Although large multinationals can no longer maintain the R&D and innovation monopolies they enjoyed in previous decades as displayed by research centers such as Xerox’s PARC, there nonetheless remains a disparity in the level of investment between firms. A phenomenon has emerged where dominant firms in the market (the Samsungs, Googles, and GMs of the world) are increasingly investing in R&D while smaller competitors plateau or decrease their R&D spending.
While they no longer hold a monopoly on research, they nonetheless maintain a significant advantage, and are continuing to pull away from the market. Although it is tempting to try to compete with superstar firms on a dollar-to-dollar ratio, smaller firms can't afford to do so given the differences in available resources. Rather, small firms can effectively compete by engaging in innovation strategies that leverage external technologies instead of depending on internal innovation. Using technology scouting, firms can innovate in a low-cost and efficient way to improve product innovation and remain competitive against larger firms.
Disparity in R&D investments
Although private sector R&D spending has shown a general increase in the last several decades, this increase has not been unilateral across all industries and companies. In Germany, for example, R&D expenditures increased by 59% between 2003 and 2015 while the share of firms investing in R&D declined from 47% to 35%. The U.S. experienced a similar trend, with a 67% increase in R&D spending between 2003 and 2014, with the top 100 firms by R&D budget increasing their R&D spending by nearly 92%. As such, this means that fewer firms are increasing their investments in R&D, with the larger firms increasing their spending while smaller firms have not.
While it may be unrealistic to expect every firm to heavily (or at all) to invest in R&D, it does demonstrate a worrying trend for companies attempting to compete on a global market. Given that R&D spending impacts productivity and innovative capabilities, firms that attempt to skirt ‘unnecessary’ expenses like R&D spending are downgrading their future by not maintaining their R&D spending or investing it in expanding innovative capabilities.
This trend leaves mid-market firms particularly vulnerable as they fall in between large, dominant enterprises and emerging innovative firms. Facing pressure from both high R&D spending on top and high levels of creativity below, mid-market firms are in a unique position where their competitive advantage in products are hollowed out from both ends of the market. Lacking the economies of scale and industry relationships that protect large enterprises, mid-market firms live and die by their product position and innovation.
However, despite the absolute need for innovation to remain competitive, there is often very little appetite for large-scale R&D spending without a definitely end-result. This is also affected by the reality that too many missteps in research programs can lead to the end of a company, as mid-market firms do not have the type of financial resources to invest such large sums into projects that may not bear fruit for years or decades. Being highly sensitive to market forces, mid-market firms need a strategy that allow for significant technological innovation without the expenditure typically required by traditional R&D.
Fortunately, the outlook for mid-market firms is not as bleak as the above data suggests. Firms can easily and fundamentally augment their R&D spending and innovative capabilities by seeking emerging technologies outside of their company walls. By engaging in technology scouting and other open innovation practices, firms can identify and execute on emerging technological opportunities that add real value to their offerings and allow them to remain competitive against larger firms.
Technology scouting focuses on seeking out nascent, technologically advanced firms that are working on developing, or have developed, technologies that can be implemented within already existing products or added to a company's current product line. This allows organizations to defer the time and expense of having to develop the technology in-house, allowing the company to move quicker in the product development cycle while remaining competitive in the market. By off-loading part of the R&D process onto external firms, startups, and university research groups, mid-market firms are able to capitalize on cutting edge research while avoiding the large expenditures and bureaucracy that would be faced if such a project is done internally.
Merely investing in open innovation and technology scouts is no guarantee that these programs will bring the needed results. Companies need a strong tech scouting process, management resources, and a commitment to develop best practices and organizational changes to enable open innovation practices to succeed. Furthermore, organizations need a comprehensive system of record to serve as a knowledge base for emerging technologies and to enable accountability.