Question

Explain the role of R&D within a corporation. Does more research and development automatically create shareholder value? Please Discuss

Answer 1

R&D (Research & Development) plays a very important role in the success of a business. R&D contributes to sustainability of business. Many companies do not understand the importance of R&D until it is too late.

It is the R&D function that provides a platform for creativity and innovation to flourish in an organisation. Innovative breakthroughs have happened only because of painstaking efforts of the R&D function. Perseverant efforts are needed when one is in pursuit of research. Every failure in a R&D effort increases the pressure to perform.

R&D helps a business to have a competitive edge over its competitors. It is the R&D function that develops plans much ahead other functions. The R&D function needs to have a clear foresight about future problems that need solutions. R&D (in its development role) can act as a catalyst for speeding up the growth of organisation by way of introducing breakthrough products in the market.

R&D is very relevant in today’s competitive scenario when customers are hankering after new products and new technologies. The firm that can successfully leverage its R&D efforts by translating the efforts in building new products will find itself ahead of its competitors. Expenses on R&D can be considered not as expenditure but as an investment.

The ROI on R&D efforts can take a while to materialise. But once success is achieved, the financial returns can be quite high. Pharmaceutical companies, chemical companies, automotive companies, lubricant companies invest massive amounts of capital expenditure and revenue expenditure for this reason. These companies strive to be ahead of others in their learning curve.

Some companies are technology leaders, while others are followers. Some industries prove to be laggards (they are the ones to wake up to the market realities a way bit late).

Let us take the case of mobile phones. Today there are different types of models that are being launched in market are the result of intensive R&D efforts. Apple, Sony, 3M are the companies that are known for their breakthrough technologies - some of these technologies are albeit disruptive because they make the existing technologies redundant.

3M’s scrotchbrite is one example that brought in the hygiene factor and capitalized on it.The turnaround time for new products in toothpastes (dental care products) has considerably shortened. Many firms have converted problems into opportunities only because of their R&D efforts. These companies eventually became technology leaders as they created a churn in the market

All the modern inventions –laptops, palmtops, music players, iPods, mp3players, automatic washing machines, dishwashers, water filters are all examples of R&D efforts that had a successful outcome. Who would have thought that mosquitoes would provide an opportunity for new product development in the form of mosquito mats, repellent creams, vaporizers etc.

Digital photography has made the conventional technique redundant. Computers have confined the typewriters to the museum. E-mail has rendered the snail mail defunct.

The world moves on only through scientific inventions and discoveries which are result of sustained R&D effort .Only this leads to long term business sustainability. Sometimes R&D efforts are also necessitated to meet the regulatory norms eg: green technologies that reduce pollution. Hybrid cars, electric cars, catalytic converters in cars are examples of successful R&D efforts

The true test of R&D function lies in time to market. Business exists for the sake of making profits. So, the role of R&D in shortening the time to market becomes extremely important. Unless the R&D efforts in the lab cannot be scaled up within a reasonable time frame, little can be expected in terms of the functional credit to be assigned to R&D.

In India, the problems faced by R&D functions are one too many. It is high time the scenario changed. Germany is known for world class engineering and US is known for its research agenda. India, despite having a talent pool, still lacks in indigenous research. We have a situation where foreign companies like GE and Shell come and set up R&D centers here and gain competitive advantage globally.

R&D becomes extremely relevant to make an organization future ready, to equip the business with the wherewithal required for commercialization of lab efforts through large scale production.

R&D function can reasonably predict future technology trends. In an environment filled with resource constraints, R&D efforts in the right direction will enable allocation of scarce resources for the right purpose.

R&D helps a business earn revenues through licensing of technology, technology transfer too. The information technology has developed so much in the last few years that change has become the norm in such sectors. There needs to be greater co ordination between academic research and industry research.

Companies tend to focus more on “development” and less on “research” mainly to meet short term operational goals. It must be understood clearly that R&D has a strategic orientation and using the R&D function to meet short term operational goals is anything but a wise more. Some firms use R&D as a cost center because of the depreciation allowance given by the Income Tax dept. This is indeed sad.

R&D CREATES SHREHOLDER VALUE

We examined the impact on the market value of firms' stock of announcements about R&D projects made in the innovation and commercialization stages of the R&D process. Technology- and market-related variables were tested as predictors of the wealth impact of R&D announcements. Our analysis indicates that the stage of the R&D process moderates the relationship between the wealth effects and technology and market variables. The former are more important than market variables in the innovation stage, and both are important during commercialization