Blog: What makes a successful R&D strategy?

Vinci-researcher Isabel Estrada Vaquero 

In 2015, European companies invested more than EUR 190 billion in Research and Development (R&D) activities(1). Even in times of economic turmoil many executives seek to keep R&D high on their companies’ agendas(2). Thus, companies seem to be fully aware that R&D is core to long-term competitiveness. But what makes a successful R&D strategy? Should companies do their R&D in-house, outsource it, or both? Many executives struggle with these questions, and it is not for nothing. A successful R&D strategy does not come without challenges.

Research conducted by VinCi experts(3) and the stories of successful companies may offer some guidance to take up these challenges.

Invest on your company’s R&D capabilities, but do not overdo
A first challenge is to calibrate the pros and cons of in-house R&D. On the one hand, a strong in-house R&D system is key to building the company’s innovation capabilities. Companies need to continuously invest in their R&D teams to stay ahead of competitors, for example through attracting top R&D talent. While these investments  require significant funding, the returns may be even higher: a fruitful innovation strategy that puts the company’s products at the forefront of the market. 

On the other hand, the positive returns of in-house R&D investments may not hold endlessly. Investing in the company’s R&D capabilities is very beneficial but focusing solely on in-house R&D may be risky and ineffective. In a world of interconnectedness, a closed R&D system is probably doomed to failure. Our R&D team cannot know it all. No matter how talented and diverse our R&D professionals are, they may be unaware of some market trend or lack expertise on a cutting-edge technology. Without input from outsiders, they may end up running out of ideas, becoming biased or stuck in groupthink, all well-known enemies of innovation.

Outsource some R&D projects and actively deal with the risks
Collaborating with R&D partners is one key solution to the above problem. External partners can provide novel technologies and thought-provoking ideas. In fact, top innovative companies like Tesla, Google or Amazon nurture their innovation processes through rich ecosystems of partners, including universities and research institutes, governmental agencies, promising start-ups, clients, suppliers, and even competitors. Therefore, outsourcing part of the company’s R&D activities seems like the right strategic move, especially for projects that require expertise not available in-house or a totally different perspective.

Managing partnerships is challenging, though, and especially so in the R&D arena. To begin with, the outcomes from an outsourced R&D project need to fit the company’s necessities. Achieving this is not always easy, given the intangible assets in play (ideas, technology applications, etc.). Some companies report having faced this issue when working with universities and research institutes. Our research shows that some of these projects may result in developments that do not fit the company’s processes or lack commercial value(4). These issues can be eased through open communication to keep the R&D partners on the same page throughout the project.

Another risk is that proprietary information may leak, a common concern in projects with competitors (or with their partners). If the company’s secrets become exposed, the losses can be tremendous. Our research suggests that communication may be essential also to deal with this risk(5), since it can promote an effective yet safe use and exchange of ideas with R&D partners.

Take action to bring together in-house and outsourced R&D
A successful R&D strategy combines in-house and outsourced R&D projects, given the important synergies between both activities. How much of the R&D budget should stay in-house and how much should go to R&D partners? In the most innovative companies, in-house activities normally get top priority in the annual R&D budget. This allows them to build, upgrade and take ownership of their innovation capabilities. The optimal investment policy may vary per company. For example, in R&D intensive industries like pharmaceutical the share of in-house R&D may need to be higher than in less innovative industries.

However, an optimal R&D budget’s distribution does not mean capturing synergies. How can companies truly bring in-house and outsourced R&D together? Executives may need to identify opportunities to align both activities and take action in pursuing them. It is crucial to allocate the right attention, time and resources to do so. To cope with this challenge, creating a dedicated team may be one effective solution. For example, an Innovation Committee is the central element in the recently renovated innovation model of global IT company Indra(6). The committee’s mission is to define innovation priorities for the company and monitor that the different innovation initiatives converge towards them.

In a nutshell, to implement a successful R&D strategy, companies can build a strong in-house R&D system, while making sure that their innovation processes do not only feed upon in-house born ideas. Therefore, rather than giving the benefits of R&D outsourcing up, executives can proactively handle the accompanying risks through adopting the right actions, such as a thought-through communication strategy with R&D partners. Last but not least, companies also can ensure that their internal and outsourced R&D efforts are properly brought together through, for example, forming a dedicated innovation committee.

Want to know more? Don’t hesitate to contact the author of this post:
Isabel Estrada (i.estrada.vaquero@rug.nl)

1 Europe 2020 indicators- R&D and innovation. Available at:  http://ec.europa.eu/eurostat/statistics-explained/index.php/Europe_2020_indicators_-_R%26D_and_innovation  (last accessed 30-10-2017)

2 R&D in the downturn: McKinsey Global Survey Results (2009). Available at: https://www.mckinsey.com/business-functions/operations/our-insights/r-and-ampd-in-the-downturn-mckinsey-global-survey-results (last accessed 30-10-2017)

3 Estrada, I. & de Faria, P (2017). R&D structure and New Product Development: The Moderating Role of Innovation Management Mechanisms. Working paper presented at 2017 International Product Development Management Conference and R&D Management Conference.

4 Estrada, I., Faems, D., Cruz, N. M., & Santana, P. P. (2016). The role of interpartner dissimilarities in Industry-University alliances: Insights from a comparative case study. Research Policy, 45(10), 2008-2022.

5 Estrada, I., Faems, D., & de Faria, P. (2016). Coopetition and product innovation performance: The role of internal knowledge sharing mechanisms and formal knowledge protection mechanisms. Industrial Marketing Management, 53, 56-65.

6 For more information, visit https://www.indracompany.com/en/indra/innovation-model (last accessed 30-10-2017)