2015-11-04 16:09:00ProductivityEnglishKnowing if R&D is right for you small business and how to conduct it can set you apart from the competition. Learn how to build a product...https://quickbooks.intuit.com/r/us_qrc/uploads/2015/11/2015_10_13-small-am-understanding_the_basics_of_research_and_development.jpghttps://quickbooks.intuit.com/r/productivity/understanding-the-basics-of-research-and-development/Understanding the Basics of Research and Development

Understanding the Basics of Research and Development

6 min read

Depending on your level of business experience, you may view research and development (R&D) as a step that only highly technical companies take into account. Many smaller companies and entrepreneurs believe that R&D is something only larger firms can afford to do. However, if you manufacture a product or have developed a consumer product that you are looking to market, then your company would likely benefit from a formal R&D process.

Below we’ll examine the different types of R&D, and how you might be able to incorporate them into a small business budget and timeline.

What Is Research and Development?

It’s probably best to start with what research and development isn’t. It is not simply testing existing products or conducting focus groups to gather consumer feedback. True R&D is the allocation of time and resources to allow product manufacturers or inventors to conceive of, foster and develop these product ideas. This includes making prototypes and conducting trials to confirm ideas formed in earlier research stages.

Contrary to popular belief, R&D can also be conducted on existing products as well as on new products or ideas. While many companies looking to diversify their revenue streams constantly conceive of and produce new products, other companies spend copious amounts of money each year on improving their existing products.

When compared to their annual revenue, this investment in R&D is considered a wise one, as it can keep a company at the leading edge of its industry and help maintain its name recognition with consumers.

Where to Begin

Research and development typically begins with an idea. This initial idea may be vetted against earlier research and built upon already existing product knowledge. For example, if you have conceived of a new razor, you might spend time in the beginning of your R&D process learning all you can about the current razors for sale, what your competition offers and how razors are set apart from each other. You might also want to investigate the conventional razor’s origin or evolution.

The next step is applied research, which is applying your efforts to understanding or addressing a specific pain point. In other words, you take the information you uncovered during basic research and apply it to commercial objectives.

Once all research has been conducted, development begins. This is when all of the research into the product, its uses, the materials it’s made of and more are put to a real-world test. Prototype design and testing are also part of the development process and it’s not uncommon for products to go through many iterations during the development phase.

How to Get Started

Deciding to invest time and money in R&D is not a choice to make lightly. It’s also important to recognize when investing in R&D is right for your business. Weigh the following when making a decision to commit to research and development.

1. What Is Your Current Business or Industry Outlook?

Industries with a high growth rate don’t always lend themselves to R&D. The R&D process can be long, and by the time anything significant is discovered, the business has already moved past it. The same is true for small business. If your business is growing rapidly, then stunting that growth to pay for an R&D plan may do you more harm than good.

2. Can You Handle the Uncertainty of R&D?

Not everything developed through R&D is commercially useful. Companies can spend years looking for ways to improve a product and ultimately find no significant way to do so. Larger companies might find this type of non-result frustrating, but the risks to a small business owner could be very detrimental to his or her business’ revenue and chances for success.

3. Can You Afford to Be Out-Researched?

It’s possible that competitors are already conducting R&D on a very similar product. If that’s the case, they could easily release findings sooner than your own research begins, thereby nullifying your efforts. Similar to unfruitful research, this type of research “poaching” might be merely an annoyance to a larger organization, but can be veritably devastating to a small business.

Instituting a Research and Development Process

If you’ve determined that you do have the time, money and patience for a formal R&D process in your organization, there are a few things to consider when getting the program up and running.

1. Assess the Market and Identify Pain Points

While you want to provide an opportunity to innovate, you also want to focus your R&D as much as possible. In general, you should always conduct R&D with an emphasis on addressing a need or objective learned from assessing the current market and customer needs. Make sure that your R&D team understands what business objective you are hoping to address, and make sure that benchmarks can be measured against this objective.

2. Designate a Team

For a small business, the “team” may simply be you, the inventor or entrepreneur. If you have the time, money or connections, try to enlist the help of another innovative individual. It’s best to have a cross-functional team that brings different strengths and perspectives to bear on the project.

3. When All Else Fails, Outsource

The process of maintaining a successful business on its own may preclude you from pursuing R&D yourself. If this is the case, outsourcing becomes a viable option. Research organizations and some universities might be able to offer more focused and in-depth R&D than you could manage on your own. Meanwhile, you have time to build your business.

Benefits of R&D

Aside from the potential of gaining marketshare with a great product, a formal R&D process can offer other benefits to your organization.

  • Tax Breaks. Normally, R&D expenses are tax deductible. Make sure you and your tax accountant are clear on what specific activities fall into this bucket.
  • Cost Assessment. R&D processes can yield more cost-effective methods or materials for your product, which can increase profit margins or reduce consumer cost.
  • Financing. Having a formal R&D process on the books is highly attractive to well-financed investors. They want assurances that the companies they invest in are set up for long-term success. Having a process in place is often seen as a positive and proactive step.
  • Patents. Your R&D processes may yield patents or other intellectual property. Patents can help your company gain a strong foothold in the industry and lead to long-term profits.

Challenges of R&D

Formal R&D processes require time, talent and money, some or all of which may be in short supply for small businesses. If a formal process won’t work for your organization, consider embracing an R&D mindset. Instead of putting a process into place, an R&D mindset encourages all members of your organization to think creatively with an eye toward research-based solutions.

By training your employees to consider the customer’s point of view as well as keep their eyes and ears open to the latest trends in the industry, you can capitalize on the benefits of R&D without sinking a lot of time or money into it. This also allows for flexibility, in that you can choose to further explore an employee’s idea if it’s viewed as worth the effort.

Research and development are essential to the creation and adoption of products, as well as product innovation. Even small businesses can take advantage of the benefits of research and development by expanding their mindset and adopting a spirit of creativity.

If you’re looking to enhance your R&D efforts, start by conducting some proper market research.

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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