This is a re-purposed post from Dr Ken Foster, an R&D consultant in the USA, and is mirrored by the Harvard Business review.  It neatly encapsulates aspects of our philosophy, namely that your investment in R&D is a strategic lever for growth.

Leaders and laggards

There is one key difference between companies poised for sustained growth (leaders) versus those poised for incremental growth (laggards).  Both spend the same on product and process support, but the key difference is in the proportion invested in incremental product development compared to new (transforming) products / technologies.  Leaders typically dedicate 15-20% of R&D investments to transforming products and technologies; laggards dedicate <5% to new product platforms.  Setting the R&D and company strategy to re-weight this allocation is a key enabler to drive organic growth.

This is not easy.  Demand from sales teams always exists for R&D groups to make incremental improvements to a product line.  It is certain, safe and easy.  Key customers are always asking for better products or “look-alike” products to match competitors.  However, the sales value return on this incremental R&D is low because market differentiation is weak – the improved product is barely distinguishable from competing products or existing functionality, and sales of the improved product may cannibalise existing sales. This limits expected increase in net sales revenue and margin.

Choose your frame of reference

By contrast, a company that is always looking for new opportunities to drive revenue growth and profit have a different ‘frame of reference’.  These companies structure their strategy to drive short, medium and long term growth through new products and technologies.  They understand market and technology trends.  They supplement this understanding with keen customer insight.  They purposefully allocate R&D resources across these time horizons to underpin sustained growth.  This is a tried and tested pathway to win the marketplace.  Over time, it leaves your competitors to play catch up.

If you feel product pressure in the marketplace, part of the reason may be traced to how you manage your R&D portfolio compared to others that you perceive have more to invest in R&D.  This may or may not be the case, but it will often be that your competitors use a different ‘frame of reference’ which has allowed them to invest in R&D over time.  What you see in the marketplace today, is the power of that investment compounded over time.

R&D is a strategic investment

The call to action is to invest in the future by changing your ‘frame of reference’.  Allocate your R&D investment over the short, medium and long term as a strategic and leadership priority.  Seek out new areas that offer multiple returns on your investment.  Whilst there are always many complexities to execute against this new ‘frame of reference’, shifting some resources away from safe product line extensions to identify new market-based opportunities that fit with your capabilities is a great first step.   This is how laggards become leaders, and how market leaders sustain market leadership.