To remain successful in a competitive marketplace, businesses need to drive future growth and increase profits. One way of doing this is through investing a proportion of business revenue into research and development (R&D) activities, which will help in the delivery of new, innovative products and solutions. But what percentage of revenue should be invested in R&D and how do businesses ensure that this investment will contribute towards generating profits?
What should your investment in R&D be?
Lets take a highly successful and innovative company that annually tops the Thomson Reuters Top 100 Global Innovators list - Apple. In comparison to the other companies on the list, which in 2013 collectively invested $223 billion in their R&D efforts, Apple proportionally invested a very small amount. According to the Cult of Mac, Apple spends less than 3% of its revenue (net sales calculated at $170.91 billion as of November 2013) on R&D of new products. Although this is still a lot of money (to the tune of $4.475 billion) in terms of percentage, it is very low compared to its competitors such as Microsoft, which invested around 13% of its $77.849 billion revenue into R&D during the same period.
So, in contrast to what many may think, simply pumping money into R&D does not automatically translate into greater profits or lead to increased innovation.
In light of this, how do businesses go about leveraging profits from R&D investments?
Keith Nichols, of independent research and analysis consultancy Cambashi, has some guidelines that can influence the amount of profits that are generated.
Firstly, companies need to align their product strategy with R&D activities. In other words, link research efforts to planned product developments as part of the company road map.
Secondly, instead of focusing R&D and product development on improving existing products, take the riskier route of developing highly innovative new products for new markets where there are greater growth opportunities. Back to the Apple example - Apple, focuses its R&D efforts on looking at new innovations and business opportunities whereas Microsoft, which comparatively invests very heavily in R&D (almost six times that of Apple), focuses its R&D efforts on old business. Instead of finding new solutions to old problems that could change the market, Microsoft instead focus on making their existing products better, faster or cheaper.
Thirdly, Nichols claims that not every operation should be tarred with the same brush. In other words, don’t allocate R&D investment proportionally to all business operations. If you think a smaller operation could lead to highly innovative products, invest the funds there.
The above guidelines from Cambashi may provide food for thought as to how to go about generating a greater return on R&D. However, the challenge for many businesses is having the funds to invest in the first place. This is where the UK Government can step in and help out. The HM Revenue & Customs’ (HMRC) R&D Tax Credit scheme, aims to raise the level of R&D in the UK by compensating companies for costs incurred in developing innovative products. The R&D tax credit works by allowing companies (both SMEs and large companies) an increased, or enhanced, deduction in respect of qualifying expenditure on R&D activities. The enhanced deduction either reduces the company’s profit or increases its losses.
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