Federal State Budget Educational Institution for Higher
Education
THE RUSSIAN PRESIDENTIAL ACADEMY OF NATIONAL
ECONOMY AND PUBLIC ADMINISTRATION UNDER THE
PRESIDENT OF THE RUSSIAN FEDERATION
SCHOOL OF PUBLIC POLICY
Chair of International Management
Qualification: 38.03.02 Management
Master’s Degree Program: Global Governance and Leadership
WORK TITLE:
«The Advantages of Research and Development and innovation
in competitive markets»
Student:
Sukharev Nikita
Supervisor:
Pavel Golosov, PhD, Head of Chair
of Information Technology
Advisory:
Sergey Chumak, Senior Lecturer of Chair
of International Management
Moscow 2020
CONTENT
INTRODUCTION..........................................................................3
CHAPTER 1 WHY DO COMPANIES OF COMPUTER SOFTWARE
SECTOR ARE WILLING TO INVEST IN R&D?.............................5
1.1 KEY PRINCIPLES OF R&D.....................................................5
1.2 NEW GLOBAL TRENDS AT INVESTING IN INNOVATIONS..7
1.3 WHY DO COMPANIES OF COMPUTER SOFTWARE SECTOR
ARE ESPECIALLY INTERESTED IN INVESTING THEIR MONEY
IN R&D?..................................................................................... 16
CHAPTER 2 FAILS AND DRAWBACKS OF R&D AND
INNOVATIONS (AT SOFTWARE COMPANIES).........................22
2.1 LOW SUCCESS RATE IN R&D AND INNOVATIONS.
INDUSTRY STATISTICS AND CASES........................................22
2.2 KEY EXTERNAL THREATS...................................................28
2.3 RESEARCH AND DEVELOPMENT ORGANIZATIONAL
STRUCTURE TYPES...................................................................30
CHAPTER 3 HOW TO INCREASE EFFECTIVENESS OF R&D
AND INNOVATIONS?.................................................................38
3.1 R&D EVALUATION SYSTEM................................................38
3.2 COST-EFFICIENCY DRIVERS..............................................41
3.3 PRODUCTIVITY BOOSTING DRIVERS.................................43
CONCLUSION............................................................................56
REFERENCES............................................................................59
3
INTRODUCTION
To begin with, the object of my paper’s research is a
process of Research and Development and innovations in the
sector of IT companies, while the subject is the effectiveness of
the above-mentioned process, including its evaluation system.
The central objective of the paper is a provision of
recommendations
aimed
at
the
increase
of
the
level
of
effectiveness of R&D at IT companies.
The goal forms a number of following tasks:
1.
the analysis of the current situation in regards to
investments in R&D and innovations by IT companies
2.
data provision showing the current success rate of
innovation projects
3.
presentation of unsuccessful and abortive famous cases
of innovation projects
4.
the analysis of R&D process evaluation system
5.
the
analysis
of
companies’
experience
regarding
improvement of R&D efficiency level.
The methodological basis of the research is represented by
comparative, descriptive, and logical methods that relate to
general scientific methods. It is also important to note that
within the empirical part of the presented study, synthesis and
analysis methods prevail.
The structure of the paper is defined by the main goals and
objectives and consists of an introduction, three chapters,
conclusion and a list of references.
4
The first part of this paper can be seen as a description of
the current situation regarding expenditures on Research and
Development and its effectiveness.
The second chapter shows a complication related to R&D
and
innovations
providing
key
threats
of
Research
and
Development (both internal and external). Also, there is a
number of big companies and their disastrous failure cases of
innovative projects as an explanation of their low success rate.
The last but most important part is a proposition of
recommendations in order to increase success rate of such
projects and in order to increase the whole R&D and innovations
effectiveness, which implies a division into a number of costefficiency drivers as well as productivity-boosting ones.
5
CHAPTER 1 Why do companies of computer software
sector are willing to invest in R&D?
1.1 Key principles of R&D
The term «R&D» or «Research and Development» implies
scientific activities undertaken by companies to innovate and
introduce new products and services. These works are aimed at
obtaining new knowledge and applying it in practical life.
For companies which are familiar with «Research and
Development» in management and, therefore, which are focused
on such development, it means being advanced in creating new
types of products and promoting them on the markets.
Most people from the former Soviet Union know there were
similar ventures in the USSR: widespread scientific research
institutes
and
design
bureaus
which
carried
similar
developments. Generally, it was common in the military sector,
but also in fundamental areas of science and a number of areas
of the national economy. In modern times, many companies also
use «Research and Development» as an important element of
their
strategy
for
development
and
being
different
from
competitors.
Nevertheless, this strategic instrument has a couple of
troublesome areas. Here I am going to mention the most
superficial one: I mean the cost of such projects and their period
of payback. Modern business principles do not allow even large
companies to spend too much time on such developments, their
implementation, and promotion. That is a problem even for large
corporations, famous brands and network marketing companies.
Does it make sense to consider small and medium businesses?
6
It goes without saying, if company treats «R&D» an
important element of its overall future development, it does not
skimp on such scientific projects. Usually they create their own
research centers, attract leading specialists and scientists on a
permanent basis as well as numerous temporary consultants.
They provide all the conditions, equipment and opportunities
required for research, experimental development and industrial
serial development.
Let me mention a couple of superficial examples of R&D
surrounding
us.
Automotive
companies’
manufacturers
of
automotive components altogether create new car models. Food
companies
in
cooperation
with
manufacturers
of
food
components and raw materials constantly offer their consumers
new types of products. Thousands of computers, smartphones,
tablets and other gadgets are constantly developing, and this is
also
a
consequence
of
ongoing
scientific
research
and
development projects. These are prime examples of R&D and
such examples can be given in any industry, in many areas of
commercial and non-commercial activities of enterprises.
Obviously, the most important element of the R&D strategy
is the speed of research and development. Key objective is not
just to get result, but to do it before competitors, combining with
a very important element of every production business - the
protection of intellectual property. In this way company does not
throw money away and developments are not used with impunity
by competitors who are eager to copy and offer to consumers
products invented and designed by more successful business
rivals.
7
I have already mentioned that in large corporations, R&D is
created not only by individual departments, but also by entire
enterprises
and
research
institutes.
Medium
and
small
companies can create R&D departments, or they can implement
R&D functions in conjunction with marketing or productive
divisions. In other words, small companies may have a «research
and development» function, but usually they do not have a
separately dedicated division in the organizational structure for
this purpose. Regardless the form of implementation, the R&D
function allows the enterprise to grow, evolve and expand by
creating new types of products or services.
In R&D usually the project organization of work is used.
Each new product or service is a separate project. Projects may
overlap or even merge into so-called megaprojects. In order to
manage such projects or megaprojects, it is convenient to use
project management methods and project organization of work.
In each project, a project Manager can be appointed to develop a
project plan, attract performers, create and protect the project
budget.
Unlike ordinary processes, which are one of the most
modern forms of enterprise management, projects have a limited
time of existence. The project must always be completed,
whereas the process can exist within the company for unlimited
time. This organizational form and usage of project management
mechanisms in most efficient ways make it possible to achieve
project completion with a positive result. The project itself is not
already a success. Only a project perfectly completed in time and
within the planned budgets can be considered as success.
8
Despite the complexity of the organization of such scientific
developments and innovations, despite the costs associated with
designing the future, many companies, including medium ones,
frequently use R&D as a competitive tool. They design not only
new products, but also completely new types of services, which is
also important in the competition for the market share.
1.2 New global trends at investing in innovations
Nowadays economic instability forces even market leaders
to reconsider their investment strategies. Investment in R&D is
not an exception. During the crisis of 2008-2009, European
companies, as well as Russian ones, reduced their Research and
Development spending and created global trends which are still
noticeable today.
In 2008, Russian analysts predicted another drop in
economic indicators. Businesses have almost refused the idea of
investing in new technologies. According to the «Expert Rating
Agency», both private and public investments in R&D in Russia
have fallen by 5% since the beginning of the year. The private
sector showed especially great drop in investment indicators.
Even before the crisis, an average volume of innovation spending
by large Russian companies did not exceed 0.5% of revenue, and
after 2009 it decreased to 0.1% of total company revenues
(considering that revenues themselves were falling, these figures
look even more depressing).
Considering
Western
countries,
economic
instabilities
occurred about a year later. So, since 2009, the world's largest
giants have also begun to reduce their investment in R&D.
According to a McKinsey study, held in 2009, approximately 40%
9
of the world's top managers said they had to reduce R&D
spending, and about 30% managers decided to reduce the
number of R&D projects planned for that year. However, a
number of representatives of major Western companies said that
they did not intend to reduce investment in R&D, and some of
them even planned to increase spending in the midst of the crisis
(figure 1.2.1 below). So, Figure 1 shows that expenditures on
Research and Development and innovations are not affected even
by international crisis (Great Recession during the late 2000s).
As a result, in the West, private sector investment in R&D
declined only in 2009, and a year later, in 2010, there was a
steady growth again (figure 1.2.2 below).
Figure 1.2.1 Investment plans in R&D in Western companies (%
of managers)
10
Figure 1.2.2 Investments in R&D in private sector 2000-2015
(bln $)
I believe that most of the world's major corporations can’t
simply cut their R&D spending significantly. Let me take, for
example, any major corporation in software sector: Google,
Apple, IBM or Microsoft. A significant reduction in R&D budgets,
even in a situation, where the overall market indicators are
falling, is a «suicide» for such companies. I mean they already
have a well-established cycle of new product development and
they simply can't stop it. Otherwise, they risk violate their
obligations concerning new products (this may be followed by
legal proceedings and additional costs) and risk find themselves
with much smaller number of loyal clients. Moreover, a number
of large companies treat such periods of instability as an
opportunity to outperform their competitors and occupy the
vacant market share at minimal cost. Using this strategy,
investment in R&D is a primary tool.
During years followed by crisis, a number of key principles,
tactics and strategies related to spending on R&D have been
changing. In 2009-2014 the approach to this type of investment
11
in the West has experienced significant changes. First of all,
companies have become more conservative. So, according to a
McKinsey survey, in 2009, 31% of Western companies with a
turnover of more than $1 billion began to focus on projects with
the
shortest
payback
period,
freezing,
delaying
or
even
cancelling most of long-term projects. 14% of companies
emphasized their R&D towards lower-risk projects. More than
70% decided to create fundamentally new products and services
that would meet the changed needs of their customers in the era
of crisis. At the same time, long-term projects and the
development of more or less vague products were postponed.
Secondly, most market leaders have revised their policies in
the field of recruitment. Before the crisis, the rotation of
specialists in knowledge-intensive areas was extremely high. If,
for example, Google needed a unique specialist in mathematical
sets, the company could afford to «buy» him on the market,
paying 2-3 times more than its previous employer. However,
since 2009, according to McKinsey, 27% of large Western
corporations have frozen their budgets for expanding the staff of
specialists in R&D departments. Approximately the same number
of companies has taken a course to grow such talents inside the
company. Three years later, when the economy began to recover,
35% of respondents reported that they sharply reduced the scale
of «purchases» of specialists in the foreign market. A new
recruitment strategy that emerged during the crisis has become
a primary one.
a) The Asian trend
It was the period of 2008-2013 that formed the global
trends that we can see today in the field of Research and
12
Development. The first of trends is a large amount of investment
in Asia. Before the crisis of 2008, the United States was the
leader in attracting investment in R&D (in 2008, the total budget
for R&D of American companies was $532 billion; $215 billion
was invested domestically). Since 2009, the situation started to
change dramatically. According to «Bloomberg», from 2009 to
2015, a number of spending on R&D of American companies was
still increasing, but the main growth came to foreign companies,
and first of all – to Chinese ones. In 2015, the US invested about
$60 billion in Chinese scientific research projects. At the same
time, investment in R&D in China itself began to grow
explosively: according to «Capital IQ», the growth about 60%
from 2009 to 2015. Less significant, but still noticeable growth in
R&D investment is observed in this period in India: by 2015, the
country was able to attract more than $30 billion. Most of this
money came from domestic market players and from the
Chinese, British and Americans companies.
The primary reason why Western companies have started to
move
their
Research
and
Development
spending
and
departments to Asia is generally clear. There were same reasons
that prompted major market players to move their production to
China, Korea, and India in the mid-1990s. I mean cheap labor,
«softer» tax policies of the authorities, lower operating costs,
and huge potential for Asian markets. One of the most striking
examples
in
this
area
is
the
American
industrial
giant
«Caterpillar». During the crisis of 2009, the company opened a
new Research and Development center in the Chinese city of
Wuxi, the center of Jiangsu province. They were sure that China
was a huge market experiencing a construction boom, so it was
13
important for to open a research center that would better
understand the needs of local consumers. But the issue was not
just about the «cultural» specifics, which was better understood
by Chinese employees of the new center than by the Americans.
The main reason was that the center was opened just across the
street from the Chinese «Caterpillar» factories. One of them
started working in 2006, and the other two were launched a
couple of months before the center was opened.
Geographical proximity helped the company to speed up an
exchange of information between enterprises and the R&D
division and to make it less expensive. In addition, the center
was located next to the Caterpillar Asia Pacific Proving Ground –
the company's experimental site, where all the products were
produces and being tested for Asian consumers (not only
Chinese, but also Korean, Japanese, Thai and so on). This also
reduced costs and time spent on information exchange and
product development.
I have read the company’s R&D report where it was told
that all the R&D products at Caterpillar were divided into three
major categories. The First category was “products that are one
cycle away from the current one and have a chance to appear on
the market in 5-10 years”. This type includes mainly engineering
equipment. The second category was the company's «existing
products,
which
were
subject
to
modifications
and
improvements». And, finally, the third one – «products that could
be reduced at cost and improved at reliability».
At the same time, each research center of the company,
regardless of its location, participated in all three categories of
projects or at least at part of them. For example, «Caterpillar» is
14
currently actively developing a new generation of compressors.
They are planned to be released primarily to the US market, so
the entire product development cycle is managed in the United
States, Illinois. Employees of the American research center
conduct measurements and analyses, send the data to Chinese
department and by the morning receive a complete analysis of
the results from their Chinese colleagues. I would say it is quite
reasonable to use time difference in such an efficient way.
b) Student Fraternity
Another global trend that emerged in the field of R&D
during the crisis is the activation and reinforcement of links
between major market players and the educational environment
and universities. I would say that in most cases this trend is a
perfect complement to the Asian trend. In other words, Western
companies have begun to show increased interest not just in
universities, but in universities in Asian countries. For example,
between
2009
and
2011,
«GE»
(«General
Electric»)
was
investing more than $4 billion in Research and Development
every year (including $800 million invested in new healthcare
products or «General Electric Healthcare», «GEH»).
GEH's
Scientific
Research
center
is
Munich.
Here
employees of the corporation are engaged in Research and
Development in the field of medical products. Back in 2007, the
company launched an additional Research Center in Bangalore,
then,
in
2009 a
program of
cooperation
with
the
local
Polytechnic University was started. Small by Western standards,
but giant by Indian standards grants were allocated for students
engaged in medical research. As a result, the MAC 400 was
released - a portable electrocardiograph with the market price of
15
$800. Comparing to the similar analogues produced by the same
«GEH» to the markets of Europe and the United States with a
cost varying from $2 000 to $10 000. Furthermore, in 2010 at
the same Bangalore center, with the involvement of University
students, the MAC 400 was finalized with a price of $500.
The
new
product
started
selling
unbelievably
well,
especially in emerging markets. According to Vijay Govindarajan
(senior innovation consultant at «GEH») the crisis has caused
innovation processes to flow in the opposite direction. If 10-15
years before crisis technologies and innovative solutions came to
Asia from the West, then in the second decade of the XXI
century, the opposite trend has clearly developed. Asia has
started to create its own innovative solutions and technologies
with a lower cost, which are used all over the world including in
Western countries."
c) Pragmatic approach
Finally, the third significant global R&D trend emerged
during the crisis and recession of 2009-2011 is related to the
relationship between large companies and their suppliers. The
easiest way to show the dynamics of these relationships is to use
the example of the Japanese Honda Corporation. Despite the
rapidly
growing
crisis
processes
in
the
global
economy,
according to the Booz & Company report, in 2009 Honda
Company was one of the Top 20 largest innovative companies in
the world. The corporation invested $5.6 million in Research and
Development. Considering the amount of money, it was 4% less
than a year earlier – but taking into account a percentage of the
company's revenue, the figure increased by 6%. Honda, like most
Japanese companies, builds its relationships with suppliers on
16
the «Keiretsu system». It forms a conglomerate of companies,
where various shares belong to Honda itself. It looks more like a
«mother-daughter» than a «customer-supplier» relationship.
Within
the
companies
using
the
framework
of
Keiretsu,
technology exchange between the parent company and its
subsidiaries was common. So, Honda was not an exception in
this sense. The company actively sponsored the development of
new materials, spare parts, and technologies that were later to
be produced by its suppliers. However, this system that has been
established for year was also changed by the crisis.
In short, Honda has become more pragmatic in a relation to
working with suppliers. First, the company has started the
promotion and stimulation of competition. For instance, the
supplier X produces spare parts for Honda in Japan. Previously,
this meant that the same supplier would produce spare parts for
the company in the United States, the United Kingdom, and
Southeast Asia (if the capacity of production allowed). Right
before the crisis, Honda management realized that this approach
makes the relationship with the supplier stronger, the quality is
becoming more and more predictable regardless creating more
risks – concerning both price and technology. In 2009, the
company started movement away from the principle of «one part
– one supplier». Honda began to create competition among its
suppliers. Honda choose those suppliers who best meet the
companys needs according to 5 criteria: quality, price, logistics,
development and management (or «QCDDM» - Quality, Cost,
Delivery, Development, Management).
Second, the company has increased the exchange of
knowledge and expertise with its suppliers, while reducing
17
overall spending on Research and Development on the supplier
side. Previously, it was considered like a normal practice for
Honda to send own specialists to work on the supplier
companies’ sites. But after 2009 this practice has become
mandatory. Today any Honda supplier is required to send a
group of R&D specialists to the company's factories at least once
a month, and Honda’s R&D specialists are required to work for
several
months
in
the
Research
departments
of
supplier
companies. Moreover, earlier the exchange of knowledge and
technology between suppliers themselves was not encouraged in
Honda. However, now, despite the promotion of competition, the
company has stepped up the transfer of best practices from one
supplier to another. The logic here is simple and has a special
Japanese specificity: if a solution is found, it does not mean that
it cannot be improved and refined, and the best way to improve
one is to involve as many people as possible in solving the
problem. Honda management believes this innovation, like any
other strategy, requires staying pragmatic and forward-thinking.
The logic was that crisis will end sooner or later, and the trends
that were set in motion as a result of economic instability will
remain for a long time – at least until the next crisis.
Talking about Russia, I can say that from 2010 to 2014, the
costs of Russian
enterprises for technological
innovations
increased from 349.8 to 762.8 billion rubles (2.2 times more),
while the share of innovative products in the total volume of
goods, works and services produced in the Russian Federation
increased from 4.9% to 8.2% (almost 1.7 times more). Russian
exports increased from 6% to 9% (1.5 times more). This data was
presented at the Gaidar forum in January 2016 by Anatoly
18
Aksakov, head of the state Duma Committee on economic policy,
innovative development and entrepreneurship. According to the
Committee, the most active technological innovations were
introduced by enterprises working in the area of production of
electronic and optical equipment (27% of all enterprises in the
industry),
production
petroleum
products
(23%),
chemical
production (21.4%), production of vehicles and its equipment
(19.4%).
So, most of private companies are not really interested in
developing their R&D. The overall number of companies that
have built their business models based on R&D is extremely
small – according to the “HSE Institute for statistical research
and knowledge Economics”, it is less than 5% among industrial
enterprises. The largest expenditures on innovation can be seen
at large state corporations. Thus, “Rosatom” spent about 28
billion rubles on R&D in 2014. As a result, according to the
company's annual report, its specialists have received 1,129
patents. In the same year, “Gazprom” spent a record high
amount of 10.82 billion rubles, and the group's companies
received 218 patents.
In 2016, Russia ranked 12th among the world's innovative
economies in the innovation index compiled by Bloomberg (14th
place a year before). The index evaluated seven indicators: R&D
expenditures,
productivity,
concentration
of
technological
companies in the national economy, prevalence of higher
education, value added of goods, number of registered patents,
and number of researchers. The first place in this ranking was
held by South Korea. It is followed by Germany, Sweden, Japan
and Switzerland. The top ten most innovative countries also
19
include Singapore, Finland, the United States, Denmark and
France.
1.3 Why do companies of computer software sector are
especially interested in investing their money in R&D?
It is hard to overestimate the importance of scientific
researches, developments and innovations as the whole in the
Information Technology sector, which involves companies that
produce
software,
hardware
or
semiconductor
equipment,
companies that provide internet or related services etc. That is
why spending on R&D for leading companies working in the IT
sector is completely undeniable. Such corporations have a huge
inventory of intangible assets. In fact, intellectual capital for the
IT companies is one of the main factors in determining the
market value of the company.
There is a study called «Global Leaders of Innovation»,
which analyzes the spending of 1,000 of the world's largest
public companies in terms of investment in researches and
innovations. The annual studies have been conducted for more
than fifteen years. They show exactly how investment in
innovation is linked to a long-term growth strategy and
confidence in the future in the face of increased spending on
R&D in each region and virtually almost each industry.
According to a number of last annual researches, globally,
spending on innovations and R&D in the IT sector companies has
increased in all regions, especially a “double-digit growth” can
be seen in China (+34%) and Europe (+14%), while North
20
America and Japan experienced slightly less dramatic increase
(+7.8% and +9.3% respectively).
At the same time, the overall knowledge intensity — the
ratio of R&D spending/ sales — remained at the quite high level
of 4.5%.
This year research was a part of an industrial comparison of
performance and investment in innovation over five years. As a
result, 88 companies from different countries and industries
received the status of high-performance innovative companies.
These companies outperformed competitors in their industry
groups in seven key financial indicators over five years, even
while their costs of R&D spending as a percentage of sales were
below the industry average.
The set of seven financial indicators includes revenue
growth, increased market capitalization, operating margin, gross
margin, operating profit and gross profit, and total shareholder
income.
These 88 high-performing innovative companies in the
period from 2013 to 2017 showed the same indicators of
operating and gross margins as other organizations included in
the study «Global innovation leaders», but the growth of sales
and market capitalization of these companies was almost 3 times
higher. Most successful IT companies at the top of the ranking
outperformed other market participants at least twice in all other
analyzed indicators.
All
88
high-performance
innovative
companies
demonstrated the following common characteristics:
- Strategic consistency: 77% of the fastest-growing IT
companies reported a high level of consistency between their
21
innovation strategy and their business strategy. In comparison,
the indicator of a group of corporations who did not increase the
growth rate was 54%, and in the group of companies showed a
slowdown, there are only 32%.
- Culture: 71% of IT corporations who showed faster growth
in their income relative to competitors said that their corporate
culture is aligned with the innovation strategy, compared to 53%
of companies who did not increase their growth rate, and 33% of
respondents whose growth slowed.
- Role of management: 78% of companies whose revenue
growth
exceeded
the
average
one
within
the
industry
competitors indicated that management fully or significantly
supported the strategy for investment in R&D and innovation,
compared to 62% of firms who did not increase their growth
rate, and 53% of companies who showed a slowdown in growth.
In terms of geographical distribution, the resulting list of
companies reflects a consistent significant growth in the number
of companies from China — from 3% in the first survey in 2007 to
17% in the last year survey.
European companies also showed significant growth — from
18% in 2007 to 30% in 2018. In North America, the number of
high-performing innovative companies decreased by 45%, and
in In Japan, such companies were less than 8%.
Also, out of the more than 1,000 companies whose
performance was analyzed over 3 separate five-year periods
ending in 2007, 2012, and 2017, only two confirmed their status
as high-performing innovative companies over the entire 15-year
period. Both of them are representatives of the IT sector.
22
Among other main results of the study, the following can
also be noted:
Amazon has become the leader in R&D investment for the
second year in a row. Siemens is once again among the world's
top 20 companies in terms of R & d spending.
Apple regains the top spot in innovation, beating Alphabet,
and Netflix is among the top ten most innovative companies for
the first time.
In 2018, the information technology and electronics
account for 40% of global corporate Research and Development
spending.
It is also worth to be mentioned, that among top ten most
innovative companies there are 7 representatives of the IT
sector: Apple, Amazon, Alphabet, Facebook, Microsoft, Samsung
and Intel.
The amount of expenditures on Research and Development
innovative projects by IT companies such as Apple Inc. (Figure
1.3.1) and Alphabet Inc. (Figure 1.3.2) is attached below. I have
examined about a dozen IT companies’ investment reports taking
into account large market leaders as well as medium companies
in IT sector, but most of them showed quite similar view:
-
The amount of R&D spending is steadily growing
-
The number of projects and their spending are not
affected neither by local nor by international crises
23
-
The further – the higher is a percent of company’s
revenue spent on R&D and
innovations
Figure 1.3.1 Apple Inc. Expenditure on R&D projects, 2007-2019,
billion $
24
Figure 1.3.2 Alphabet Inc. Expenditure on R&D projects,
2013-2019, million $
Once
again,
each
company
representing
IT
sector,
regardless its size, number of employees, market value etc. is
primarily
interested
in
development
within
the
field
of
researches and innovations. Obviously, each company is eager to
get
a
successful
invention,
discovery
or
some
kind
of
breakthrough regardless its industry. However, I believe, today,
during the century of technologies, the closer company is to the
software/hardware
products,
internet
provision/services
or
semiconductor equipment industry, the closer it is to revolution
and numerous innovations.
Regarding expenditures on R&D and innovations in IT, the
final statement is also quite obvious: Research and Development
spending is currently critical for large corporations, especially
for such companies in IT industry (Figure 1.3.3). Moreover, such
25
spending is not affected even by international crisis (Great
Recession during the late 2000s) while the amount of such
spending within the industry is steadily growing from year to
year.
Figure 1.3.3 Percentage of revenue spent on R&D by
industry, 2018
Nevertheless,
a
large
volume
of
such
spending
on
innovations still does not guarantee a high success rate of R&D
projects. So, the next chapter represents the analysis of success
rate of such projects providing examples of famous innovative
projects.
26
CHAPTER 2 Fails and drawbacks of R&D and innovations
(at software companies)
2.1 Low success rate in R&D and innovations. Industry
statistics and cases
Thereby,
development
of
innovative
Research
and
Development departments and so-called «investments in the
future» of a company are becoming fundamental and inevitable
expenditures. Unfortunately, a great number of organizations
cannot
afford
such
significant
spending
on
innovations.
Moreover, even if an organization manages to allocate money for
such
investments,
one
more
issue
arises:
most
of
R&D
departments work not as efficiently as it was expected. That is a
reason
why
this
chapter
analyzes
effectiveness
of
such
investments in innovations.
According
to
the
report
from
the
PMI
(or
Project
Management Institute), only 14 percent out of all Research and
Development projects in IT sphere fail. It seems like other 86
percent of projects should be successful. Unfortunately, this is
not the case. That number of 14 percent represent only complete
utter
failures
-
most
of
projects
did
not
fail
outright.
Nevertheless, 31 percent did not meet their primary target
objectives, at 43 percent of cases the initial budget was
significantly exceeded and almost half of them (49 percent) were
slow and tardy. More detailed at the Figure 2.1.1:
27
Figure 2.1.1 Success rate of R&D projects in IT industry,
2017
It is worth to note that abovementioned data mostly relates
to the advanced and progressive international companies and
market leaders. Most probably, in regards to more modest and
frugal organizations the overall situation is rather different.
In order to get the full picture of the current situation
regarding expenditures in R&D and innovations and its real
effectiveness I would like to refer to the report called «The
Impact of Business Requirements on the Success of Technology
Projects» provided by IAG Consulting.
Summarizing the whole report, I would mention a number
of most important statistical facts:
-
70 percent of companies are more likely to have quite
an ordinary «below the average» project or even a complete
failure.
-
Organizations
with
medium
business
analysis
capabilities have three times as many projects failed as
successful ones.
28
-
On average, companies of Information Technology
sector take over 180 percent of target time and consume in
excess of 160 percent of expected budget, while provide under
70 percent of the required functionality!
-
Approximately 40 percent of the budget allocated for
the R&D project is usually consumed by poor requirements of a
software company.
The reason of such a poor state of affairs is rather
superficial: usually the level of required competency is much
higher than the existing within the R&D department employees
one. In my humble opinion, this situation mostly relates to
medium companies (especially representing software sector) and
can be described as: «average companies use average specialists
in order to succeed average projects» while leaders of IT
industry have much more positive circumstances and most
probably succeed in such projects much more frequently.
Then let me go back to worldwide known corporations and
provide a number of recent cases which lead to great financial
losses.
One of the most widespread examples of such disastrous
projects is a Fire Phone by Amazon. In the summer of 2014, the
company launched a new promising product — Fire Phone.
However, the project has become one of company’s biggest
misfires. Right after a debut at the top spot of Amazon’s retail
charts, things quickly spun out of control. Overall, according to
company’s reports, the Fire Phone sold approximately 30
thousand of units during the first month after release. One more
outstanding fact concerning this case is the reduction of the
price of the Fire Phone down to 99 cents per unit. Unfortunately,
29
even such a prodigious price reduction did not make people to
start buying the new phone. It was more than enough to put
Amazon off the whole project of Fire Phone and to end the
permanent production of these smartphones just a year after
release date, in September 2015. Nevertheless, even more
upsetting for Amazon was the fact that the company has instantly
lost more than $170 million. In order to realize the volume of the
loss, it is equal to the budget of the first “Guardians of the
Galaxy” movie. In my humble opinion, the primary reason of such
a great loss is rather obvious: the company has overestimated
the product – Amazon has put Fire Phone at the top of sales
charts and has produced too many units of the product before
the release date just because of too much of confidence in the
product.
One more example failed projects is even more famous –
Galaxy Note 7 by Samsung. It has been one of the most
discussed technological failures of recent years: new 7 th model of
Galaxy Notes produced by Samsung has experienced numerous
cases of phones explosion. As it turned out later, it was
suspected to be battery issues all along: the company had a
couple of issues related to phone’s battery during the process of
Research and Development (batteries were smaller at one
corner, causing the higher likelihood of short circuiting) as well
as during production process (there was a third party provider of
batteries, “Amperex” Technology Ltd. Their batteries were found
to be incorrectly welded. In September 2016 Samsung was
forced to suspend sales of the new promising product due to
numerous reports of explosion right in the hands of users. The
company has ordered a global recall of two and a half million
30
units of devices, hoping that such measure is going to prevent
the more significant issues for the brand.
Fortunately, there were no fatal accident because of
Samsung phones explosions. Nevertheless, the company has
experienced a number of problems which lead to additional
corporate expenses: trials and court proceedings, the ban on all
US flights due to fire hazard. As a result, Samsung, whose sales
indicators were growing from year to year, has experienced a 2percent drop in sales according to the annual company’s report.
Moreover, the reputation of Samsung as a leading innovative
technological
company
has
suffered
right
after
first
announcement of the explosive battery. Taking into account the
fact
of
fast-growing
competition
within
the
market
of
smartphones (Apple was about to announce new iPhone 7,
Google as stated it has started to develop its own smartphones),
the level of credibility of Samsung company as a smartphone
pioneer was also significantly affected. However, it is not only a
reputation that have been affected. According to numerous
estimations, the first recall has cost the company about $2 billion
including the cost of phones replacements and significant of in
the company’s share price.
Thirdly, I would like to combine two cases of the innovative
project failures: Google Glass and Apple Newton. I have
interconnected these two cases because of quite similar issues
and failure causes.
In 2012 Google has announced its promising innovation –
Google Glass. The device was supposed to provide you with
mobile
communication,
geolocation,
voice-controlled
and
transmitted sound through the bone. Rather innovative, isn’t it?
31
Undoubtedly. However, it didn't work out. First of all, price was
innovative as well - $1500, three times higher than flagship
models. Second reason was a number of privacy issues: Google
Glass could shoot everything that came into view as a video
without being noticed. It is not known whether the owners of
glasses would find loopholes in the laws, but there were
numerous rumors that the glasses would fall as illegal devices.
Actually, it's not surprising. Obviously, this project is not an
exception – it caused a huge financial loss for the company.
Nevertheless, today Google is developing a new generation of
Google Glass which are going to be used more in professional
sector. Also, it is worth to mention that this project gave an
impetus to the development of the whole modern VR-glasses
industry.
In its turn, Newton, pocket personal computer, developed
by Apple Inc. was supposed to become a pocket mini-computer
capable of recognizing stylus handwriting. This was a central
feature and a central issue of the product same time. Taking into
account the late 90s, the price of product was similar to Google
Glass: $1000. However, a system of written text recognition was
a hell of a mess. So, why did people need to pay $1000 for a
device that doesn't do its main task? Moreover, the size of
Newton was not for “pocket”. As a result, it is not too portable,
rather expensive and poorly working gadget. Apple was eager to
make a breakthrough with Newton, but the company has
evidently rushed to the market the unfinished device.
In order to realize the volume of financial losses, I have also
examined
annual
Research
and
Development
Expenditure
reports of leading IT corporations. As a result, only in 2019 due
32
to innovative projects failures and delays Apple Inc. has lost
more than $5 billion; Microsoft has lost even more than $6
billion. There is a great number of such examples and I am not
going to mention a lot of them.
However, I will highlight a couple of core internal reasons
(threats) why do project fail so often and why do companies still
lose millions and billions of dollars due to project failures.
a)
Wrong decision-making
Research and Development management often sets wrong
course within innovative projects or during the process of
selecting ideas in regards to the promising products. Obviously,
wrong decisions affect a great number of aspects such as ideas
prioritization, product strategies for new products, choice of
development options, etc.
The reasons for this can be following:
-
A lack of a corporate and innovation strategy as a basis
for decision-making process.
-
Insufficiency of information as a basis for decision-
making process.
It also happens that instead of facts, the management's own
beliefs dominate, and decisions are made from within, which
later turn out to be false.
b)
Slow structures
It usually happens like this: the larger is a company, the
slower
are
internal
organizational
processes.
Low
speed
processes with a long decision-making process can become like a
death sentence for the whole innovation process. Moreover,
there are often communication and interface issues. It is obvious
33
that all of these factors negatively affect the quality and
efficiency of the Research and Development process.
It is very opportunely to mention a couple of advantages of
start-ups over large corporations;
-
They are less complex, quick and more agile due to
their size, absence of numerous hierarchies, bureaucracies.
-
They are better networked and interlocked. This
positively
affects
processes
acceleration,
collaboration
and
sometimes even openness and willingness to change.
c)
Lack of market orientation
One more important reason of project failures is low level of
market and customer orientation. Often products do not provide
rather convincing customer value, or it is not enough different
from similar existing products.
It can be caused by:
-
Too much focus on technological process.
-
Lack of time for customer analysis and product
specifications development (Apple customers used to new iPhone
every year)
-
Low level of accessibility to customers and customer
information because of weak Sales departments or due to
tensions between Sales and Technology departments.
-
A lot of companies are sure that they already know
their target group and existing customers, relying on own
assumptions and missing latent and actual needs.
All of this is not a good way to develop innovative unique
products. The more information you have about your target
group, the more chances you have in your innovative project. So,
34
I believe that investing in extensive customer research and needs
research is a key success factor for R&D.
d) I would also add here a couple of causes which at least in
theory lead to project failures such as violation of work time
limits; getting results that don't meet the requirements (the
product is not patentable or it does not correspond to the market
demand); it is impossible to transfer the results of laboratory
tests to the existing technical or technological level.
I will express already obvious state of affairs: companies
spend a great money on innovations and suffer because of
enormous financial losses. That means that a sector of Research
and Development has a lot of space to grow. Further in this
chapter I would like to analyze other risks threatening the
process of Research and Development and leading numerous
innovative projects to failure.
2.2 Key external threats
During case studies, I have already deeply analyzed the
most superficial risk of innovation process - financial losses due
to project failure. Then I have also provided a number of internal
reasons compromising project’s successfulness. Further I am
going to mention more profound external threats. Talking about
risks and possible losses, enterprises which carry out Research
and Development work interact with the external environment,
so external factors have a significant impact on both the process
of R&D and the activities of the enterprise as a whole. In the
external
(political,
35
environment,
economic,
we
can
scientific
distinguish
and
indirect
technical,
factors
social,
environmental,
legal
features),
as
well
as
direct
factors
(competitors, consumers, investors, suppliers).
Among external indirect factors of conducting Research and
Development processes, economic risks should be mentioned
first of all. Such risks imply inflationary processes, instability of
exchange rates, slowing investment activity due to economic
sanctions etc. In Russia political regulations are aimed at
activating innovation processes and maximizing the contribution
to the development of research (as an evidence - the steady
growth of budget funding for scientific research from 140.5
billion rubles in 2005 to 617.3 billion rubles in 2015).
There
are
also
social
threats
which
imply
high
unemployment rate, low living standards, low real income of the
population and low level of purchasing capacity.
Last of eternal indirect factors I would mention force
majeures and ecological threats which imply inconsistency of
ongoing work and new developments and requirements of
environmental legislation.
Considering external direct factors affecting Research and
Development process they include:
- Factors causing threats of competition: high indicators of
competitors' scientific and technical developments, low cost of
competitors' R&D processes, high speed of competitors’ R&D
processes,
huge
competitors'
reputation
in
the
sector
of
innovations. The existence of a large number of competitors not
only encourages overall growth, but also creates obstacles for
R&D. Here the main risk is the possibility of development a
product or technology by competitors with a lower price and
36
with a better customer satisfaction, using unfair techniques and
obtaining results of innovative developments of other companies.
- Investors can also be seen as external direct threat.
Corporations
often
experience
difficulties
with
attracting
investments during the initial stages of the Research and
Development, which may lead to a lack of funds at the initial
stages and the closure of the project. In addition, investors may
interfere excessively in the work of the research Department and
require access to confidential information, which carries the risk
of information leakage and negatively affects the development
process.
- I would also mention interaction with consumers whose
needs are never stable and interaction with suppliers as two
more external direct factors. Since certain delays in the supply of
raw materials and materials necessary for conducting R&D
processes slow down the entire innovation process of the
enterprise. In addition, materials received from suppliers may
not meet the standards and may have a higher cost than is
stipulated in the preliminary estimates for the R & d process.
2.3 Research and development organizational structure
types
So, I have described a number of key threats for R&D and
innovations. In order to avoid internal organizational risks, the
company has to choose an appropriate organizational type in
regards to the process of Research and Development. That is
why now I am going to consider several different types of the
structure of R&D and analyze their own positive and negative
features.
37
Today
organizational
Development
structure
departments
is
rather
of
Research
diverse.
and
Usually
big
corporations choose between five organizational R&D structure
types. Obviously, every type has its own advantages and
drawbacks. The issue is a selection and a use of criteria for the
organizational structure of R&D services within enterprises. An
inappropriate strategy choice usually leads to such issue. That is
why a process of strategy selection requires, as I have already
mentioned,
consideration
a
number
of
specific
conditions
regarding capital accumulation and competition.
Specialists manage to distinguish the following five types of
organizational structures which are organized by:
-
Scientific
branches
(fields
of
knowledge)
and
technology-functional structure
-
Product / technology attributes (thematic structure
type)
-
Projects (project-based)
-
Organized according to the stages of Research and
Development process (phased)
-
Mixed (or combined) structures (system-component)
1. At the technology-functional structure, Research and
Development departments are usually divided into numerous
sectors. Each of them is dealing with a certain separate branch
of science (usually quite narrow one).
One
of
the
most
important
advantages
of
the
first
organizational structure type is an opportunity of creation a
number of coordinated groups of high-quality specialists in one
such sector. There usually is a creative atmosphere, without any
parallelism within a project.
38
The main drawback of this structure type is a significant
isolation of certain areas of Research and development caused by
the functional form of management organization. That leads to
an
organizational
gap
between
research
departments,
laboratories, on the one hand, and production, sales services and
market research, on the other hand. With such a significant
organizational autonomy, it is rather difficult to achieve close
cooperation
between
different
departments’
specialists.
Moreover, the processes of monitoring, planning and operational
regulation of the process of implementing research and project
programs become even more complicated. That is why it is
necessary always keep in mind a perfectly coordinated work at
the horizontal level. The thing is that such divisions are built on a
functional principle, so most of employees become narrow
specialists and sometimes they are unable to resolve issues
which exists beyond the traditional scope of their narrow
specialization.
2. The second type of organizational structure is based on
product or technological characteristics (that is why it is also
called
as
thematic
structure
type).
According
to
the
abovementioned organizational structure, workers of Research
and Development departments have to be primarily focused on
the final result instead of the problems and requirements of
production and sales. There are two big advantages of this
organizational structure type which a) raises the probability of
fundamentally new ideas appearance, as well as the opportunity
to combine the stages of development by organizing their
implementation in a parallel-sequential scheme. Here I can also
mention an opportunity to unify the design and technical
39
solutions within the framework of a certain task; b) moreover, it
allows to increase a level of personal responsibility of creative
specialists and project management aiming at high-quality
performance in accordance to the current theme and product.
Obviously, this structure type also has its disadvantages.
First of all, an attention to this area of development is higher.
This creates a threat of underestimation of long-term and
functional
research.
Also,
a
number
of
difficulties
in
improvement the skills of personnel arise; an uneven load of
laboratory equipment and experimental facilities occurs from
time to time; and the intensity of the resource usage is becoming
relatively low due to inability of a narrow specialists to work at
full steam in regards to wide range of problems.
I have studied this organizational structure type taking as
an example GE company (or General Electric). There is an
organizational structure of an R&D division which is purely
based on a product line at the innovation project of radio relay
systems development.
3. The next structure type is primarily based on project.
Such organization type is usually used in companies where the
simultaneous implementation of several projects is a main goal.
This structure type is rather flexible even taking into account the
fact that it requires the involvement of specialists in a numerous
branch of science. However, it is always necessary to determine
the number of research fields and researchers of certain
specialties and combine them into groups at the initial stages of
a new Research and Development project organized by such
structure. This organizational structure is also applicable for
organizations where a new product is predominantly created and
40
developed at every stage of the innovation process. It is
especially efficient at the last stages of the process of a new
product development. The type of project structure also makes it
easier to plan, to control, and to evaluate the project based on
both scientific and commercial criteria.
The project work organization is characterized by high
efficiency
indicators
and
high
speed
of
developments
implementation. It happens this way because the divisions are
totally responsible for the current product implementation in
production.
I have found just the only drawback of this organizational
structure type. There is a common issue: a lack of time for
scientists for conducting basic researches, studying and solving
promising problems, according to a number of American experts’
surveys.
4. Phased structure implies a form of labor division, where
every department whether is it responsible for theoretical or
exploratory
research,
engineering
and
technological
development, design, creation of prototypes is separated from
each other. It is called phased due to the structure organized by
stages of Research and Development process.
This type of organizational structure is also aimed at
helping scientists to conduct scientific work, while the whole
engineering staff is fully devoted to the work in accordance with
their specialization.
In my humble opinion, the biggest drawback of this
structure type is rather obvious - the lack of flexibility. It can be
especially seen in companies where products are changed
frequently. This structure is also applicable in industries and
41
organizations where the same products are being produced for a
long time.
5. One more type of organizational structure is called mixed
structure
(or
combinational
practical
perspective,
it
/system-component).
is
the
most
From
frequently
the
used
organizational structure type among big corporations and
companies paying special attention to innovations and to the
process of Research and Development. It creates the best
opportunity for high-quality and fast-growing performance of the
entire range of Research and Development departments’ activity.
A matrix structure is usually included into mixed structures.
They imply a combination of functional and product (thematic)
features. Obviously, flexibility is the main advantage of a matrix
organizational structure type. At this structure an employee
should be able to perform two functions simultaneously, for
example: being a project Manager while performing a significant
amount of work within this project.
It is rather important that the matrix organizational
structure can be applicable to any stage of a new project
development cycle with an option to move from one type of work
to another (such as idea planning and financing, sample
development, experimental work, etc.)
There are two different types of matrix structure: a) designmatrix and b) functional-matrix.
At the organizations who chose a usage of design-matrix
structure, employees who represent functional divisions are
usually accountable directly to the project Manager during the
entire
time
implementation.
42
of
project’s
creation,
development
and
Within design-matrix structure, the Project Manager has a
following responsibilities: task distribution among employees,
their activity control and coordination, management of the
overall work process related to the innovative project. In his
turn, from the perspective of the head of any functional division
it is necessary to provide his employees with all the necessary
assistance, to distribute specialists in their areas of work, etc.
The design matrix structure is used at companies where an
organization performs a few number of projects which are
different from each other. Aerospace, pharmaceutical, chemical
and, of course electronic/ software are industries where the
design matrix type is most widely used. In order to provide a
couple of examples of design matrix forms of Research and
Development management within IT industry, I would choose its
introducing at “IBM” and “GE” (“General electric”). And as
examples out of IT sphere – famous US “American Cyanamid”
and “Texas Instruments”.
Taking into account the second type - functional matrix
structure, here specialists working on the project are not
completely accountable to the project Manager, but all of them
work under a dual subordination. The head of an innovation
project, Project Manager, performs the duties of a qualified
leader of the creative direction of the project. In their turn, every
head of functional department provides the organization of
implementation of solutions in accordance with the common
current reporting requirements. This structure is perfectly
applicable to companies where there is just a couple of
complicated long-term R&D projects and a bigger number of
streaming ones.
43
Therefore, in order to name one of most suitable structure
for the specific innovative projects’ development, I would choose
the matrix form. Firstly, it creates a perfect opportunity for
simultaneous work of various types at different stages of
projects’
development.
Secondly,
there
is
an
ability
for
corporation to adapt for the changing conditions within the
whole organization.
It is rather obvious, but still worth to be mentioned, that
Research and Development organizational structures are not
permanent. There is a number of impartial circumstances that
bring it in line with new tasks, changes and improvements in the
economic entity or even those which make it necessary to revise
the
whole
stimulating
innovation
changes
structure.
within
The
Research
main
and
such
factors
Development
organizational structures are:
-
Changes in the Research and Development technology
in connection with the current expansion of the computers’
usage as well as latest scientific and technological progress;
-
Subject areas’ changes in regards to ongoing projects
of Research and Development;
-
Significant
changes
at
the
core
organization’s
objectives or even its entire strategy;
-
A decrease
indicators,
innovative
or instability at
centers’
and
the R&D
efficiency
laboratories’
indicators
caused by the discrepancy within their organizational structure
(or by of performing same functions by different departments),
as a result – a great amount of wasted time and the inertia of the
whole system;
44
-
Thematic or product changes within the structure of
the plan which lead to the changes in specialists’ number.
Moreover,
the
organizational
structures
of
R&D
management should be reviewed from time to time in order to
change the formal and informal relationships that have already
been developed along the line of command, in order to eliminate
the inertia and conservatism of the system as a whole.
In cases where organizational management structures
manage to create an opportunity both for efficient use of
resources, and provide an active systematic search for further
innovative development of production with the background of the
latest scientific achievements, these structures are maximally
effective.
Most
specialists
who
are
analyzing
the
R&D
organizational structure theory sector are sure that such
organizational structure should be primarily determined in
accordance with the innovation strategy. Corporations must be
flexible if they have chosen the implementation of a leadership
strategy. Such high level of flexibility can be achieved by the
staff placement structure. It creates an opportunity for new
activities’ adaption, while at the same time, the structure should
be based on the free transfer of information principle (both
horizontally and vertically). It leads to a higher level of
employees’ participation in decision-making process, which
raises the whole R&D process evaluation.
Organizations which state an increase of efficiency and
stability as a primary objective by creating so-called mechanistic
structures frequently use a so-called «follow the leader»
strategy. Such mechanistic structures usually have quite high
level of responsibilities formalization and low level of Junior
45
management participation in decision-making process. Also,
there are rigid vertical relations. Adaptability of the organization
to new conditions is not a goal of mechanistic structures instead
of managerial control. In case an organization is aimed at
combination of the features both of organic and mechanistic
structures, it should choose the strategy of simulation.
Nevertheless, today rather different structural approach to
Research and Development is being created. I mean the so-called
«limitless» organization principle proposed by Jack Welch who is
the CEO of «General Electric» company. Both vertical and
horizontal boundaries are eliminated according to this principle.
As a result, external barriers between the company, its suppliers
and customers are broken. This implies a break of the orders
chain from the main center and introduction of a system where
there is no inter control among managers. Moreover, temporary
creative groups replace previous individual hardware instances.
The evaluation of the group work is primarily based on
employees’ and managers’ participation in decision-making
process. There is a training organization, whose concept is
adopted by great number of corporations acting in the field of
Research & Development and innovation (especially by large
software and electronic corporations). And such organization
with no limits is rather close to its ideal.
Such training organization has 5 central features:
-
employees are free from old ways of thinking;
-
employees learn to be open about each other;
-
employees understand how the organization really
works;
46
-
employees
identify
approved
work
plans
and
perspectives;
-
employees
work
together
to
implement
these
perspectives;
In order to boost the improvement of the entire production
system,
they
involve
project
managers
and
employees
representing each level of the creative activity sphere.
In a brief conclusion of the second chapter, I would like to
stress that every medium and small company representing the IT
sector faces a great number of difficulties during the process of
R&D and innovations. At a first glance, it seems like large
corporations which are also IT market leaders do not have a lot
of obstacles and their innovative projects should have rather
higher success rate of such projects. However, I have analyzed
the corresponding data and statistics concerning success rate of
such corporations and gave a number of famous examples
considering failed projects of companies like Apple, Amazon or
Samsung. After showing a low success rate and numerous proofs
that there is a lot of space to grow for R&D, in the last third
chapter I am going to propose a couple of recommendations in
order to increase effectiveness of Research and Development
both internally and externally.
47
CHAPTER 3 How to increase effectiveness of R&D and
innovations?
3.1 R&D evaluation system
First of all, in order to increase the existing level of R&D
effectiveness,
companies
have
to
evaluate
corresponding
indicators precisely. For the better understanding of these
indicators, it would be helpful to analyze key effects arising from
R&D implementation. Economic efficiency implies the correlation
of the result with the costs associated with its achievement, this
is a relative value. Different indicators are used here. But there
are also effects, that is, results, they can also be different:
technical, economic, and other. Economic effects are always
measured in absolute terms. During planning and evaluating
implemented Research and Development project, it is necessary
to evaluate both effectiveness and efficiency in a complex. After
that it is possible to evaluate the overall assessment of the
Research and Development effectiveness.
So, there are three main groups of effects which arise from
the implementation of innovative projects:
a) Technical effects
Each innovation project should have its own specific
measures of technical effects. During the process of project
implementation, the specified characteristics can be developed
(such as hardness, strength, heat resistance or wear resistance
of the material, etc.). Considering the sector of Information
Technology,
direct
technical
effects
for
microprocessor
technology can be measured by performance and memory
capacity parameters. An objective assessment of direct technical
48
effects can only be obtained with the participation of researchers
and engineers who should have an access to the data banks for
the relevant fields of science and technology in order to have a
base for comparing the results achieved and available known
results. Along with direct effects, there may be indirect technical
effects. Even if the innovation did not achieve the planned
technical effect, there are training effects in the area of new
technologies, their methods and tools improvement. In addition,
it is also possible to patent a technical know-how and fix
priorities, as well as identify weaknesses in the equipment and
technology of the enterprise. Often unsuccessful innovations in
commercial
terms
give
rise
to
subsequent
processes
of
innovation, which are much more effective due to the creation of
an «innovation climate».
b) Economic effects
Such effects, as well as technical ones, can be decomposed
into direct and indirect ones. Direct effects imply profit
estimation, margin profit, cost reduction, etc. Innovations that
affect the entire production process are difficult to measure in
terms of profit growth or cost reduction. Rationalization of the
production process can be manifested in reducing the volume of
waste, reducing the time of the production process, improving
product quality, increasing flexibility and stability, as well as
reduction of the harmful impact on the environment. Indirect
economic effects relate to the field of competition: a decrease in
sales from competitors; the increase in the cost of the
competition, providing innovative leadership of the enterprise.
Effects of this type can only rarely be quantified.
c) Other effects
49
They are located in the system or individual area. Talking
about individual aspects of measuring the success of R&D
developers, it is important for the developers to recognize their
contribution in publications, receiving prestigious awards, etc.
Today, one of the most indisputable indicators of the success of
innovations in the field of products and technologies is the socalled environmental effect – the reduction of effects which are
harmful for the environment. The future belongs to energysaving, waste-free and environmentally friendly technologies.
There
are
also
humanities
and
social
results
of
implementing innovations that which also relate to other effects:
-
the creation of new workplaces;
-
an improvement of working conditions;
-
the creation of humanistic relations within the team by
introducing new methods of control;
-
an acceleration of passing of the project and better
control over the phases of its execution;
-
a growth in management transparency of costs and
results;
-
a higher level of an enterprise flexibility and its speed
of reaction
in regards to adapting to changing
external
conditions.
It is usually difficult to quantify achievements of the internal
management effects. So that, they are usually seen in a form of
«chances» and «strengths» of the enterprise that ensure
strategic success. Different methods can be used to at evaluation
the economic effects (economic performance of R&D). First of
all, they rely on the calculation and comparison of costs for
alternative R&D options. The essence of the method implies
50
calculation and comparison of the total costs of alternative
options. An alternative that requires less current and capital
costs is preferable. The resulting revenue is not considered in
this method. Therefore, the method of calculating and comparing
costs can be also used in such cases where the result of projects
will not be sold, but will be used for the company's own needs. If
the development is aimed only at commercial purposes, then
financial and economic criteria such as revenue, profit, and sales
should be considered as the main indicators for the assessment
of future economic success, as well as efficiency evaluation (for
example, profitability).
Research and Development projects which are being
conducted at the expense of state programs, patronage and
sponsorship
is
most
often
evaluated
by
social,
political,
environmental and other similar criteria. In some cases, in
particular, to attract state or municipal funding, an assessment
of the national and economic effectiveness of the project can be
carried out. For instance, meeting the demand for particularly
important goods; social and environmental factors: employment,
environmental cleanliness; ensuring security and prestige of the
state. In other words, the result of R & d is linked to the
consequences of its implementation, but not necessarily to
commercial benefits.
3.2 Cost-efficiency drivers
In the previous chapter I have analyzed main risks and
threats of Research and Development process which lead to
projects ineffectiveness or even complete failure. All of these
factors can be divided into two big clusters: internal influence
51
factors and eternal influence factors. In its turn, the proposed
recommendations, which should increase success rate and
improve Research and Development projects’ effectiveness will
be also divided into two types: 1) Cost-efficiency drivers and 2)
Productivity boosting drivers.
Cost-efficiency factors primarily relate to the cost and labor
reduction tools, time-saving instruments and so on, while
productivity
drivers
imply
project
management
and
organizational structure improvement. I would like to start with
cost-efficiency instruments because they are more explicit and
their causal relationship is much more evident and apparent
instead of tools aimed at productivity increase.
First type of drivers includes 4 instruments: a) the
reduction of material costs, b) the reduction of labor costs, c) the
saving of capital investments and d) time-saving instruments.
a) Material costs reduction is one of key measures for a
significant increase of the growth of sales and for an increase in
production
rates.
The
significant
reduction
and
following
advanced results can be achieved by a number of aspects such
as:
-
the usage of new equipment, recent technologies and
technological processes;
-
reduction of the cost of project diagnostics, monitoring
its effectiveness and other processes of its inspection;
-
increased working life of equipment;
-
usage
of
import-substituting
materials
and
replacement of materials used in production with cheap ones
where it is possible;
52
b)
Labor
costs
reduction
implies
automatization
of
technological processes of Research and Development and a
maximal reduction of processes requiring pure human labor
force.
labor
the usage of modern equipment substituting human
and
automatization
of
Research
and
Development
processes;
-
reduction of occupational diseases and professional
injuries sustained during the innovation process;
-
improvement of standards and regulations, incentive
system for employees' remuneration;
-
peak personnel development;
c) In the previous chapter I have already mentioned that
frequently large corporations experience problems with slow
organizational structures. The only way to overcome such
problem is a usage of time-saving instrument which include:
-
increase the level of production intensification by
production processes automatization;
-
reduction of the time during non-technological breaks
and downtime during the transition from one stage of the
production process to another;
-
reduction the time to get control information;
d) Capital investment saving is one more important aspect
which implies:
-
increase of the working life cycle of machinery,
equipment, and vehicles
-
improvement
of
technical,
technological
and
organizational aspects in the capital structures and objects
construction;
53
The combination of the abovementioned tools and
instruments is quite helpful at economic indicators’ increase in
regards to the reduction of production and Research and
Development processes costs. It should also reduce costs related
to money spent on materials needed for R&D, pure human labor
which is going to be reduced and automized, reduction of wasted
and gaped time and money invested in corporation’s capital.
3.3 Productivity boosting drivers
It is indisputable, the improvement of economic aspects of
the Research and Development process is vitally important for
every organization. However, I believe that in order to boost
productivity indicators and achieve really groundbreaking effect
of the innovation development, it is essential to change internal
project
management,
its
organizational
structure
and
permanently analyze why the product became successful or
abortive one.
That is why now I am going to focus on the second cluster of
drivers which are aimed at productivity boost. It is worth to be
mentioned that this type of instruments is primarily aimed at the
internal project management improvement. These factors do not
affect economic indicators in a direct way, so I would say they
are less apparent and less superficial. However, the result of
their usage may be much more stunning and groundbreaking.
Such drivers type includes following instruments and ways of
improvement: a) the analysis and improvement of previous failed
projects; b) risks reduction; c) the internal project management;
d) strategies and methods of projects’ commercialization; e)
state-level factors making product successful.
54
a) In case a company has already experienced innovation
projects’ launching, first of all it should conduct the analysis of
the previous project’s research, production, implementation and
commercialization stages. Most often problems or even a
complete failure of any innovation project is caused by just one
backward stage. Obviously, every of such underdeveloped parts
have to be improved in order to make the next project in a
smoother way. Surprisingly, the statistics shows that the most
troublesome stage is the final one – a process of a project
commercialization. I will focus on this stage more in details later
in this chapter during the point b.
b) During the process of innovative project selection, it is
always necessary to pay attention to ways aimed at the whole
project’s risks reduction.
There is a number of different techniques aimed at risks
reduction in R&D. I would like to focus on the following three
ones:
1) to split risks among every project participant (in other
words, to transfer a part of the risk to collaborators and so-called
co-executors);
2) risk insurance;
3) to cover unpredictable expenses by the preliminarily
funds reserving;
- The process of risk distribution going on during an
innovation
project
financial
plan
and
other
contract
documentation development. In order to expand or to make the
potential investors range narrower, R&D project participants
make a number of risk-reducing decisions. The participants have
55
to show as much flexibility during the process of appropriate
negotiations as much of the risk they are willing to accept.
Above I have already provided a data showing a critically
high
number
of
R&D
projects
that
had
a
delay
in
its
implementation (including even large corporations). Obviously,
such delays lead to a significant expenditure growth in regards
to cost of labor, raw materials and so on, exceeding the initially
expected cost of the whole Research and Development project.
That is why companies pay also so much of attention to the
process of risk insurance, which is the next risk-reducing
instrument.
- The instrument which is called risk insurance implies a
certain threatening part transmitted to a special insurance
company. The process of risk reduction by the risk insurance tool
is an integral essential part of every Research and Development
project. An organization which carries out an innovative project
has an opportunity to minimize almost all property risks, as well
as numerous commercial, credit and industrial risks thanks to
insurance
companies.
However,
this
method
as
its
own
drawbacks and limitations. One of the most superficial ones is
that insurance is usually does not relate to risks associated with
the partners' bad faith, which happens quite often.
Moreover, in case the probability of a risk occurrence
event is very high, such risks cannot be covered by insurance
because of non-acceptance by an insurance company;
The contribution amount is always established by the
side of insurance company. That is why in most cases the sum of
money is obscenely high while the process of entering into the
insurance contract;
56
- The certain amount of reserved funds provides an
opportunity to establish a coherent balance between the level of
potential risks which affects the cost of the Research and
Development project and between the cost which is necessary in
case of different kind of failures during the implementation
process of the whole innovative project. It is also worth to be
mentioned that this takes into account the accuracy of the initial
assessment of the general cost of the innovation project and all
its elements.
Most of the mentioned above tools and techniques are
aimed at trade secret protection which is one of the most
important part in regards to innovation process’ risk reduction
from the developer’s perspective.
Usually, the level of research and Development project
manager’s experience and the capabilities of the innovation
organization. primarily affect the choice of a certain way aimed
at risk minimization. However, in order to achieve a more
effective result at risk minimization during all stages of the
project implementation, a set of instruments is used.
c) In my humble opinion, the process of innovative project’s
management is the most important aspect in Research and
Development. It includes all the main stages such as early
research process, the product development process and the
process of product commercialization on the certain market. The
management process begins almost from the moment of the idea
generation or the creation of an intellectual R&D product. From
that moment it is necessary to pass through quite a long way of
product development, its design, a protection of intellectual
property, feasible analysis of the previous success/ failed
57
innovation project, business planning, search for financial,
material and human resources and so on. Let us not forget about
project funding: a search for an appropriate investor with
rational requirements and cooperation contract conclusion. Next,
the project management has to ensure that every stage of
marketing process (pre-production, production and sales of
products, the organization of a network of sales and service
organizations, the organization of financial flow control, social
process management, risk management, and much more) are
going smoothly. One of the most obvious managerial difficulties
at this step is that the innovation project time interval is usually
limited to a year after the investment payback period, while the
duration of the innovation life cycle is significantly longer.
After the enumeration of such complex and various work
types required during the whole process of the innovation
projects’ implementation it became rather obvious that there is
also a number of high requirements for the innovation managers
qualification. First of all, they must have the body of knowledge
and skills in the field of attraction the necessary additional
resources as well as optimization the all available ones in order
to implement the Research and Development project during its
every stage in a most successful way.
Such multitasking employees should have a systemic
knowledge as well as comprehensive knowledge about the
project (in this case, a project is kind of a such system). In my
humble opinion, the innovation project manager or the manager
of
Research
and
Development
perhaps
is
the
highest
qualification of a management in General. None of any other
specialization in management requires such a voluminous
58
knowledge and practical skills. Moreover, an innovation manager
has to be proficient at traditional Economics knowledge, as well
as at every functional section of management. He must also have
the basic knowledge at technics and engineering in regards to
the industry where innovation is produced, as well as to have
knowledge of the patenting and protection of intellectual
property basics, and, of course he has to know key principles of
intellectual property commercialization. It may be seemed like an
innovation project manager is the person responsible for the
whole Research and Development process starting from the idea
generation stage finishing project’s commercialization. This is
not true at all, however, innovation project manager is kind of
link connecting all of the R&D departments’ specialists, that is
why this person must know and consider all the nuances in
regards to each specialist of each department. Moreover, this
position relates to numerous potential risks and threats, so that
there is an entire project management team instead of a single
one.
At this point I would like to mention two concepts or two
methods of business process management: the first one is
engineering, the second one - reengineering.
- Engineering process implies an improvement, optimization
and rationalization of a process (by the usage of improving
innovations). Usually, engineering helps to increase economic
effectiveness indicators of performance insignificantly (10% 50%)
- The process of reengineering can be seen as the use of
radical innovations leading to an increase in the economic
efficiency indicators much more effectively: by tens or hundreds
59
of percent. From the perspective of the innovation project
manager, he should consider and use both of these methods in
his work: the strategy of actions is based on reengineering, while
the tactics of everyday activities is mostly related to the
engineering process.
Regarding the entire project of Research and Development
it can be seen as a division into three major stages: 1) project
development 2) production 3) project commercialization. Each
stage of the innovation process has its own management
specifics. Let me analyze each them one by one.
- The first stage of project’s design includes idea generation
and research analytical work. The final result of this stage is a
set of working design documentation, including graphic and text
parts. In addition, one of the central appendices to such
documentation is the prototype and its test report, which is
usually agreed with the innovation project customer or with a
special supervision service representative (they exist in sectors
such as health or energy).
Management at the first part, the project development
stage, requires the project manager to be proficient in the field
of an appropriate science as well as being able to manage
modern research methods, to know the basics of the main
regulatory documents and standards used at the product design,
the infrastructure for monitoring, supervision and approval of
documentation. Moreover, the head manager of the projects
must provide timely assistance and other help to developers in
preparing applications for intellectual property objects.
During the first period the head project manager has a
special responsibility requiring first marketing efforts in regards
60
to the future production. I mean he has to consider volumes of
products he is able potentially agree with consumers in the
future, also take into account the volumes of purchased raw
materials, Research and Development process components,
necessary equipment, etc. At this stage a number of issues
related to consumers arise. For example, there is a need to
persuade consumers almost without precise product data (since
the products sold in the future may be rather different from the
current ones, and the advertising campaign of the product is still
practically absent). This is why even the first stage of marketing
is associated with a particularly large risk factor. In order to
reduce such factors, the organization usually tries to interacts
with the consumer organization, forming a kind of elementary
cluster. This is a case close to mentioned in the previous chapter,
where I have described how it is possible to reduce the risk of
supplies of raw materials which are necessary for the production
process by forming clusters with supplier organizations.
I still did not pay too much attention to the personnel
management. In its turn, the whole staff usually consists
primarily of highly qualified employees, and often outstanding
individuals, scientists, their management methods should be
rather unusual. So that the construction of the organizational
structure should be close to adhocratic system. In other words,
at
such
system
professional
qualities,
knowledge,
and
qualifications always come first.
2) The second stage is a management of production process.
It begins with the preparation of technologies necessary during
the production process and is finished by the preparation of
products for the commercial sales.
61
Technological preparation of production can be compared to
the preparation of an army for a decisive battle – during this
critically important stage the state of all future production is
specified and determined. During this period each process,
equipment, costs of labor force, a plan of communication,
innovation product quality control, delivery plan and sales plan
are determined by the technological process of production. They
initially launch a test batch of products in order to check
technological process. Then it is necessary to adjust both the
technological process and the working design documentation and
to start the production process of the innovation product.
Production process management also has a couple of its
own specific features such as:
-
the Manager must know the technological process in
operational terms (every workplace, possess basic production
skills etc.);
-
the whole production process must be controlled by
the head of project management team. He has to plan and ensure
the
logistics
communication
of
each
links
workplace,
between
to
provide
departments
and
sustainable
innovation
specialists;
-
a high level of motivation maintenance in order to
increase economic productivity indicators is one more permanent
responsibility of the project manager.
3) I have already mentioned that however strange, the last
stage which implies the commercialization process is the most
problematic and troublesome one. It usually includes not only the
process of distribution and sales of products, but also a process
of commercial transaction for the purpose to sale intellectual
62
property rights. From the perspective of marketing, during this
stage a real campaign begins. First of all, a wide advertising
campaign must be organized because the product is not known
to the market and its consumers. At the initial stages, the cost of
such campaign may include a significant share of the money
invested in the project; then it should be a certain part of
organization’s income gained from the sale of the innovation
product. In both cases a marketing campaign requires a highqualified marketing specialist who has advertising skills and who
is able to enter into long-term contracts for the new innovation
product.
There is a number of activities related to sales at this stage.
I
mean
product
packaging,
its
transportation,
negotiation
regarding price aspects, storage, and research and inventory
management.
An
optimization
considering
storage
(such
unforeseen
production
as
stops,
of
the
sudden
raw
product
volumes
company
demands,
materials
shipment
interruptions) determines the inventory management aspects.
Last but not least, product inventory process should not cause
any losses to the organization. Quality of packaging, product
appearance, the entire product attractiveness and its design are
imposed be numerous special requirements at the nowadays
market in regards to the clients’ consumption and innovation
product reliability during transportation. Considering packaging,
today
it
can
be
seen
as
a
“small
innovation
product
advertisement”. Usually it contains an innovation product image,
its
general
and
specific
characteristics,
the
detail
of
manufacturer, and its trademark altogether. As a rule, modern
63
large manufacturing enterprises have their own services and
shops.
Concerning
the
process
of
intellectual
products
commercialization there is a number of factors affecting its
entire effectiveness. The situation in Information Technology
sector all over the world and, in particular, Russia, with a R&D
projects commercialization is quite poor today: there is a scarcity
of specialists in the field of patent activities as well as the lack of
specialized consulting firms. Also, banking and legislation
systems have to be imperfected significantly. Patent licenses is
one
of
the
most
profitable
types
of
innovation
process
commercialization abroad. There is also a need of a steady
mechanism being created in order to transfer money within a
country. However, this way is not the only way the diffusion of
innovation acceleration.
Moreover, a state is also a beneficiary party of the process
of intellectual property rights commercialization, but not only
manufacturing organizations. For example, in Russia after a
thorough adjustment of patent law (in the Civil code of the
Russian Federation, part 4) a significant market expansion is
expected. In particular, after fees being cancelled (or to be more
precise, replaced by deferred benefits), the income from the sale
of intellectual property rights or from the amount of investment
in an innovative project will not only cover all the organization
losses from the absence of fees, but will also bring huge benefits
to all participants in the “patent process”. I mean the state itself
first of all. However, issues here are quite specific, there is also a
number of rather high requirements in regards to a project
manager qualification within the field of innovation property
64
commercialization and its implementation. In this regard, it is
necessary, in my opinion, to change the standard of training in
innovative management significantly.
d) That is quite surprising, however, creating an innovation
is not the end of R&D project implementation. I would even say it
is only half of the job. The most important and troublesome part
of the whole innovation project cycle is entering the market. Far
not all of R&D products have succeeded at this stage of the
innovation
process.
I
can
take
Russian
Research
and
Development industry as an example: it is necessary to solve
many problems and avoid a number of pitfalls. Some of them are
related to the evaluation of innovative projects, while others are
related to the infrastructure for innovation development that is
not yet developed. How do innovations enter the economy, and
what stages do they go through? What are the conditions or
prerequisites for successful implementation of innovations? What
opportunities do innovators have and what do they need? Let's
trace the process of commercialization of innovation from the
point of view of all participants of a project, because the success
of an innovation primarily depends on their effective interaction
between each other. Every participant sets objectives of the
project taking into account their own interests foremost whether
they are representatives of investment institutions or some
business community, whether they are private investors, other
inventors and innovators or even the state. Considering business
community, it primarily hopes to get new market segments or
market niches in order to implement the new product after
Research and Development process (or new technologies in
order to produce already existing products for the purpose of
65
their competitiveness growth and consistent win of the market).
From the perspective of investment institutions or private
investors, first of all, they expect to gain new objects of highyielding promising investment. Investments provide the state
with economic independence as well as accelerates development
of industry and the whole national economy. Finally, other
inventors or innovators, they are looking for the provision of
themselves
with
the
means
of
further
research,
develop
businesses, or compensate for the resources and labor costs
invested. In addition, innovative consumers are no less important
than manufacturers. To the question “Do you need a regular
toothpaste or innovative?” or “Do you need a conventional metal
coating or innovative, nanotechnological one?”, most of them will
respond: “Of course, new, innovative ones!” For interaction
between participants to take place, the innovator must attract
the attention of potential partners to their innovation and
convince them that a new product or invented technology will be
implemented on the market. During the ideas generating process
and a process of running a business, within the Research and
Development team — those members who work on the purpose
of
commercialization
-
the
close
collective
interaction
is
essential. However, usually, there is a number of people who are
behind radical innovations, and sometimes the fate of every
generated idea depends on them. Sometimes it is quite difficult
to create a commercialization strategy for the ideas, created
R&D products and technologies, but is necessary to develop own
unique commercialization strategy for every innovation project
on the basis of existing opportunities for the idea implementation
into the market. The choice of the commercialization method is
66
the main point in the strategy development process. First, the
innovator must determine their role in this process and make a
specific decision — to continue research to create a series of
improving innovations, move to another area of research, or
participate in the process of bringing the invention to the
market, or perhaps sell the technology and leave this area of
activity. It is very important to be able to protect intellectual
property rights. This can be done through various mechanisms —
patent protection, trademark registration, and the introduction
of a trade secret regime. A competent solution of this issue will
expand the innovator's further opportunities and position in the
business community as well as upcoming real transactions. Then
it is necessary to choose the appropriate commercialization
strategy. Of course, every innovation is unique and individual, so
that the ways of product commercialization can be varied. Let me
describe the three such methods and various ways of their
implementation:
-
Independent
usage
of
development
for
business
organization is the most common form of realizing the potential
of innovation. It usually involves organization of production and
sale of finished products, production and leasing of equipment,
provision of engineering services.
property
The next way is a partial assignment of intellectual
rights.
This
method
includes:
licenses
sale
and
franchising; contract for joint development of finished products
with the consumer in the joint registration of intellectual
property
rights;
transfer
employees’ provision).
67
of
production
secrets
(by
own
-
One more way to commercialize innovation product is
an intellectual rights transition to the third party which can be
realized through the sale of patent rights , through the contract
on alienation of exclusive rights or through the obtaining a
contract for further research and development with the condition
that the rights to patent the received RIDS will pass to the
customer. For large-scale market penetration, the first two
methods do not exclude each other in case of market definition
from a geographical point of view. A company or individual — the
current copyright holder — can use its own developments in the
territory where the innovation was created and simultaneously
sell its licenses to carry out similar activities in other territories.
It is worth to be mentioned, that such situations are rather
frequent in practice nowadays. First of all, the process of product
commercialization involves conducting comparative financial
calculations in order to assess the profitability level of a
particular method of commercialization in a particular market.
e) There is always a number of factors making any R&D
project more successful. Here I am going to mention powerful
state-level
factors
which
are
able
to
boost
productivity
indicators.
- State Order
The first state-level factor of innovation success is the
demand for new technologies and products. The state order for
innovation is an incentive for innovative activities of universities,
research institutes and companies. For example, such essential
elements of smartphones as GPS, touch screens or Internet
access
were
originally
developed
by
the
United
States
Department of State Defense, while solar panels and Tesla
68
battery technology — with the support of the US Department of
Energy (DOE).
An example of such innovation in Russia is the GLONASS
navigation system, which was originally created for military
purposes by state order. In 1995 it became available for civilian
use and is currently used in navigation devices, radar detectors
and other systems.
- Financing
The state selectively sponsors basic and applied research in
priority areas or research with potential. In other words, I am
talking not only about national security and defense issues, but
also about research beyond these topics. In Russia, the state has
played a major role in shaping the innovation Finance system,
including the venture capital market.
In the future, it will be necessary to change the attitude to
investment in innovations and increase risk tolerance, because
only a small part of innovative projects end in grandiose success.
Reducing the level of bureaucracy when issuing grants can
simplify
the
process
of
attracting
funding
for
innovation
development.
- Infrastructure
I would like to considering the next state-level driver, which
is infrastructure, taking the example of Russia. There are four
types
of
innovation
development
institutions
successfully
operating in Russia:
-
funding for basic or applied research;
-
direct
Innovations”);
69
financing
of
innovative
companies
(“VEB
provide
techno parks, incubators and other institutions that
services
to
innovative
companies
(“SKOLKOVO”,
“Mosgormash”);
-
funding for certain priority areas - Internet initiative
development Fund (FII).
In Russia the infrastructure for the innovation development
was created, but there has not yet been a qualitative leap in their
development and business activity.
- The culture of innovation
The state also plays a significant role in a cultural
development
of
implementing
educational
systems,
creating
institutions.
It
entrepreneurship
and
also
programs,
assisting
encourages
and
innovation
by
supporting
mentoring
development
agencies/
national
innovative
entrepreneurship.
In my opinion, Russia has come a long way in developing an
entrepreneurial culture. However, taking into account the
relatively short history of the market economy in the country, it
is
necessary
to
continue
the
course
of
promoting
entrepreneurship and innovation.
As a brief conclusion of the third chapter I would stress in
spite of risks and threats of the innovation process, which were
divided into internal and external factors, my above mentioned
recommendations,
which
improvement
Research
of
are
theoretically
and
aimed
Development
at
projects’
effectiveness as well as at the increase of the success rate, were
divided
into
Cost-efficiency
drivers
and
drivers
boosting
productivity. Cost-efficiency drivers are related to the cost and
labor reduction tools, time-saving instruments and so on and
70
implied tools aimed at the reduction of material costs, the
reduction of labor costs, the saving of capital investments and
time-saving instruments. The second type of drivers is rather less
explicit: it implies project management and organizational
structure
improvement
tools
such
as
the
analysis
and
improvement of previous failed projects, risks reduction, the
internal innovation project management, strategies and methods
of projects’ commercialization and state-level factors making
product successful. Also, I have analyzed an innovation project
manager position, its required skills and knowledge fields.
However, every innovative company, which conducts Research
and Development processes, has to combine both cost-efficiency
instruments with the productivity-boosting ones in order to avoid
numerous failed innovation projects and in order to increase the
entire projects’ success rate.
71
CONCLUSION
In conclusion of the paper as a whole, I would like to
summarize all of three chapters’ key points and conclusion in
order to get the full picture of my paper.
First of all, it is hard to overestimate the importance of
scientific researches, developments and innovations as the whole
in the Information Technology sector, which involves companies
that produce software, hardware or semiconductor equipment,
companies that provide internet or related services etc. R&D has
become vitally important for IT corporations and this is an
explanation
of
such
huge
investments
in
Research
and
Development process and innovations. The amount of annual
expenditures on Research and Development innovative projects
by IT companies such as Apple Inc. or Alphabet Inc. is frequently
higher than $ 5-6 billion. And these sums are still steadily
growing from year to year, the number of R&D projects and their
expenditures are increasing as well regardless crises and
economic instabilities. Unfortunately, even so large volume of
spending on R&D and innovations still does not guarantee a high
success rate of R&D projects.
Then I have analyzed numerous obstacles and threats
during the process of R&D and innovations in regards to
companies representing Information Technology sector. At first,
it seems like most of difficulties (such as project financing or the
advertisement of a promising product) relate only to small and
medium companies, while big market leaders do not experience
a lot of problems at R&D and it seems they should have rather
higher success rate of such projects. However, this is far from
72
the case – I have proved otherwise providing corresponding data
and statistics showing rather low success rate, billions of dollars
spent to nowhere. Also, I gave a number of famous examples
considering failed projects of companies like Apple, Amazon or
Samsung. All of that has clearly proved an assumption of that
there is a lot of space for a potential growth and improvement for
Research & Development and innovations industry as a whole.
In the last chapter I have analyzed the system or Research
and Development process evaluation which includes technical,
economic and other effects. In spite of risks and threats of the
innovation process, which were divided into internal and external
factors, my proposed recommendations, which are aimed at the
increase of the success rate and to improvement of Research and
Development projects’ effectiveness were divided into Costefficiency
drivers and
Productivity
boosting
drivers.
Cost-
efficiency drivers are related to the cost and labor reduction
tools, time-saving instruments and so on and implied tools aimed
at the reduction of material costs, the reduction of labor costs,
the saving of capital investments and time-saving instruments.
The second type of drivers is rather less explicit: it implies
project management and organizational structure improvement
tools such as the analysis and improvement of previous failed
projects,
risks
management,
reduction,
strategies
commercialization
and
the
internal
and
state-level
innovation
project
methods
of
projects’
factors
making
product
successful.
To sum up, in order to save their investments, to increase
innovation projects success rate and to decrease the number of
failed or delayed projects, companies which conduct a Research
73
and Development processes, always have to analyze previous
innovation products, whether they were successful or failed,
reduce risks related to innovation product and intellectual
property, pay a special attention to the internal project
management keeping in mind the importance of an innovation
project management team.
And vice versa it has to avoid neglection of any kind of slow
structures within the Research and Development departments; it
has to overcome the problem of a lack of market orientation,
analyzing its customers more precisely instead of emphasizing
technological processes only as well as to overcome the wrong
decision making issue which is usually caused by a lack of a
corporate and innovation strategy.
Last and one of the most important point is that every
corporation has to avoid underestimation of a process of
environment selection as well as a process of innovation product
commercialization.
Thus, the tasks set in the beginning of the paper (namely,
the analysis of the current situation in regards to investments in
R&D and innovations by IT companies, data provision showing
the current success rate of innovation projects, presentation of
unsuccessful and abortive famous cases of innovation projects,
the analysis of R&D process evaluation system, the analysis of
companies’ experience regarding improvement of R&D efficiency
level) are successfully completed, so that the central objective of
the paper, which is a provision of recommendations aimed at the
increase of the level of effectiveness of R&D at IT companies, is
successfully completed as well.
74
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URL:
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