A Simple View of “When to Use What Amount and What Form of R&D

A simpler means to look at the right quantity and form of New Product Development (NPD) and New Business Development (NBD) is to follow the path of the arrow shown in the “Quantity and Dominant Form of Innovation Required” figure. Transforming the arrow from a line which is going from market value add per capital and economic value add per capital and looking at it as a time sequence in the growth of most corporations, transforms the figure into a company’s or industrial segments’ business maturity S-Curve as shown in the “Simple Business Maturity S-Curve” figure.

Simple Business Maturity S-Curve

Matching the R&D investment to the Business S-Curve has been shown in many ways. In Strategy & Leadership, elements of NPD as a function of market type are highlighted as shown in the  
“Market Characteristics” figure. Early in the product adoption lifecycle, a “single market” is present. Midway through the product adoption lifecycle, a “multi-market proprietary” environment is typical. Finally, late in the product adoption lifecycle, a “multimarket commodity” environment exists.

Market Characteristics

Thinking about this in more detail, early on the S-curve a single market situation is present. This is characterized by a few early key customers. Having solid technology and a good understanding of the product technology roadmap is critical for success. The center part of the S-curve is characterized by multi-market proprietary driven entities. Since the market is growing they’ve now attracted thousands of customers. New product development is driven by both the market and competition. Each product design and intellectual property management are critical to success during this phase. The last phase of the S-curve is in when there is a multi-market commodity environment. Thousands to tens of thousands of customers exist for companies participating in this field. Price, delivery and quality are key drivers. Product development is focused on the cost and new incremental functions that have been validated for customers.

This translates into the type of innovation that’s required for each phase of the S-curve. Early on its disruptive innovation which is really about reinventing an industry and oftentimes the innovation focuses on the business model. In the intermediate part of the S-curve it is really about next-generation innovation where reinventing the category and making large changes in the product or service offering are key. In the final stages of the S-curve it is really about incremental innovation. You’re refining the product or service andstreamlining the execution of manufacturing and delivery operations is often the source of innovation that creates value for the Corporation.

Innovation Types along the Business Adoption Lifecycle

Said another way, the “Innovation Types along the Business Adoption Lifecycle” figure shows the challenges and type of innovation associated with each position along the Business S-curve. Of note is that the innovation focus and amount of leverage shifts accordingly. This summarizes the basis for and logic behind funding NPD at different levels in different industries that are located along the business lifecycle.

Impact of Non-financial Criteria on Corporation Share Price

Another way to see how NPD is leveraged differently in industries along the product adoption lifecycle curve is shown in the “Impact of Non-financial Criteria on Corporation Share Price” figure, developed by Ernst & Young. The Criteria or Points of Leverage for changing a corporation’s share price are listed along with the summary of key leverage points.

Use-of-IP-along-the-Business-S-Curve
Use-of-IP-along-the-Business-S-Curve
It’s important to consider such nonfinancial criteria when making good decisions about how to fund new product development. It is early market and midmarket companies that can leverage new product development the most. The form of intellectual property dominantly used in these phases of the lifecycle are copyrights and patents. Later in the product adoption lifecycle, in the mature areas, the forms of intellectual property usually found to be of most value are trade secrets and trademarks as shown in the “Use of IP along the Business S-Curve” figure.

As will be more fully discussed later note that the need for freedom to practice occurs all along the lifecycle. The ability to exclude another comes immediately with creation of intellectual property rights but this capability is best conducted only after the chasm is crossed. (For a definition and description of the dip in the S-curve see the book on “Crossing the Chasm” by Geoffrey Moore.) The ability to create additional revenues for a Corporation from out-licensing one’s technology is often found for corporations that have large acquired portfolios operating in the mature, late stages of the adoption lifecycle.