R&D and Manufacturing: Where do they belong in your organization?
A 2011 survey of Middle Market executives by the National Center for
the Middle Market singled out two major challenges: Large corporations
achieve better performance when they separate R&D from manufacturing
by, for example, using different employees and metrics in the two
functions. In contrast, small entrepreneurial firms often have no choice
but to house the two functions together, a model that research has
indicated benefits them financially.
Middle Market companies are
engaged in a trapeze act: assessing the optimal time to move away from
the small-company’s unified model and adopt the large-company’s
distinct-functions model. They must also consider the performance
implications of making the change too early or too late and how best to
execute this transition.
To help executives make this decision,
Aravind Chandrasekaran, Ken Boyer and John Gray, fellows of the National
Center for the Middle Market, studied a multi-product Middle Market
company that has tried several approaches to managing R&D and
manufacturing. Their study offers preliminary evidence on six factors
that may influence the decision to separate R&D and manufacturing.
Those factors are as follows:
1. Firm Ownership
startups typically combine R&D and manufacturing because they lack
resources to do otherwise, family-owned companies are likely to keep
those functions in-house and coupled tightly together. This tendency may
decrease with other forms of ownership, such as private equity and
2. Firm Size
So long as
Middle Market firms remain small, they may be able to effectively use
the same teams for R&D and manufacturing. But if sales—and
consequently volume of products—increase significantly, the requirement
to focus on production may reduce efforts to create and improve products
and processes. Consequently, using the same workforce for both
functions may decrease innovation.
3. Product Diversity
addition of new product categories can significantly affect a team’s
ability to effectively manage both R&D and manufacturing. New
products introduce both product and process complexity in a way that
increased volume does not. Under higher levels of task complexity,
employees who shift between R&D and manufacturing don’t perform as
4. Specialization of Work
engineers in Middle Market firms, who are responsible for production,
are engrossed in maximizing outputs given limitations on workers, raw
materials and other constraints. Their intense concentration on
improving existing processes can leave little room for innovative
thinking about products and technologies that may differ significantly
from what is being made.
financial performance may also prompt the separation of R&D and
manufacturing, as companies seek organic growth through either
additional innovation or reduction of manufacturing costs.
6: Non-core businesses
Middle Market firms expand into businesses that are not core to their
operations, they are better off outsourcing both R&D and
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