ABSTRACT This article shows that R&D departments in small and medium size enterprises (SMEs) have to increase ROI1 on R&D dollars in order to avoid further displacement of expensive R&D jobs to lower cost countries. Unfortunately, too many projects that are technically successful end up failing at launch. This is a sales & marketing failure that reduces nonetheless the ROI on R&D as well. This is why ensuring upfront that every new product development (NPD) project translates into a commercial success is a shared responsibility between S&M and R&D departments. R&D managers must reject any NPD proposal missing a preliminary sales forecast. This protects R&D pipeline capacity against wasteful NPD activities that are bound to fail at launch. Hedging commercial risk upfront with a preliminary sales forecast is the best way to increase ROI on R&D investment and protect American R&D job. If the R&D manager does not have the in-house resources to forecast NPD sales, MarketChemica can forecast the potential revenue for new chemical products and advise if a new product should be accepted in the R&D pipeline. This aspect will be discussed in the second part of this article. INTRODUCTION The chemical industry has been dominated by technical and scientific prowess in the nineteenth and twentieth century. He who had access to good science and technology won the market battle. This has completely changed in the first decade of the twenty-first century. In a world of overproduction and excess capacity, having a product or a technology is mere entry-stakes to the game. How you deliver the product, from the NPD2 process all the way to the customer’s warehouse and post-sale support, is increasingly a critical competitive advantage. In fact some argue that in a flat world the interface between the company and the customer has become the only sustainable competitive advantage3. SMEs4 that pay attention to the market interface can morph from an outdated, product-oriented company to a modern, market-oriented organization that will survive and prosper in the age of globalization.This article makes the argument that the NPD process should focus from the very beginning on the company interface with the market. SMEs should include in their NPD approval process the question: “Can we sell it?” along with the usual question, “Can we make it?” It is incumbent on the R&D manager to work with sales and marketing to answer this question before any work in the laboratory begins. The seamless collaboration between R&D, sales and marketing is a first step towards the evolution of a product driven to a market driven organization. It is also a step in the right direction to prevent delocalization of R&D jobs by improving ROI on R&D activities. DISCUSSION THE CHEMICAL INDUSTRY: AN ORDINARY REACTION TO AN EXTRAORDINARY CHALLENGE Figure 1: 2001-2010 An Extraordinary Decade in the Chemical Industry Business Environment5 Figure 1 clearly demonstrates that the first decade of the 21st century transformed profoundly the chemical industry, as we knew it. While the US and EU output continued to grow at a steady but modest pace China went from 100 MM 4 in 2001 to 1 Trillion $ in 2010 and now rivals with the EU industry for world supremacy. SMEs planning to hunker down and wait for better times might want to pay close attention to the rapid surge of patent output (Figure 1). The buoyancy of the patent Chinese market is a leading indicator of the things to come. It is obvious that the surge in the Chinese industry chemical output is also accompanied by a “hockey stick” rise in the R&D capacity and capability measured in number of patent applications. This clearly threatens the competitive position of the American and EU SMEs including the security of the R&D jobs. In conclusion the trend in the business environment is clear: the gap between the developed and developing economies is quickly closing. In a short decade, the free movement of capital, goods, people and information has successfully flattened the world and the global competitive pressures spare no one. One would think that such a dramatic change in business environment would be reflected in some defensive countermeasures within the American enterprise. This should be easily reflected in the increase of key financial ratios such as R&D/sales or M&S expense/sales. In reality, Figure 2 shows that for leading American companies, nothing has really changed in the past ten years. The average R&D/sales ratio is between 2 to 4 % while the average sales & marketing/sales ratio hovers around 10%. Surprisingly, for all the talk about R&D investment, it is “business as usual” in the Western World Chemical enterprise. There is little resource reallocation towards R&D in the globalization age. Obviously, hard profitability targets dictated by financial markets restrict significant resource reallocation towards R&D or marketing & sales in the chemical industry. From the R&D manager perspective, the fact is that increased investment in R&D has not, is not, and probably will not happen for as long as higher ROI on R&D happens elsewhere. Caught between a rock and a hard place the R&D management must increase ROI on Research & Development at insignificant incremental cost. How can it be done? Figure 2 2000-2010: An Ordinary Decade in the Enterprise Resource Allocation MarketChemica believes that minimizing the number of commercially failed R&D projects is the best way to go about it. Minimization of commercial risk for NPD projects can be accomplished at a small upfront extra marketing cost but could have significant impact on the revenue line of the company. Determining the NPD sales forecast is a relatively easy feat in the computer age and SMEs should make this step mandatory before the usual technical and literature review begins. In order to understand why this is so important we need to have a look into why NPD projects fail at launch. WHY DO PRODUCTS FAIL AT LAUNCH? The main causes for NPD failure in US manufacturing are: 6 1. Inadequate market analysis (24%) 2. Product problems/defects (16%) 3. Lack of effective marketing effort (14%) 4. Higher costs than initially anticipated (10%) 5. Strong competitive reaction (9%) 6. Poor timing of introduction (8%) 7. Technical and production problems ( 6%) 8. All other causes (13%) Figure 3: NPD failure is rooted in lack of proper marketing work If you regroup the list above by broad NPD failure causes they fall under 1) Marketing, 2) Technical and 3) Management issues. Surprisingly, it turns out that the most important factor impairing ROI on R&D is in fact marketing! (Figure 3) The same study shows in a cost analysis of the NPD process in the US manufacturing that preliminary and early market research is particularly underfunded (Figure 4).
Figure 4 Early market studies represent 2% of the NPD cost but are #1 reason for commercial failure The direct consequence is that many NPD projects destined to commercial failure clog the R&D pipeline in an unproductive manner. The lack of marketing scrutiny automatically decreases the ROI on R&D and renders it expensive through no fault of the R&D department (Figure 5). To quantify the los of R&D productivity it is interesting to note that out of 63 ideas 36 enter the NPD process and take R&D production capacity. These projects continue to advance and absorb expensive R&D resources at an great opportunity cost as the R&D pipeline is occupied by future product failures. Eventually, 22 new products are eliminated however 14 products launch. Only 9 products survive commercially on the breakeven point while in fact only one single product is a money-maker for the company. A cursory look at these numbers suggest clearly suggest that the R&D cost per successful product could be cut by 90% on an incremental upfront marketing effort. If so, as shocking as this might sound, the R&D cost in the developed world could in fact become competitive with low cost countries. Figure 5: NPD products must fail early in order to improve ROI on R&D CONCLUSIONS R&D departments in small and medium size enterprises (SMEs) have to increase ROI7 on R&D dollars in order to avoid displacement of expensive R&D jobs to lower cost countries. Unfortunately, too many projects that are technically successful end up failing at launch. This is why ensuring upfront that every new product development (NPD) project translates into a commercial success is not only a sales and marketing function but a shared responsibility between with the R&D departments. If Sales does not produce upfront a preliminary sales forecast for NPD, the R&D manager must reject the project. This protects R&D pipeline capacity against NPD activities that are bound to fail at launch. Hedging commercial risk upfront with a simple preliminary sales forecast could cut R&D exoense by one order of magnitude. This is the best way to increase ROI on R&D investment and protect American R&D jobs. MarketChemica offers specialized marketing services to the global fine and specialty chemicals industry. For more information on Mch NPD Forecast™and Mch R&D PipelineAudit™ see marketchemica.com 1 ROI stands for return on investment, a widespread performance measure for any investment decision. 2 NPD stands herein for New Product Development 3 Vandenbosch M., Dawar N. 2002. Beyond better products: finding, building and capturing value in customer interactions. MIT Sloan Management Review, 43(4): 35-42 4 SME stands herein for Small and Medium Size Enterprises defined as companies having sales in the 10 MM $ to 250 MM $ 5 http://www.americanchemistry.com/Jobs/EconomicStatistics/Industry-Profile/Global- Business-of-Chemistry and http://www.wipo.int/export/sites/www/ipstats/en/wipi/pdf/941_2011_section_a.pdf 6 http://www.inventvermont.com/meetings_05.php, Rob Smart presentation at Invent Vermont, 2005 7 ROI stands for return on investment, a widespread performance measure for any investment decision.