What is research and development (R&D)?
R&D is the umbrella term for all the activities and processes businesses use to gather information to improve or create new products and services. Large companies will often have their own R&D teams, but smaller businesses may outsource this work to specialist partners.
Why is R&D important?
Most businesses need to invest in R&D to grow and remain competitive over time, says Tim Chater, CEO of Phoenix Ventures and a Non-Executive Director and Board Advisor. “As a business owner looking for growth, you either need to develop a bigger platform by expanding into new markets with your product, or you need to innovate and develop new products,” he says. “The role of R&D is to help you understand what new formats and products will help your business to grow.”
When spending money on R&D, Chater advises small businesses to view this activity as a portfolio. “Not every R&D activity will generate a return, or generate a return over the same time frame,” he advises. “It’s important to remember that R&D is how you get to innovation, and the eventual return from that innovation is what matters.”
Coffee machine manufacturer Fracino has been making coffee machines for more than 60 years, and R&D is a critical part of the company’s success, says Alex Maxwell, the company’s Managing Director.
“Our turnover has dropped, and money is tight, but you cannot stand still in business, you always need to look to the future,” he says. “We’re always looking at developing new products that will give us access to new markets.”
Main types of R&D
Research and development can include a wide range of activities designed to capture knowledge that informs business improvement. However, some businesses approaching R&D will not have the resources to develop new products internally, says Chater.
“Smaller firms can use government grants and incentives to do R&D in-house, but in many cases they will outsource much of that work to companies that have specialist research teams and development processes,” he says.
Fracino’s R&D activity is split between in-house and third-party services, explains Maxwell. During the early stages of developing new products, the company’s in-house engineers and sales team use research to identify potential gaps in the market, and trends that should guide future development. “At that point we work with an external agency that will design paper prototypes, and our engineers will then step back in to make working prototypes of our preferred options,” he says.
R&D is commonly split into three key activities: basic research, applied research and experimental development.
Method 1: Basic research
Basic R&D means gathering information that is used as background information, rather than answering a specific question or solving a particular problem.
For example, if an appliance repair firm carries out a telephone market research survey of 500 customers to understand their perception of the brand or their lifestyle patterns, this insight may be extremely helpful in understanding future demand, but it doesn’t have a specific commercial outcome.
Basic research often takes a long-term view of an industry or issue, rather than looking at short-term practical benefits. This initial type of R&D might simply be talking to customers, friends and colleagues, using feedback surveys or social media channels, says Chater. “As you start to get a picture of the landscape and marketplace, you might get a kernel of an idea of a product that could inhabit that space,” he says.
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Method 2: Applied research
While basic research is about gathering background insight, applied research is a type of R&D that involves using existing knowledge to solve specific problems or to develop new products, technologies and processes.
“This can be done informally, but if you have the funding, you might commission quantitative or qualitative research from a third party, which can be used to further your understanding,” says Chater.
Applied research should have a specific goal and commercial outcome. For example, a pharmaceutical company testing new compounds to develop new drugs is using applied R&D, as is a manufacturing plant designing more efficient production processes.
Investing in applied R&D helps companies to better understand their products, processes, and customers, and then develop solutions to meet those needs that have been identified. It is a critical component of R&D for companies of all sizes and sectors.
Method 3: Experimental development
When companies create new or improved products and services through practical application and testing, this type of hands-on R&D is ‘experimental development’. Experimental development translates ideas into prototypes or working models. These help a business understand the new product or service’s functionality, reliability and likely success.
Some examples of experimental development could include a high-tech company that is developing new software features, or an engineering company building new lightbulbs and testing their effectiveness using different materials.
Fracino’s engineers build working prototypes of new coffee machines based on models generated by a specialist design agency. “It’s a lengthy process that can take 18 months, and once we have a working prototype we will move into field-testing,” explains Maxwell. “It’s important to get outside feedback from distributors and customers as to how a machine performs in the real world.”
The benefit of experimental development is that it drives innovation, and can lead to increased market share, greater brand reputation, and increased profitability. Companies that invest in R&D can also benefit from the creation of new intellectual property, patents and intangible assets. For Fracino, R&D has helped them to launch new products that have allowed the company to continue to expand into new markets.
“Our research identified a gap in the market for a new type of water boiler that keeps water hot and doesn’t need to be refilled, and that’s really coming up in sales,” Maxwell says. “We’ve also identified a need for more aesthetic machines, so over the past couple of years we have invested quite a bit of time and money developing more high-end models that are aesthetically pleasing.”
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