Factor 23: R&D Budget Levels

This factor deals with R&D budget levels versus the competition.

Factor extremes as measured in survey:

The R&D budget is much less than the competition

vs.

The R&D budget is much more than the competition

Overview to restructuring initiatives

Typically, research and development budgets are stretched. Setting the budget is most often a process of eliminating initiatives rather than finding projects to fulfill available funds. Thus techniques for leveraging R&D spending are important. Understanding the R&D efforts of the competition is also an important step towards deciding how to spend scarce resources.

An example of a sustained approach to innovation

Deere & Company; Chairman and Chief Executive Officer, Robert W. Lane, from an address he gave on May 7, 2007, addresses how Deere is ‘Driving Growth through Innovation’. Mr. Lane’s remarks make it clear that Deere is proud of its continuing support of R&D and that its levels are generally at the upper end of similar companies. ‘R&D has consistently run in the range of 4 to 5 percent of net sales, generally high for our industry… a spend rate of nearly $2 million a day’. One of the 4 key pillars at Deere makes reference to providing ‘sustained investment’.

Possible Initiatives to Modify and Improve the Culture for Innovation

Gain leverage for investment in R&D spending by enlisting a government agency with funding

Counterpart funds can often be found by examining the spending initiatives of governments and cross tying government interests with those of the corporation. Leverage is gained, but as a quid pro quo, it might be that the rights to the idea must be shared broadly in the industry, at least after a few years.

Engage in seed investment

Provide minority investment in a business/corporation to gain a window on emerging technologies. Such seed investments are often used as a way to manage risk and uncertainty and allow for a flexible approach to cultural differences between partners. As the relationship develops, a greater commitment can be made on both sides. Seed investment are sometimes made to gain privileged access to scarce new product. Seed investments can be generally made with less than 10% ownership.

Establish a privileged relationship with suppliers

Suppliers are often more in touch with developing technologies in their industry than the buyer of products and or services. Jointly funding innovative projects, entered into in exchange for long-term purchasing or financing commitment, can tap into a new source of ideas and funding.

Check the effectiveness of R&D spending and compare levels to the competition; domestically and internationally

A central R&D establishment, while operating at arms-length from operating divisions, could prove to be more effective in the spending of research and development funds than several decentralized units. Centralizing the research and development activities also tends to ensure that spending is more oriented to basic than to applied research, which may or may not be desirable. Alternately, the more R&D is decentralized, the more the R&D program content will probably reflect shorter term project interests; as enhancing the bottom line becomes more significant. A further area for examination into the effectiveness of spending is to consider the potential for contracting-out R&D spending.