To what extent is it necessary for companies to reinvest profits in research and development? In the past 20 years, intellectual property has been highly respected in the world. In other words, there has been a majority of companies that paid more and more attention with regard to the performance of department of research and development (R&D), and especially for technologic corporations that own the fast product-life-cycle.
Despite the fact that some people will argue whether reinvesting more source in research and development is successful strategy or not, an important issue for management studies would be normally discussed to be to what extent companies have to reinvest in research and development. This essay will seek to discuss some solutions of a number of large technologic companies form different views and also try to find the optimum one. Firstly, there are two solutions will be discussed. Secondly , They will be compared each other. In the end, the essay could summarize that which solution is the best.
One way of solving the problem would be to undoubtedly reinvest a significant amount of profits in R&D, even if it may occupy more 15% of the revenue. In fact, John Madden (2010) emphasized that “Most successful companies reinvest 3-6% of net sales into research and development” and some companies in the specific industries would arrive at 15% of revenue into R&D. In addition, according to Chesbrough, H. W. (2006: xix), “Internal R&D was viewed as a strategic asset and even barrier to competitive entry in many industries”.
In particular, those enormous technologic corporations with considerable capitals and extended schemes of R&D could compete, such APPLE, IBM and HTC. Therefore, it could be said that the solution entirely agree R&D is a vital cycle and asset in developing company. Evidence indicates that most products of technologic corporations be probably own shorter product-life-cycle. As a result, R&D will allow the company to create new products continually. Following that, company makes a majority of profit form these new products.
For example, ADES stated that more than 60% of revenue of Xerox earn from the new products that launched in the past two years. Moreover, investing R&D oneself will control the main techniques and put up the higher barriers to control competitor’s entrance. For instance, Apple enterprise continually devotes to discover new technology to take out enormous intellectual patents and then raise their competitiveness. On the other hand, firms need to spend huge time money and manpower to participate in the process of R&D and some companies that want to reinvest in R&D must ante up bigger risk.
Unfortunately, this investment may be frequently sunk costs. A number of businesses fail and go bankrupt in the bad condition. On balance, it is not only unsuitable methods for all enterprise, but it is not unique answer. Another way to solving the problem would be to stop any investment of R&D. This is to say, the corporations do not have to reinvest any resource into R&D and also do not need to organize the department of R&D oneself. However, it does not mean that they must not acquire any new techniques and products of next generation.
They just utilize some methods or strategies to gain a number of technology what they want, such as technical authorization, technical transfer, outsource R&D, hire consultants and enterprise merger and acquisition. To a certain extent, there are probably noticeable advantages in this solution. Firstly, the firms just spend lower cost to gain new technical knowledge and then finish the mission of R&D. Secondly, this should be able to compress the time of researching new technical knowledge and also shorten in the procedure of developing the coming products.
Furthermore, the brilliant product could be successfully launched at the good timing. In contrast, evidence indicates that the strategy of utilizing outsource seem to be marked difficult for how to execute deeply it. There is one instance of enterprise merger and acquisition of exploring the post-acquisition integration risks. According to Chen, C. H. and Shih, H. T. (2008), Whether the mission or vision of the both company is the same or not will be a vital factor. The reason totally affects the success of an acquisition. In addition, how to find out and to purchase the primary techniques is also an obvious problem.
Clearly, this method has some strengths and weaknesses, thus below two will be evaluated as follows. Both methods have probably offered most corporations to solve the R&D problem. Similarly, all of them agree that the importance of R&D and utilizing new techniques in the company. Moreover, there are also the similar risks in both ways. Tassey (1997) stated that uncertainty of R&D is “ the inability to estimate the reward and risk. ” On the other hand, one of their different points is the speed of exploiting new product.
This would seem to be the way of cooperating other R&D institutions. The other one could be whether they can control the key techniques to persistently maintain core competitiveness of the enterprise or not. According to Porter (2004:164), “Technological change is one of the principal driver of competition. It plays a major role in industry structural. ” technological As for that, organizing own R&D might be an appropriate way. Overall, how to keep the main technical knowledge is a very vital around growing energy and supporting stable profit of most firms.
Despite the fact that outsourcing can help corporations acquire rapidly knowledge, reinvesting income in R&D by themselves is apparently better. Obviously, every method has different characters to solve the R&D problem. So people should understand the situation of the companies themselves before choosing the solution. All in all, it is difficult to clearly identify what extent is suitable to plow revenue in R&D related to the large technologic companies to and decide the best way to solve this problem. However, Here there are two methods to solve the problem in this essay. The best way seems to be the first one.
It could be said that should do their own individual R&D seem to be one of competitive capabilities in a firm, and then it may affect the growth of a company in the future, such as launching latest production and recognizing new marking. Nevertheless, they should estimate the overall risk before deciding that. References: ADES (2008) Invest in R&D, It’s vital for your business’ survival. (school practitioner). ADESBLOG Weblog [online] 5th March. Available from: http://www. adesblog. com/2008/03/05/invest-in-research-and-development/. [Accessed 22/8/11]. CHEN, C. H. and SHIH, H. T. 2008) Mergers and Acquisitions in China: Impacts of WTO Accession. United Kingdom: Edward Elgar Publishing Limited. CHESBROUGH, H. W. (2006) Open Innovation: The New Imperative for Creating And Profiting from Technology. United States of America: Harvard Business School Publishing Corporation. MADDEN, J. (2010) Research and Development- reinvestment in innovation [www] Airborn Electronics. Available from: http://www. airborn. com. au/spec/econ. html [Accessed 22/08/11]. PORTER, M. E. (2004) Competitive Advantage. New York: Free press. TASSEY, G. (1997) The Economics of R&D Policy. United States of America: Quorum books.
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