5.8 Research and development

Full video class on YouTube, summary and notes on Instagram, class extracts on TikTok, text below. Have fun!

The main point of this class is to learn to explain R&D, IP rights and types of innovation.

Research and development (R&D) refers to activities directed at innovation, launch and improvement of products (goods and services). Let’s break down this definition. Innovation refers to creating something new and commercialising it, for example one of the first automobiles by Benz and Daimler. More about innovation and its types later in this class. Launch refers to the very first stage of the product life cycle when product is available for sale for the first time. R&D is not only about designing something new, eventually it is about creating something new for sale, hence launch is one of the targets of R&D. And lastly, R&D may also be directed at improvement of products, i.e. when nothing entirely new is produced but an alteration is made, for example, Volkswagen has been producing Golf for decades, but this model is updated every once in a while.

Please be mindful of two important facts about R&D:

1. It applies to all industries, not only high-tech and pharmaceuticals. For some reason, it is a common misconception among students that in order to do R&D you have to be a multinational tech company like Apple or a multinational pharmaceutical company like Pfizer. No, you can be a cupcake bakery startup and have R&D as well.
2. R&D is about products, i.e. goods and services, not just goods. R&D about how to improve a service, such as call centre, customer care or sales is as common as R&D of goods.

As you hopefully remember from the previous chapters of this textbook, when the assessment objective is to discuss the importance of something, it usually refers to breaking it down into pros and cons. Let’s do that.

On the one hand, successful R&D may result in first mover advantage — that is when an organisation is doing something before others, thus enjoying temporary monopoly before competitors enter the market. For example, iPhone was the first smartphone of that kind and it entirely changed the industry, letting Apple enjoy high revenues until other comparable alternatives started to come out. Other than that, successful R&D can help organisations reach a competitive advantage and develop a USP. Besides, if R&D targets improvement of existing products, it may extend product life cycle, letting products “stay afloat” in the market longer (more about it in 4.5). Lastly, R&D results in cost reduction in the long term because it can lead to improvement of efficiency in production or provision of services. For example, every new model of Boeing airplanes has lower fuel consumption (thanks to R&D) thus decreasing the costs.

On the other hand, R&D takes a long time, especially in pharmaceutical industry where it takes 10-15 years on average to develop new medicine. Additionally, R&D results in increased costs in the short term because researchers need equipment and salaries and whatever is being researched does not result in sales until it’s launched. For this reason, R&D department is usually a cost centre. Besides, R&D does not guarantee any success. It may result in failure, for example Apple Newton was an extremely innovative product for its time but it did not have a commercial success. So, failures of R&D are quite common. And lastly, R&D often comes with ethical implications which might delay the launch of the products. Again, in pharmaceutical industry, it is essential for new drugs to go through rounds of testing until they can be open for sale.

Think about the countries and companies that spend on R&D most and see how it matches the reality in the picture below.

Customers do not always know what they need. For example, before iPhone was released, people were not in urgent need of a phone with big touch screen and no buttons. You, students, were not born back then, but let me assure you that my friends and I (back when we were teenagers) were perfectly happy with our Nokia smartphones that had traditional old school buttons under the screen. And then iPhone was released and it was a complete game changer. Everyone realised that this is what phone looks like now: customers’ needs were met, even though those needs were unknown and customers were not aware of them.

The iPhone example above when people do not really know what they need refers to product-oriented approach to marketing: organisations take the risk to develop something that will meet customers’ needs even when these needs are unclear. Another way to satisfy unmet needs is market-oriented approach: conducting market research in order to find out what customers need. Both approaches have the same goal (to sell products successfully) but ways to achieve it are different. Product-oriented approach refers to satisfying unmet needs that customers are unaware of and market-oriented approach refers to satisfying unmet needs that customers are aware of. See classes 4.1 and 4.4 to review approaches to marketing and market research.

Implications and pros and cons of developing products that address unmet needs are similar to those of R&D, product-oriented and market-oriented approaches. On the one hand, if you (organisation) hit the spot, then market is all yours: either because you met the needs that customers were not aware of (product-oriented approach) or because you are very good at market research and at understanding what customers want (market-oriented approach). On the other hand, if you don’t hit the spot, it’s a waste of time and money.

Reality is, of course, more complicated than BM textbook and marketing is not necessarily either product- or market-oriented. It might be somewhere in-between. Watch this video where Steve Jobs reflects on it.

Intellectual property (IP) is intangible property that is the result of creativity. According to WTO, IP rights are the rights given to people or organisations over the creations of their minds. Usually, these rights are not infinite but are granted for a limited period of time. IP rights that we learn in the Business Management course are copyright, patent and trademark.

Look up your local IP rights policies in order to find out the exact time periods and specifics. What we are learning is “average” global features of IP rights.

Copyright (symbol: “©”) is an exclusive right for the creator to copy, publish, distribute or perform a creative work. Basically, anything that is written or can be explained using text symbols (art, music, literature) is protected by copyright.

Patent is the right to prohibit others from producing, using or selling an invention. In exchange for being granted this right for a limited period of time, patent holders disclose the details of the claimed invention. Others may still produce similar inventions with different features but are not allowed to produce the exact same thing as in the patent.

Trademark (symbols: “™” for unregistered trademark or “®” for registered trademark) is a recognised symbol, style, or phrase that defines and sets apart a product from others. For example, logos and slogans are trademarks, which means that if you want to open a fast food cafe, call it “McDonald’s” and use “I’m loving it” slogan, you will be illegally using two trademarks, unless you are a licensed franchisee.

Innovation is the process of commercialising a creative idea and giving it a practical use. From the business perspective, creating something new is not innovation unless it can have a real-life application, satisfy needs and wants and have a commercial value. If you create something new, and if you personally are really happy with your invention, but no one else is, and nobody is willing to pay for it, it is not innovation.

The two types of innovation that IBO wants you to learn are incremental and disruptive. Incremental innovation is the improvement of existing products based on the established needs of customers. It may also be called adaptive innovation or sustaining innovation. For example, every new modification of iPhone is incremental innovation. Apple does not create an entirely new smartphone twice a year, they just improve and add new features to every new version. Disruptive innovation refers to creation of completely new products that change existing industry or create a new industry. For example, the very first iPhone may be considered a disruptive innovation because it changed the industry entirely and it was a complete game changer.

It is debatable whether some products are incremental or disruptive innovation. Some people might say that iPhone is also an incremental innovation because there were smartphones before it, or that air travel is not disruptive innovation because it is just an alteration of travel process. What exactly is incremental and what is disruptive depends on perspective, it is relative to what it is compared to and it is very important to learn to justify whether you think something is incremental or disruptive innovation.

So, the key feature of incremental innovation is that it refers to alteration of what already exists whereas disruptive innovation refers to commercialising something that is entirely new. What exactly can be considered an alteration and what can be considered completely new is open for the debate.

Make sure you can define all of these:

1. Research and development (R&D)
2. First mover advantage
3. Product-oriented approach
4. Market-oriented approach
5. Market research
6. Intellectual property (IP)
7. Intellectual property rights (IP rights)
8. Copyright
9. Patent
10. Trademark
11. Innovation
12. Incremental innovation
13. Disruptive innovation