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116 PART 2 • STRATEGY FORMULATION

launch new businesses, developing new products, improving product quality, improving
manufacturing efficiency, and deepening or broadening the company’s technological
capabilities. 23
The best-managed firms today seek to organize R&D activities in a way that breaks
the isolation of R&D from the rest of the company and promotes a spirit of partnership
between R&D managers and other managers in the firm. R&D decisions and plans must be
integrated and coordinated across departments and divisions by having the departments
share experiences and information. The strategic-management process facilitates this
cross-functional approach to managing the R&D function.
Based in Sunnyvale, California, Juniper Networks spends about 20 percent of its rev-
enues or $800 million annually on R&D. However, the company is struggling with falling
demand for its products in a global recession. But rather than cutting R&D expenditures, the
firm is cutting other expenses. About 70 percent of Juniper’s revenues come from Internet
routers for phone and cable companies. Juniper’s annual R&D budget has not dropped since
the company went public in 1999. Rival Cisco Systems spends 13 percent of its revenues on
R&D. Motorola is slashing its R&D budget. Qualcomm Inc. is holding its R&D spending
flat in 2009.
Although R&D is the lifeblood of pharmaceutical firms, Valeant Pharmaceuticals
International recently cut its R&D budget by 50 percent to make acquisitions and buy
back its own stock. Lead director Robert Ingram at Valeant says, “R&D is a high-risk bet,
and the fact is we fail more often than we succeed.” France’s Sanofi-Aventis SA also
recently cut its R&D spending, but for most pharmaceutical firms cutting such expenses
is still taboo.

Internal and External R&D
Cost distributions among R&D activities vary by company and industry, but total R&D
costs generally do not exceed manufacturing and marketing start-up costs. Four
approaches to determining R&D budget allocations commonly are used: (1) financing as
many project proposals as possible, (2) using a percentage-of-sales method, (3) budget-
ing about the same amount that competitors spend for R&D, or (4) deciding how many
successful new products are needed and working backward to estimate the required
R&D investment.
R&D in organizations can take two basic forms: (1) internal R&D, in which an organi-
zation operates its own R&D department, and/or (2) contract R&D, in which a firm hires
independent researchers or independent agencies to develop specific products. Many
companies use both approaches to develop new products. A widely used approach for obtain-
ing outside R&D assistance is to pursue a joint venture with another firm. R&D strengths
(capabilities) and weaknesses (limitations) play a major role in strategy formulation and
strategy implementation.
Most firms have no choice but to continually develop new and improved products
because of changing consumer needs and tastes, new technologies, shortened product life
cycles, and increased domestic and foreign competition. A shortage of ideas for new prod-
ucts, increased global competition, increased market segmentation, strong special-interest
groups, and increased government regulations are several factors making the successful
development of new products more and more difficult, costly, and risky. In the pharmaceuti-
cal industry, for example, only one out of every few thousand drugs created in the laboratory
ends up on pharmacists’ shelves. Scarpello, Boulton, and Hofer emphasized that different
strategies require different R&D capabilities:

The focus of R&D efforts can vary greatly depending on a firm’s competitive
strategy. Some corporations attempt to be market leaders and innovators of new
products, while others are satisfied to be market followers and developers of
currently available products. The basic skills required to support these strategies
will vary, depending on whether R&D becomes the driving force behind compet-
itive strategy. In cases where new product introduction is the driving force for
strategy, R&D activities must be extensive. The R&D unit must then be able to