R&D opportunities in a downturn: creating new products to take advantage of competitors’ weaknesses

The McKinsey Quarterly surveyed 494 senior executives around the world in February and March 2009. Results show that research and development remains a strategic priority for executives, even in turbulent times: 40% of the respondents say their companies are actively seeking to reduce R&D costs – far fewer than are cutting operational costs overall (according to other McKinsey research). Some 34% of the executives report that R&D budgets are lower in 2009 than they were in 2008. Further, a large majority indicate that their companies are taking a new approach to R&D in the current economic circumstances; many are turning to shorter-term, lower-risk projects or focusing on minor changes to existing products.

While this tendency toward caution is understandable, other findings indicate that many companies may be overlooking longer-term opportunities to innovate. Notably, the companies that get the greatest benefit from innovation appear to be taking a different approach. The respondents from them not only indicate that, during the past 5 years, they have had high rates of organic growth as compared with competitors but also attribute more than 30% of that growth to new products developed in house. In the areas just described, these high performers are taking a very different approach – one that seems intended to fortify their existing competitive advantages.

Respondents at high-performing innovators are nearly twice as likely as the others to regard the current economic situation as an opportunity to upgrade R&D (24%, compared to 14%) and are more likely to say their companies are expanding some R&D activities (30% versus 21%). Indeed, they are more than twice as likely as other respondents to report that their companies’ R&D budgets are either “higher” or “much higher” this year than last (35% versus 17%). As for setting R&D goals, executives at these companies are more likely than others to say they are focused on creating new products to meet changing consumer needs and new products or services to take advantage of competitors’ weaknesses. Most notably, these companies are more than twice as likely as the others to seek projects that combine higher risks with higher returns.

R&D trends based on survey results:

  • Although the urge to reduce R&D costs is understandable, not all cuts are created equal. Top companies save money by optimizing and upgrading R&D processes and making them leaner – a path that improves the bottom line while raising productivity and speed to market.
  • A rigorous portfolio approach to managing R&D projects helps senior executives focus on strategically promising efforts while uncovering moribund projects that may otherwise go undermanaged – or even unnoticed.
  • Widespread layoffs and industry restructuring, though painful, offer opportunities too. An unprecedented pool of specialist engineering talent – for example, in the automotive industry – is available for companies looking to steal a march on competitors.

For more details:
http://www.mckinseyquarterly.com/Operations/Product_Development/RD_in_the_downturn_McKinsey_Global_Survey_Results_2342

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