Research and development — What is it, and how can it benefit you?
Research and development, or R&D for short, is the field of the advancement of knowledge that a private or public sector organisation may undertake, in order to develop or create new products, processes or services, or to improve upon those already offered. In other words, R&D, as a concept, represents the pursuit of innovation within the context of business.
Research and development can be thought of as a cycle, with a constant study of the efficacy and efficiency of a company’s existing products and services leading to new ideas and experimentation, followed by research and more in-depth exploration of new ideas and potential products, to the eventual design and testing of new products. And then the cycle completes or repeats because of markets and competition.
This research and development cycle is often the earliest stage of the development for new products and services, and as such, is inherently risky as the outcomes are uncertain — there may be uncertainties around whether a new development is technologically or economically feasible, or even possible. Ideally, research and development will result in meaningful gains for the company, whether through new or improved products and services, valuable intellectual property or patents.
However, while investing in research and development does carry some inherent risk, a company not investing in research and development is guaranteed to not come up with anything new — and there is every chance it will stagnate and fall behind, as competitors continue to seek to increase their own market share.
Saving money on R & D in the short term can end up costing businesses severely in the longer term, as they become increasingly irrelevant and their previous customers move onto new products and services that are either better, or offer better value for money.
What does R&D look like in the industry
R&D is more important in some industries than others; but whatever the industry though, the world does not stand still, and other companies will no doubt be attempting to follow the example of an already successful competitor, and to improve on their pre-existing solutions, to take their market share from them.
Companies fall behind or fail completely for many reasons, and it can be difficult to apportion blame in the aftermath of a business’ collapse, but failure to adequately fund research and development can often be a contributing factor in the demise of a company.
It’s impossible to say whether for example, if the former Blockbuster CEO John Antioco had chosen to invest more in R&D, that they could have fought off competition from the likes of Netflix and remained competitive and relevant in the era of digital downloads and streaming services. Nor is it possible to say whether retailers such as BHS or Woolworths could have retained a space in the increasingly internet dominated retail market if they had spent more on R&D.
However, you only have to look at the companies that value R&D and allocate large budgets to this activity to see some very familiar, household names and market leaders, which shouldn’t surprise anyone. These companies are in their position because they continually invest in R&D to pursue new knowledge and new, improved products and services, in the hopes of remaining competitive and relevant, in the cut-throat world we live in.
Amongst the biggest spending companies worldwide, according to the 2018 EU Industrial R&D Investment Scoreboard, are South Korean tech behemoth Samsung at number one and Google parent company Alphabet at number two, while Volkswagen, the largest car manufacturer in the world, ranks third, and tech companies Microsoft, Huawei, Intel and Apple all rank within the top ten. As well as technology and automotive companies, pharmaceutical companies feature highly in the list of companies spending the most on R&D, for example, the two Swiss giants Roche and Novartis, German multinational Merck and American “big pharma” corporations Johnson & Johnson and Pfizer.
But is it all really down to R&D?
There is certainly a correlation between the highest performing companies and the amount that they spend on R&D, but, do the highest performing companies hold their positions because of the large amounts of capital they dedicate to investment in R&D, or are they able to dedicate the large amounts of money to R&D because of their leading position in the market?
The answer is probably a little bit of both; companies such as Apple and Google are well known for having ploughed money into R&D, and for having made major market gains as a result, as well as a few relative failures.
Research and development can gain a company intellectual property and patents, as well as allowing them to remain competitive in the market by creating actual new products or services for their customers, or becoming more efficient at producing or providing the products or services that they already offer.
The intellectual property and patents gained from research and development can become highly valuable in and of themselves, and provide a secondary source of income, often from competitors wishing to make use of technologies and developments made by the company holding the patent. The mobile phone market is infamous for its interconnected spider webs of patent claims made between the various manufacturers, often highly fought over in court.
It can be all too easy for a company to fall behind in the area of research and development; an already profitable business may be averse to spending money on something that will not provide immediate gain to the company, and may feel confident enough in their business and believe that they are still providing their customers with what they want.
There are indeed highly successful companies that spend little on R&D, Walmart being but one example. Walmart provides a service that technology and the internet can only offer so much in competition; people will always value having a bricks and mortar store to shop from. Even as they take advantage of the convenience that online retailers offer, a bricks and mortar store offers its own conveniences and that is unlikely to change anytime soon, Covid-19 pandemic notwithstanding.
Certain industries are less R&D intensive, particularly state-owned enterprises such as Russia’s Gazprom or Malaysia’s Petronas, although renewable energies are a notable exception. Opening a traditional chain of fried chicken shops may provide immediate revenue, but investing in a more “R&D intensive” business can have greater potential for long-term profit.
R&D for society as a whole
R&D benefits not just the investing company, but the economy as a whole and wider society. Technologies that make our lives easier, more healthy, or happier even; whether by reducing arduous labour, allowing easier and better quality long-distance communication between loved ones, reducing the burden of medical conditions, or allowing the attainment of greater knowledge at the touch of a button are a real benefit to humankind that investment in R&D has made possible, and that would not have been possible had companies only been looking for immediate profit.
At the company level, greater investment in R&D often provides a company with the knowledge it needs to remain competitive in the global market. This further benefits society by providing jobs, and also providing extra tax revenue to the government to spend on healthcare, social security, education and the general wellbeing of the nation as a whole.
With these benefits in mind, governments, including our own in the UK, often provide incentives in the form of tax relief or tax credits, to encourage companies to invest in the not immediately profitable R&D. In turn, we’ve developed our SaaS product called Novel to help companies in UK that want to learn more and do an R&D tax relief claim.