New Products: How do we get them?

Dr. Robert M. Gresham, Contributing Editor | TLT Lubrication Fundamentals February 2010

Before making the build-it or buy-it decision, consider these four scenarios.
 


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KEY CONCEPTS
• A bit of mystery continues to surround the R&D departments in many companies.
• Despite what some managers think, using a different-colored container doesn’t make a product new.
• Screaming at the lab rats is never a good idea.

Most people who don’t spend much time around research and development departments appear to have some interesting ideas about what goes on there, how it is done and even who does it. Further, they equally seem to have little idea where a new product comes from—other than images of the alchemist’s cauldron or the mad scientist’s laboratory. There are even mis-perceptions as to what a new product is.

Yet, in most companies, while the R&D department is a rather obscure part of the operation, its output is usually critical to the longevity of the company.

I once had a boss whose background was primarily in sales. His belief was that anything different about an existing product made it a new product. He actually said, “Can’t you just aerosolize it or put it into a different colored container?” What he was really looking for was an excuse to go into the customer with something new and then, once a conversation was started (make that sales pitch), he could sell whatever he wanted. It didn’t matter to him whether the “new” product was an improvement for the customer, only that it was a means for getting in the door.

Needless, to say this was a real morale booster for my lab rats. I’ll spare you their invectives. Instead, let’s take a more positive look at what’s involved in new product development.

You frequently hear the term asset management applied to manufacturing facilities. It equally applies to R&D departments, not only with the physical assets of the lab and its attendant hardware but also the department’s intellectual property. This is the combination of patents, licenses, product approvals and, of course, the in-house expertise of the lab rats themselves. This latter group is most difficult to assess, and the process usually is inconsistently done. Do you count the number of doctorates, certified technicians, peer-reviewed papers or patents, awards, etc.? How do you put a number on an individual’s or R&D department’s relevant technical expertise and his (or its) cognizant understanding of how this expertise can impact the company’s markets?

Also, how do you measure the output of your R&D department? I think one telling measure is the percentage of sales from new products commercialized, say, in the last five years. Sales and R&D share a common dilemma in that it is difficult to answer certain almost unanswerable questions.

It is easy (and all too common) for sales folks to scream, “We don’t have any new products and what we have aren’t any good!” Equally R&D folks scream, “You couldn’t sell a lifeboat to a drowning man!” Even if sales are reasonably good, and the R&D department seems to be functioning well, the questions, “What could you or should you have sold?” or “What could you or should you have invented?” continue to nag.

Corporate R&D departments vary considerably depending on the size of the company, the company’s business and the state of the science or technology that encompasses that business area. Indeed, even the areas of responsibility can vary considerably. Some R&D departments also are responsible for quality assurance and/or customer technical service and/or plant technical (providing assistance to the manufacturing operation). Other R&D departments are responsible for none of these.

In terms of budget, few companies, regardless of how their R&D is deployed, exceed 10% or much less than 3% of sales. So in a small company where the R&D budget is say 5% and the department is often responsible for quality, technical service, etc., that company likely does virtually no “R” and precious little “D.” There’s just not enough money to go around.

These considerations also define physical resources as well. Do you have one large lab or several small labs? Do they have all the latest gadgets? How much and what kind of analytical capability do you need, and how much can be contracted to outside analytical labs?


Many people continue to have interesting ideas about what is happening in the R&D department.

Given these realities, how is an R&D manager to staff his department? If the company has a small budget and diverse areas of responsibility, then having a stable of high priced, hot-shot PhDs is not cost-effective. Many of the daily tasks easily can be handled by a combination of trained technicians or bachelor’s- and master’s-degreed people, perhaps with one PhD to oversee things.

On the other hand, if the department is tasked with developing long-term, cutting edge science that, it is hoped, leads to truly new innovative products or processes (true research), then PhDs, preferably with relevant post-doctoral experience, are essential. So the staffing and facilities must fit the company’s approach to the business and the reality of their markets. And, it is hoped, the budget will fit the needs of the business (not a foregone conclusion).

So let’s take as a given that we have an R&D department that fits our business model and that it routinely cranks out enough new products that 20% of the company’s sales comes from products developed in the last five years—which is pretty good! But suppose the mavens that run the company have determined (in conjunction with the R&D manager, one hopes) that the company needs to move into a new direction. It usually ends up being the R&D manager’s task to figure out how to move the company in that direction.

Believe me, this is not accomplished by running down to the lab and screaming, “You clowns better invent something fast or you’ll be out of a job!” although this does happen, a better approach is to make a strong business case for the new initiative.

When approaching a new (at least to the company) technology area, the manager doesn’t have the luxury of a knowledgeable staff nor a lab necessarily designed and equipped for exploiting the new kind of technology. He may need to hire and train new people and/or hire experts in the new field, and he may need to re-equip or redesign his lab facilities.

Before he makes these kinds of expensive decisions, however, he might be helped by considering the following scenarios:

The technology is mature and there are many competitors. In this situation, where the market is moving slowly and there are a number of players, margins are likely small, and developing truly new technology will be a long-term and expensive proposition. The likelihood of the lab folks coming up with anything but me-too products in the short-term is remote. A license of technology, with so much competition, would further erode potential profitability. It might make more sense to purchase one or more companies to establish a presence and gain immediate market share.

The technology is moving rapidly and there are many competitors. Here the technology and market are moving rapidly and the direction of the market is also known or there wouldn’t be a lot of competition already. Profitability likely is still good. Thus, it is unlikely another new player would be able to ramp up his R&D effort fast enough to catch up and surpass the fast-moving technology from the competition.

Purchasing a company is an option but risky as you might pick a company with technology that won’t hold up over time. Licensing could be a good, low-risk option. Should you choose wrong-developing technology, not much money will have been spent. The license could be a jump start for getting your own R&D department up to speed in a hurry while enjoying immediate sales to finance the department build-up.

The technology is mature and there are few competitors. With a slowly moving market there is time to learn to develop your own products and technology. It is relatively risk-free since you are using largely fixed assets. But with few competitors, one would need to ask the profit potential for this kind of business.

The technology is moving rapidly and there are few competitors. This is a highly fluid situation. If your R&D has some unique talents or ideas for this market, it might make sense to try to have an impact. It might also make sense, especially if you are a small company with limited R&D resources, to simply monitor the market and then either obtain a license or acquire the company that seems to have the best technological edge.

So when getting into new product technology areas, the build-or-buy decision—do i invent the technology myself or buy it from someone else—is not simple. Be advised, however, that the stockholders will demand that you get it right the first time.
 

Bob Gresham is STLE’s director of professional development. You can reach him at rgresham@stle.org.