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:

• Pharmaceuticals
• Aerospace
• Consumer electronics
• Computers
• Communications

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.

Also see revision notes on Invention and Innovation