3. BENEFITS OF EARLY INTEGRATION OF R&D AND COMMERCIALIZATION PLANS

Even the most sophisticated techniques aimed at forecasting the returns from R&D projects and programs seem to have had limited success. For example, the oil firm in the previous section abandoned the model described above. One of the key problems has been the difficulty in forecasting how R&D, if successful, will be utilized. Whereas economists' models often put R&D at the center of the stage, the truth is that R&D is often useless unless it is combined properly with marketing, production, and finance. Thus, to forecast the returns from investments in new technology, one must forecast how the new technology will be used, which seldom is easy.

Nonetheless, the available evidence (which unfortunately dates back to the 1970s) seems to suggest that firms that attempt such forecasts at an early stage do better than others.⁵ The probability that an R&D project will be an economic success is the product of three probabilities — the probability of technical success, the probability of commercialization (given technical success), and the probability of economic success (given commercialization). According to econometric results based on data from 20 firms in the chemical, drug, petroleum, and electronics industries, all three of these probabilities of success were directly related to how quickly R&D projects have been evaluated from the point of view of economic potential.⁶ Apparently, this reflects the fact that firms sometimes allow projects to run on too long before evaluating their economic (as distinct from their technological) potential. Even though it is very difficult to forecast the benefits and costs of a particular R&D project, firms seem to do better if they try to do so early in the game, rather than wait until substantial amounts have been spent.

To illustrate the significance of organizational factors, the probability of commercialization (given technical completion) seems to have been directly related to the degree to which R&D and marketing have been integrated. In some firms, the R&D department has not always worked very closely with the marketing staff the result being that the R&D output has not been as well mated with market realities as it might have been. A substantial percentage of a firm's R&D results may lie fallow because other parts of the firm do not make proper use of them. According to estimates made by executives of 18 of these firms, the percentage of R&D projects that were economic successes would have increased by about one-half if the marketing and production people had done a proper job in exploiting them.⁷ (And it is important to note that the non-R&D executives seemed to agree on this point with the R&D executives.)

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Date created: June 15, 2006
Last updated: June 16, 2006

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