Research and development is the heartbeat of the business for many organizations around the world. Technology companies like Amazon, Intel, Apple and Microsoft spend billions on R&D each year. The activities involved in this process enable businesses to create innovative products and services with cutting-edge features. As a small business, you too can leverage R&D to gain a competitive edge, attract potential investors and reduce your company’s tax bill.
What Is Research and Development?
Companies worldwide invest in activities designed to help them create new products or improve existing products and processes. Their end goal is to remain competitive and achieve growth. These activities are an integral part of R&D. Think of it as an ongoing process of discovery that leads to better products, services and technologies.
R&D is often associated with pharmaceutical companies and technology businesses. The truth is that companies across all industries may benefit from it. Marketing agencies, for example, often use R&D to create new processes or improve pre-existing technologies that allow them to reach more prospects or improve customer experience. A well-defined R&D strategy can lead to greater productivity, reduced business costs, increased customer satisfaction and new competitive advantages.
In general, R&D constitutes the first step in the development of new products or services. As you would expect, R&D activities vary from one business or industry to another. Although these processes don't yield immediate profit, they can significantly increase a company's revenue in the long run. Furthermore, companies with a strong focus on R&D can improve society as a whole and change people's lives for the better.
R&D Drives Innovation
R&D drives innovation and economic growth. The most successful brands in the world rely on this process to create unique products and stay ahead of the game. Amazon, for instance, spent $22.6 billion on R&D investment activities in 2017 — that's more than any other American company. Next comes Alphabet, which invested $16.6 billion in R&D expenditures in the same year, and Intel, with a total investment of $13.1 billion.
Tech companies are not the only ones that benefit from these activities. Adidas, for example, spent 187 million Euros on R&D in 2017, which is nearly double the amount invested in 2010. Its ability to use the latest technology to innovate products has fueled its rapid growth. In 2017, the Adidas FutureCraft 4D Sneaker was nominated as one of the best inventions of the year by TIME Magazine.
R&D also plays a major role in the pharma industry. Swiss pharma giant Roche invested over $11 billion in R&D in 2018. Johnson & Johnson's R&D spending exceeded $10 billion in the same year. Pharma companies actually account for nearly half of the top-20 largest R&D spenders. The medications and drug therapies they develop are saving millions of lives.
Whether you sell cars, food or software products, it's worth investing time and resources into this field. Sports supplement brands, for example, often have several versions of a product, such as zero-carb protein powder, organic protein powder or lactose-free protein powder. All of these products are the result of extensive R&D. Telecom giant AT&T, Fiat, Ford, Reynolds American, Tyson Foods, Sysmex and Playtech are all examples of popular brands that prioritize R&D.
Types of R&D Activities
Different companies invest in different R&D projects depending on their industry and business goals. All of these projects encompass three main types of R&D: basic research, applied research and experimental development. They all contribute in some way to technological development and innovation.
First, organizations conduct basic research to gain a better understanding of the key aspects of a concept or process. At this point, they have no specific commercial goals. If done right, basic research can provide valuable insights and pave the way for further studies. During this process, you will get the information needed to decide whether you should take the next step or try something else.
Applied research provides further insights and uncovers possible uses for the findings of basic research. Due to its complex nature, this process is costly and time consuming. On the positive side, it provides compelling data that may help companies develop new products and operational processes. These activities are performed with a specific goal or product in mind, such as creating a new software program or reducing manufacturing costs.
Development research, or experimental development process, involves a series of strategic activities based on existing knowledge gained from practical experience or previous research. This process gives companies the information they need to build prototypes and designs and then convert them into products or services.
The Advantages of R&D
From breaking into new markets to cutting costs and increasing your income, there are plenty of reasons to invest in R&D. Say you want to expand your product offering and reach more customers. A well-planned R&D program can help you develop innovative products or services, leading to more customers and sales. This way, you will have a unique selling point that sets your business apart.
R&D can also boost your revenue by making your business more appealing to investors and prospects alike. This process allows you to create new income streams and increase your market share. Furthermore, a small business that invests in R&D may qualify for grants and claim R&D tax relief. The R&D tax credit is worth up to 13.5 cents for each dollar of qualified expenses and can be carried forward up to two decades.
R&D can benefit any business, not just corporations. Countless innovations were made by small companies trying to make a difference; after all, popular brands like Amazon, Apple and Google started in a garage. R&D drives business growth and innovation, giving you the tools to differentiate your brand. The products you develop can help you gain access to new markets and supply chains, attract top talent and optimize your business operations.
Is R&D Worth the Risk?
Companies that invest in R&D are often more profitable than those that don't. However, R&D spending by itself doesn't guarantee success. First of all, innovation requires a new approach to product development or process implementation, and therefore, uncertainty is inevitable. Second, technology is changing at a fast pace and so are customer demands, which further increases uncertainty and makes R&D processes more complex.
Imagine spending millions on the development of a product that fails to work as it should or doesn't sell. This kind of scenario would affect your revenue, brand image and reputation. In fact, no other department or activity poses more risks to a company's earnings and bottom line than R&D, but there are situations when it's worth taking these risks.
R&D projects aimed to improve existing products or services often have greater success rates than those focused on product development. Additionally, a well-defined R&D program can yield higher returns than any other investment. In general, it's worth investing in this field if you have the right team and know that customers actually want your product. Before making a decision, consider the skills and expertise of your staff members, the size of your budget and the maturity of the market in which you compete.
- National Science Foundation: Definitions of Research and Development: An Annotated Compilation of Official Sources
- Vox: Amazon Spent Nearly $23 Billion on R&D Last Year — More Than Any Other U.S. Company
- Statista: Research and Development (R&D) Expenditure of the Adidas Group Worldwide From 2010 to 2018
- TIME: The 25 Best Inventions of 2017
- FierceBiotech: The Top 10 Pharma R&D Budgets in 2018
- Investopedia: Average Research & Development Costs for Pharmaceutical Companies
- KBKG: Research and Development Tax Credit
- Sustainability: Identification and Prioritisation of Risk Factors in R&D Projects Based on an R&D Process Model