As my innovation module progresses it centres more and more around the importance of R&D and the role that research plays.
A big note – these are just my initial thoughts, and I’m suspecting there is a lot more to be understood from business research papers. I would welcome comments to correct my misunderstandings.
In my last post I wrote:
“My personal hunch over the years that R&D never maxes out, and there are always questions about value in terms of financial gains, and value in terms of worth and importance that gets played out in politics and culture”.
As the weeks have passed, I’m looking into this more. Value is defined financially as a return on investment, sales, revenue, plus also in terms of wider commercial importance like providing stories for communications, inputting into business decisions. Value = Worth and Importance.
There are several tricky questions to consider:
- How do research breakthroughs feed into innovation?
- How do you justify the research spend?
- What is the impact of other research activities, and what is their value in terms of worth and importance?
What is value?
Value describes the translation of knowledge or technical know-how services or products that the customer is happy to pay for. Things satisfy a need or something the customer wants. Without a doubt, businesses small and large can have a huge impact on economics and society so there must be some form of value?
R&D creates a lot of value. R&D creates options from blue sky research or technology know how. These options meet consumer needs or deal with uncertainty and solve problems. As this study says, one challenge is to create a healthy portfolio of viable options. Researchers come into their own here by understanding the problems to be solved and are able to look into the future for opportunities.
What processes are needed?
The first challenge partly comes with the innovation process and how research feeds in to create value be it for new products, services or better processes. Challenges might be at the very heart of the R-D relationship. Difficulties include alignment in big ideas, timings, variables affecting one function of another. In my experience, getting this right won’t happen some of the time, and there has to be lots of opportunity for discussion in forums or casual chats. Maybe we’ve lost some of this through lock down.
Then how does your company R&D feed into the innovation process – usually four steps of searching, selecting, implementing and capturing learning. The same difficulties crop up again – aligning R&D with the company plans, more variables and different wants from perhaps marketing and innovation functions. Again in my experience, so difficult to make it work all of the time. Covid certainly knocked my reasonably well-aligned project roadmap on the head. I suspect this is a much bigger area to explore, so I’ll dump it for now.
Measuring value
I’m constantly asked what is the commercial value of my research. I now realise that is two questions about financial worth and importance. I’ve always struggled to come up with anything that felt like meaningful metrics for my research:
- Numbers of publications
- Numbers of citations from those publications
- Uplift in ecommerce sales detectable from research news
Nothing seemed to really work, and the last one would be a nightmare of data gathering so not really practical.
What business research says
Rouse and Boff says to construct the value network or stream and then assess the role of R&D in creating that value. This looks like a pass-the-parcel of knowledge often back and forth or between groups until it reaches the end user, and the important part is that this knowledge is new and competitive. You can then allocate the costs and returns associated. I must admit, I do not fully understand this yet, particularly how to allocate the returns.
Other studies say that the relationship between innovation (measured by an innovation index) and company performance (sales, growth, cost reductions) is only moderate. Therefore measuring aspects of innovation itself isn’t the full story. The research says the obvious metrics of intellectual property and patenting inventions aren’t that useful either, and these can close down discussions and hinder ideas and innovation.
Knowledge is Queen!
Denicolai and colleagues in 2014 suggested this.
Innovation gathers internal and external knowledge and creates value. Knowledge comes from staff experiences, researching and inventing, or sometimes company acquisitions.
They talk about KINT – Knowledge INtensity and Technology capability and EINT – External knowledge sourcing INTensity. In their research of 300 organisations and collection of data for sales, innovation and knowledge, they found quite clearly that sales resulted from strong knowledge processes and external knowledge coming in, and less about what you’d measure in the form of innovation or R&D outputs.
Other work suggests that strong relationships are vital for growing expertise and success, and reputation growth also relates to company performance.
This work gives clues to how to design processes, develop internal know-how and grow external knowledge opportunities.
So that is:
Knowledge processes and management
External partnerships and open discussions to bring ideas to the table
Deepening partnerships to enhance reputations
Delai also talks about efficient knowledge management systems which I’m happy about having spent the last six months building one.
So what to measure?
For the research-innovation relationship, input and output metrics are still useful proxies. But the capturing of sales and innovation data is less important than capturing knowledge, partnerships and reputation. I guess my remaining questions are, 1. How transferable are these ideas to my company? 2. You still need a group of people to place a judgement on whether something is valued or not, and the approaches written about here will help build a stronger case with more tangible facts and figures.
I like this broader view of companies needing to rethink value beyond the finances, although I suspect this is easy to say when firms are doing well.
Summary
- Research as part of R&D and Innovation is a financially valuable and worthwhile pursuit, but it is up to the firm to believe it
- Research helps create value by maintaining a healthy portfolio of work options and ideas
- Work needs to be done to build a value-creating machine
- Tangible input and output metrics (Input: Investment, Output: Patents, publications) are OK proxies for sales, but not great
- Studies suggest sales performance is related to knowledge, fruits of external partnerships and reputation, and these can be measured
- Return on investment is therefore a factor of Knowledge, Partnerships, Reputation, alongside proxy measures, and all should be considered to place a judgement on whether research is good value
- Internal processes and management needs to help R&D max out on value creation, and this will be the subject of another blog post
Bessant J & Tidd J (2013). Managing Innovation. https://www.researchgate.net/publication/285052130_Managing_Innovation/citation/download
Rouse WB & Boff KR (2004). Value‐centered R&D organizations: Ten principles for characterizing, assessing, and managing value. Systems Engineering, 7(2), 167-185.
Denicolai S, Ramirez M & Tidd J (2014). Creating and capturing value from external knowledge: the moderating role of knowledge intensity. R&D Management, 44(3), 248-264.
Dancey K and Tilley C (2020). Now Is the Time for Companies to Rethink Value Creation. https://www.ifac.org/knowledge-gateway/preparing-future-ready-professionals/discussion/now-time-companies-rethink-value-creation-heres-what-means-cfos