Industrial research and development of R&D Company - Essay Example

Industrial research and development Introduction: In the atmosphere of the current global recession, many companies are sacrificing on R&D in order to conserve expenses. The Industrial Research Institute carried out a survey in order to arrive at an estimate of expectations for R&D investment for the year 2009 among almost 91 companies in the United States who are also members of the Institute. R&D budgets had demonstrated growth for the past three years, however based on the responses to the survey, the IRI report projects that R&D budgets would be flat in the coming year. It appears from the survey that the expenses on existing products and basic research is likely to drop while there would be increased funding for new business projects and for outsourcing projects in the current global recession. One of the most important trends appears discernible is an increase in expenditure for 2009 for participation in alliances, mergers and joint R&D ventures. (Cosner, 2009). Innovation is the cornerstone of the R&D department within any firm and therefore plays a vital role in ensuring its productivity and profitability. As Sadakao (2009) points out, innovation is in fact, attracting additional attention as a means of overcoming the current global recession by enhancing competitiveness, which appears to offer a means of coping with the financial constraints of the recession. This trend is in line with the policies followed by Japanese companies, where slightly less than 70% of their R&D projects are designed to enhance competitiveness of the organization, with only 25% being directed towards the development of new business and 10% for the development of long term technological seeds. Sadakao (2009) also points out during a recession, R&D investment is generally constrained because there is a lack of capital available and therefore Government may play a more important role, just as the Obama administration is also implementing the Green deal program in the current recession, in order to promote innovation in the development of environmentally friendly energy programs. The importance of innovation: Dugal and Morbey (1995) have compared R&D spending by several Companies during two U.S. recessions and the findings from their study suggest that those Companies investing more heavily in R&D are more likely to continue with a pattern of sustained growth. Their competitors who have modest investments into R&D tend to suffer from a decline in sales during a recession. In the current business climate, it is significant to note that innovation is becoming an increasingly open process, where one company may develop a new business idea but partner with another Company in selling it (Chesbrough, 2007). Alternatively, it may also allow other Companies to gain access to its unused internal technologies in order to gain the maximum out of its already existing potential. A recent example of a partnership in the development of an innovative idea is the participation of Teleflex Medical (Ireland) in the Innovation Partnership programme. Teleflex has entered into a partnership with NUI Galway’s National Centre for Laser applications in developing a new kind of cardiac catheter, with holes at both ends. The solution is an expensive one for the Company to implement, but by entering into a partnership with the NUI laser centre which already has the equipment and trained personnel to tackle such a job, Teleflex has been able to develop this new product in a manner that is not counterproductive in terms of financial investment and people training required. In a similar manner, Qualcom, the maker of cell phone technology has partnered with Chicago, the musical play and movie as well as the Proctor and Gamble Company, in order to allow its mobile phone technology to be used by the other organizations.(Chesbrough, 2007:22). Chesbrough(2007) contends that in order to derive the maximum benefit out of open innovation trends, companies need to develop an open business model. A business model performs the functions of (a) creating value and (b) capturing a portion of that value. The first involves defining a series of activities starting from raw materials to produce new products that will also serve to create value. To supplement the value gained out of the innovative process, the Company must then consolidate its position in the market by establishing a unique position that will help it to gain the maximum advantage from the innovative asset/resource it possesses. Chesbrough (2007) contends that an open business model lends itself much more easily to creating and capturing value. Since different organizations possess different assets and resources, they will look at opportunities differently. While they may easily apply solutions and resources that have proved successful in the past, they will generally struggle with new and innovative concepts. However, applying Peter Senge’s definition of a learning organization, “…..people continually expand their capacity to create the results they truly desire, where new and expansive patterns of thinking are nurtured, where collective aspiration is set free” because this is necessary to .... make organizations flexible in a changing environment.” (Senge, 1990:4). He has also argued that such learning must not merely be geared towards survival in a changing, challenging environment, but needs to move beyond that to learning that “enhances our capacity to create.” (Senge, 1990:14). For example, Senge argues that one of the problems inherent in organizations is the tendency to look for simplistic solutions to what are complex problems. Hence the focus seems to be directed towards deriving short term, readily applicable solutions to problems rather than looking for the kind of solutions that would reduce long term costs. Senge provides the example of research and development costs which are often cut down as a part of a short term financial solution, but which can often be detrimental to the organization in the long term, because all short term improvements in systems will also be accompanied by significant long term costs and small changes will tend to build upon themselves; “a small action snowballs, with more and still more of the same, resembling compound interest.” (Senge, 1990:81). The learning at scale model poses that near constant innovation is the only way to respond to the near constant disruption posed by changes in the global environment (www.blogs.harvardbusiness.org). It must be noted however, that while the markets for innovation have existed for many years, such markets have historically been ineffective. According to Thoman, CEO of Xerox, maximizing value out of the Company’s innovative potential involves the ability to manage its own intellectual property (Rivette and Kline, 2000:54). Companies are increasingly learning how to exploit patents through methods like think clustering, bracketing and mapping so that they are able to derive revenues out of it. Intellectual property acquired through licenses and patents provides a Company with a source of revenue every time the product is used. Hence developing and protecting intellectual property developed through innovation is likely to benefit an organization financially, even in a recession. Birkinshaw (2002) points out that in today’s business atmosphere, most organizational functions include R&D functions may be global in scope, with R&D centres being spread out across different countries. Firms such as Erickson and ABB have more than twenty R&D sites that are dotted all across the world, hence as Birkinshaw states, structuring and integrating this dispersed network could pose quite a challenge. He is of the view that if such dispersed R&D centres are to be effectively managed, the issue is one of leveraging and exploiting the knowledge that is contained in these R&D centres. Two kinds of solutions can be developed (a) an integrated network of R&D units which functions as a virtual organization functioning under one coherent and integrated R&D strategy. The second one is a (b) loosely coupled network, where centres of excellence are developed. In this instance, individual R&D centres are given a lot more freedom than if they were functioning within an integrated network. They can develop innovative solutions centering around a particular technology they specialise in, because they have a greater degree of freedom to leverage the existing knowledge in developing innovative products. It may be noted that the second type of R&D network is likely to be much more amenable to the development of radical innovation projects which are inherently risky. This is the kind of product development where the potential revenues could be huge and provide an enormous competitive edge to an organization, but the costs and risks involved in the development of such products is also huge.(Keizer and Halmnan, 2007). Radical innovation especially involves the input of considerable knowledge and skills available at R&D centres, because “unprecedented improvements or performance features are achieved, representing major changes in technology regarding materials and functions, newness to the market, and substantial time and cost.” (Keizer and Halmann, 2007:32). However in developing these innovative products and services, there is a greater level of risk and uncertainty involved. This uncertainty in outcome arises because of the gap that exists between the available knowledge, skills and experience versus those that are required, whether these skills and resources pertain to technological, financial, market or other factors. There could be different types of R&D centres even among the loosely coupled ones, such as (a) self contained centres (b) modular centres and (c) home base centres. The self contained centres have a high level of autonomy because they perform a unique role with vertical specialization, where they work with a project through to commercialization. The modular centres do not perform a unique role with horizontal specialisation, where they focus on one step in the R&D chain. As opposed to a self contained centre, the modular centres have a relatively low level of autonomy (Birkinshaw 2002:251). The last one is similar to the self contained centres, but works on several projects rather than just one. The success of innovation at the R&D centres may largely depend upon how they are developed in these centres, but as Birkinshaw (2002) points out, in reality organizations with a network of R&D centres may show both self contained and modular centres functioning side by side. Birkinshaw (2002) provides the example of the ABB Company that is in the business of power generation, transmission and distribution and the R&D centres functioned as a loosely coupled network. But ABB had some IT based R&D which produced automation of the business, so that increasingly, more and more of the modular units have come under the integrated control and umbrella of the IT integrated network. Radical innovation is risky, but it may be very lucrative to an organization because it involves the economic concept of creative destruction, or the process of transformation that necessarily accompanies any kind of radical innovation. Schumpter characterized this process as follows: “The opening up of new markets and the organizational development from the craft shop and factory .............illustrate the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one ...” (Schumpter, 2006:82). The process of creative destruction and the innovation it generates can be lethal to established businesses, because it can enable a hitherto unknown market entity to seize and corner the market. A notable example of this is Google, which has established it firmly as a leader in the marketplace through its search engine. The company incurs considerable amounts of expenditure in recruiting people with the knowledge and skills to develop risky new ideas which the Company tests out with its financial clout, despite the element of risk and losses that may be involved. Risky innovation involving creative destruction could thus potentially create enormous value for an organization, if it is successful. Conclusions: On the basis of the submissions above, it may be noted that innovation is an essential aspect of business activity, because it provides a business with a strong competitive edge through the development of innovative new products and services in the marketplace. The recessionary atmosphere has led some organizations to make cuts in R&D, however in the long term it is those organizations that strengthen R&D activities which can survive a recessionary environment. Creative destruction may actually strengthen an organization if it is successful. From the discussion above, it may thus be concluded that the extent of R&D activity within a firm and its operational parameters will depend upon the desired technological objectives of the firm. The development of internal skills and knowledge would play a vital role in the design of innovative products, and extracting the best out of the R&D departments would also depend upon how they were designed. The network of R&D units could be centre based or modular, depending upon organizational needs, and in some instances both could also exist side by side. References: Birkinshaw, Julian, 2002. “Managing Internal R&D Networks in global firms: what sort of knowledge is involved?”, Long Range Planning, 35:245-267 Chesbrough, Henry W, 2007. “Why Companies should have open business models”, MIT Sloan Management Review, 48(2):22-30 Cosner, Raymond R, 2009. “Industrial research Institute’s R&D trends forecast for 2009”, Research Technology Management, 52(1): 19-27 Dugal, Sanjiv S and Morbey, Graham K, 1995. “Revisiting corporate R&D spending during a recession”, Industrial research Institute, Retrieved October 15, 2009 from: http://www.iriinc.org/Template.cfm?Section=Survive_and_Thrive&Template=/ContentManagement/ContentDisplay.cfm&ContentFileID=4100 Keizer, Jimme A and Halman, Johannes I M, 2007. “Diagnosing risk in radical innovation projects”, Research Technology Management, 50(5): 30-37 Rivette, Kevin G and Kline, David, 2000. “Discovering new value in intellectual property”, Harvard Business Review, January-February 2000: 54-68 Sadao, Nagaoka, 2009. “R&D in global recession and the role of Government”, research Institute of Economy, Trade and Industry, Retrieved October 15, 2009 from: http://www.rieti.go.jp/en/papers/contribution/nagaoka/02.html Schumpeter, Jose and Swedberg, Richard, 2006. “Capitalism, Socialism and democracy”, Routledge Senge, P. et al, 1994. “The Fifth Discipline Fieldbook: Strategies and Tools for Building a Learning Organization”, Pearson. The Big Shift: The new organizational model: learning at scale”, retrieved September 5, 2009 from: http://blogs.harvardbusiness.org/bigshift/2009/03/can-your-company-scale-its-lea.html Utterback, James M and Abernathy, William J, 1975. “A dynamic model of process and product innovation”, OMEGA the International Journal of Business Management Science, 3(6): 639-657 Read More