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Your assignment delivery of ‘Innovation and Change’ is: answer this question

Critically examine the claim that THE key to being an innovative organisation is R & D – more expenditure equals more innovation. ?

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Answer

INNOVATION AND CHANGE

Contents

Introduction. 2

Is R&D All That Matters? No. 3

What Else Matters?: Internal and External Factors Influencing Innovation. 10

Conclusion. 12

References. 14

Introduction

Today, rapidly changing environments have led to increasing competition in the world of business. For businesses to survive and grow in this turbulent world, they must embark on a systematic and effective process of innovation. Innovation is a complex process that begins with an idea, followed by an invention, and finally a process of commercialisation (Tidd, Bessant & Pavitt, 2009). It involves the participation of different departments in a business organisation such as production and distribution. An innovation may be radical or incremental, and this is reflected in its impact on the business and the market at large. Another way to look at innovation is through the type of knowledge relied upon. Regardless of these differences, innovation is always driven by the ability to identify connections, to link them to business opportunities, and to commercialize them with a view to gain competitive advantage (Zachariadis, 2003).

            The contemporary innovative organisation is wrapped up in the statement that it is really Research and Development (R&D) that matters. Every year, OECD countries spend about US$700 billion on R&D (Bessant & Tidd, 2007). In the US, more than 20 firms have annual R&D budgets exceeding US$1 billion (Bessant & Tidd, 2007). This demonstrates the extent to which innovation is tied up with R&D.  The impression created in this regard is that as far as innovation is concerned, it is only R&D that matters. The aim of this paper is to critically examine the claim that the key to being an innovative organisation is R&D. The paper sets out to examine whether the notion that more R&D expenditure equals more innovation is true or not.

Is R&D All That Matters? No

            One of the most dominant trends in the corporate world today is the tendency by companies to continue allocating a significant amount of money to research and development. For instance, in 2007, the top 80 R&D spenders in the US allocated someUS$146 billion to research and development (Jaruzelski & Dehoff, 2008). In Europe, the top 50 R&D spenders deployed US$117 billion during the same year (Jaruzelski & Dehoff, 2008). In Japan alone, the top 43 firms allocated US$71.6 to R&D (Jaruzelski & Dehoff, 2008). The determination by companies to pursue the goal of innovation through R&D is also demonstrated in their willingness to invest outside their home countries. In 2007, 91 percent 1000 largest multinational corporations (MNCs) in terms of R$D spending were found to be conducting their R&D activities outside their home countries (Jaruzelski & Dehoff, 2008). These statistics demonstrates the existence of the view that R&D is the only thing that matters when it comes to innovation.

            Many successful multinational corporations have a long history of investing in R&D. For example, IBM, a US-based computer company, opened a research laboratory in Switzerland during the 1950s. Toyota, a leading multinational automobile manufacturer, has continued to invest in R&D both locally and internationally. In 2007, Toyota invested US$8.39 billion in R&D (Jaruzelski & Dehoff, 2008). During the same year, General Motors, one of Toyota’s fiercest competitors on the global automobile market, invested US$8.1 billion. Other leading R&D spenders in 2007 include Pfizer (US$8.09 billion), Nokia (US$7.73 billion), Microsoft (US$ 7.1 billion), Intel (US$5.8 billion), and Sony ($4.56 billion) (Jaruzelski & Dehoff, 2008). In many cases, analysts put these budgetary allocations into perspective by denoting them as a percentage of annual sales.

            Pharmaceutical companies are known to be heavily reliant on R&D for survival (Hall, 2001). In normal instances, these companies undertake R&D efforts in the form of development programmes that extend for a period of 10 to 15 years with one such programme sometimes costing up to £1 billion (Hall & Lerner, 2009). Large MNCs such as GlaxoSmithKline often invest heavily in R&D in the hope that their efforts will lead to the development of new drugs that might give them a long-term competitive edge in the industry. Other potential benefits of such programmes include stronger support from investors, lower costs, and a reduced time-to-market (Halla, 2002).

In their pursuit of innovation through R&D, pharmaceutical companies encounter numerous challenges such as inefficiency in the regulatory process, cost control, and decisions by governments to block innovative medicines. In the UK, for instance, pharmaceutical companies have decried the decision by the National Institute for Health and Care Excellence (Nice). Nice is responsible for regulating the prices of drugs through cost control. To many pharmaceutical companies, such price control measures are an indication that the institute is insensitive to the growing need to invest heavily in R$D in the pursuit of innovation.

 One of the ways through which R&D investments are directed is platform innovation. Through platforms, companies are able to engage in incremental innovation. The platforms act as the foundation that individual firms can build upon to come up with new designs. One example manifests itself in the semiconductor industry, where companies like Intel have come up with platforms that are relied upon to manufacture a wide range of products such as chipsets. Another example is that of car manufacturers, who produce vehicles that differ in style but are based on common engine components. The case of Sony’s “Walkman” technology provides another example of R&D efforts that have led to the establishment of a platform (Tidd, Bessant & Pavitt, 2009). Walkman was originally a Sony product. However, through innovation, it has been adopted as a platform for different manufacturers who deploy the technology to produce a wide range of items including MP3 and minidisk players (Tidd, Bessant & Pavitt, 2009).

Companies are increasingly relying on platforms to obtain a return on R&D investment. They do this through the deployment of technology in different market fields. A case in point is Procter & Gamble’s decision to invest in the development of cyclodextrin, which was originally intended for use in detergents (Tidd, Bessant & Pavitt, 2009). However, the technology ended up being used in different categories of products such as fine fragrances, odour control detergents, and bleaches.

However, the fact that a company has invested in R&D does not mean that it has a clear innovation strategy. It is extremely difficult for a company to make a return on R&D investment without putting in place a clear innovation strategy (Von Stamm, 2003). This is indeed a major challenge that many firms face today. In the quest to give shape to such a strategy, firms must begin by searching for ways through which they can benefit from innovation. Secondly, they must select what innovations they are going to pursue and the reasons for pursuing them, thirdly, they must come up with a decision on implementation. Lastly, a decision on how benefit from the innovation process.

It is difficult for a company to manage the innovation process owing to its sheer complexity (Avnimelech, 2008). The processes and outcomes of an R&D investment may vary depending on circumstances. For example, many large companies that rely heavily on science such as drug companies often come up with processes that rely heavily on the search for patents as well as formal R&D for long-term use. In contrast, smaller subcontractors in the field of engineering tend to be interested primarily on the capability to implement findings rapidly to obtain huge returns in the short- and medium-term contexts. Another example is that of retailers, who may not express enthusiasm in regards to formal R&D, yet they continually scan the business environment to understand changes in consumer trends as a basis for introducing changes in their marketing strategies.

Those who produce consumer goods may be interested primarily on the rapidity of the process of developing and launching new products. They may put a lot of attention on the need to reposition the existing product platforms. In contrast, engineering companies that undertake mega construction projects are more likely to embrace design-intensity. Moreover, they are normally highly dependent upon systems through which projects are managed as well as an integrated approach during the implementation process. Organisations operating in the public sector have to put into consideration a completely different set of challenges, including the need to adapt their innovation processes to strong regulatory influence and external political interference.

As advances in information technology continue to take shape, a rapid increase in the flow of knowledge at the international level is being experienced. This phenomenon inspires many companies to engage in practices that facilitate information exchanges as a foundation for creating and documenting standard methods for use in the design and development of different products. Traditionally, the decision to deploy R&D has been based on a number of factors. One of them is the need to support new and existing businesses. Another factor has been the need to support foreign production through the design of products that are adapted to the needs of the local population.

Owing to the magnitude of R&D investments, large companies seem to have adopted a framework for guiding investment decisions (Burnes, 2004). For example, they tend to defer decisions on the location of R&D investments until all the critical competences required for the project are available (Burnes, 2004). Other important factors include international credibility, external sources of both market and technical knowledge, costs of various transactions undertaken internally, and the cost of disrupting normal operations in situations where personnel has to be relocated to a new site.

However, R&D is not all that matters. Although the ability by countries and companies to compete is being examined majorly through their R&D investments, there is more to innovation than R&D. Yet many firms in emerging economic powerhouses continue to struggle to reach the high levels of R&D investments attained by advanced OECD countries (Ulku, 2007). For example, in Taiwan and Korea, companies are now spending more than 2 percent of their GDP on research and development (Bessant & Tidd, 2007). During the 1990s, Taiwanese companies were on the leading pack in the pursuit of patents in the US. Similarly, Korea has already caught up with Netherlands and Switzerland in terms of the ability to obtain patents in the US.

Evidently, R&D has become increasingly internationalized, meaning that companies are increasingly being compelled to tap into foreign innovation systems, including incentives, specialized workforce, and regulatory regimes (Smith, 2010). This change of scope from home-country to international focus has triggered a wave of intense competition where companies are tempted to invest heavily in R&D without a proper innovation strategy. In the absence of an innovation strategy, such R&D efforts are not likely to succeed. This may explain why small- and medium-sized (SMEs) enterprises excel to become innovative despite their modest R&D investments. Such enterprises become innovative simply because they are able to come up with an innovation strategy that can easily be executed and constantly supported by the modest R&D investments (O’Regan, Ghobadian & Sims, 2006).

The realization that R&D is not the only thing that matters may have been a key factor by major MNCs to tighten their R&D budgets in recent times (Mayle, 2006). The corporations may also have realized that there are organisations that do not spend on R&D but are innovative. In the rush to outdo each other through huge R&D spending, many companies have ended up duplicating innovations even in situations where shared product development efforts would have resulted in massive savings. For example, major mobile phone companies such as Nokia, Samsung, and Apple have continued to duplicate each other’s R&D efforts, with each company spending some $30 million to design a smartphone when they could just purchase the hardware designs (Mayle, 2006). To save on such costs, many large electronics companies have resorted to shrinking their R&D capabilities to enable them to focus on proprietary architecture, manage diverse R&D teams, and set specifications.

The decision by giant technology companies such as HP and Cisco to tighten their R&D budgets may also be viewed as an indication that a company cannot become innovative simply because of investing heavily in R&D. HP’s R&D budget has traditionally remained fixed at 6 percent of sales; today, it has been reduced to 4.4 percent (Mayle, 2006). On the other hand, Cisco Systems’ R&D spending has been slashed from 17 percent to 14.5 percent (Mayle, 2006). Other companies that have adopted a similar trend include Lucent Technologies, Motorola, Nokia and Ericsson. For example, between 2004 and 2006, Nokia reduced its R&D budget from 12.8 percent of sales to 10 percent (Mayle, 2006).

Despite these decisive actions to reduce R&D spending, most companies are still insistent on in-house efforts to undertake critical design tasks (Henry & Mayle, 2002). Such companies are unwilling to reduce R&D spending in the long run. Although numerous Western companies are reducing R&D spending in their headquarters, they are intensifying R&D in their foreign stations. Their rationale for this move is that outsourcing should not be relied on because it is not sustainable in the long run. They are also driven by the fact that failure to invest heavily might drive the wrong message to investors. It makes economic sense to outsource back-office tasks but the decision by a company to own a design is extremely important since it adds to the firm’s intrinsic value (Goffin & Mitchell, 2005). By allowing a foreign company to take charge of intellectual property, a firm might not know how much it should expect to profit once a hit product is designed. This explains why, to guard against such problems, a company like Apple Computer aptly declares that its hit products such as the iPod have been manufactured in-house within the company’s headquarters in the United States.

There are many examples of organisations that have spent heavily on R&D but are not particularly innovative. These organisations find themselves in this situation not because they have failed to develop new products and services but because they are not innovative enterprises. A good example is Microsoft, which spent US$9 billion or almost 13 percent of its revenue on R&D in 2012 to produce updates to its operating system, which received a poor rating from Industry experts (Verganti, 2013). Although these updates are functional, they cannot be regarded as innovative. Another example is Nokia, whose R&D efforts in 2011 sucked up almost US$8 billion (Verganti, 2013). Despite this massive investment, the company is relying entirely on Microsoft’s software for survival. This demonstrates that is wrong to argue a company will automatically get more innovation by spending more on R&D.

The Technology S Curve states that the performance of a technological invention evolves at a slow pact in the beginning (Lu & Beamish, 2004). After some time, a breakthrough invention is achieved and a phase of rapidity in technological performance sets in. However, the improvement in technological performance cannot continue to perpetuity; after some time, the limits of technological capability are reached, meaning that performance does not increase any more. As performance starts slowing down, performance is said to be approach its maturity stage. As this stage sets in, the level of vulnerability increases significantly in the form of the threat of substitute technologies.

The implication of the Technology S Curve for companies that spend a lot on R&D in the belief that it is equivalent to innovation is that there are limits to the innovations that can be achieved along one line of technological specialization. In the long run, such investments are likely to hit a dead end because no amount of funding can drive researchers into stretching the limits of scientific possibilities. By spending too much money to create updates on a near-obsolete operating system, Microsoft failed to adhere to the wisdom of the Technology S curve because it seems that the technology that was used to create the operating system is fast approaching the maturity stage. It could have been better if Microsoft channelled the funds towards the development of a new operating system altogether.

What Else Matters?: Internal and External Factors Influencing Innovation

            A number of internal and external factors influence the extent to which R&D investments will translate into increased innovation. An important internal factor that companies ought to put into consideration is creativity (Bettina von Stamm, 2003). A creative climate can be created through managers’ efforts to put in place the appropriate motivation systems as a way of encouraging researchers to adopt a positive approach to creative thinking. Other internal factors influencing innovation include leadership, shared vision, and the sheer will to continually innovate. The vision should be clearly articulated to enable the business organisation to operate on the foundation of a shared sense of purpose. The strategic intent of the members of the organisation should be stretched to encompass the innovation process in its entirety (Tushman & Anderson, 2004). For these objectives to be achieved, top executives need to be committed to the vision of transforming the firm into an innovative organisation.

            Moreover, appropriate structures must be put in place before an organisation can become innovative (Sørensen & Stuart, 2000). For instance, organisation design should create an ideal environment for learning, creativity, and continuous interaction. The organisation must strike and maintain a balance between organic elements and the mechanistic choices available for different contingencies. This essentially means that the organisation also needs to hire the right individuals. It should hire people who promote the vision of innovation. It should also hire gatekeepers and champions who perform the important role of energizing and facilitating innovation.

            Team-working is also an essential internal factor influencing innovation in a business organisation (Howells, 2005). Different teams are suited to different contexts within the organization. This may explain the distinction between cross-functional and inter-inter-organisational teams (Sampson, 2007). This means that the company must invest in the process of selecting and building the right teams for the right positions. At the same time, organizations must look at the issue of individual development. Innovation thrives best in workplaces where individual employees are motivated to commit their long-term career development to the company (Afuah, 2003). Once the employees are assured of continuity within the organization, it becomes easy for them to stretch their learning abilities and creative instincts to the limit through continuous education and training. Once they gain the requisite competences and skills, they become well equipped to contribute to the company’s innovation process.

            A crucial external factor that large corporations need to examine is the complexities of today’s supply chains and technologies. No single corporation, no matter the capital-intensity of its R&D investment, can become a master of all product development processes. Companies must choose what to focus on as the core and then identify the context in which the product development process is to unfold. By focusing on only one aspect of product development, researchers can succeed in coming up with next-generation technologies. Such specialization also facilitates a process whereby talent is freed up to focus on new product lines. This is one of the factors that innovative organisations put into consideration in their decision to outsource some of their R&D activities.

            The national context of innovation also influences a company’s ability to innovate since it defines its choices in relation to threats and opportunities. Similarly, its value chain position and market power influences innovation by virtue of shaping the nature of innovation-based opportunities. In essence, it is true to state that external sources of innovation may be global, regional, or national (Cooke, 2002).  Under the present circumstances, all the three sources of innovation are important for R&D-intensive companies.

Conclusion

            Based on the analysis presented in this paper, it seems that the notion that more R&D expenditure equals more innovation has pervaded the corporate world. The Technology S Curve shows that as the maturity stage approach, companies should prepare to look for new platforms through which to undertake R&D work. Once a technological invention reaches the maturity stage, no amount of investment can bring about innovative outcomes. Not all companies that spend huge sums of money on R&D are innovative. In other words, it is not really only R&D that matters. Many SMEs are not focused on formal R&D and yet they continue to operate as innovative organizations simply because they create an ideal environment for creativity, teamwork, motivation, and continuous learning. For companies to become innovative organizations, they must put into consideration internal factors such as creativity as well as external factors such as national context, value chain position, and market power.

References

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