be statistically stable. When research companies join hands they are able to attract grants and funding that enable them to do excellent investigations.
Portraying a positive corporate image
Corporate image is being explained as a mental picture that springs up at the mention of a firm’s name. It is an impression that continually changes with the firm’s circumstances, media coverage, performance, pronouncements. Similar to a firm’s reputation, it is the public perception of the firm rather than a reflection of its actual state. Large firms use various techniques to enhance their image in order to improve their desirability as a business. For businesses to strive and continue to lead, they need to constantly undertake research activities so they can base on the findings and make better decisions.
Creating future options through new knowledge and technology
When businesses undertake R & D activities they are able to create for themselves future options that help them to grow. Through R & D activities businesses discover new areas for studies. R & D helps in promoting innovation within businesses. R&D investment helps develop new products and services that drive growth, create jobs, and improve the national welfare. For decades the U.S. government and private sector have spent more than any other nation on R&D. The reason why they keep spending is that R & D activities direct and create future options for the country.
Author: EVANS BRAKO NTIAMOAH is a researcher, lecturer, managing editor of Cillans publications and a market researcher. He is currently studying for his Doctor of Philosophy (PhD) in Management Science. He writes, teaches and consults on marketing and management issues. He serves as an editorial board member and a reviewer for a number of international journals. His research interest includes innovation management, corporate social responsibility, project management, R & D management, organizational performance and strategic management.
