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INNOVATION AND CHANGE: THE ROLE OF RESEARCH AND DEVELOPMENT

Contents

Introduction. 2

Overview of the Problem of Over-Spending in R&D and Equating it to Innovation. 2

Choice of Innovation Strategy: Theoretical Framework. 3

Problems Arising from Innovation Strategies that are Driven Primarily by R&D Expenditure. 6

An Assessment of the Potential for Businesses to Achieve Innovation Without Investing Heavily in R&D. 8

The need to focus on aspects of both demand and supply in the pursuit of innovation. 11

Conclusion. 12

References. 13

Introduction

Research and development (R&D) play a critical role in influencing the level of competitiveness among small and large companies alike in today’s highly dynamic business environment. The mistaken notion has more expenditure on research and development (R&D) equals more innovation has pervaded the corporate world. Many research-driven organizations continue to spend heavily in R&D on the basis of the assumption that this expenditure is the biggest proof of their ability to innovate (Tether & Lodorfos, 2011).

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Unfortunately, no company can claim to be innovative simply because it has allocated a certain percentage of its annual sales to R&D. Other than R&D expenditure, companies must be willing to put into consideration other internal and external factors affecting innovation. Many companies have spent heavily in R&D but have failed to be innovative. Conversely, numerous small- and medium-sized enterprises (SMEs) do not spend huge amounts of money on R&D and yet they have managed to become innovative. The aim of this paper is to demonstrate that more R&D expenditure should not be equated to more innovation. The gist of the argument in this paper is that other than the availability of funds, companies must examine other factors influencing innovation.

Overview of the Problem of Over-Spending in R&D and Equating it to Innovation

Whether or not an innovative company has invested in R&D, it must continue to stretch the limits of education and training among its workforce with a view to constantly improve their skills and competencies. Moreover, extensive communication is required both within and outside the organization. Internally, the information should flow laterally, upwards, and downwards. This is an important requirement as a way of avoiding a situation where researchers come up with new inventions but have no idea how to turn them into competitive products and services. Through extensive communication, innovative organizations are able to establish a culture of continuous improvement.

In many cases, the innovative activities of one business organization end up exerting an impact on the entire industry or market (Bessant & Tidd, 2007). This essentially means that innovative organizations must continually scan the industry and the market for changes. External focus enables a company to maintain customer orientation while engaging in networking activities whenever the need arises. Similarly, the presence of a creative climate is essential for innovation to occur (Tidd, Bessant & Pavitt, 2009). Many companies continue to a huge percentage of their revenues to R&D yet people across the organization have not yet learned to appreciate the value of adopting a positive approach to creativity (Tether & Lodorfos, 2011). It would be better to start by directing funds to efforts aimed at establishing and maintaining appropriate motivation systems.

Whenever R&D is undertaken in contexts where these conditions have been met, the vision of a learning organization may be said to have been achieved. In such an organization, the emphasis is on proactive experimentation. Employees endeavor to make use of all the existing opportunities to find and solve problems. They communicate and share experiences, thereby establishing a culture of knowledge creation and dissemination. At this point, such an organization may be said to have qualified to be regarded as an innovative organization.

Choice of Innovation Strategy: Theoretical Framework

Different theories have been developed to explain the contexts within which organizations become innovative. For example, the Kaizen philosophy, which has been widely adopted in Japan, emphasizes small, incremental improvements aimed at yielding cumulatively large changes (Tether & Lodorfos, 2011). The Kaizen philosophy is based on a bottom-up approach whereby all members of the organization from employees of the lowest cadres to the chief executive officer contribute to the overall creative engagement strategy. In the Kaizen system, the objective is to eliminate wastes arising from automation, quality circles, and suggestion systems. For this continuous improvement of processes and products to occur, companies must invest heavily in efforts to nurture and manage human resources.

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Another theoretical approach in the analysis of innovation entails market push versus market pull factors (Tether & Lodorfos, 2011). In the market push approach, the focus is on core competencies. This approach has been widely examined through the resource-based theory (Tidd, Bessant & Pavitt, 2009). In respect of core competencies, the focus is on resources that are valuable, rare, inimitable, and non-substitutable (VRIN) (Tidd, Bessant & Pavitt, 2009). They also focus a lot on efforts to obtain knowledge and technological skills in efforts to come up with products and services that are functionally irresistible. In this supply-side view, organizations are required to constantly keep track of their core competencies, to update them regularly, and to reconfigure them whenever the need arises. The assumption in this regard is that if companies look at the environment in which they operate from the inside out, they will ultimately succeed in building core competencies that can compete favorably against the value propositions of competitors in a sustainable manner.

In the market pull approach, companies emphasize the requirements and demands of the external environment in which it operates as well as its target market (Von Stamm, 2003). It makes perfect sense for a business organisation to constantly scan its environment in order to understand the socio-economic, political, technological, and legal factors that may affect business operations. This enables the business to evade threats and to seize opportunities. In this approach, innovation strategies are derived from the demand-side view of the market. In most cases, companies focus on both the pull and push factors although they sometimes choose to lean towards one approach at the expense of the other depending on organizational demand and the life cycle of the product or service.

During the early and mid-twentieth century, a theory known as Fordism became dominant (Tidd, Bessant & Pavitt, 2009). In Fordism, the emphasis was on technology push, whereby companies did whatever they could to engage in technological sophistication through R&D (Tidd, Bessant & Pavitt, 2009). In many cases, they tended to fall into the trap of pursuing R&D for its own sake. In other words, they tended to treat R&D as a means in itself rather than as a means to an end. This pursuit of technological sophistication in this fashion was driven by the notion that more expenditure in R&D equals more innovation. Such companies easily neglected the needs of the markets and the environments in which they operated. However, towards the end of the 20th century, companies have been compelled to become more responsive to the complex needs of consumers. This change of tact has been heavily influenced by changes in public policy concerns regarding the needs of the markets. This has led to a situation where many companies are re-examining the idea that more R&D expenditure equals more R&D. The conclusions derived from the critique of this notion have greatly influenced the decision by companies to adopt either the market-push or market-pull approach to innovation.

Nevertheless, the changes that have occurred in the discourse on innovation have greatly contributed to the emergence of a generic innovation model whose core activities include searching, selecting, innovating, and capturing (SSIC) (Tether & Lodorfos, 2011). In this generic model, innovation can be rational or incremental (Goffin & Mitchell, 2005). In the rational approach, the emphasis is on flexibility and adaptability to change. For instance, the SSIC approach may not be of any use in enterprises that are experiencing radical challenges. Such enterprises ultimately end up adopting a culture of discontinuous innovation.

Problems Arising from Innovation Strategies that are Driven Primarily by R&D Expenditure

            Companies that pursue the goal of innovation that is driven primarily by R&D expenditure are likely to encounter numerous challenges. By focusing on R&D expenditure as an indicator of innovation, companies demonstrate their reliance on a partial view of innovation. The amount of money used to develop new technology does not determine whether or not this technology is going to be accepted by users. Moreover, when the outcomes of R&D are pre-empted based on the level of funding, it is easy for companies to lock out a section of specialists whose contributions could have contributed to the creation of a more innovative product or service. Similarly, those participating in R&D may miss out on the important goal of meeting the needs of customers. Cumulatively, these shortcomings might lead to a situation where technical progression is lacking, projects are not strategically targeted, and the company has failed to gain a competitive edge.

            There are numerous cases of companies that invested heavily in R&D but did not become innovative (Tidd, Bessant & Pavitt, 2009). Despite increasing R&D spending, many leading companies continue to find it extremely difficult to innovate. A classic example is that of Proctor & Gamble (P&G). Between 1996 and 2000, P&G’s R&D spending accounted for 3.4 percent to 4.7 percent of annual sales (Coleman-Lochner & Hymowitz, 2012). This massive spending placed the company well ahead of its main competitors: Colgate, Unilever, Henkel, and Kimberly-Clark. Since 2000, P&G’s R&D spending decreased dramatically, reaching 2.4 percent of annual sales in 2012 (Coleman-Lochner & Hymowitz, 2012). The decision by the company’s management to reduce R&D expenditure arose from P&G’s failure to produce new products and product categories. This essentially means that at some point, the company started losing its flair for innovation despite the availability of funds set aside for R&D.

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            Throughout its history, P&G has established a reputation as an innovative organization. It is for this reason that it is often regarded as a branded science organization. However, in recent years, the number of pioneering brands coming from the company has been surprisingly low (Coleman-Lochner & Hymowitz, 2012). The decision by the company to reduce R&D spending has partly been informed by changes in the external environment in the form of rising costs of household products and market-share declines. Internal factors such as management changes have also contributed to a drop in the level of R&D spending.

P&G’s declining R&D expenditure may also be explained using the Technology S Curve, whereby technological inventions tend to be stretched to their scientific limits as they approach the maturity stage. The Technology S Curve provides an idea of how changes in quality of technology occur in relation to investment in R&D. In this curve, three phases are identified: emergence, growth, and maturity. The emergent phase is characterized by a slow rate of innovation while the growth phase is characterized by a high return on investment arising from the rapid accumulation of knowledge. The maturity phase is characterized by a decline in return on R&D investment because of the approaching limits of a technological invention.

In recent years, P&G’s researchers have resorted to leveraging and reformulating existing technologies and ideas to develop new products instead of coming up with entirely new ideas. This means that the repository of the company’s technologies is approaching the maturity stage. This is an indication that the company needs to chart a new course as far as innovation is concerned. It is also an indication that R&D spending is not equal to more innovation.

            Today, many large corporations seem to be making more progress than ever before in terms of innovation. On average, leading American corporations pump about $200 billion into R&D every year (The Economist, 2007). Most of these funds go towards the pursuit of inventions in computer systems and information technology. For example, in 2006, Microsoft spent about $6.6 billion while HP and Cisco Systems spend $4 billion each (The Economist, 2007). Unfortunately, most of the R&D activities undertaken by these corporations entailed the introduction of minor improvements as well as efforts to ensure that ideas were delivered into the market at a faster pace. Despite increased spending on R&D, major technological breakthroughs are increasingly becoming a rarity. Instead of producing patents, researchers hired by multinational +corporations such as IBM seem to have shifted towards the so-called “services science”. This approach stands in sharp contrast to the “hardware science” that dominated the corporate world soon after World War II.

An Assessment of the Potential for Businesses to Achieve Innovation Without Investing Heavily in R&D

Discourse on organizational learning and its contribution to innovation tends to focus on large organizations (Tidd, Bessant & Pavitt, 2009). Therefore, there is a need to examine the unique learning processes that enable many SMEs to become innovative business organizations. SMEs face numerous challenges in terms of managerial capacity as well as platforms for gaining access to external-source knowledge. This explains why businesses of this category have been at the forefront in embracing the idea of open innovation. Owners of innovative SMEs tend to be outward-facing in their approach to the pursuit of business opportunities. They also tend to encourage members of the organization to embrace “deep and wide” learning (Zhang, Macpherson & Jones, 2006). In contrast, owners of small firms who are inward-looking tend to encounter difficulties in their efforts to raise the profile of their businesses to the level of innovative enterprises (Zhang, Macpherson & Jones, 2006). They also tend to adopt an experiential approach to learning, in which case focus is primarily on single individuals and in some cases small- and medium-sized teams (Zhang, Macpherson & Jones, 2006).

Nevertheless, SMEs need not set aside huge R&D budgets for them to become innovative (Tether & Lodorfos, 2011). Even in the absence of lavish spending, these business enterprises are in a position to leverage the advantages that come with the small magnitude of their operations. The main advantages include shared vision, speed in decision making, high level of commitment, entrepreneurial spirit, flexibility, the potential for internal and external networks, and sheer passion for innovation. Moreover, the high degree of autonomy and the fact that members of R&D teams do not need to worry about bureaucracy make the SME environment a perfect place for breakthrough inventions that can be converted into revolutionary products and services.

There are many examples of revolutionary products that were produced in informal, small-scale contexts under lean R&D budgets (Tidd, Bessant & Pavitt, 2009). A case in point is the Lockheed Advanced Development Projects that yielded famous designs of aircraft such as the F-117 Nighthawk and the F-35 Lightning 11 (Zhang, Macpherson & Jones, 2006). Such projects become successful not because of huge budgetary allocations but because of the sheer strength of cluster innovation networks. The knowledge that is obtained through industrial innovation networks tends to spill over to individual entrepreneurs, who set out to implement it in SME contexts by transforming it into breakthrough innovations (Tether & Lodorfos, 2011).

SMEs tend to face innovation pressures in just the same way as large corporations. In response, the former category of business enterprises resorts to both radical and incremental innovations. This has been demonstrated in the case of SMEs operating in the context of emerging Asian economic giants such as Taiwan and South Korea. In Taiwan, for example, these enterprises have become highly innovative, a situation that has enabled them to thrive in the areas of Original Equipment Manufacturing (OEM) (Lin & Chen, 2007). The seed of innovation was sown decades ago when thousands of small firms embraced Taiwan’s center-satellite system of manufacturing products (Lin & Chen, 2007). Each SME was allocated a specialty, where it operated in collaboration with other SMEs under the supervision of a center corporation. In regards to OEM, the SMEs chose to embrace innovation by ensuring that they were always coming up with their own innovative products that always won the approval of the center corporation. Each SME was also interested in enhancing its own competitiveness in terms of delivery and pricing strategy. This way, the SMEs were able to embed innovation in all aspects of their continuous improvement efforts in a routine manner.

In this process, the SMEs have not been spending heavily on R&D. Instead, they have simply been exploiting their competitive advantages as well as the open innovation opportunities arising from the center-satellite system. This approach has proven to be productive in Taiwan because 80 percent of SMEs in this country implement one form of innovation or the other (Lin & Chen, 2007). This is an indication that innovation has been entrenched in Taiwan’s business environment. This situation may have greatly contributed to the high ranking (fourth position globally) in terms of the percentage of US patent grants processed (Lin & Chen, 2007). Analysis undertaken by Lin & Chen (2007) demonstrates that companies do not necessarily need to spend heavily in R&D or to embrace radical change for them to become innovative organizations. Large corporations should not become too immersed in corporate R&D to the point of neglecting administrative innovation.

The need to focus on aspects of both demand and supply in the pursuit of innovation

The level of R&D funding is just one of many factors that influence innovation in business enterprises. To begin with, it is important to understand that innovation has a life cycle regardless of the amount of funding allocated to R&D activities. On the demand side, this is well demonstrated by the Technology Life Cycle (TLC), the diffusion curve, as well as different “long waves” that greatly influence the long-term performance of a technological invention in the market. On the supply side, changes in innovation are often demonstrated using the Technology S Curve, the Dominant Design Model, and the Product-Process Cycle. In this regard, the objective is to examine different technical aspects of technological innovation.

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Based on this view, it is evident that to believe that R&D spending equals more innovation is to embrace a misguided, partial view of business innovation. For instance, insights from the Diffusion Curve indicate that all innovative organizations must actively engage in the process of identifying and interacting with key adopter groups (Tidd, Bessant & Pavitt, 2009). To begin with, they need to interact with innovators, who happen to be the most responsive as far as new ideas are concerned. Innovators can greatly assist a company with ideas as well as feedback during the process of initiating an R&D project or testing an invention. Similarly, the adopter group that comprises of early adopters is essential because it is an excellent source of information of the embeddedness of a technological invention within local social systems. The opinion provided by this group should be respected because it is based on real-life on-the-market experiences. On the other hand, the group that is often referred o as the Early Majority is important for a different reason: it contributes to the creation of momentum in the adoption of the invention, which is a critical requirement for unit-cost reduction and sales-volume increase (Tidd, Bessant & Pavitt, 2009).

In many situations where large corporations elevate the idea of increased R&D spending as an equivalent of increased innovation, the power of innovation networks tends to be neglected (Tidd, Bessant & Pavitt, 2009). Although it is proper to think of innovation as a lonely venture that individual corporations can embark on independent of other corporations, the reality is that it takes a great deal of interactive and marketing skills. In this undertaking, the objective is to convince people that the technological invention that they cannot survive without (Tidd, Bessant & Pavitt, 2009). Mass adoption of such an invention is critical for commercial viability since it easily translates into increased sales volume and reduction in cost per unit. To succeed in the objective of triggering the mass adoption of innovative products, firms must focus on both the demand and supply sides.

Conclusion

The critique presented in this paper suggests that the debate on R&D expenditure by large corporations has become controversial. There is no consensus regarding the notion that spending heavily on R&D is the best way of generating innovative ideas that can be transformed into marketable products and services. In the meantime, a faulty notion has gained prominence, whereby R&D expenditure is equated to innovation. The implication in this regard is that firms that do not spend a huge percentage of their annual sales on R&D are unlikely to become innovative. This is not true because many SMEs have become innovative without formally investing in R&D. On the other hand, not all corporations that establish costly R&D laboratories end up generating innovative products. This is an indication that in addition to R&D spending, contemporary must look at other factors influencing innovation such as the life cycle of technological innovation. In conclusion, R&D spending is not the key to innovation; companies must examine changes in both the internal and external environment and their impact on the ability to transform ideas and inventions into innovative products that are readily accepted in the mass market. By extension, both market-pull and market-push factors are important in the ongoing struggle by firms to become innovative.

References

Bessant, J & Tidd, J 2007, Innovation and Entrepreneurship, Wiley, London.

Coleman-Lochner, L & Hymowitz, C 2012, At Procter & Gamble, the Innovation Well Runs Dry, Bloomberg Businessweek, September 06, 2012.

Goffin, K & Mitchell, R 2005, Innovation Management, Strategy and Implementation Using the Pentathlon Framework, Palgrave, New York.

Lin, C & Chen, M  2007, ‘Does innovation lead to performance? An empirical study of SMEs in Taiwan’, Management Research News, vol. 30, no. 2,pp. 115-132.

Tether, P & Lodorfos, G 2011, Innovation and Change, Wiley Custom Services, London.

The Economist, 2007, The rise and fall of corporate R&D: Out of the dusty labs, 31 March 2007, Palo Alto.

Tidd, J, Bessant, J & Pavitt, K 2009, Managing Innovation: Integrating Technological, Market and Organisational Change, (4th Edition), Wiley, London.

Von Stamm, B 2003, Managing Innovation, Design & Creativity, Wiley, London.

Zhang, M, Macpherson, A & Jones, O  2006, ‘Conceptualizing the Learning Process in SMEs: Improving Innovation through External Orientation’, International Small Business Journal, vol. 24, no. 3, pp. 299-323.

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