R&D – from Netanel’s book
A chapter from Netanel’s book “Manufacturing, Product, Solutions”
A company that belongs to one of my best friends, and sells mainly to the military market, decided to upgrade from a manufacturing company to a product-based company. In its current status, the company did not have qualified people on board who could define and develop new products, so it contacted and successfully recruited the two most notable experts in the IDF. This created an astounding effect, whereby the company’s main client, the IDF, contained the knowledge center, but the people who characterized and drew the products had shifted their alliance to the company, which was now both the designer and the manufacturer. No one remained in the IDF to characterize the products, and it did not have the necessary specifications to request price quotes for these products. As a result, the company began to receive requests from its clients for solutions to problems; thus, it turned out that it had to make a direct switch from being a manufacturing company to a solutions-based company. Although the company still had to make additional changes (some of which have been implemented already), the most significant change that altered its status was the establishment of an R&D department, and the recruitment of the best specialists to staff it.
One of the things by which to determine if a company is a product- or a solutions-based company is the R&D department.
A manufacturing company hardly needs R&D. It receives all the information required for production from the clients; therefore, the only R&D required relates to the improvement of processes within the company. If there are engineers in the company, they deal with in-house improvements of machinery and work processes. These employees are mainly industrial and management engineers.
The product-based company invests in R&D to improve its products. The engineers usually focus on improving previous versions of products, upgrading them to newer models. The R&D department is the key to implementing a status shift from a manufacturing to a product-based company. A well-established R&D department is a necessary investment if the company goal is to continue to thrive.
The R&D department is responsible also for the development of new products, which are synergistically compatible with the company’s infrastructure. The synergy may be compatible with the company’s manufacturing capabilities (a new product manufactured in-house) or with the company’s market niche (new product for existing clientele).
For example, Nokia tries to back to her position as a market leader in the cellular devices market. In order to do so Nokia invested 4.782 billion Euros, which represented 15.8% of Nokia net sales in 2012[1]. A product-based company must improve its products, as mentioned in the chapter on pricing, because if it does not launch new products, its competitors will do so. And that’s exactly what happened to Nokia, after having been the market leader for years with more than 50% of the market; she lost her leadership and her brand value to Apple and Samsung which came with “smartphones” when Nokia was late to this game.
In the solutions-based company, the expenditure on R&D is divided differently than in a product-based company. The solution company needs to know its clients better than they know themselves. Therefore, a large part of its research is not focused on its current products, as is done in product-based companies, but is invested in searching for problems that the clients might encounter, even before they are aware of them. The solutions-based company involves strategic clients in characterizing the solutions needed, by using focus groups or through daily contact with the client. With the help of these sources, the company can determine the problems, and study their behavior. In addition, the solutions-based company always seeks multi-disciplinary solutions, because these can provide a more comprehensive and inclusive solution, which in turn can increase the company’s income and profit.
For example, the solutions supplier, Google, spends over 13%[2] of its sales revenue on R&D. Although users do not necessarily request more innovative solutions, the company is constantly working to improve its products. In this manner, by ensuring that customers consistently find in Google the best solution to their needs, it gains the customers’ trust.
In a solutions-based company, it is difficult to predict which of the company’s newly developed products and technologies will be adopted by the clients. Therefore, the company is aware that a large part of the R&D expenditure is invested in developing products that will never reach the market. Solutions-based companies operate in a market in which the clients are not yet aware of either their own needs or of the solutions they are about to receive; by definition then, the company cannot be completely certain how new products will be received. Companies cannot ask the customer to evaluate the solution before it is placed on the market, and even if it were possible to question customers directly, the customers’ ability to forecast their response to new technologies is limited, at best. Typically, customers know how much money they are prepared to invest for the purchase of either a more advanced model of a particular product they are currently using or a different product with clearly defined advantages. However, they find it much more difficult to assess in advance their attitude towards a new form of solution. For example, before the launch of the Internet, customers could never have imagined its effect on their lives. Nevertheless it is currently standard practice to have vast amounts of knowledge freely available and accessible at home as well as to read opinions of and communicate with people from all over the world in a matter of seconds. Every technological revolution has been accompanied by doubters, those who could not see the potential benefits they stood to gain from its use. The introduction of the first cars on the market was accompanied by demonstrations held by the carriage owners, who claimed that the new vehicles were scaring the horses and constituted a danger to pedestrians. Many failed to recognize the change that cars would bring to the world.
In cellular communications companies, for example, R&D efforts involve a constant search for usage packages, which will induce customers to commit for longer periods, remain loyal and spend more money. One of the developments in the field of cellular companies was the Multimedia Messaging Service, or MMS, the ability to send messages that include multimedia content. Unlike many other services, this service failed to draw a large number of users, and the cellular companies stopped marketing it aggressively. Before the MMS service was developed, we did not think we would need it, and even after its development, customers did not look for it on their phones. This is an example of a product which was developed in a solutions company, but failed to take off. By contrast, cellular Internet services have become a considerable source of income for these companies. Who would have predicted a few years ago that we would be willing to pay so much to be able to access the Internet from anywhere?
The example of one of the biggest toys companies in the world attempt to conduct part of their R&D processes directly with customers highlights the importance and uniqueness of development methods in a solutions-based company. This company develops toys and games; therefore, the decision to test potential products meant gathering a group of children, exposing them to a large number of new toys and games, and letting them play freely, to their hearts’ content. The games the children liked most were manufactured and distributed in toy stores. The products failed miserably in the market, despite the tests conducted with the children’s focus group. Also products designated for production and marketing based on a second focus group failed. The internal investigation conducted by the company revealed the following flaw: all of the games the children played with were entirely new to them; there was no opportunity for them to choose between familiar toys and the brand new ones. However, in the real test ground, that is, at the store, the children preferred the good old games.
The company failure emphasizes the differences between R&D in product- and in solutions‑based companies. In the former, the firm strives to improve products and invent new ones, and the process is conducted within the company. In a solutions-based firm, R&D is conducted at the client’s, to determine the problems in the field. Had the company chosen to spend several hours observing children at play in their regular environments, they would have gained greater insights.
I occasionally read about company managers who go into the field, in order to analyze the clients’ behavior in their own territory. In one particular case, managers of a TV station in Israel went to customers’ homes and spent several hours collecting information on the customers’ viewing habits. The managers were very proud of their decision to conduct field observations. This exercise failed, and the reasons became apparent upon reading the article: it was bad enough that this was a one-time event instead of part of an ongoing effort, but having this excursion led by senior management instead of by professional R&D staff made it worse, since it meant that their goal was merely to form a very general impression and a one-off understanding. A company that supposedly aims to provide a rich viewing experience and an overall family entertainment solution, but fails to investigate customers’ viewing behaviors at home regularly is bound to miss the mark.
The solutions-based company has a group of clients that represents the variety of its customers, and it is with this group that the company conducts its research. Given that the company constantly needs to remain at the forefront of technology, it seeks and documents clients’ feedback regarding every type of usage or service provided, in an attempt to understand the clients better than they understand themselves.
Israel is ranked as the fourth exporter of arms in the world. Taking into consideration the fact that there are fewer people in Israel than in some cities of the world and sixty years ago not a single company could manufacture military equipment legally, this fact requires examination.
Hearing about the scope of military equipment exported brings to mind the incessant disputes between Israel and its neighbors, and the number of wars Israel was involved in. It is a common belief that Israel’s ability to produce high-quality weapons and sell them in large quantities all over the world was born of necessity: Israel had to produce military equipment in order to survive.
Although this statement may ring true, it provides neither an adequate nor an accurate explanation of this phenomenon. Indeed, the simple facts show that there are many countries that have been involved in the same number of wars (for example, Israel’s adversaries in those wars) or even more. As I see it, there are a number of factors, which often escape our attention, that contribute to and explain the success of Israel’s military equipment industries. Due to these factors, Israel is nearly the sole solutions provider in this market, while all the other military equipment suppliers are product-based companies. The factors described here are inter-dependent, and show the Israeli military equipment industry in a different light.
The first factor that can explain the success of Israel military equipment companies is the fact that they view themselves as solutions providers and not as product suppliers. The reason for this could be found in Israeli companies’ R&D culture, which is informal and includes the clients throughout the process, the client is IDF and its various units. By default, the development and marketing experts in the Israeli company have been through military service, so when they want to test the developed product, they ask a “favor” from their army buddies. Such favors, which can mean conducting flights or operating entire units, provide the foundation on which the Israeli R&D culture thrives. These tests are typically coordinated between the company and the officers in the field, without involving senior command levels or any other formal authorizing entities in the military. This open culture means that any soldier in the field can address and congratulate the company’s general manager who is there to observe the test, and openly express an opinion or offer suggestions on how the product might be improved. Nowhere else in the world is the process so informal and open. I myself have visited many military facilities in the world in my capacity as marketing manager, and every time I demonstrated a product or tried to understand the client’s needs or desires, I met with restrained military courtesy: “the product is impressive”, “thank you for coming”, “we have learned a lot”, or “we shall certainly try to purchase it”. Only in the IDF have I managed to receive constructive comments, such as “What makes you think I could carry this on my back?” “There’s no way we’re going to use this”, “it is too difficult to maneuver”, and other comments that reveal what the customer truly thinks.
Also other agents from around the world who were affiliated with the company in which I worked claimed that they never received useful feedback. The reason that I could obtain such real feedback from the IDF was not because I’m Israeli, but because the potential customers in this case were Israeli soldiers. In other countries, professional soldiers in professional armies work by the book rather than as members of their supplier’s development team.
The first time we encounter Israeli “chutzpah” and its consequences is in the Bible. The Bible tells of Pharaoh, King of Egypt, who is unable to solve a dream he had. Joseph, the slave imprisoned in Egypt, is called upon to decipher the meaning of the dream. He does so; however, without being asked, he solves not only the mystery of the dream’s meaning, but also the problem predicted by the dream, as he provides a detailed operational plan for a solution. The courage he demonstrates in ignoring the class differences and facing the king directly, as well as his instructions for solving the problem impress the Pharaoh, who adopts the program devised. I personally know a large number of soldiers and officers who addressed a company’s CEO directly and described their own vision of how the product being developed should behave. Upon completing their military service, these individuals found their way to the R&D department of that same firm. Here we begin to understand one of the main factors that contribute to Israeli companies’ success in the global military industry market: its R&D department includes the clients in the development in ways unparalleled anywhere else.
A second component in the success of Israeli companies is the cultural axiom that states “of course we can”. Another aspect of this cultural phenomenon is the “you can count on me” approach, which effectively means “don’t worry, everything will be OK –and don’t expect me to give you a detailed account of how we’ll get there”. This attitude has often led to problems and severe dysfunctions, and other times it has led to unbridled success. Here too, the roots of this attitude can be found in the Bible, which includes numerous stories demonstrating the victory of few against many, while ignoring stories of defeat in similar circumstances. These biblical stories create a sense of empowerment, of defying normative boundaries. The interpreted message is “you can do it”, “where there’s a will there’s a way’. People involved in field marketing share this culture, so that when the client asks that the product perform an additional function, they respond “no problem, trust me”. In fact, forcing the R&D people to deal with the promises made by the marketers makes them more creative and, as a result, they often supply a more comprehensive solution. In addition, marketing people know that in a pinch, Israeli culture allows them to include products of another company as part of their package, with the confidence that the other company will be willing to include its products in the same package. Thus, instead of just selling the product they produce, they sell the client a complete solution.
To summarize, different R&D departments have a different focus, depending on the type of company.
[1] http://i.nokia.com/blob/view/-/2246090/data/2/-/form20-f-12-pdf.pdf