Research & Development
Research & Development (or ‘R&D’) is technical or scientific research that is undertaken with a view to introducing new or improved products and services.
Although Market Research would also be undertaken as part of any product development process, do not confuse it with R&D.
R&D can be very expensive and the chances of success can be slim, with a relatively low rate of commercially successful ideas. However, in many industries, a committed programme of R&D is absolutely essential in order for firms to maintain their competitiveness. Industries with an especially high level of R&D would include:
- Consumer electronics
The major pharmaceutical companies typically spend 10-15% of annual sales turnover on R&D and yet might expect only around 1 in 500 new drug formulations to become a commercial success. Nevertheless, whilst the stakes are high, so are the potential rewards, and one successful new drug – such as Viagra and Retrovir, can secure the financial future of a company for several years.
R&D as a percentage of sales is one way of comparing companies in a given industry. Remember, also, to look at the actual amount spent on R&D – for example:
- Company A spent £30 million per year on R&D, 6.7% of turnover
- Company B spent £80 million per year on R&D, 3.2% of turnover
Plainly, Company A spends a larger percentage of its turnover on R&D, but n absolute terms, Company B, which is the larger company, spends far more. In some industries, it is the largest firms that can afford to spend enough on R&D to make it worthwhile, especially when specialised equipment and highly qualified staff are needed to conduct R&D activity.
In other questions, you may see figures that illustrate how the firms of some countries spend far more than comparable firms from other countries.
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