New product design and development is more often than not a crucial factor in the survival of a company. In an competitive environment that is fast changing, firms must continually revise their design and range of products. This is necessary due to continuous technology change and development as well as other competitors and the changing preference of customers. A system driven by marketing is one that puts the customer needs first, and only produces goods that are known to sell. Market research is carried out, which establishes what is needed. If the development is technology driven then it is a matter of selling what it is possible to make. The product range is developed so that production processes are as efficient as possible and the products are technically superior, hence possessing a natural advantage in the market place.
R&D has a special economic significance apart from its conventional association with scientific and technological development. R&D investment generally reflects a government’s or organization’s willingness to forgo current operations or profit to improve future performance or returns, and its abilities to conduct research and development.
In 2006, the world’s four largest spenders of R&D were the United States (US$343 billion), the EU (US$231 billion), China (US$136 billion), and Japan (US$130 billion). In terms of percentage of GDP, the order of these spenders for 2006 was China (US$115 billion of US$2,668 billion GDP), Japan, United States, EU with approximate percentages of 4.3, 3.2, 2.6, and 1.8 respectively. The top 10 spenders in terms of percentage of GDP were Israel (4.53%), China (4.3%), Sweden (3.73%), Finland (3.45%), Japan (3.39%), South Korea (3.23%), Switzerland (2.9%), Iceland (2.78%), United States (2.62%), and Germany (2.53%).
In general, R&D activities are conducted by specialized units or centers belonging to companies, universities and state agencies. In the context of commerce, “research and development” normally refers to future-oriented, longer-term activities in science or technology, using similar techniques to scientific research without predetermined outcomes and with broad forecasts of commercial yield.
Statistics on organizations devoted to “R&D” may express the state of an industry, the degree of competition or the lure of progress. Some common measures include: budgets, numbers of patents or on rates of peer-reviewed publications.
Bank ratios are one of the best measures, because they are continuously maintained, public and reflect risk.
In the U.S., a typical ratio of research and development for an industrial company is about 3.5% of revenues. A high technology company such as a computer manufacturer might spend 7%. Although Allergan (a biotech company) tops the spending table 43.4% investment, anything over 15% is remarkable and usually gains a reputation for being a high technology company. Companies in this category include pharmaceutical companies such as Merck HYPERLINK “file:///wiki/Merck_&_Co.”&HYPERLINK “file:///wiki/Merck_&_Co.” Co. (14.1%) or Novartis (15.1%), and engineering companies like Ericsson (24.9%).
Such companies are often seen as poor credit risks because their spending ratios are so unusual.
Generally such firms prosper only in markets whose customers have extreme needs, such as medicine, scientific instruments, safety-critical mechanisms (aircraft) or high technology military armaments. The extreme needs justify the high risk of failure and consequently high gross margins from 60% to 90% of revenues. That is, gross profits will be as much as 90% of the sales cost, with manufacturing costing only 10% of the product price, because so many individual projects yield no exploitable product. Most industrial companies get only 40% revenues.
On a technical level, high tech organizations explore ways to re-purpose and repackage advanced technologies as a way of amortizing the high overhead. They often reuse advanced manufacturing processes, expensive safety certifications, specialized embedded software, computer-aided design software, electronic designs and mechanical subsystems.
Research has shown that firms with a persistent R&D strategy outperform those with an irregular or no R&D investment programme
HenceI have chosen to analyze GSK’s R&D and focus how it achieved growth.
Brief Company Background:
Head quartered in the UK, GlaxoSmithKline was formed in 2000 as a result of the merger of Glaxo Wellcome and SmithKline Beecham. It employs over 100,000 people in 116 countries with over 15,000 involved in research. GSK has a broad portfolio, with projects in the fields of respiratory, central nervous system, and anti-infectives to name a few. In addition, GSK has an extensive vaccines portfolio. According to GSK, it supplied one quarter of the world’s vaccines by the end of 2006 and had a further 20 in clinical development
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With nearly 210 pharmaceuticals and vaccine, GSK has one of the most promising pipelines in the pharmaceutical arena. However, its current success appears to be not only due to the ‘blockbuster’ merger, but also to the leadership and business acumen of its CEO, Dr Jean-Pierre Garnier (formerly CEO of SmithKline Beecham), and his strategy to prioritise R&D activities. Additionally, the strategic ‘bolt-on’ acquisitions, such as those of Corixa and Domantis, have further strengthened the business, adding specialist expertise to maximise future potential revenue.
It is important to note that GSK is not only a world leader in pharmaceuticals, but generates significant revenue from its Consumer Healthcare division – Lucozade and Nicorette, for example, are globally recognised brand.
In all core areas of GSK research and development plays a very important role in the product pipeline, new product development, launch and timing of the product and the final release of the product. In all these stages other department coordinate with the research and development department to ensure that the product helps GSK maintain a strong market share.
Interview: GSK’s Research and Development and its strategic priorities
While writing this report I conducted a brief interview with Faisal Mehmud , Director GSK , Global Research and Development , who has said that GSK’S merger was a complete success and that the R&D department of GSK is one of the best in the world and has been instrumental in making GSK a market leader.
Why do you think R&D department in GSK is important?
Faisal: Research and development is nowadays of great importance in business as the level of competition, production processes and methods are rapidly increasing. It is of special importance in the field of marketing where companies keep an eagle eye on competitors and customers in order to keep pace with modern trends and analyze the needs, demands and desires of their customers
How do you manage GSK’s R&D capabilities?
Faisal: Research often refers to basic experimental research; development refers to the exploitation of discoveries. Research involves the identification of possible chemical compounds or theoretical mechanisms. GSK normally buy’s licenses from universities or hire’s scientists directly when economically solid research level products emerge and the development phase of drug delivery is almost entirely managed by GSK. Development is concerned with proof of concept, safety testing, and determining ideal levels and delivery mechanisms. Development often occurs in phases that are defined by drug safety regulators in the country of interest. In the United States, the development phase can cost between $10 to $200 million and approximately one in ten compounds identified by basic research pass all development phases and reach market
What does the term R&D alliance means? And who are GSK’s partners in R&D alliance?
An R&D alliance is a mutually beneficial formal relationship formed between two or more parties to pursue a set of agreed upon goals while remaining independent organisations, where acquiring new knowledge is a goal by itself. The different parties agree to combine their knowledge to create new innovative products. Thanks to funding from government organizations, like the European Union’s Seventh Framework Programme and modern advances in technology.
GSK has many partners in research and development including the world health organization (WHO) and the Japanese government to name a few.
Research and Development in GSK: A brief Literature Review.
With the general growth of R&D in many academic and business fields, it is hardly surprising that the relationship between research and development and growth has attracted considerable attention in recent years. In an attempt to go beyond “traditional” assumptions about how research and development helps achieve competitive advantage and market growth, studies have focused on anything from different traditional, analytical or structural uses of research and development to aspects of marketing, such as product launch and timing, and other interactions in the product life cycle. While some research has focused only on the description and functions of research and development, other work has sought to show how research and development helps a company grow in terms of gaining and then maintain a competitive advantage not shared by its rivals. Accordingly, Kuemmerle (1999) suggests that research and development can be divided into studies that focus on product development and those that focus on innovation.
Much of the earlier work emphasized product development. SL Brown (1995) pioneering work suggested that product development can be divided into three streams of research and development: product development as a rational plan, communication web and disciplined problem solving . Thus, he argued that the type of R&D capabilities will later shape the structure of the organization since research and development is a key component of product development and new products are becoming the nexus of competition amongst firms striving to achieve a larger market share(1995, p.5). While there are clearly some problems with SL Browns’s work – his analysis was not based on empirical research, for example the automatic equation of product development with `three streams’ is problematic – the emphasis on research and development has understandably remained at the Centre of much of this work. Research has shown how companies invested in R&D dominated more, interrupted less often, held the market share for longer, and so on (see, for example, J Griffin , Journal of product innovation 1995). The chief focus of this approach, then, has been to show how research and development interacts between new product development and dominant market share
Some studies, however, have taken a different approach by looking not so much at R&D in product development but have focused how research and development helps innovation. In a typical study of this type, JF Reinganum (1989) developed lists of what he described as research and development features of innovation. He argued that “For research and development to yield up new approaches, they must also be closely coupled to the problems and challenges where innovation is needed”. Much of this research has focused on comparisons between, for example the competitive nature of businesses and the ways to acquire larger market share through innovation.
While some of the more popular work of this type, such as GC Moore (1991), lacks a critical dimension, the emphasis on innovation has nevertheless been valuable in interaction between research and development and company growth
Although Kuemmerle (1999) distinction is clearly a useful one, it also seems evident that these two approaches are by no means mutually exclusive. While it is important on the one hand, therefore, not to operate with a simplistic version of product development and to consider research and development only in product development and innovation, it is also important not to treat research and development as if it existed outside sphere of business studies. As AH Van de Ven, HL Angle, MS Poole (2000) ask, “Can it be coincidence that only firms with a persistent R&D strategy outperform those with an irregular or no R&D investment pr (p.80). Clearly, there is scope here for a great deal more research that
is based on empirical data of research and development;
operates with a complex understanding of research and development and its relationship with other core functions of business management
looks specifically at the contexts of R&D use, rather than assuming broad categories;
aims not only to describe and explain research and development but also to change the overall understanding of R&D and its importance in growth and development of a company.
How research and development helped GSK
GSK adopted a ‘resource strategy’ to grow a well diversified global business.GSK invested heavily in its research and development (£3.2 billion in 2007 alone) and linked IT with biology to retrieve, process, analyse and model the vast amount of information for optimum results.
GSK also realised the growth potential of emerging markets and drove expansion in Japan.
The merger of Glaxo and SmithKline Beeckham created a diverse range of product portfolio for GSK and allowed geographical expansion
GSK also grew its consumer healthcare business; this was done by focusing more on innovations and scare resources where they could make the biggest difference.
Patent protection ensures competitive advantage, however once patent protection is lost a company has trouble maintaining a product’s position in the market, for this reason GSK maintains one of the best research and development facilities in the world and has some 160,000 R&D staff worldwide At any time GSK has some 150 projects in clinical development comprising new drugs, product line extensions and vaccines to ensure their comparative advantage and their position as a market leader.
GSK stuck with its past product success. These products were targeted at its current customers in their current markets. GSK implemented a ‘conservative new product’ strategy by making minor modifications and incremental improvements in the packaging of their current products. At the same time they adopted a strategy of ‘exploring market potential’ of their established existing markets by targeting them with extended new products. These new products were commercialized to replace old products that were running out of patent protection or substituted by superior rival products from competitors. GSK also identified new markets for its products.
GSK adopted all these strategies simultaneously to grow a well-diversified business.
GSK’s main competitors such as Novartis, Pfizer and Sanofi-Aventis also have a strategy of delivering more products of value however GSK’s strategy of delivering more products of value is based on simplifying its clinical R&D and by adding value to the supplies brought into the organization. GSK’s strategy was to increase flow and improve the distribution of its products simultaneously they increased the quality of their products through research and development and creating global brands with a strong marketing initiative.
GSK also compensated individuals who bought supplies for them and took strong steps to improve their supply-chain management.
Unlike its main competitors GSK maintained a prescriptive resource strategy. GSK used its resources for maximum strategic benefit.
If we link GSK’s strategic priority of delivering more products of value with its prescriptive resource strategy we see that GSK significantly grew its biopharm capability. Biopharmaceuticals are medical drugs produced using biotechnology.
GSK invested heavily to attract the best talent, compensated them and took maximum advantage of their human resources and development, which resulted in not just a growth in biopharm but also resulted in enhanced productivity for drug discovery. GSK’s vision of becoming a undisputed market leader can only be accomplished if it has the right talent.
Research and Development hence helped GSK achieve all its strategic priorities.
Methodology
I envision this project as an investigation of three primary issues: how research and development helps an organization grow, how research and development helps in product development and how research and development helps achieve innovation. In order to conduct my research effectively I chose GSK as a company to study and prepare a case study, there were two important reasons for choosing GSK. Firstly GSK has a very good research and development department that has contributed to its growth as one of the biggest pharmaceutical companies in the world. Secondly GSK is a ‘research based’ organization and hence maintains a very good R&D capability which is worth researching.
The first part of my research is primarily concerned with analysis of research and development in context with GSK. This is important because without this interrelation it becomes very difficult to understand the importance of GSK in a multinational business environment. I have also used this part to understand how research and development fits into a overall corporate strategy and goals of a company. This helps me understand why so much money is spend on research and development. It also answers several important questions from the point of view of shareholders who are often confused where these intangible costs are attributed and how the gains from spending on something non productive as research and development are maximized.
The second part of my research is concerned with R&D as a primary tool for production processes and product development as a linear function. As mentioned in the literature review this part is more theoretical than other parts as it involves research and development at the very core of product development.
Figure 1
As shown in figure 1 Research and Development is at the very centre of product development in the product life cycle. Hence this area is of considerable importance in the field of business management and requires further research. It is a well established fact that any company that has a good R&D department benefits in the long run compared to a company that gives little importance to R&D hence in this part I tried to understand why research and development is so crucial in the long run for any company. By understanding product development with a case study of GSK I will begin to understand how research and development is linked with product development. Then with empirical evidence I will try and compare other companies whose research has helped them grow an impressive product portfolio. Next I will try and understand with analysis how other factors contribute to make research and development an effective force in product development, I will do this with a case study of GSK.
The third aspect is how research and development contributes to innovation. For this it is important to understand innovation and study an ‘innovative organization’. Innovation helps an organization achieve competitive advantage which is a unique position a firm occupies with respect to its competitors. Innovation is a new discovery, which is commercially viable in a business sense, and which is not explored and marketed by anyone else. Innovation is protected through various mediums including trademarks and patents. I wanted to find whether research and development leads to innovation and if YES then how. For this I studied the basic model of the R&D capabilities of GSK who have innovated many drugs and spoke with Dr Faisal Mahmud, Director R&D, GSK. In this third aspect my focus was on the subjective side of research and development as a tool for innovation. It was observed that in an organization that devotes some and most of its energies in the primary research and development capabilities do infect breed innovation. Also my research observed that most aspects of a business chain are integrated and linked with research and development.
Research Methods.
Primary Research:
The fieldwork for primary research took place in two regions. I conducted an informal interview with Faisal Mahmud, Director Global R&D, GSK. Also I conducted a SWOT analysis on GSK as a company, in general, and their R&D department in particular.
WEAKNESSES
-Loss of patent protection.
-Does not perform well on marketing practices.
-Environmental performance.
-External pressures.
STRENGTHS
-Size: Economies of scale
-Patent protection.
-Focus on innovation.
-Good research and development.
-Globally recognized brand.
-Strong financial reserves.
-Good return for investors.
-Access to larger markets.
-Experienced corporate management team.
-Passion for achievement
SWOT ANALYSIS DIAGRAM
.
OPPORTUNITIES
-Expansion in developing countries.
-Strong global influence.
-Segmented market.
-Product development
-Growth in Japan.
OPPORTUNITIES
-Expansion in developing countries.
-Strong global influence.
-Segmented market.
-Product development
-Growth in Japan.
OPPORTUNITIES
-Expansion in developing countries.
-Strong global influence.
-Segmented market.
-Product development
-Growth in Japan.
THREATS
-Competitors.
-Loss of key staff.
-Political pressures.
-Court cases.
-IT development.
-Legal controversies.
THREATS
-Competitors.
-Loss of key staff.
-Political pressures.
-Court cases.
-IT development.
-Legal controversies.
THREATS
-Competitors.
-Loss of key staff.
-Political pressures.
-Court cases.
-IT development.
-Legal controversies.
OPPORTUNITIES
-Expansion in developing countries.
-Strong global influence.
-Segmented market.
-Product development
-Growth in Japan.
OPPORTUNITIES
-Expansion in developing countries.
-Strong global influence.
-Segmented market.
-Product development
-Growth in Japan.
THREATS
-Competitors.
-Loss of key staff.
-Political pressures.
-Court cases.
-IT development.
-Legal controversies.
THREATS
-Competitors.
-Loss of key staff.
-Political pressures.
-Court cases.
-IT development.
-Legal controversies.
OPPORTUNITIES
-Expansion in developing countries.
-Strong global influence.
-Segmented market.
-Product development
-Growth in Japan.
THREATS
-Competitors.
-Loss of key staff.
-Political pressures.
-Court cases.
-IT development.
-Legal controversies.
I also conducted a survey of 10 GSK product users and asked them the following questions regarding the research and development of GSK
Below a sample survey I conducted for my primary research
Secondary Research:
For my secondary research I conducted a judgmental sampling, this was done by the help of the BCG Growth share matrix model, which I used just for my research and the matrix allowed me to compare, along with sampling, different R&D departments and their activities and link it, or compare it, with GSK’s. This comparative studies was followed by many journals and articles I read online and many books including Corporate Strategy by Richard Lynch, which helped me not just in terms of comparison but also helped me conduct my research and analysis properly.
Thus through my research I have tried to understand how GSK, through its R&D, maintains a competitive advantage over its competitors.
Apart from the above mentioned objectives, my project and research have answered the following questions:
Globally diagnosis and treatments have improved, so people are using more medicines now than ever before. How does GSK’s research and development help maintain demand for their products?
Demand for safer, more effective, new medicines continues to grow. How does R&D propose to integrate efficiency and safety?
Ageing populations take long-term treatments. How does GSK’s research and development propose to meet this challenge?
Major healthcare challenges exist in the developing world with no easy solutions. Does GSK’s research and development help improvised nations?
It takes 10-12 years from the discovery of a potential new medicine until it is available for the patients. Can this time be reduced?
The estimated cost of each medicine, from discovery to market, is $897 million but only 3 out of 10 new treatments recover development costs. Is it really worth it?
Results
Results
As mentioned in the literature review and methodology the research conducted for this report focused primarily in three areas. How research and development helps an organization grow? How research and development helps in product development and how research and development leads to innovation. As mentioned this research was conducted with a case study of GSK.
How research and development helps an organization grow?
Results:
From my research I found out that R&D helps considerably for an organization to grow and expand. Based on facts until the merger of Glaxo and Smith to form GSK both companies maintained a highly productive research and development department but had opposite interests, while Glaxo’s main businesses were medicines Smithkline Beckham dealed in Vaccines primarily. Hence their research was limited in the sense of their strategy and their respective market share.
After the merger both organizations integrated their R&D capabilities and invested heavily in research and development. This led to many R&D centers to be established across the world including in countries such as India and Australia which are considered emerging markets.
This high investment in research and development created a diverse and unique product portfolio and led to groundbreaking developments in fields such as central nervous systems, bacteria, malaria and cancer. This helped GSK, a newly merged company in 2000 to become the second best pharmaceutical company in the world.
Andrew Witty, CEO GSK, in an interview with the Financial Times in 2007 described the phenomenal growth of GSK to its ‘outstanding research and development capabilities’ which led to a ‘unique product portfolio’ and helped ‘develop a strong position against competitors’. From my research I found out that through R&D GK developed a very good overall reputation for ‘discovering’ new drugs which led to affiliations with organizations such as World Health Organization (WHO). Also R&D ensures that new products not launched by competitors are developed and marketed which keeps the comparative advantage enjoyed by an organization and helps maintain a strong market share and growth rate in the long run.
How research and development helps in product development?
Results:
Research and development forms the core and integral part of any product development. Business analysts evaluate gaps in the market and understand and comprehend market and customer needs. This information is then passed to the R&D department who work vigorously to develop products which suit the requirements of the business models and corporate strategy of the organization.
R&D makes the designs, comprehends the requirements, conducts research and forms the basis and provides a ‘prototype’. This proto is then subjected to a number of tests to make sure the product meets the standard international health and safety laws and whether it is feasible. This process is very vigorous and time consuming. Once all the tests all positive then the organizational heads decide how best to market the product. Sometimes they even sample it to customers as an extension of the ‘Testing’ process.
It is established that not all R&D leads to a standardized product and results in many wastages however without research and development constant changes which are needed for a product cannot occur and secondly product development process cannot start by ignoring R&D costs and benefits.
How research and development leads to innovation:
Results:
In my interview with Dr Faisal Mehmud he said ‘Research often refers to basic experimental research; development refers to the exploitation of discoveries’. Hence innovation is indeed a discovery and constant research helps solve unresolved problems in any field where research is being conducted. For example from my research I found that many ‘updated’ versions of ‘in market’ drugs that had ‘limited’ cure in diseases such as malaria and cancer are solved by GSK . Many incurable diseases not have prescription. These are all innovations. Constant research invariably leads to innovation.
Many innovations solve problems and are limited in scope for drugs for cancer. But constant research is the only way to solve these issues. Also as far as GSK is concerned most research is ‘experimental’ and experiments lead to discoveries and innovations.
Reflective Report:
I started working on this report in November 2009. The fieldwork for this research took place in two regions and many academic journals, online materials, reference books and opinions were needed to complete this report. I faced a number of p-problems while writing this report and it was a big challenge. The first problem I faced was understanding R&D. It is a very complex term and is used not just by firms but governments and even the military. Each R&D capability has its own unique function that caters to the organization it represents. However what made this subject interesting to study was the importance of R&D.
When I first started my project, I remained in the forming stage for quite a while. It took me many weeks and many meetings to figure out what I was doing and split up into three broad categories. Although the forming stage did take a while, I was able to cover most of the norming stage at the same time because I started knowing the subject quite well. Once I finally formed my basis, the rest of the stages went much easier. I was able to finish up the norming and began performing rather quickly. This stage continued until recently as I was doing research, and reading journals, quite often.
I performed quite well in research and spent very little time, if any, in the storming stage. Most of the storming I dealt with was with the help of other students and my academic teacher at Greenwich. I was trying to plan an interesting project,
Another topic I was able to apply to my project was clarity and hardwork. Once I decided, I was able to take responsibility for different parts of the project. I learned to wor
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