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• Research and Development (R&D) | Overview & Process

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Companies often spend resources on certain investigative undertakings in an effort to make discoveries that can help develop new products or way of doing things or work towards enhancing pre-existing products or processes. These activities come under the Research and Development (R&D) umbrella.

R&D is an important means for achieving future growth and maintaining a relevant product in the market . There is a misconception that R&D is the domain of high tech technology firms or the big pharmaceutical companies. In fact, most established consumer goods companies dedicate a significant part of their resources towards developing new versions of products or improving existing designs . However, where most other firms may only spend less than 5 percent of their revenue on research, industries such as pharmaceutical, software or high technology products need to spend significantly given the nature of their products.

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In this article, we look at 1) types of R&D , 2) understanding similar terminology , 3) making the R&D decision , 4) basic R&D process , 5) creating an effective R&D process , 6) advantages of R&D , and 7) R&D challenges .

TYPES OF R&D

A US government agency, the National Science Foundation defines three types of R&D .

Basic Research

When research aims to understand a subject matter more completely and build on the body of knowledge relating to it, then it falls in the basic research category. This research does not have much practical or commercial application. The findings of such research may often be of potential interest to a company

Applied Research

Applied research has more specific and directed objectives. This type of research aims to determine methods to address a specific customer/industry need or requirement. These investigations are all focused on specific commercial objectives regarding products or processes.

Development

Development is when findings of a research are utilized for the production of specific products including materials, systems and methods. Design and development of prototypes and processes are also part of this area. A vital differentiation at this point is between development and engineering or manufacturing. Development is research that generates requisite knowledge and designs for production and converts these into prototypes. Engineering is utilization of these plans and research to produce commercial products.

UNDERSTANDING SIMILAR TERMINOLOGY

There are a number of terms that are often used interchangeably. Thought there is often overlap in all of these processes, there still remains a considerable difference in what they represent. This is why it is important to understand these differences.

The creation of new body of knowledge about existing products or processes, or the creation of an entirely new product is called R&D. This is systematic creative work, and the resulting new knowledge is then used to formulate new materials or entire new products as well as to alter and improve existing ones

Innovation includes either of two events or a combination of both of them. These are either the exploitation of a new market opportunity or the development and subsequent marketing of a technical invention. A technical invention with no demand will not be an innovation.

New Product Development

This is a management or business term where there is some change in the appearance, materials or marketing of a product but no new invention. It is basically the conversion of a market need or opportunity into a new product or a product upgrade

When an idea is turned into information which can lead to a new product then it is called design. This term is interpreted differently from country to country and varies between analytical marketing approaches to a more creative process.

Product Design

Misleadingly thought of as the superficial appearance of a product, product design actually encompasses a lot more. It is a cross functional process that includes market research, technical research, design of a concept, prototype creation, final product creation and launch . Usually, this is the refinement of an existing product rather than a new product.

MAKING THE R&D DECISION

Investment in R&D can be extensive and a long term commitment. Often, the required knowledge already exists and can be acquired for a price. Before committing to investment in R&D, a company needs to analyze whether it makes more sense to produce their own knowledge base or acquire existing work. The influence of the following factors can help make this decision.

Proprietariness

If the nature of the research is such that it can be protected through patents or non-disclosure agreements , then this research becomes the sole property of the company undertaking it and becomes much more valuable. Patents can allow a company several years of a head start to maximize profits and cement its position in the market. This sort of situation justifies the cost of the R&D process. On the other hand, if the research cannot be protected, then it may be easily copied by a competitor with little or no monetary expense. In this case, it may be a good idea to acquire research.

Setting up a R&D wing only makes sense if the market growth rate is slow or relatively moderate. In a fast paced environment, competitors may rush ahead before research has been completed, making the entire process useless.

Because of its nature, R&D is not always a guaranteed success commercially. In this regard, it may be desirable to acquire the required research to convert it into necessary marketable products. There is significantly less risk in acquisition as there may be an opportunity to test the technology out before formally purchasing anything.

Considering the long term potential success of a product, acquiring technology is less risky but more costly than generating own research. This is because license fees or royalties may need to be paid and there may even be an arrangement that requires payments tied to sales figures and may continue for as long as the license period. There is also the danger of geographical limitations or other restrictive caveats. In addition, if the technology changes mid license, all the investment will become a sunk cost. Setting up R&D has its own costs associated with it. There needs to be massive initial investment that leads to negative cash flow for a long time. But it does protect the company from the rest of the limitations of acquiring research.

All these aspects need to be carefully assessed and a pros vs. cons assessment needs to be conducted before the make or buy decision is finalized.

BASIC R&D PROCESS

Foster Ideas

At this point the research team may sit down to brainstorm. The discussion may start with an understanding and itemization of the issues faced in their particular industry and then narrowed down to important or core areas of opportunity or concern.

Focus Ideas

The initial pool of ideas is vast and may be generic. The team will then sift through these and locate ideas with potential or those that do not have insurmountable limitations. At this point the team may look into existing products and assess how original a new idea is and how well it can be developed.

Develop Ideas

Once an idea has been thoroughly researched, it may be combined with a market survey to assess market readiness. Ideas with true potential are once again narrowed down and the process of turning research into a marketable commodity begins.

Prototypes and Trials

Researchers may work closely with product developers to understand and agree on how an idea may be turned into a practical product. As the process iterates, the prototype complexity may start to increase and issues such as mass production and sales tactics may begin to enter the process.

Regulatory, Marketing & Product Development Activities

As the product takes shape, the process that began with R&D divides into relevant areas necessary to bring the research product to the market. Regulatory aspects are assessed and work begins to meet all the criteria for approvals and launch. The marketing function begins developing strategies and preparing their materials while sales, pricing and distribution are also planned for.

The product that started as a research question will now be ready for its biggest test, the introduction to the market. The evaluation of the product continues at this stage and beyond, eventually leading to possible re-designs if needed. At any point in this process the idea may be abandoned. Its feasibility may be questioned or the research may not reveal what the business hoped for. It is therefore important to analyze each idea critically at every stage and not become emotionally invested in anything.

CREATING AN EFFECTIVE R&D PROCESS

A formal R&D function adds great value to any organization. It can significantly contribute towards organizational growth and sustained market share. However, all business may not have the necessary resources to set up such a function. In such cases, or in organizations where a formal R&D function is not really required, it is a good idea to foster an R&D mindset . When all employees are encouraged to think creatively and with a research oriented thought process, they all feel invested in the business and there will be the possibility of innovation and unique ideas and solutions. This mindset can be slowly inculcated within the company by following the steps mentioned below.

Assess Customer Needs

It is a good idea to regularly scan and assess the market and identify whether the company’s offering is doing well or if it is in trouble. If it is successful, encourage employees to identify reasons for success so that these can then be used as benchmarks or best practices. If the product is not doing well, then encourage teams to research reasons why. Perhaps a competitor is offering a better solution or perhaps the product cannot meet the customer’s needs effectively.

Identify Objectives

Allow your employees to see clearly what the business objectives are. The end goal for a commercial enterprise is to enhance profits. If this is the case, then all research the employees engage in should focus on reaching this goal while fulfilling a customer need.

Define and Design Processes

A definite project management process helps keep formal and informal research programs on schedule. Realistic goals and targets help focus the process and ensures that relevant and realistic timelines are decided upon.

Create a Team

A team may need to be created if a specific project is on the agenda. This team should be cross functional and will be able to work towards a specific goal in a systematic manner. If the surrounding organizational environment also has a research mindset then they will be better prepared and suited to assist the core team when ever needed.

Whenever needed, it may be a good idea to outsource research projects. Universities and specific research organizations can help achieve research objectives that may not be manageable within a limited organizational budget.

ADVANTAGES OF R&D

Though setting up an R&D function is not an easy task by any means, it has its unique advantages for the organization. These include the following.

Research and Development expenses are often tax deductible. This depends on the country of operations of course but a significant write-off can be a great way to offset large initial investments. But it is important to understand what kind of research activities are deductible and which ones are not. Generally, things like market research or an assessment of historical information are not deductible.

A company can use research to identify leaner and more cost effective means of manufacturing. This reduction in cost can either help provide a more reasonably priced product to the customer or increase the profit margin.

When an investor sets out to put their resources into any company, they tend to prefer those who can become market leaders and innovate constantly. An effective R&D function goes a long way in helping to achieve these objectives for a company. Investors see this as a proactive approach to business and they may end up financing the costs associated with maintaining this R&D function.

Recruitment

Top talent is also attracted to innovative companies doing exciting things. With a successful Research and Development function, qualified candidates will be excited to join the company.

Through R&D based developments, companies can acquire patents for their products. These can help them gain market advantage and cement their position in the industry. This one time product development can lead to long term profits.

R&D CHALLENGES

R&D also has many challenges associated with it. These may include the following.

Initial setup costs as well as continued investment are necessary to keep research work cutting edge and relevant. Not all companies may find it feasible to continue this expenditure.

Increased Timescales

Once a commitment to R&D is made, it may take many years for the actual product to reach the market and a number of years will be filled with no return on continued heavy investment.

Uncertain Results

Not all research that is undertaken yields results. Many ideas and solutions are scrapped midway and work has to start from the beginning.

Market Conditions

There is always the danger that a significant new invention or innovation will render years of research obsolete and create setbacks in the industry with competitors becoming front runners for the customer’s business.

It is important for any business to understand the advantages and disadvantages of engaging in Research and Development activities. Once these are studied, then the step can be taken towards becoming and R&D organization.

In the meanwhile, it is good practice to inculcate a research mind set and research oriented thinking within all employees, no matter what their functional area of expertise. This will help bring about new ideas, new solutions and an innovative way of approaching all business problems, whether small or large.

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Intuitively, research and development is a building block of a productive future. But exactly how important is it, and can we put a number on it? Heidi Williams is a professor of economics at Dartmouth College, and an expert on innovation policy. She is also a visiting fellow at the Congressional Budget Office. Today on the show, she joins Soumaya Keynes to discuss public and private funding for R&D, how the two sources interact, and what we can know about how much it’s all worth to the economic future of a country.

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The Keys and Benefits of Research and Development (R&D)

• March 19, 2024

Innovation is the lifeblood of success in today’s competitive business landscape. Companies striving to stay ahead of the curve recognize that investing in Research and Development (R&D) is not just a strategic move but a necessity. R&D programs hold the key to unlocking groundbreaking ideas, driving growth, and maintaining a competitive edge. At Lurtis AI, we delve into the intricacies of R&D to illuminate its significance and highlight the benefits it offers to businesses across industries.

Fueling Innovation:

R&D serves as the engine of innovation, propelling companies forward by fostering the creation of new products, services, and technologies. By investing in R&D initiatives, businesses can explore uncharted territories, push boundaries, and pioneer groundbreaking solutions that address emerging challenges and meet evolving customer needs.

Driving Growth:

Innovation is intrinsically linked to growth, and R&D plays a pivotal role in fueling expansion and market penetration. Companies that prioritize R&D are better positioned to capitalize on emerging trends, seize new opportunities, and capture larger market shares. Through continuous innovation, businesses can differentiate themselves from competitors, attract new customers, and drive sustainable growth.

Enhancing Competitiveness:

In today’s dynamic business environment, staying competitive requires more than just keeping up with the latest trends – it demands staying one step ahead. R&D enables companies to stay at the forefront of industry advancements, anticipate market shifts, and adapt proactively to changing consumer preferences. By embracing innovation through R&D, businesses can solidify their competitive position and maintain relevance in an ever-evolving marketplace.

Cultivating Talent and Expertise:

R&D initiatives provide valuable opportunities for talent development and knowledge acquisition. Engaging in R&D projects allows employees to sharpen their skills, deepen their expertise, and explore new areas of interest. By fostering a culture of innovation and learning, companies can attract top talent, retain key employees, and cultivate a workforce that drives continuous improvement and innovation.

Mitigating Risks:

Innovation inherently involves risks, but strategic R&D efforts can help mitigate these risks by enabling companies to anticipate challenges, test hypotheses, and validate concepts before full-scale implementation. By conducting thorough research and experimentation, businesses can minimize the likelihood of costly failures and maximize the potential for success.

Securing Competitive Advantage:

In today’s hyper-competitive business landscape, securing a competitive advantage is essential for long-term success. R&D empowers companies to differentiate themselves through unique value propositions, proprietary technologies, and innovative solutions that set them apart from competitors. By continuously innovating and evolving, businesses can establish themselves as industry leaders and pioneers in their respective fields.

Driving Economic Growth:

Beyond individual companies, R&D plays a critical role in driving economic growth at both the regional and national levels. By investing in innovation, businesses contribute to job creation, stimulate economic activity, and drive productivity gains that benefit society as a whole. R&D-intensive industries serve as catalysts for innovation ecosystems, attracting investment, fostering collaboration, and driving overall prosperity.

At Lurtis AI, we’re committed to empowering businesses to harness the power of R&D and unlock their full potential. Let us help you turn visionary ideas into tangible realities that propel your business forward.

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What is the Research and Development (R&D) Process?

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• Investing in R&D
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Why You Should Invest in Research and Development (R&D)

Research and development (R&D) is the part of a company's operations that seeks knowledge to develop, design, and enhance its products, services, technologies, or processes. Along with creating new products and adding features to old ones, investing in research and development connects various parts of a company's strategy and business plan.

According to the latest Business Enterprise Research and Development survey by the National Center for Science and Engineering and the U.S. Census Bureau, businesses spent $32.5 billion to support their R&D activities in 2020.

Here are some reasons your business should invest in research and development.

Key Takeaways

• Research and development (R&D) is an essential driver of economic growth as it spurs innovation, invention, and progress.
• R&D spending can lead to breakthroughs that can drive profits and well-being for consumers.
• Today, R&D is present in nearly every business sector as companies jockey for position in their respective markets.
• Smaller firms engaged in R&D can offset some of these costs and attract investors thanks to a federal tax break.

Investing in Research and Development (R&D)

The Internal Revenue Service's definition of research and development is investigative activities that a person or business chooses to do with the desired result of a discovery that will create an entirely new product, product line, or service.

However, the activities don't only need to be for disovering new products or services—this is only for tax purposes.

R&D isn’t just about creating new products; it can be used to strengthen an existing product or service with additional features.

Research refers to any new science or thinking that will result in a new product or new features for an existing product. Research can be broken down into either basic research or applied research. Basic research seeks to delve into scientific principles from an academic standpoint, while applied research aims to use that basic research in a real-world setting.

The development portion refers to the actual application of the new science or thinking so that a new or increasingly better product or service can begin to take shape.

Research and development is essentially the first step in developing a new product, but product development is not exclusively research and development. An offshoot of R&D, product development can refer to the entire product life cycle , from conception to sale to renovation to retirement.

R&D Offers Productivity, Product Differentiation

Firms gain a competitive advantage by performing in some way that their rivals cannot easily replicate. If R&D efforts lead to an improved type of business process—cutting marginal costs or increasing marginal productivity—it is easier to outpace competitors.

R&D often leads to a new type of product or service—for example, without research and development, cell phones or other mobile devices would never have been created. The internet, and even how people live today, would be completely different if businesses had not conducted R&D in the past.

Research results give businesses a means to find issues people have and ways to address them, and development allows companies to find unique and different ways to fix the problems.

This leads to many different product and service variations, which gives consumers choices and keeps the markets competitive. Some examples of companies that carry out R&D activities are auto manufacturers, software creators, cutting-edge tech companies, and pharmaceutical firms.

The R&D Tax Credit

In 1981, the IRS started offering tax breaks for companies to spend money and hire employees for research and development. Qualifying companies include startups and other small ventures with qualified research expenses. Such expenses can be used to offset tax liabilities , along with an impressive 20-year carry-forward provision for the credit.

Many entrepreneurs and small businesses have made a large sum of money in a short time by selling good ideas to established firms with many resources. Buyouts are particularly common with online companies, but they can be seen wherever there is a lot of incentive to innovate.

Research and development can help your ideas or business become more attractive to investors and other companies looking to expand.

Advertising and Marketing R&D Benefits

Advertising is full of claims about revolutionary new techniques or never-before-seen products and technologies. Consumers demand new and improved products, sometimes simply because they are new. R&D departments can act as advertising wings in the right market.

R&D strategies let companies create highly effective marketing strategies around releasing a new or existing product with new features. A company can create marketing campaigns to match innovative products and market participation.

What Are the Reasons for R&D?

Research and development keep your business competitive. Without R&D, you risk losing your competitive advantage and falling behind other companies researching and developing new products in your industry.

Why Is R&D Important for Startups?

R&D is essential because it helps you keep your business momentum going. New products and services help you attract more customers, make sales, and give you something to talk about with your investors.

What Factors are Essential in Successful R&D?

Successful research and development depend on many factors, but the most important is a strong interest from your customer base and investors. If you spend money and time researching and developing something no one wants, it's being wasted.

Increased market participation, cost management benefits, advancements in marketing abilities, and trend-matching are all reasons companies invest in R&D. R&D can help a company follow or stay ahead of market trends and keep the company relevant.

Although resources must be allocated to R&D, the innovations gained through this research can actually work to reduce costs through more efficient production processes or more efficient products. R&D efforts can also reduce corporate income tax, thanks to the deductions and credits they generate.

National Center for Science and Engineering. " Businesses Invested $32.5 Billion in Assets to Support Their R&D Activities in the United States in 2020 ."

Tax Foundation. " Reviewing the Federal Tax Treatment of Research & Development Expenses ."

Internal Revenue Service. " About Form 6765, Credit for Increasing Research Activities ."

Internal Revenue Service. " Instructions for Form 3800 (2022) ," Page 2.

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Research and Development: Characteristics, Organization, and Outcome

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• Edwin Mansfield 6 ,
• John Rapoport 7 ,
• Jerome Schnee 8 ,
• Samuel Wagner 9 &
• Michael Hamburger 10  

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As pointed out in the previous chapter, recent years have witnessed a very great interest among economists in industrial research and development, a considerable number of studies of this facet of business activity having been carried out. 1 Although these studies have promoted a much clearer understanding of this area, we still have very little information concerning many important aspects of industrial research and development, one of the most obvious gaps being the lack of studies indicating the characteristics of research and development in various industries, the effect of various characteristics of a firm on the nature of the R and D it undertakes, and the effects of various characteristics of a firm on the effectiveness of a firm’s R and D efforts.

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For example, see Edwin Mansfield, Industrial Research and Technological Innovation , (New York: W. W. Norton for the Cowles Foundation for Research in Economics at Yale University, 1968);

Google Scholar  

Richard Nelson, Merton Peck, and Edward Kalachek, Technology, Economic Growth, and Public Policy (Washington, D.C.: The Brookings Institution, 1967);

Richard Nelson, and Thomas Marschak, Thomas Glennan, and Robert Summers, Strategy for R and D (New York: Springer-Verlag, 1967).

For a review of the literature, see Edwin Mansfield, The Economics of Technological Change (New York: W. W. Norton, 1968), Chap. 3.

See Allan Cartter, “Economics of the University” ( American Economic Review , May 1965);

Allan Cartter, An Assessment of Quality in Graduate Education (American Council on Education, 1966).

Robert Seiler, Improving the Effectiveness of Research and Development (New York: McGraw-Hill, 1965), p. 133.

For some discussions of the reasons for, and the advantages of, separating research from development, see William Kornhauser, Scientists in Industry: Conflict and Accommodation (Berkeley: University of California Press, 1962);

A. Stanley and K. White, Organizing the R and D Function (American Management Association, 1965).

A statistical discriminant function is optimal in the sense that under specified conditions, it minimizes the proportion of incorrect predictions. See T. Anderson, An Introduction to Multivariate Statistical Analysis (New York: Wiley, 1958).

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Mansfield, E., Rapoport, J., Schnee, J., Wagner, S., Hamburger, M. (1971). Research and Development: Characteristics, Organization, and Outcome. In: Research and Innovation in the Modern Corporation. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-01639-6_2

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