Platt Perspective on Business and Technology

Pure research, applied research and development, and business models 3

Posted in strategy and planning by Timothy Platt on March 27, 2017

This is my third installment to a series in which I discuss contexts and circumstances – and business models and their execution, where it would be cost-effective and prudent for a business to actively participate in applied and even pure research, as a means of creating its own next-step future (see Part 1 and Part 2.)

I ended Part 2, on two notes:

• The prospect of citing AT&T and their Bell Labs research facility, as an example of a large corporate sponsor of in-house pure and applied research, and
• The issue of what makes actively systematic research and development cost-effective when it can be made so, and of making it into an overall value creating approach in a business in general, (and here and for this second point, regardless of whether that is carried out by a large corporation or at a smaller-in-scale enterprise with a research business focus.)

More specifically, I said that I would address these business model and execution issues here, at least as a starting point in terms of a large corporate research, default model and by citing AT&T and its Bell Labs facility as an paradigmatic example of that. And to clarify this point, I refer to:

• Business model examples such as AT&T and their research centers as following a default model, as historically it has primarily been large, and even the very largest of innovation-driven businesses that have pursued active ongoing research, and successfully and as a defining source of their overall strength.

That certainly holds true when long-term research efforts are considered, and particularly when you focus on very wide-ranging and impactful within-business, in-house research programs and their supportive facilities, and where their research success has been developed as a significant driver for them as they seek to competitively lead in their markets and in their industries.

I ended Part 2 of this series by offering a brief orienting pair of business finance and risk/benefits management parameters that of necessity would enter into any determination of when research would work effectively in a business and its strategic and operational systems, and as a reliable source of strength – and not just as a perhaps short-term value-positive, marketing cost center as that might be attempted:

• Timeframes, and the determination of what is more a cost center and what is more of a profit center in a business – and how these two set of issues interrelate.

I begin this posting with the first half of that bullet point, and with the issues of timeframes, and the here-closely related issues of cash flow, financial reserves development and liquidity allocation. And I will continue this line of discussion from there to more specifically consider the issues and questions of what would qualify as a profit or cost center in this context. And as suggested above in my opening comments here, all aspects of that to-address list hinge for their relevance to this discussion, on risk and benefits determinations and on what types of scenarios are considered in business development planning at that level.

I will start addressing all of this in general terms with avery non-AT&T example and then cite work done at Bell Labs to further take this line of discussion at least somewhat out of the abstract. And with this fuller anticipatory orienting note in place, I start with timelines, and on how research in its varying forms and more focused product development all fit into and help define them.

I have in effect already started addressing that complex of points in the first two postings to this series, when I initially offered working definitions as to what pure and applied research are, and how they might in principle fit into a business model as sources of future competitive strength and marketplace share. So to recap a point already made there, as a starting point for this narrative, I repeat that basic research arrives at more fundamental new knowledge, some of which if properly identified for its potential can feed into more directed applied research settings. Pure research is carried out as such without any requisite specific product development focus, but it can lay the groundwork for enabling more marketable product-focused research and development: applied research. And the more specific-product focused end of this research-type spectrum is specific product development, where all effort is oriented towards making some specific marketable offering that would be both cost-effective to produce and appealing and of recognized value to a marketplace and its customers.

And one of the key driving elements that runs through all of this progression of innovative knowledge building and development is time. Pure research takes time, and so does applied research, that feeds into specific product development and certainly as this overall process comes into a more and more marketable focus. Specific product and product line development take time too. And this progression carries at least two very significant sources of potential risk in its fundamental structure, as well as the potential positive benefits that might accrue to the business if it can bring a truly innovative marketplace winner to market first – and particularly if it can do so under the protection of patent law or other mechanisms for retaining a monopoly on its invention, and for a sufficient enough period of time so as to be able to make it significantly profitable, and particularly while that business is still that new offering type’s sole marketplace source:

• First, the more research and development steps are required,
• And certainly in-house and at the expense of that business’ income and reserves with all of the funding based scheduling constraints that they can impose,
• The longer this is all going to take from initial first research step conception to when a finished product that is based on it can be ready to ship.
• And the longer this takes, the greater the likelihood that another business will get there first with a matching product offering, and with that competitor taking any first mover advantage that might be available.

This source of potential risk particularly holds significance when a possible new innovation is more evolutionary in nature than it is revolutionary, but the history of innovation and invention has shown that the world and its innovators can in effect be prepared for certain types of innovation – and even seemingly the most disruptively novel ones. That particularly holds true when innovation and even disruptively novel innovation are arrived at in response to what have become more widely recognized unmet needs – needs that many might be seeking to find resolution to through independent parallel effort. So this type of preemption from success, after the investment of innovation expenditures can and does occur and for the more disruptively novel end of the innovation scale too. And the possibility of that happening, always has be to weighed into any risk/benefits calculations made, and in as much realistic detail as possible, and in any assessment of how long an overall development timeline might be sustainably realistic to pursue. And that enters into any determination of what balance if any, of pure and applied research it might be cost-effective enough to pursue too, if any is, and particularly as any such decisions would set what amount to fundamental minimum timeline durations required in order to bring new product offerings to market.

To take this out of the abstract with a currently popular non-AT&T competitive innovation scenario, consider big prize innovation race contests, such as the strictly private sector race to launch a manned space vehicle into Earth orbit by a strictly private sector business venture such as SpaceX or one of its competitors, and safely bring it back to Earth again. (For background reading on that and related matters see private spaceflight.)

Timeline and risk/benefits constraints would essentially entirely preclude pure research there, and even just more general applied research for this type of competition. And essentially all development carried out in pursuing this type of prize would have to be more specific-product focused and based on already established underlying research. Any other approach would be unlikely to reach the desired prize winning performance goals required, and in time to win.

And as the second basic risk and benefits timeline consideration that has to be considered here:

• The less specifically marketable-focused an overall research and development progression is at its beginning, and the more pure research-oriented it begins as, the lower the proportion of overall effort made in it is going to develop into realized marketable, profitable products.
• And the lower the percentage of this effort that does turn specifically into next step-forward profitability for a business through development of specific marketable products, the greater the overall research and development costs that the products that are arrived at, will have to carry through the revenue that they come to bring in.
• This, among other things creates pressure to raise the price point asked for those new products and on any per unit or similar basis that might be tracked, in order to cover these additional costs. But price point per se is only one such factor that could be skewed in directions counter to immediately greater competitive position here.

I posited this line of discussion in more strictly Finance and cash flow terms, but I stress here that the issues that I raise in this posting also have to be considered as intrinsically risk management issues too. The more research and development costs are piled into any given new product that might result from them, the longer it is going to take for that new product to cover those expenses, plus the costs involved in setting up manufacturing lines to produce them, the costs of parts and materials and labor and so on. Putting this in admittedly simplistic, set timeframe terms, this means that if a new product is going to offer significant sole source value to a company that brings it to market for some period of time: say X months, or even X years with sufficiently tight patent or similar protections, and the overall cost load that has to be covered by the sales profits of this product is increased, that is in and of itself going to cut into the time in which this business is in fact making genuine, revenue over all expenses profits from it – before perhaps lower priced alternatives come out and compete with it in the marketplace – at which point its market share and profitability might very well have peaked. This all invokes risk assessment costs and considerations, as well as more strictly here-and-now and longer-term financial ones.

And this is where I would cite an explicitly AT&T example, with their long-term ongoing materials science research to develop new technologies that can last and function in even the harshest environments and under the most stressing workloads. Just to note one example of that ongoing effort, Bell Labs researchers and product developers had to devise and test as many as thousands of potential materials that might be used in applications such as the protective covering sheaths for high volume communications cables, that would have to last untended and unrepaired for long periods of time, as for example in their undersea communications cable networks. Their goal was essentially always in this development scenarios, one of arriving at one best solution to a technological problem: one final product that would be built in one way out of one specific final selection choice of materials. So much and even most of this type of effort of materials science research would lead to the developing and testing of new substances that would not end up being used, and certainly not in the specific product they were initially developed and tested for.

This type of research and certainly of research at the more pure end of the spectrum does necessity does not in and of itself lead to direct return on investment as only a few of the specific materials formulations devised and tested might ever make it into any finished marketable products, and even as possibilities that find their product development niche later as sources of resource potential in waiting. But the overall costs of all of this effort, in the search for a winning few materials science solutions, would be carried by the company as a whole and ultimately by the revenue generated by the marketable products that it can develop out of all of this effort – less any government or related research funding that might help defray these overall longer-term costs if that can be secured, to add in an at least possible cost/risk modulating factor here.

I am going to continue this discussion in a next series installment where I will turn to the issues of cost centers and profit centers, as well as further exploring issues raised here in this Part 3. Meanwhile, you can find this and related postings and series at Business Strategy and Operations – 4, and also at Page 1, Page 2 and Page 3 of that directory.


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