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How much do you spend on R&D? Is it enough?

Why do profitable, mature businesses die away?

One of the most obvious reasons mature businesses die away – when we look in the rear view mirror – is that they did not spend to renew their product or service when newer entrants into the business arrived with better products and services built upon newer technology.

Should be an easy fix for companies making annual net profit. Right?  Not so much, as our rear view mirror makes obvious.

The life cycle of any product

There is a life cycle for any product, and it is much shorter on average today than five years ago, especially in the technology world.

Companies that are successful with their first product must begin thinking about the costs of additional products or of that product’s replacement well before any evidence of a peak in sales is noticed.

The R&D “tax”

[Email readers, continue here…]   There are rules of thumb for various industries in creating a reserve for research and development.  To attempt to find an average number, companies should “tax” themselves by reserving some percentage – say ten percent of their net revenues or two percent of sales – for research and new product development.

Obsolete yourself!

Wouldn’t you rather obsolete yourself than watch helplessly as someone else does that for you?

It is a certainty that even with patent protection, a successful product will be challenged, duplicated, even exceeded by competitors, and within increasingly shortened time periods.  It is a difficult concept, but a necessity of the modern age, to plan to obsolete your own successful products before someone else does that for you.

  • Kent Deines

    It seems like a lot of companies find it easier, cheaper or more convenient to use lobbyist and attorneys to protect them from competition and change. R&D has an uncertain payoff, to profit from it requires the company to act on the results (Xerox and its Palo Alto Research Center is a fine example of that), i.e. change what it is doing and how it does it. Nobody wants that. Not management, not employees, not unions, not shareholders. Its better to stop the change or buy the threatening company – if you can.

  • Steve Meyer

    I read, with special interest, your weekly offering this morning as I understand the importance of R&D. The day one stops innovating is the day they plan to die. This is especially true in this age where virtually everything is being assaulted by one form or another or digital-based disruption.

    While many companies, startups or established, continue to innovate, not all of them are taking advantage of the strategic tax credits available to them. There are several to consider however for a moment I will focus on R&D. As you may know, several years ago Congress revised the definition of QREs or qualified research expenses. No longer are they just related to beakers and bunsen burners. Now software development, new product design and even architecture all meet the definition of a QRE.

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