Consider Separating Manufacturing and R&D activities

7/19/2013 Plante Moran Operational Excellence

When and why should a middle market company separate its research and development efforts from its operations?

Among large firms, there is a consensus that separating R&D and manufacturing is the best way to maximize financial performance. This separation means that the organizations maintain distinct reporting structures, metrics, and incentives for manufacturing and research and development.

Research on small, entrepreneurial firms indicates just the opposite. For them structural separation is not necessary and may even be detrimental.

Where does this leave the middle market?

Recent research at The Ohio State University commissioned by the National Center for the Middle Market (NCMM) looked at this question of whether, how, and when middle market firms should make the transition.

In their summary, the authors write: "We believe that it is important for managers of middle market firms, as they grow, to understand that at some point they should begin to structurally separate manufacturing and R&D."

OUTSIDE EVENTS TRIGGERED SEPARATION

The results of their research indicate that middle market firms often need a trigger to When firms expand their product categories, however, evidence indicates that using the same people for R&D and manufacturing starts to diminish performance. Common triggers may be:

Diversification into multiple product categories
A notable decrease in performance
An ownership change (often precipitated by a decrease in performance)

Based on case studies, the research team found that middle market firms with a narrow product focus can effectively use the same teams for R&D and manufacturing activities; in fact, they can find valuable synergies.

When firms expand their product categories, however, evidence indicates that using the same people for R&D and manufacturing starts to diminish performance.

Also when they grow into businesses that are not central to their operations, middle market firms are better off outsourcing both R&D and manufacturing.

USING METRICS TO MEASURE INNOVATION

Maintaining distinct reporting structures, metrics, and incentives for R&D seems to offer a good solution to firms serious about innovation. Plante Moran in its ongoing innovation studies finds that the most innovative companies are distinguished by the level of accountability they demand of their innovation teams.