Building R&D strategy is not an easy task, particularly in turbulent and uncertain times. Even if you have R&D funding available it may not guarantee success without a robust R&D strategy.

“Many enterprises lack an R&D strategy that has the necessary clarity, agility, and conviction to realize the organization’s aspirations. Instead of serving as the company’s innovation engine, R&D ends up isolated from corporate priorities, disconnected from market developments, and out of sync with the speed of business.”

McKinsey [1]

What is the best approach to developing a company’s R&D strategy?

There have been many different approaches developed. You will need to choose the one that better suits your organisation and its stakeholders, and a particular situation. Yet, there are three key steps that can ensure trouble-free liftoff of your R&D strategy:

1. overcome the four main challenges of modern R&D organizations,
2. choose the right components for your strategy,
3. test your R&D strategy before enacting it.

Step 1. Overcoming the four main challenges

First challenge: your organisation needs to find a way of adapting to rapidly accelerating innovation cycles. In other words, it needs to become agile, which you can achieve by building a learning organisation. Start by considering these three main elements of your organisation:

PEOPLE – develop and train effective workforce and leadership equipped with the 21^st century workforce skills.

PROCESSES – design and implement the business processes and practices that support learning through Intelligent Fast Failure approach [2] and knowledge sharing; enhance and optimise these processes using digital technologies.

ENVIRONMENT – foster the organisational culture that is open to new ideas, values different perspectives, and supports open communication and calculated risk taking.

Second challenge: your organisation needs to ensure customer (market) orientation of R&D. This can be addressed by building a robust interface between two company functions, namely Marketing & R&D.

Third challenge: effective accountability metrics for R&D projects is required to quantify R&D’s contribution. Typical metrics include R&D % of sales, Revenue from new products over last N years, Total R&D headcount and Number of patents filed (or granted). Moreover, many companies apply the same metrics to all types of R&D projects, which obscures the assessment.

R&D projects could be grouped into five categories (Figure 1):

• Derivative projects include projects, which focus on incremental improvements, e.g. development of cost-reduced versions of existing products, add-ons or enhancements for an existing production process.
• Platform projects involve more product and/or process changes than derivatives do, but are still based on existing technologies and/or materials. These projects aim to bring fundamental improvements (e.g. in cost, quality, performance) in the existing range of products or services and result in significantly better system solutions (i.e. new platforms) for the customer.
• Breakthrough projects often incorporate revolutionary new technologies and/or materials and involve significant changes to the existing products and processes and, when successful, yield new, fundamentally different core products and processes.
• Research and Advanced Development (R&AD) projects lie outside of commercial development and aim to create new knowledge (know-how and know-why), which should eventually translate into commercial development.
• Alliances and Partnerships projects form a distinct group, which can be categorised as any of the above projects – R&AD, breakthrough, platform, or derivative. The reason for putting these projects into a separate group is that often companies fail to include them in their project planning having relied too much on the partner company. As a result, these projects are not provided with appropriate development resources.

As you can see from the above definitions, different types of R&D projects have different goals and objectives, resource and management requirements. It would be difficult to measure all types using the same metrics. For example, the number of patents filed would not be the right metric for derivative (incremental) R&D projects as such projects are not focused on new knowledge creation. That is why it is recommended to devise metrics tailored specifically for each of the five types of R&D projects.

Figure 1. Five types of R&D projects [3].

Fourth challenge: the structuring of your organisation R&D portfolio that ensures long-term growth. Here you need to balance the number of Derivative (incremental) and other types of projects (i.e. Platform, Research & Advanced Development (R&AD) and Breakthrough projects). McKinsey’s research indicates that “incremental projects account for more than half of an average company’s R&D investment, even though bold bets and aggressive reallocation of the innovation portfolio deliver higher rates of success” [1]. This is not surprising as incremental projects have lower risk and higher near-term returns, while R&AD and Breakthrough projects bear higher uncertainty and risk of failure, and require stepping outside the company’s (and individuals) comfort zone. Still, McKinsey’s research suggests that incremental projects “in many cases do little more than maintain existing market share” [1].

How much of R&D budget should be allocated to each type of R&D projects? While allocation of resources will depend on industry and your company’s strategy (which in turn will depend on the company’s maturity and competitive position), research [4] reveals that the following budget allocation is a good starting point for most companies:

Step 2. Choosing the right components

To choose the right components of your R&D strategy, and to ensure commitment and collaboration across different functions you may want to consider these three elements:

• what we want to deliver,
• what we need to deliver,
• how we will deliver it.

You might be thinking now where you should start. First, make sure that R&D strategy function collaborates closely with corporate and marketing strategy functions.

Aligning these strategy functions helps to achieve clear understanding of what the company wants to and can deliver – corporate and marketing strategy teams help R&D team to focus on the company’s priorities, while R&D strategy team helps to identify what is possible and what new opportunities (including completely new business models) could be created by new technologies.

Moreover, it is important to maintain the dialogue between the R&D, marketing, and corporate strategy teams even after the R&D strategy has been established. This will help you to ensure that your company’s strategy remains relevant and stays tuned to fast changing business environment.

Now, that you have identified what solutions your company wants to deliver, the task of R&D strategy team is to determine what is needed for delivering those solutions. In other words, determine what R&D capabilities (including technologies, talent and other assets) are required in order to bring those solutions to market.  This process involves identification and prioritisation of the required capabilities, choosing an appropriate level for each capability (i.e. is being “good” sufficient, or must it be “the best in class”?), weighing in-house capabilities against outsourced capabilities.

Last but not least, you have to decide how to support the execution of the R&D strategy, i.e. what enablers will be required. For example, what will be your strategy to attract, develop and retain talent? How can you foster the organisational culture that will support R&D strategy? How could digital technologies help to create a better, more collaborative working environment?

Step 3. Testing the R&D strategy

Your R&D strategy is almost ready – you have chosen the right components and mitigated the four main challenges of R&D organisations. The last step left to take before launching your strategy is to assess the robustness and comprehensiveness of your strategy by asking yourself few test questions.

McKinsey finds the following two questions particularly important for testing R&D strategy [1]:

• Does the organization’s strategy tap the true source of advantage?
  • What are the distinctive R&D capabilities of your organisation that provide competitive advantage (i.e. capabilities that have strategic importance rather than just technical necessity)? Does your R&D strategy leverage those capabilities? Moreover, you should also take a dynamic view and ask whether those capabilities are becoming commoditized?
• Does the organization’s strategy balance commitment-rich choices with flexibility and learning?
  • One of the main challenges of any strategy is to find the right balance between commitment and flexibility. Without strong commitment your R&D strategy won’t be able to create sustainable competitive advantage (because R&D strategies usually have long-term horizons). On the other hand, without sufficient flexibility you won’t be able to compete today, in the fast-changing and uncertain environment.
    
    So, to balance commitment and flexibility your strategy should include a portfolio of options with clearly defined technical, regulatory and other milestones, at which you may decide whether to re-allocate resources to or away from certain R&D areas. Those milestones may also serve as criteria for assessing the execution of your strategy.

One more crucial element of the successful launch of your R&D strategy is clear and simple communication of the strategy to other functions and external stakeholders. Moreover, you will likely need to tailor such communication for each stakeholder group to enhance its clarity.
If communicating the key points of your strategy in simple terms does not come easy, the chances are that you need to spend more time on devising and formulating the strategy until easy communication is made possible.

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[1] https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/building-an-r-and-d-strategy-for-modern-times

[2] Jack Matson (1991), The Art of Innovation: Using Intelligent Fast Failure, State College: Pennsylvania State University Press, p. 35

[3] S.C. Weelwright and K.B. Clark (1992), ‘Creating Project Plans to Focus Product Development’, Harvard Business Review, v. 70, Issue 2, pp.70-82

[4] Bansi Nagji, Geoff Tuff: Managing Your Innovation Portfolio, Harvard Business Review, http://hbr.org/2012/05/managing-your-innovation-portfolio/