Explanation of Research and Development
- Research and Development (R&D) comes up with new ideas, products and processes.
- R&D does technical research to come up with new products. Many firms do some form of R&D, but businesses who want to innovate depend on it.
- Innovation is thinking of something or bringing out a product that is different to what's already on the market.
- R&D has to turn raw ideas into products or new processes. This can take a long time.
- R&D is related to market research, but they're not the same. Market research discovers what customers want and R&D comes up with new products to meet the customers' wants.
- R&D can also be used to come up with new production methods - e.g. to improve productive efficiency.
Innovation can be risky but can make big profits
- Research and Development is a very costly process.
- It's also a risky process - it's estimated that in the pharmaceutical industry, only 1 in 12 new drugs researched are actually thought to have commercial potential and developed. Companies can end up developing something customers don't want, or they might not be able to produce the product on a large scale at a low enough cost.
- However, market leaders normally invest in R&D. The most successful businesses have a large portfolio of products, balanced between innovative new products and proven older products.
- The ability to successfully launch a new product in the market is of great value. A company can charge a high price for its innovative product (market skimming), before competitors enter the market with similar products at competitive prices. The original Sony WALKMAN was a great example of this.
- Being innovative can be good for a firm's reputation - e.g. if they've been the first to launch exciting electrical products in the past, customers will naturally go to them if they want a cutting edge digital camera or whatever.
- Some industries are particularly fast moving, and need to constantly develop new products - e.g. the pharmaceutical industry, the microchip industry and the mobile telecommunications industry.
- Some organisations choose not to have a specific R&D department, but instead they adapt and modify new products brought out by their rivals. This may be because the business is risk averse, or because its shareholders prefer profits to be paid as dividends in the short term rather than invested for the long term.
New Product Development (NPD) Stages 1-3
1) Idea: The business comes up with new ideas, explores and develops existing ideas or modifies competitors' ideas. New ideas can come from brainstorming in a group, from employee suggestions or from R&D department meetings. New ideas are also discovered through market research finding out what customers want, or from customers submitting requests to a firm. Businesses can sometimes also use already patented ideas, for a fee.
2) Analysis and Screening: The business wants to see if the product can be produced and sold at a profit. All aspects of the idea are investigated - whether there's a potential market for it or not, based on market research, whether the technology and resources exist to develop it, whether a competitor has an existing patent on a similar idea. At this stage, a prototype may be made to see what the product will be like.
3) Development: The R&D department develop a working prototype. They test it scientifically, and tweak the design to make the functional design (how it works) and aesthetic design (how it looks, feels - or smells and tastes if it's a food) as good as possible. This is the real "meat" of research and development.
NPD Stages 4-6
4) Value Analysis: The business tries to make the product good value for money. They look at the cost of making, warehousing and distributing the product to make sure the whole process is good value - for both business and consumer.
5) Test Marketing (where the marketing department gets involved again): The business sometimes sells the new product in a limited geographical area, and then analyses consumer feedback on the product, price and packaging. This allows modifications to be made before a wider launch.
6) Launch: A successful launch requires enough stock of the product to be distributed across the market. It also needs an effective promotional campaign to inform retailers and consumers and persuade them to buy the product.
- Value analysis looks at factors which affect "value added" - how much the customer is prepared to pay for the product compared to how much it cost to make the product.
- Businesses do value analysis to assess how well the product does its job, whether consumers like the way it looks, and whether they'd be prepared to pay a little more for it.
- Value analysis investigates all the costs of production to see whether they could be reduced. For example, maybe cheaper materials or cheaper processes could be used.
- Value analysis has been blamed for reduction in quality - cheaper materials and cheaper labour sometimes create a tatty product or one that wears out quite quickly.
- However, some people argue that most customers will replace their laptop computer after 5 years whether it's worn out or not, so there's no point equipping it with a battery that lasts 50 years. Supplying a battery with a 5 year lifespan is an effective response to market research - it means the company is meeting customer needs exactly.
Innovation's effect on the finance department
- R&D for innovative products is expensive, so the finance department might need to raise extra working capital to pay for it.
- Innovation in production methods might mean that finance has to spend a lot on new capital (machinery). New machinery is expensive, but tends to make companies more cost-effective in the long-term.
Innovation's effect on the marketing department
- Companies might increase the amount of market research they do when researching an innovative idea - the risks and costs are high, so they need to be absolutely sure customers want or need the product.
- An innovative product can lead to big changes in the marketing mix. E.g. marketing will often use a different pricing strategy (usually skimming) for an innovative product. Promotional activities are affected too - there's often a lot of PR (public relations) activity when a radically new product is launched as everyone wants to feature it in their newspaper or on their TV show.
Innovation's effect on the HR department
- Innovation can mean there's a change in staffing needs - if a company suddenly decides to focus heavily on R&D they might need more skilled staff.
- HR need to make sure that the business has the right culture for innovation to be successful. In a culture where staff are scared of the consequences of failing (e.g. that it might lead to dismissal), workers are unlikely to want to take risks. It's the job of HR to find ways of encouraging employees to take risks, e.g. by rewarding people who try new things, even if they don't work.