AI Generated Imaged
R&D and innovation are business functions that are often poorly understood by executives. This can lead to misallocation of resources and missed opportunities for value creation. It’s surprising to find that even large corporations with significant R&D investments and academic or public research institutions are concerned.
Why it this important? R&D is the bottleneck to the company’s future profits.
Since the emergence of large corporations in the late 1800s, management scholars have proposed various organizational and management frameworks. Some are known by every manager, such as the organization by divisions, departments and functions, or project management. These frameworks help us understand what works and why, allowing us to adopt the best practices for the general betterment of the economy and continuously improve our management practices.
However, very few have received a course on the management of research and innovation projects.
These specific functions had somehow been overlooked. Over the past few decades, R&D, innovation and intellectual property have become increasingly important as engines of value creation. Some management scholars have focused on how to theorize R&D and innovation management to help deal with them more efficiently.
From the perspective of a company’s Board or executive team, it’s crucial to recognize that R&D and innovation are inherently distinct, requiring tailored management approaches. Moreover, companies cannot simply allocate a portion of their profits to R&D. It’s essential they have an actionable framework for these important functions and their associated processes in place, that allows them to innovate as dictated by their market conditions while maintaining levels of R&D investments aligned with short-term profitability targets.
The differences between Research (R), Development (D) and Innovation (I)
Research (R) is a controlled process of new knowledge production. A multitude of activities can generate knowledge, but only research produces it in a manner that ensures its veracity, validity, robustness, domain of confidence. Corporate research is often focused on technical issues and the hard sciences, but it can also take an interest in the humanities and social sciences.
It’s crucial to recognize that research addresses questions that have been formulated in advance. Therefore, the value created by research for the company is totally contingent upon the value of the questions submitted to it. The R function within the company, which drives the R processes, contributes to the creation of value. However, it’s neither able nor even responsible for determining what is likely to create value.
Development (D) is a process that activates existing skills and knowledge according to precise modalities, in order to specify a system (i.e. a product, process, etc.) that must meet well-defined criteria of performance, quality, cost, lead time, etc. The value of the system has been previously assessed or at least judged sufficiently probable to justify the investment in its development. It should be noted that the process of specifying a system involves the creation of knowledge about how it should be built.
The R and D functions therefore are responsible for creating value for the company, by developing specific kinds of knowledge on the issues and subjects entrusted to them. They are not responsible for choosing these issues and subjects. This is precisely the role of the innovation function.
The Innovation (I) function, which is often quite cross-functional, drives processes whose mission is to ensure:
- Assessing the potential or proven value of concepts and ideas to generate future revenues,
- Identifying the new skills needed to bring these concepts and ideas to life.
One of the responsibilities of the innovation function is therefore to identify which of all the requests it could pass on to R&D to have the greatest potential for creating value. In other words, those for which the results of R&D investments are likely to generate the most profits in the future.
The deliverables of innovation processes are numerous and intricate. They include:
- Research questions;
- Product ideas ready for development;
- Emerging concepts at various stages of formalization, which will become ready-to-develop product ideas;
- New emerging skills to be mastered.
It’s challenging to reduce these deliverables to a single number; this is why these processes require specific management methods.
With this framework in mind, one can read with deeper insight generalization statements such as “R&D tends to be more structured and formal, with clear stages and timelines. Innovation, on the other hand, is more of a mindset than a process”.
It’s likely the author of this statement intended to convey that R&D projects should be executed within budget and planning as any other project, but that the outcomes of the R&D projects might not be aligned with initial expectations. For instance, a new material developed during a research project may not achieve the desired performance levels.
This is a significant distinction from other corporate processes. Budget processes or HR annual performance processes will always deliver the desired results.
It’s also likely the author of this statement intended to convey that innovation, as it relates to creating value for customers, and is influenced by market conditions, external events and even sometimes fashion, is a more flexible and serendipitous process by its very nature.
Knowledge at the core
It’s likely that you have observed that the fundamental differences between R, D and I, lies in the manner in which these functions relate to knowledge.
This framework empowers managers to strategically manage expertise, facilitating smarter decisions on skill acquisition, partnerships, and team organization. It aligns knowledge management with company goals, boosting efficiency and fostering innovation.
Balancing short-term gains with long-term R&D investments for sustained value creation
Continuous improvement efforts (selection of a new supplier, changes to assembly lines, incremental design evolutions, etc.) can be implemented and made profitable in a short period of time. As a result, even small gains can be profitable.
Conversely, knowledge creation takes time. Incidentally, it’s a well-known fact that R&D is the only corporate function where the multi-year nature of projects is so characteristic they’re systematically positioned in the company’s medium-term or strategic plan. Innovation processes also take time.
That’s why R, I and D must seek to pave the way for offerings that create significant value, in order to provide a sufficient rate of return on these investments. Management must be careful to ensure R&D efforts don’t slip, over time, into a search for incremental gains, as is unfortunately often the case.
Jerome Gosset
Senior Advisor
