R&D and increase of market share are vital for firms particularly in making a firm more competitive in the market. For any firm to compete effectively, it must invest a substantial amount of its funds in R&D as well as expanding its product market share. R&D play a key role in enabling a firm to come up with new and unique innovations that differentiates their products from those of the competitors. As a result, a firm gains a competitive edge in the market due to its ability to offer something different in the eyes of customers. This is imperative in adapting to stiff competition in the market because product differentiation is the most effective approach to address competition from other firms. In addition, every firm aims at expanding its market with the aim of gaining a stable customer base than competitors. This is vital because a firm’s inability to adapt to stiff competition in the market means that a firm may be outdone by other competing firms in the market. Therefore, firms must also allocate sufficient funds on product market expansion in order to gain stability in the market.
However, Managers need to be keen because overreliance on these two projects might have a negative impact on the overall performance of the firm. This is because such programs might incur a lot of cost and eventually turn out to be unprofitable for the business. This implies that such programs will compromise the performance of a firm towards the accomplishment of its goals and objectives. Therefore, managers must be more vigilant when designing programs for R&D and market expansion to avoid adverse effects on the firm. In addition, managers must also create a balance on all projects carried out by a firm to avoid relying more on R&D and increase of market share because it can be unprofitable for a firm.
Research and Development(R&D), in business is a critical phase in the conception or introduction of a product to the market. Investing in R&D is basically investing in the future of the company. Most firm managers are well informed in putting R&D first and forfeiting profits for sometime because if this is not well done, the company’s current product sooner or later becomes outdated and often overtaken by other competitors who did their research well and have an idea of the changing dynamics of the business or customer needs. Once firms have invested in development and research, they turn to the stock market to see if it has borne any fruit. A company that does not invest in R&D later lacks the viable successors. Managers therefore who act to increase market share as well as invest in research and development are normally acting in the shareholders interests. Most of them are assumed to make choices on investment that maximize the corporate value of the firm. This paper will examine the why firm managers opt to forfeit the profits and for what purpose.
For a company to be said to be investing in Research and Development, about two percent of the revenue of the company should be enough for a market that is fairly sedate but in a market that is moving fast, then the firms managers usually spend more than fifteen percent in R&D. This is just to keep up with the competitors especially if the company is dealing in technology. In the past, R&D would take about five years but due to advancements in technology, the time frames have become shorter. At first and especially in the current economic suppression it may be difficult to justify using such percentages on research. The research may not even bring returns for ten or so years and sometimes that is not forthcoming, it eventually pays with prosperity and growth hence giving the shareholders more value. There is a relationship between a company’s market value and the R& D investments because they both affect how they perform in the stock market. Firm managers therefore have to carefully consider and evaluate how investments in R&D will affect the firm’s market value and its prices in the stock market. R&D obviously affects the company’s profits, the cash flows and its performance. Financial markets that are efficient are what most firm managers will use to predict and evaluate the firm and the cash flows expected. This basically means that the value market of a firm is most of the time equal to the value of the cash expected at that time and in the future. Investments in R&D should be reflected in the market values.
A stock price is what drives the firm’s investment in R&D. it in fact drives all information available in the R&D investments. Any new information is likely to affect the stock prices. Stock prices are as such an important source of information on the performance of the company as a result of R&D investments. This is because they may be spread over many years. The price of a stock is influenced by such investments and is a suitable short term indicator than accounting that is short term like Return on Equity or ROE, earnings, the taxes, depreciation and so forth. Valuation of the stock market is therefore a very important tool in signaling the future of the firm and so is R&D investments. Informed by this, managers are led to making decisions based on the reactions from the stock market in reference to technology and research and development. Financial systems also affect the level of investment in research and development (Rasmussen 1969).
Once firms have invested in development and research, they turn to the stock market to see if it has borne any fruit. Researches and firm managers use different approaches to access the economic results. One of those methods is by analyzing the link between the market value of the firm in respect to investments done in R&D. other firms use returns got in the short term like announcements being made concerning the company’s development and activity at a given time among other methods.
Market share. Firms always consider the size of market for their specific products and or services. They also put into consideration the market proportion that they are able to reach. This is what is referred to as market share. It could also be defined as the percentage of sales made by a single firm in a market. Share is either the units in percentage, customers in percentage or sale in dollars percentage. Market share is an indicator of either success or failure by a certain industry. The market must be clearly defined. For example, a firm can have a very small share of a very large market but the same can be profitable just like a firm controlling a large share in a market that is small. One must determine if their product is made of equestrian sales, sales or good sales.
Market share can be measured in two ways. The first is by surveying the consumers and competitors. Observing the competitors will give the firm a reliable and accurate picture of the exact market share. One could easily survey all the competitors but the same is not possible for consumers. Interviewing all the consumers is next to impossible and takes time. Moreover, the market share is usually complied by trade associations, government agencies and research firms that are private (Dorsey, 2004).
A firm’s market share usually defines what roles a company will play in a certain industry. The market leader, (the company with the greatest percentage of the market share) has the highest distribution, marketing expenditure, product innovation of new products and price changes. Most firms’ vision is to be the market leader; market challengers. Market followers will do little to increase their sales or market share. According to Dorsey (2004), a firm may also opt to concentrate on the sections of the market that have been ignored by the market leaders. This could result to very high profits because of high margins as opposed to higher volumes.
Market share is very important and that’s why managers will invest both a lot of time and money to be the market leader because when in this position the firm determines the prices of their products and prices resulting to high margins and great profits in the long term.
Market Strategies. The leader should constantly and closely monitor the market since the competitor is always looking for ways to take the market share. The company with the largest market share has to expand their market, expand its market share or protect its market share so as to keep the leading position. Any weaknesses noted should be quickly remedied. Innovation in the products or services is the best way to keep the market share. When the market leader is complacent, the competitor makes progress in their products and or services. Increasing just a small percentage of the market share may lead to making a firm making a killing. The challenger is always looking for a competitive advantage that is sustainable so as to attack the market leader. The attack may be direct for example through price alteration, distribution and promotion, diversification of undeserved segments. Market share could be used to measure success of a firm. This is because it is used to identify the participants in the market and what the market strategy will be (Groth 2000).
Companies mostly focus on beating or matching their rivals which in turn leads to convergence of some basic dimensions in terms of competition. Such firms share a set of ideologies on how to compete with each other. They share some conventional wisdom on the on the type of customers they have. Most are also aware of who their customers are and what they want. Competitive convergence increases with sharing out of conventional knowledge and wisdom. When rivals outdo each other in all manner of strategies, they only compete on the incremental improvements only, quality or cost or even on both.
To create a new market so as to improve the market share, it requires one to strategically think. Thinking has to be outside the borders of what has been put by the competition. By thinking beyond the set boundaries, new opportunities are discovered. A territory that is unoccupied can present a breakthrough that a company needed to discover more profits. Companies could also pursue innovation by carefully looking through the defined boundaries. They could look across the substitute industries as well as across the types of products being offered.
When looking across industries, it is important to consider that a company does not compete only with the companies that are in the same industry as them but also the rest who produce substitutes for your company’s products and services. This is because before consumers purchase a certain product, they usually have weighed the different substitute’s even if not consciously. Sellers rarely think of how the customers will build trade-offs ranging from all the substitutes. A slight shift in price, model change, a new advert or campaign can have tremendous reactions from rivals in the same industry. In a substitute industry, such actions would actually go unnoticed.
It is true that R&D investments positively affect the value of the firm in the stock market. Most firms have confirmed that an announcement to invest in R&D definitely affects the market value of trading firms. Studies however show that investments of R&D can cause volatility in the market valuation. It can be varied. Investors will often look at market valuation before investing. It should also be considered that development and research holds a high uncertainty degree. It is therefore very hard to know what impact will be felt on the firm in terms of value. This should be considered in analyzing market valuation as a result of R& D investments.
Managers are usually seeking the wealth maximization of shareholders and as such, they evaluate the firm’s expected performance in uncertain circumstances. Managers make decisions on the allocation of resources to innovative activities as well as their way out of the capital markets so as to finance research and development.
Governance issues in a country or in a company or firm will usually affect the how the stocks behave and the research and development investments. There are substantial differences that can be observed in research investments in market value in different countries. Even in the different countries, the valuation seems to mainly depend on the firm’s specific ownership structure.
It has been proposed however that evaluating investments in R&D through financial markets is not accurate and neither is it efficient. This is primarily due to information asymmetries which research and development creates in the insiders especially in the managers, investors and outsiders. It must be noted that R&D investments information problems implies that capital will be at a high cost for such investments and cause underinvestment in the firm.
Market based assessment of R&D performance requires assumptions on how the financial markets work. It in particular relies on the efficiency of market information such as that the prices of security reflect all information that is available. Various forms of information subsets can be used. The first is the weak form which contains information on the historical prices, the second being prices adjusting either upwards or downwards because of information publicly available like announcements made on press. In the third case, investors have can get any information they want to determine the prices. The latter has been met with skepticism and there is open debate because information asymmetries in both outsiders and insiders. If the third method can be used, it requires that information is available at no cost at all. If it is not, one can give market efficiency definition even in the face of costly information. In such a case, the security prices will be a reflection of the available information to the extent that marginal benefits do not surpass marginal costs.
Managers will usually have private information that investors have no access to. The most common empirical models rely on some degree of assumption on the market efficiency. The market efficiency has implications on the R&D investments which are important for the market value. The first implication is that market capitalization may be considered as a reasonable proxy of the underlying value. In addition, this value may change only if the said stock market gets new general or a company’s specific information which modifies the expectations of the investors on the cash flows expected on the firm. If R&D investments increase or create intangible capital, which in future will create cash flows in future, the investments will definitely affect the firm’s market valuation.
Share holders of a firm must agree on the investment decisions which have payoffs in the end. Such investment decisions should be evaluated based on the residual claims market value. Managers therefore who act to increase market share as well as invest in research and development are normally acting in the shareholders interests. Most of them are assumed to make choices on investment that maximize the corporate value of the firm. In such conditions, one can conclude that research and development programs among other investment policies maximize the expected value of the firm (Bates 2003).
A systemic approach that is consistent in managing of a portfolio may lead to high yields on investment. Organizations and industries vary as far as the performance of R&D is concerned. Many factors contribute the performance gaps. Many organizations usually ignore and most of the times complicate the management of their portfolios. Best practices are supposed to be set to make sure that firms manage R&D portfolios in an effective way. All it take sis time, experience and commitment. An approach that is systemic enables investors to see the performance of the linkages of the portfolio, to the project level drilling and the whole project as a whole.
Imperatives such as asking tough questions, initiating internal dialogue is considered an important practice. Share holders must ask important strategic questions which hold significance on the future of the enterprise. A systematic view puts tools in place which lets investors have a look on the entire portfolio on a different light. All decisions must be informed by data that has been collected and is well presented. This helps in making effective decisions in the whole portfolio. Since every organization has a culture it practices or abides to, the structure should be well known to the investors or share holders. This is important as the investor is aware of the possible barriers to change. Understanding the culture helps in overcoming any impediments.
Research and development decisions should be part of a systemic, carefully structured and defined approach to be used by the whole organization. With such a system, the reviewers can examine how projects perform against the set objectives and other projects. They can also get snapshots of what the performance of the portfolio is in relation to assessment criteria that is important. Such a report card is valuable especially when the whole process is customized in accordance with the criteria that are considered important for an organization.
It is ironical though that many organizations who have huge R&D budgets use the bottom up approach hence ignoring strategic parameters that are important in the cross analysis of the portfolio and its management. Such a discrete approach can be appropriate but only when used as a part of comprehensive analysis which uses a top-down view. The organization team must be able to understand the purpose of using the approach for portfolio management. After this, the process can be structured to realize the benefits. Systemic approach is usually used to enhance efficiency, product development, return on investment and effectiveness. Some organizations however use it for communication.
Firms that use an R&D system for management design and implement it. The key stakeholders in the company should help in creation of the methodology, its implementation and participation in decision making. In short, they facilitate dialogue. This collaboration is not easy even in organizations that are small. In large organizations, it can be a source of frustration. This is because the researchers, funding authorities, share holders and the management all have perspectives that are not the same. This is especially true if it is a tricky situation like in the case of conflicting interests between long term strategy versus the short term needs of the customer or the shareholder. The funding authorities may feel cheated and as receiving very little after investing so much. Researchers on the other hand may find that they are unable to carry out fundamental research which they believe will bring competitive advantages in the long run. Research is a complex thing and as such assessment should be based on dialogue (Dankbaar 2003).
A research and development approach that balances timeframes, risks, purposes and rewards is essential. Where fundamental research has a horizon that is long-term, the risk is usually high just like in a firm that is introducing new products to the market. A portfolio that is effective lets the investor see the relationship between risk and demand. It also shows the short, long-term and medium results. Data can be graphically captured to show results in various dimensions. This allows the stakeholders to assess the contribution of each project.
Assessments will be made on the resource allocation of investment money in the portfolio. This is because decisions that are made in one financial year affect the portfolio implementation in the next year. Without critically looking at the portfolio, the organization will be pressed to comprehend the effects such decisions have on the portfolio and if it will bring any returns over time. Through assessments, one can see the customer demands, the changes in the market, company policies which have affected the emphasis on research. Moreover, organizations keep losing ‘memory’ because of retirement in the work force, leaves and layoffs, an approach that is consistent and speaking in one language is important as the valuable information is preserved despite having different managers in different times.
In conclusion, overall assessment should be based on a combination of strategy, mission, vision, feasibility, benefit or impact it will have and cost. Additional concepts can be considered which include the competitive impact, technology maturity uniqueness as well as innovation.