This section of the IB Business Management syllabus examines the importance of research and development for a business (AO3).

Research and development (R&D) is the process of creating new products (goods and services) and processes (how things are down), in order to meet market needs. R&D is likely to include the following:

• Investment (financial funding)

• Test marketing

• Prototypes

• Market research

In particular, research is concerned with the creation of new ideas and new products. It precedes development. Development is concerned with adapting existing ideas and products in order to commercialise new products in a financially feasible way. Both research and development are needed to increase an organization long-term earning potential.

Tesla, the world's most valuable carmaker by market value, is known for its zero advertising budget, opting instead to spend money on R&D and relying on word of mouth advertising instead. Tesla often dominates mass media press coverage as well as social media platforms. Data from Visual Capitalist show that Tesla spends an average of $2,984 onR&D per car sold, which is triple the amount of other traditional carmakers (although marketing is typically a significant cost for these producers).

Internal forces driving R&D include:

• Source of improved competitiveness

• Source of extra revenue

• First mover advantage

• Market orientation (‘keeping with the times’).

External factors driving R&D include:

• Changes in consumer habits and tastes

• Changes in government legislation

• Innovative products launched by rival firms.

In today’s fast-paced business environment, businesses must continually update their products and processes just to keep up with changing market trends. This is more apparent in some industries, such as the consumer electronics or fashion industries. For example, consumer electronics companies, such as Apple, Samsung and Huawei, spend millions of dollars each year in technological R&D in order to stay ahead of their rivals.

Car manufacturers spend a significant amount of money on R&D in order to launch each new edition of a car. They do so to remain relevant and competitive, but this is costly due to new technologies being developed and the need to update manufacturing facilities.

Fashion designers are hired to create new collections for different seasons. Thus, R&D can help the business to launch new products, with a unique selling point, that appeal to customers.

R&D is also vital in the pharmaceutical industry, where research and development often take many years to complete before a particular medicine, vaccine or drug can be commercialised.

Pharmaceutical R&D often takes many years to complete

Although R&D is an essential part of innovation, the investment can be very expensive yet it does not offer any guarantee of results. In the best-case scenario, R&D will lead to the commercialization of a product which appeals to customers.

Advantages of conducting R&D include the following points:

• The corporate image may improve, if the business is perceived to be innovative and at the forefront of research and development

• A first mover advantage might be acquired

• The R&D process can lead to the creation of premium products, enabling higher prices can be charged for (and hence improved profit margins)

• The discovery of more efficient production process can help to cut costs, and hence prices can be set more competitively

• It can improve the longevity and competitiveness of the organization

• R&D can give a business a first-mover advantage and/or allow it to achieve a competitive advantage

• It can help to prolong the product life cycle of a particular good

• New processes can help to improve an organization’s productivity rate

• Ultimately, these benefits can enhance an organization’s corporate image and improve its competitiveness

• Some organizations can use R&D expenditure as a barrier to entry in order to maintain their market presence and dominance in the industry.

However, not all research and development will be successful. Disadvantages of conducting R&D include:

• The cost of conducting R&D can be extremely high

• It is a very time-consuming process

• The failure rate of new products and ideas can be significant

• The money spent on R&D might have been better spent elsewhere to improve the organization.

R&D expenditure is both costly and time consuming