R & D: Risk and Disillusion: Research Based Firms Confront a Deepening Dilemma: As the Costs Go Up the Rewards Go Down

By Foster, Geoffrey | Management Today, January 1989 | Go to article overview

R & D: Risk and Disillusion: Research Based Firms Confront a Deepening Dilemma: As the Costs Go Up the Rewards Go Down


Foster, Geoffrey, Management Today


It's generally accepted that the pace of innovation is slowing down. Nonetheless, ever increasing sums continue to be poured into research and development -- if not necessarily in Britain then certainly around the world. At first glance, these two statements appear to suggest an extremely doubtful paradox. After all, hardly a week goes by without the announcement of some new technological breakthrough. Yet a moment's thought shows that there's no contradiction here at all.

The truth is that the wonders of the world -- even of the universe -- are finite in number. So each discovery that's made leaves one fewer to be made in future. Moreover, most of the really important discoveries already belong to history. The amazing advances which have transformed the lot of western man in the past couple of hundred years, and vastly enlarged his knowledge of the physical composition and properties of his surroundings, have considerably reduced the opportunities available to coming generations of explorers. It's also true that the biggest leaps in understanding have mostly been accomplished at nugatory cost. The application of knowledge, which frequently involves pushing out its frontiers in infinitesimal stages, is what costs a packet of money. Hence the further paradox that businesses which operate close to the frontiers, and which spend most heavily on R&D, belong in general to recognisably mature industries.

The point of this introduction is to highlight the common predicament of |high tech' companies, whether they are in computers or other branches of electronics, in chemicals and pharmaceuticals, in aerospace or elsewhere: the cost of R&D, which is the price of a seat at the table, goes up; while, at the same time, the chances of scooping the pool, by coming out with a major advance ahead of the competition, steadily decline. A look at two areas where the costs are particularly large, pharmaceuticals and aero engines, uncovers some of the difficulties.

Naturally, there are massive rewards available to the business which is outstandingly successful at R&D. Take Glaxo, which climbed from 21st place to fourth in the world pharmaceutical revenue league during the course of a decade. Or ICI Pharmaceuticals Division, up from 35th to 20th over a slightly longer period. The problem is not merely that the top of the pole is particularly slippery. Hoffmann-La Roche slid from second place in the early 1970s to 14th a year ago, despite a huge commitment to R&D; while Warner Lambert of the US plunged from fourth to 22nd. More important is that the numbers are changing, making it increasingly difficult for a company without one or two genuine bestsellers in its list to stay in the game. Glaxo's Zantac was, of course, the world's top selling drug in 1987, generating 1 billion [pounds] in revenues. ICI's Tenormin was fifth. But Tenormin was launched back in 1974.

|The industry is to a large extent living off the successes of the past,' says Dr David Heard, a corporate planner at ICI Pharmaceuticals. |Most of the soft options have already been done, there's no doubt about that.' Clearly, there are great advances yet to be made in pharmacology, in the development both of new drugs for treating so far unresponsive conditions and of increasingly effective and convenient cures for less intractable diseases. But the progress of the past 60 years or so, which has altogether revolutionised medical science, severely limits the opportunities for success remaining. And the field gets narrower with each year that passes, as the pharmaceutical companies synthesise and extract, then consider and reject, hundreds of thousands of novel substances. |We look at 10,000 new compounds a year,' points out ICI's Martin Tucker -- and ICI has under 1.5% of worldwide pharmaceuticals sales.

Moreover, the time and, therefore, cost required to come up with a marketable product continue to expand. According to a paper by Professor Stuart Walker, director of the Centre for Medicines Research at Carlshalton, Surrey, typical figures these days are 13 years and 85 million [pounds] from basic research to product launch. …

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