5.6. Research and Development (HL only)

Research and Development

The importance of research and development for a business

Take a moment to consider the changes you have already seen in products you use. Have you already gone through different mobile telephone models? What about how you listen to your music and the websites you browse? Have they changed to improve your satisfaction? Less obvious may be the clothes you wear or the food you each, and the changes these products have also undergone. What about the school you attend? Is technology being used more frequently or have you noticed any changes in the way your teachers are taught you and how your younger sibling is being taught? If you have one, otherwise you may not notice.

Well the point here is that change is continuous, especially in business and the production of goods and how services are being rendered. We only have to look back historically at how classrooms used to be managed, what cars we now ride or drive in to see the difference. We also only need to see how some products are obsolete or transformed to understand the importance of research and development and the changes that must also have taken place in operations and management.

Research is a process of inquiry and the search for new and creative ideas to either address a problem or create and opportunity. If businesses fail to invest in research and development (R&D) the competition will overtake and outcompete them very quickly through numerous areas such as, consumer preference and costs savings.

The importance of developing goods and services that address customers’ unmet needs (of which the customers may or may not be aware)

In our marketing section we discussed the concept of market-led and product-led product development. Through R&D, business uses its core competencies or skills and talent to create products that are noted through market research to be desirable or by creating a product or service that the consumer may not have known would be useful. The development Apple ipad is such a concept.

What is Research & Development?

• ‘Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.
• Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services prior to the commencement of commercial production or use.

Development Phase

Development activities tend to be much further advanced than the research stage. Where the entity can demonstrate that it is probable that future economic benefits will flow to the entity from the project, the entity may be able to recognize an intangible asset. Development activities include:

1. The design, construction and testing of pre-production prototypes and models
2. The design of tools, jigs, moulds and dies involving new technology
3. The design, construction and operation of a pilot plant that is not of a scale economically feasible for commercial production
4. The design, construction and testing of a chosen alternative for new/improved materials.

Importance of

• Research and Development leads to the development of new products. Firms which are able to develop new products ahead of their rivals will enjoy a competitive advantage in the market.
• Some Research & Development projects develop new materials. Synthetic materials have helped to reduce the use of natural resources.
• In some industries research projects are designed to develop new types of machines. New technology is capable of cutting costs and raising productivity. In addition, new machinery is often safer, cleaner and more ergonomically designed.
• It is often argued that expenditure on R & D helps to enhance a firm’s image. Consumers may be impressed by businesses which are committed to R & D.
• Motivation: investment in R & D creates opportunities for creativity and invention. Many employment positions in the R & D department will help staff to satisfy their higher order needs such as self-esteem and self-actualisation.
• Consumer benefits: Consumers enjoy an increasing variety of goods and services as new products come onto the market. They are likely to pay a lower price for products new technology lowers cost. They may also enjoy better quality products resulting from higher grade materials and more effective production methods.’

Source: CIMA Enterprise Operations Study Text, BPP Learning Media, 2013.

Intellectual property rights

• A patent is a license which prevents other firms from copying the product.
• Copyright prevents the re-use of published works without the author’s consent.
• Trademarks generally signify a manufacturer’s name. The right to sell another company’s products may have to be registered if they carry a trademark and a fee may be charged.

Some benefits of IP to businesses

• A higher level of sales
• Reduced competition
• Legal protection which encourages continued research
• Higher profits can be ploughed back into further R & D
• The industry benefits from the technical information as a result of the patent.

Source: CIMA Enterprise Operations Study Text, BPP Learning Media, 2013.

Task 3: What can be the implications for a firm of another entity infringing its patent(s)?

Research & Development spending at Tesla

Task 4: Tesla's decision to share its patents with other car producers. What are Elon Musk's reasons for this and in your opinion was it a good long-term strategic decision?

Innovation

‘Innovation is:

(a) The process of making improvements by introducing something new.

(b) Change that creates a new dimension of performance – Peter Drucker

While innovation typically adds value, innovation may also have a negative or destructive effect as new developments clear away or change old organisational forms and practices.

A key challenge in innovation is maintaining the balance between process and product innovations:

(a) Process innovation involves the implementation of a new or significantly improved production method.

(b) Product innovation involves the introduction of a new good or service that is new or substantially improved.

Factors affecting innovation adoption in an organisation

(1) Ability of the organisation to embrace change/conflict. Conflict jump-starts the creative process. A certain Law of Cybernetics states that any system must encourage and incorporate variety internally if it is to cope with variety externally. Institutionalised conflict is an integral part of Japanese management philosophy. At Honda any employee can call for a waigaya session. This involves the participants discussing openly the problems with the product/system in sometimes a highly conflictual environment.

(2) Organisational Structure: one of the Japanese’s chief organisational principles is redundancy – overlapping charters, business activities and managerial assignments, duplicative databases and parallel lines of inquiry. Redundancy spurs tension and encourages frequent dialogue and communication.

(3) Shared understandings/objectives. Those in charge of innovation must co-produce technologies and work practices by developing them with partners throughout the organisation – a shared understanding of why these innovations are important. Essentially corporate research must prototype new mental models of the organisation and its business.

(4) Responsive to the customer. Innovation will be adopted more vigorously if the organisation’s ultimate innovation partner is the customer. One role of corporate research is to invent methods and tools to help customers identify their latent needs. Future success will be dependent on co-producing these products with customers – customising technology and work practices to meet their current and future needs.

(5) Whether the innovation is incremental or radical. Incremental innovation is a step along a technology trajectory with little uncertainty about outcomes and success and generally are minor improvements responding to short-term goals. Radical innovation involves considerable change in basic technologies and methods usually created by those working outside mainstream industry and existing paradigms.

(6) Chance of failure. Failure is an inevitable part of the innovation process and most successful organisations factor in an appropriate level of risk. The impact of failure goes beyond simple investment. Failure can also lead to loss of morale among employees, an increase in cynicism and even higher resistance to change.

(7) Budgetary constraints. The average investment across all types of organisations is 4%. However, lower levels of turnover can reduce allocation to the areas of innovation in an organisation (marketing, product design, information systems, manufacturing systems and quality assurance)

(8) Cultural infrastructure. The following attributes in the cultural infrastructure will cause innovation experiments to fail:

(a) Poor leadership

(b) Poor organisation

(c) Poor communication

(d) Poor empowerment

(e) Poor knowledge management

(9) View of innovation process. Innovation can fail if seen as an organisational process whose success stems from a mechanistic approach i.e. “pull lever obtain result”

(10) Market situation. Many ideas wait at the end of the development phase for market conditions to be judged right. There are currently many new products languishing in the laboratories of Philips and Nokia waiting for their moment to begin replacing or even disrupting existing technology.’

Source: Hall, D., Raffo, C., and Jones, R. Business Studies, 3^rd Edition, Causeway Press, 2004.

Why do organisations fail to innovate?

1. Implementing an innovation strategy can be expensive in terms of financial resources, time and energy. If an organisation does not have sufficient money to fund a programme of innovation or does not have appropriate human resources, it may find itself lagging behind in innovation.

2. There may be a failure to recognize opportunities. If organisations are not skilled at recognising and evaluating opportunities, they may be overly cautious and fail to invest in ideas that turn out later to be successful for other companies.

3. Many organisations tend to resist change. Innovation means giving up old products and old ways in favour of new ways of doing things. Resistance to change can slow down the innovation process.

Organisations can, however, actively promote the innovation process. There are at least three strategies – reward systems, intrapreneurship and organisational culture.

Reward Systems

Organisations use rewards to encourage and discourage certain behaviours in employees. Rewards can be used to promote creativity and innovation by providing financial and non-financial rewards to people and groups who directly innovate ideas. If employees perceive a link between new ideas and rewards they are more likely to be creative. It is also important that organisations do not resort to punishment when creativity does not result in highly successful innovations.

Intrapreneurship

Intrapreneurship helps organisations to be innovative. We can define it as a process where individuals or groups develop a new product or business within the context of a larger organisation. A number of roles need to be performed:

▪ An inventor: this individual actually conceives of and develops the new idea, product or service by means of the creative process. This individual may have the expertise/motivation to pursue the idea further.

▪ A product champion: this person is usually a middle manager who learns about the project and becomes committed to it. He or she helps overcome organisational resistance and convinces others to take the innovation seriously. Product champions are skilled in knowing how the organisation works.

▪ A sponsor: this is a top level manager who approves of and supports a project. This manager will find the budget needed to develop an idea and overcome arguments against the project. He or she uses organisational policies to ensure its survival with a sponsor so that the inventor’s idea has a better chance of being developed.

Organisational Change

A strong, appropriately focused culture can be used to support creative and innovative activity. A well-managed culture can communicate a sense that innovation is valued and will be rewarded and that failure is not only acceptable but expected. Innovation cultures value individual creativity, risk taking and inventiveness.

Task 6: Innovation in China

Everyone should read the first article 'Does Chinese innovation focus on quantity over quality'. Afterwards, get into groups and take one of the other five articles on innovation in Chinese companies. Answer the question:

Is Chinese innovation quantity over quality?

The difference between adaptive creativity (adapting something that exists) and innovative creativity (creating something new)

As in the case of reverse engineering mentioned previously, adaptive creativity is the tendency to examine and adopt or improve upon existing products or services that serve as examples or benchmarks. A business will generally want to adopt the industry standard. It is focused on improving upon a process or product and can in turn result in the business becoming the benchmark or standard by which others compare themselves.

Innovative creativity is related to the other concept we mentioned called creative destruction. This is to “think outside of the box”. Companies such as 3M have a reputation for thinking outside of the box and coming up with a variety of “new” innovations.

How pace of change in an industry, organizational culture and ethical considerations may influence research and development practices and strategies in an organization

As business faces global challenges and as the pace of technological change appears to be moving closer towards the dreaded technological singularity, questions are raised on the nature and ethics of R&D.

Historically, changes that originated from an innovation paradigm created vast disruption in society. These changes were by and large positive, but were also to bring with them other complications. Take for example the automobile and the incredible mobile revolution the vehicle has brought to millions on the planet. This change was not only resisted and protested against but has also brought with it unprecedented levels of CO emissions that adversely effects our environment. On the other hand, labor has benefited tremendously and the mobility of the population cannot be understated.

Overall, the pace of change must always take into account increased human costs on ever higher and higher productivity rate demands. The goals of achieving ever-higher profitability margins at a cost to human beings and the environment is unethical if its does not consider all foreseeable externalities.

Business is compelled to compete in this age of technological change. By continuously seeking adaptive and innovative solutions a business can leverage itself through aggressive R&D and in turn with the sound adoption of ethics, it can firmly root in is manufacturing culture sustainable practice. A real cultural transformation must occur inside and outside the company for ethical considerations and R&D to be sustainable.

Source - https://drmullibusinessmanagement.wikispaces.com/5.6+Research+and+Development+%28HL+Only%2

Task 10: Gillette Managing Product Innovation

Gillette has always believed that continuous new product development resulting from extensive R&D is necessary to differentiate itself from its competitors. True to its corporate mantra of ‘innovation is Gillette’, the company has introduced some of the most successful and widely acclaimed innovative products in the consumer products industry. Its product range, protected by trademarks, is legendary with such brands as Sensor, SensorExcel, Mach 3 and Gillette for Women Venus.

The company’s policy is to generate 40% of its sales from products launched within the last five years. One reason for Gillette’s strong focus on new product development is that the competition has successfully learned to copy its products very quickly. For example, Schick (part of Warner lambert, later taken over by Pfizer but known as Wilkinson Sword in many parts of the world) had imitated Gillette’s Track II twin-blade razor within five months of the product’s launch. Thus, the product life cycle of many Gillette’s fast moving consumer goods is relatively short.

Further product launches have added to the brand value of Gillette. It has succeeded, in some markets, in making razors less of a commodity product – which consumers just buy on price and convenience considerations – but a branded product that consumers will pay a premium price for. It has also had success in process innovation, developing new manufacturing techniques that greatly reduce the need for labour in the production process. Gillette was also the firm who managed to reposition the razor as an essential in women’s grooming, and faced much criticism from feminist groups in their marketing practices used to change perceptions.

On a positive note, Gillette has been quick to respond to the exploitative use of animals in their R&D laboratories when developing and testing new products. Animals no longer factor in their R&D process and sophisticated software and powerful computer processing can model the effects of chemical and biochemical interactions of new skin and hair products on people.

1. Define the following terms:

i. Research and development –

ii. Innovation - [4 marks]

2. Outline three types of innovations evident in the Gillette case study. [6 marks]

3. Distinguish between adaptive creativity and innovative creativity. [5 marks]

4. Discuss how the pace of industry change and ethical considerations may influence research and development practices and strategies at Gillette. [10 marks]

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