RESEARCH AND DEVELOPMENT ISSUES

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Strategic Management MGT603

Lesson 39

RESEARCH AND DEVELOPMENT ISSUES

Learning objectives

The main objective of this chapter to enable to students about research and development issue relating

to strategy implementation.

Going public means selling off a specific percentage of the business to others in order to raise capital;

consequently, it shifts the owners' control of the firm. Going public is not recommended for companies

that initial costs can be too high for the firm to generate sufficient amount of cash inflows to make

going public worthwhile. The firm must have sufficient amount of capital to bear out lawyer,

underwriter and other documentation cost in order to form the business. In addition to initial costs

involved with a stock offering, there are costs and obligations associated with reporting and

management in a publicly held firm. For firms with more than $10 million in sales, going public can

provide major advantages:

1. It can allow the firm to raise capital to develop new products,

2. To build plants,

3. Expand, grow, and market products and services more effectively.

Before going public, a firm must have quality management with a proven track record for achieving

quality earnings and positive cash flow. The company also should enjoy growing demand for its

products. Sales growth of about 5 or 6 percent a year is good for a private firm, but shareholders expect

public companies to grow around 10 to 15 percent per year.

Research and Development (R&D) Issues

Research and development (R&D) management can plays part in strategy implementation.

"New products and improvement of existing products that allow for effective strategy implementation"

"New products and improvement of existing products that allow for effective

strategy

implementation"

These individuals are generally charged with developing new products and improving old products in a

way that will allow effective strategy implementation. R&D employees and managers perform tasks that

include

1. Transferring complex technology,

2. Adjusting processes to local raw materials,

3. Adapting processes to local markets,

4. Altering products to particular tastes and specifications.

Strategies such as product development, market penetration, and concentric diversification require that

new products be successfully developed and that old products be significantly improved. But the level

of management support for R&D is often constrained by resource availability:

Technological improvements that both affect consumer and industrial products and services shorten

product life cycles. Companies in virtually every industry are relying on the development of new

products and services to fuel profitability and growth.

Surveys suggest that the most successful organizations use an R&D strategy that ties external

opportunities to internal strength and is linked with objectives. Well-formulated R&D policies match

market opportunities with internal capabilities and provide an initial screen to all ideas generated. R&D

policies can enhance strategy-implementation efforts to:

1. Develop robotics or manual-type processes.

2. Spend a high, average, or low amount of money on R&D.

3. Perform R&D within the firm or to contract R&D to outside firms.

4. Use university researchers or private sector researchers.

5. Emphasize product or process improvements.

6. Stress basic or applied research.

7. Be leaders or followers in R&D.

There must be effective interactions between R&D departments and other functional departments in

implementing different types of generic business strategies. Conflicts between marketing,

finance/accounting, R&D, and information systems departments can be minimized with clear policies

and objectives. Table gives some examples of R&D activities that could be required for successful

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Strategic Management MGT603

implementation of various strategies. Many American utility, energy, and automotive companies are

employing their research and development departments to determine how the firm can effectively

reduce its greenhouse gas emissions.

Research and Development Involvement in Selected Strategy-

Implementation Situations

TYPE OF

STRATEGY BEING

ORGANIZATION

IMPLEMENTED

R&D ACTIVITY

Cosmetic

Concentric

Add face wash for the user in

Manufacturer

diversification

addition to other make-up

items.

Plastic container

Market penetration

Develop a biodegradable

manufacturer

container.

Electronics

Market development

Develop a telecommunications

company

system in a foreign country.

Pharmaceutical

Product development

Develop a procedure for testing

company

the effects of a new drug on

different subgroups.

Many firms wrestle with the decision to acquire R&D expertise from external firms or to develop R&D

expertise internally. The following guidelines can be used to help make this decision:

1. If the rate of technical progress is slow, the rate of market growth is moderate, and there are

significant barriers to possible new entrants, then in-house R&D is the preferred solution. The

reason is that R&D, if successful, will result in a temporary product or process monopoly that the

company can exploit.

2. If technology is changing rapidly and the market is growing slowly, then a major effort in R&D may

be very risky, because it may lead to development of an ultimately obsolete technology or one for

which there is no market.

3. If technology is changing slowly but the market is growing fast, there generally is not enough time

for in-house development. The prescribed approach is to obtain R&D expertise on an exclusive or

nonexclusive basis from an outside firm.

4. If both technical progress and market growth are fast, R&D expertise should be obtained through

acquisition of a well-established firm in the industry.

There are at least three major R&D approaches for implementing strategies.

1. First firm to market new technological products

2. Be an innovative imitator of successful products

3. Low-cost producer of similar but less expensive products

The first strategy is to be the first firm to market new technological products. This is a glamorous and

exciting strategy but also a dangerous one.

A second R&D approach is to be an innovative imitator of successful products, thus minimizing the

risks and costs of start-up. This approach entails allowing a pioneer firm to develop the first version of

the new product and to demonstrate that a market exists. Then, laggard firms develop a similar product.

This strategy requires excellent R&D personnel and an excellent marketing department.

A third R&D strategy is to be a low-cost producer by mass-producing products similar to but less

expensive than products recently introduced.

Perhaps the most current trend in R&D management has been lifting the veil of secrecy whereby firms,

even major competitors, are joining forces to develop new products. Collaboration is on the rise due to

new competitive pressures, rising research costs, increasing regulatory issues, and accelerated product

development schedules.

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