Revamping R&D Strategies as Per the New Normal

While countries struggle with macroeconomic issues and geopolitical tension, companies need to revamp themselves to maintain business continuity. Businesses are already fighting to survive, with pressure from economic downturn, global inflation, supply chain disruptions due to war situations, and climate changes. Is there a game plan that can help them not only ride out this tough time but also thrive?

The world welcomed 2022 in with many more challenges than that last year, with the International Monetary Fund estimating the global growth rate to drop down to 4.4%. Currently, the world is plagued by economic downturn, and the war between Russia and Ukraine has made matters worse. With the spread of Omicron, the new variant of COVID-19, mobility was once again restricted at the start of the year, thus worsening the economic situation. Furthermore, the surge in global inflation will hamper GDP growth across industries.

Therefore, companies are compelled to rethink their strategies and probably change the steps they took in the initial stages of the pandemic. Many companies would instinctively pause their R&D efforts to save precious funds. However, although it is a cost-effective measure, paring down of R&D would lead to a company losing its competitive advantage. Moreover, with net zero emission to be achieved, companies have to consider new technologies to reduce their carbon footprint. As of now, companies have just two avenues to pursue: be aggressive and ramp up R&D efforts or remain passive and risk-averse, thus saving monetary resources for the future.

In such a scenario, deploying the process of REI – Revise, Evaluate, Implement – can help companies decide the path they wish to tread.

REVISE

Why is it important to re-design R&D strategies and investment plans?

Revising R&D strategy could help companies stay market relevant in face of changed customer needs: The onset of global recession in 2020 made customers cautious, both in terms of health and finances. The spending pattern and priorities underwent a huge change. Companies had to alter business models and re-design product offerings, in line with the evolving customer demand and market scenarios to stay relevant. Realigning the R&D strategy with the new requirements was essential for them to stay ahead of competitors and maintain their technological advantage. This is also true in the current scenario, as customer behavior is changing significantly due to the economic pressure created by the war.

Procurement and supply chain gaps continue to be an issue: While the pandemic disrupted the entire chain, the ongoing geo-political tensions are making it worse. To streamline the process and increase efficiency, digital capabilities should be built in procurement processes. Research and development must be done to understand which technologies can help in creating better processes and embed it within the procurement system. Collaboration, innovation and leveraging data will help companies create a robust procurement framework.

Climate change and environmental issues: Climate change is an ongoing threat due to which consumers prefer more environment-friendly and vegan products. They are also more health-conscious and seek fitness options. Therefore, the packaging industry needs to adapt and create more environment-friendly packaging, while the FMCG, food and, health industries must use R&D to better their offerings.

Supporting technologies rapidly, widely adopted – an unprecedented occurrence: Horizontal technologies (AI, AR/VR, drones, wearables) which was already on a rise saw widespread commercial adoption during the pandemic. Capacity build-up in these technologies could open up newer business avenues for multiple industries. Thus, revising R&D strategy by adopting incremental innovations around these scaled technologies could result in new revenue streams for the business.

History suggests steady investment in R&D pays off: Article on Revisiting Corporate R&D Spending During a Recession published by Sanjiv S. Dugal and Graham K. Morbey states a strong relationship between company profitability and R&D initiatives undertaken during the 1991 recession. Based on their findings, they reported that R&D expenditure greater than 5% of sales could ensure reasonable growth during a recession. After the dotcom bubble in 2000, funding flowed to companies with clear R&D plans and disciplined approaches, enabling them to emerge successfully from the dark. Companies such as Facebook, Twitter, and Uber took off during the period, continuing their performance later on too. The great recession caused by the housing bubble of 2008 was again devastating for some industries. This global economic meltdown took a toll on tech companies as well. Companies that pushed their R&D efforts further during this period got past the crisis. 

Which parameters should be considered for strategy revision?

Once a decision for revising R&D strategy is accepted, it is important to answer the following two questions.

1. Should the revision be tactical or strategic? The answer to this question, for a company, would depend on factors such as product and service offerings, industry type, position in value chain, company financials, and available assets (human resources, intellectual property, etc.).
2. On which fronts would revision be required? Revision in R&D strategy should typically be on the following four fronts: 

• People: In the current “great resignation era,” industries across the board are facing a high rate of attrition. It is, therefore, essential to boost the morale and encourage greater employee participation in innovation. If need be, companies should implement cultural changes to attract participation. Rewards, recognition, and encouraging team interactions are just a few ways to retain talent and maintain productivity.

• Process: Anticipating customer needs will play a greater role in defining the overall R&D portfolio and process. Evolving customer requirements can be understood through intelligence gathered from internal marketing and procurement teams, industry experts, and external consultants. An example is Starbucks; the company derives insights from past experience and starts off fresh ideas. During the 2008 crisis, it launched the “My Starbucks Idea” platform, through which 70,000 ideas were curated from users in the first year. This helped the company align its strategies and identify new development areas to grow the business.

• Portfolio: Retaining projects with good outcome certainties, or those nearing completion is necessary as companies expend much effort and resources on certain projects. It would be a good strategy to retain and continue work on existing projects that have good outcome certainties and are near completion. Modifications would only be needed if their relevance is compromised due to changed customer demand.

  For new undertakings, companies should focus on short-term and incremental ideas, which require relatively less R&D efforts, resources, and expenditure to improve the existing products and initiate new product development. Considering the constraints on most R&D budgets, it would be ideal to enhance existing products with better features and retain the loyal customer base. However, some products could become obsolete; in this case, companies should invest in developing new products to remain competitive and meet consumers’ needs.

• Architectural Front: Migrating to open innovation is another key step for companies trying to stay relevant. In modern research practices, companies mix internal research efforts with open innovation architecture to develop technologies. Open innovation can include funding start-ups and universities, paying IP royalties, or initiating cross-technology transfers.

  To stay cost-efficient yet innovative, companies should focus on open innovation and scout for already developed technologies, resources, and institutions (start-ups, universities) that can help them achieve their long-term objectives.

• Plans for R&D outsourcing: During favorable market conditions, companies focus on high-risk as well as low-risk innovations, irrespective of the industry type. To channelize R&D efforts for incremental or revolutionary ideas, companies should analyze crowdsourcing platforms and conduct consumer surveys to understand changes in behavior patterns.

It is advisable that companies continue to outsource these ground-level R&D activities to consultants at an early stage to gain perspective on new market scenarios. Overall, companies must view R&D outsourcing as a core part of strategy, not just for incremental innovation but also to drive revolutionary or fast-fail innovations, even during recessions.

EVALUATE

Upon revising R&D strategy, it is important for companies to consider stricter evaluation processes to ensure that the revised strategies yield the right results. Strategy could be tested on the following two scales to understand if it could be well adopted and remain sustainable.

Internal Acceptability: We believe the test of internal acceptability is the most important to learn if a strategy can result in the optimum utilization of all assets (such as man, machine, capital, or material) and reduce wastage at all levels.

Scalability: Companies should also try to scale up the strategy and evaluate how long and to what extent such scaling of strategy would yield diminishing returns.

What are certain tactical methods that companies could adopt to utilize existing resources to maintain or reduce research cost?

Smart portfolio management:

• Product portfolio management – As per this approach, R&D strategy should clearly define a product-line roadmap and determine the investment required. While maintaining profitability from existing product lines, companies should also create the desired next-generation products aligned to the evolving needs of customers.

• Intellectual property (IP) portfolio repurposing – Monitoring and managing IP is as important as possessing it. It would be wise to repurpose the available IP, discard non-essential IP, or seek out new R&D activity and innovations, if the budget permits. An in-depth analysis of existing IP, such as scouting for different applications or markets, and IP licensing, will help companies find ways to leverage their IP portfolio effectively.

Compare offerings with that of competitors

Companies could diversify and introduce new options in the markets where their offerings are poor revenue generators due to intense competition. Instead, they could concentrate their efforts on regions that are more profitable by marketing and positioning their products attractively. They could expand in regions that look promising.

IMPLEMENT

Revising R&D strategies, but failing to implement them at the right time, is a futile exercise. It is imperative to understand the ‘big picture’. Gaining insights on what is happening in the space of core technologies, emerging technologies impacting the markets, internal skills and capabilities, power to collaborate, contingency plans, and expert opinions can help companies strategize better, more accurately.

Timing is everything

At any point in time, investing in R&D and understanding trending technologies are highly recommended tasks. When the markets rebound, companies with aggressive R&D plans will stick to the rhythm in developing technologies (nearing launch) and innovations (at prototype stage).

Adaptability and an acceptance of change are the two essential attributes companies must possess to innovate effectively during a recession.

It’s time to get going now. Integrate, Invest, Innovate!