Case Analysis: Farm R&D or Feed It Out

Case Analysis: Farm R&D or Feed It Out

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The success of any modern day industry hinges on innovation guided by the research and development arm or department. However, research and development is no cheap affair. Matter of fact, the expenditure budget for such a department is so huge that it forces the management to explore ways of meeting the high costs. Driven by technological changes, firms must seek cost effective ways of developing products tailored to meet if not exceed the expectations of the target customers. The firm’s management must make strategic decisions as to how the innovation is to proceed. It is the management’s prerogative to determine whether to hire the research and development team or to outsource their services. This paper addresses the issue of outsourcing and applies it to RLK’s case.

Background of the Company

RLK Media was founded in 1985 with the sole purpose of manufacturing high performance electronics for the consumer market. For the longest time, the company has enjoyed a fair market share, a feat that attributed to its brand equity, high quality products, premium prices on its products, and innovation. Most if not all of the products produced by RLK appal to the consumer market and particularly to those classified as the affluent audiophiles. However, many changes have hit the industry making it very competitive (Nohria, 2005).

The introduction of the home theatre into the consumer market changed RLK’s market position, as the firm would no longer compete favourably with its Japanese competitors. Evidently, the competition opted to price their product at a price that RLK would not dare price their own product. Perhaps one of the reasons why this happened was because of the difference in the cost of production in the two markets. In effect, this meant that RLK could not keep up with the competition (Nohria, 2005).

At the same time, the board observed that RLK’s margin was diminishing with every passing day. The CEO’s job was at stake, he needed to do something drastic to save his job. Increased research and development cost, slow sales, and decreased demand for the technologically outdated products had resulted in decreased margins. Another challenge was in the fact that the markets were evolving to adopt electronic products that were run on embedded software, an area which RLK had zero expertise (Nohria, 2005).

RLK is hopeful that its new innovative video handset that comes with directional features will turn its fortunes and help it regain its position in the retail market. However, the R & D cost associated with this project is so huge and if pursued and it failed then the company would go into liquidation. On the other hand, if the innovation succeeded, then the firm would earn good returns and regain its position among the giants in the electronic industry. The company’s current financial situation forces the CEO to analyze two alternatives for the project. Granted, the project must proceed, but now the question is how it should proceed (Nohria, 2005).

Evidently, the CEO must make a decision between outsourcing the software engineering services and hiring software engineers to work with the firm’s R & D. Traditionally, the firm’s R &D has been taking care of all innovations without hiring external expertise. However, this innovation requires technology, which the firm’s R&D, has zero experience. RLK has never outsourced before and so approaching the whole issue seems tricky. However, the CEO has to decide whether to outsource the software engineering phase of the project or to expand the capacity of the in-house R&D by hiring the experts recommended by the R&D head (Nohria, 2005).

Analysis of the case using the 11-step model

Company Mission and Social Responsibility

RLK has been in the manufacturing business for quite some time. The company’s mission has always been to produce high quality products that will afford their customers the best value. This philosophy has earned the firm a reputation, which has translated into brand equity. The company’s mission also looks at encouraging innovation. This mission guides the company in its business. This explains the chairperson to the board is concerned with the manner in which the company keeps losing its margin (Nohria, 2005). He argues that the company should do more market research to understand what their customers need and work on giving it to them.

RLK’s social responsibility requires the company to conduct their business in a manner not harmful to the environment. In this case, the environment includes both the people and the physical environment. One of the ways of ensuring the conservation of the human environment is creating channels that enable the employees to communicate freely with the management. The CEO demonstrates this by making an effort to reach out to the R&D department and this shows them that their concerns about the project are equally important. The company can conserve the physical environment by embracing green technology in its manufacturing endeavours.

Internal Analysis

This relates to the company’s effort to analyse and take stock of internal competencies as revealed by the strength of its human, financial, and physical resources (Pearce & Robinson, 2007). Internal analysis addresses the company’s management and organizational structure. A look at RLK reveals that the company has some strengths and weaknesses in its internal operations. Starting with the strengths, the company has a robust R&D department that has spearheaded the company’s past successes. The employees working in the R&D department have synergy and coordination that they have developed over time. They relate with each other like a family. Additional strength lies in the fact that bureaucracy does not burden or complicate the organizational structure. The company’s management encourages both vertical and horizontal communication (Nohria, 2005).

Conversely, the internal operations suffer from certain weaknesses. One of the weaknesses relates to the fact that the company’s R&D is not tailored to keep up with the new demands of the innovations taking place in the industry. This lack of appropriate human resource reveals the company’s second weakness, which relates to its weak financials. The CFO reveals that the company’s financial position is not strong enough to survive a product fail. This forces the CEO to evaluate whether to risk sinking the business or outsource the software engineering phase of the project. The third weakness relates to the culture embraced by the employees working in the R&D department. Most of them are not so open to the outsourcing proposal. In fact, their leader is quite vocal in his opposition to the idea. This presents a challenge because the success of the RLK-Inova partnership depends on cordial relations between the key personnel from both companies. For the project to succeed, this impasse must be resolved (Nohria, 2005).

External Environment

The external environment relates to the forces and conditions that might affect the company’s strategic options (Pearce & Robinson, 2007). The external environment surrounding RLK majorly consists of its competitors and customers. In order to outpace the competition, the firm must launch the product ahead of its competitors. Additionally, the company must work on meeting if not surpassing the expectations held by their customers on the capabilities of the new product. In order to achieve these, RLK must collaborate with Inova (Nohria, 2005).

Strategic Analysis and Choice

This component relates to the main success factor for any company (Pearce & Robinson, 2007). Sound strategic management requires that a company consider this component while evaluating the available alternatives. R&D happens to be the core competency of RLK. In this case, the company’s competency is dependent on what it lacks. The alternatives set on the CEO’s table are either he hires expert software engineers or he outsources the software engineering phase to Inova. The acquisition of the embedded technology is of strategic value to RLK in line with the company’s mission, founded on the tenets of product quality, innovation, superior capabilities (Nohria, 2005).

As aforementioned, RLK has zero expertise in embedded software technology. Contrastingly, Inova has a formidable team of software engineers, 20 of whom hold doctorates in the field. Additionally, the company has a global reputation for its deliverables and innovations. Another strategic advantage possessed by Inova relates to its working philosophy of give and take. This is a good philosophy for partnerships however; each of the partnering parties must be on the same page as regards to the give and take philosophy. Therefore, in comparison to Inova, RLK is low in software engineering competence. In this context, RLK’s decision to outsource to Inova raises its value and lowers the cost associated with the project (Nohria, 2005).

Long Term Objectives

Every organization is in the business for the long haul and as such, the management must consider its success in the long term (Pearce & Robinson, 2007). The partnership between RLK and Inova promises to raise the company’s productivity. Inova has promised to help RLK produce the device in a quick fashion and beat its closest competitors in product launch. This will help RLK secure a good chunk of the market share. Another parameter that RLK is concerned about is the return on investment. A successful product launch will see the company rake in income that will, in time, enable the company recover the capital invested in the project.

Additionally, the partnership with Inova will boost and consolidate RLK’s position as a leader in the technological field. Leaders have one thing in common; they lead while others follow. If RLK beats the competition in launching the product, they will have led the innovation and the competitors will follow suit. Employee relationship and productivity are sensitive components in this case. The CEO must find a workable way of selling the innovation idea to Ray and his team. This will guarantee the long-term success of the project once Ray buys into the idea then (Nohria, 2005).

Generic and Grand Strategies

This component determines a firm’s competitive orientation in the marketplace. It comprises of several micro-components, which work alongside each other to bring about the generic and grand strategy. RLK needs to re-define its grand strategy to include joint ventures and strategic alliances. Currently, market development, innovation, and product development inform the company’s grand strategy. However, the strategy needs to be revised to facilitate the formation of strategic partnerships that will enable the firm lower its cost of production and consolidate its market position as a leader in the consumer electronic market. Such an inclusion will smoothen out the partnership between RLK and promising partners such as Inova (Nohria, 2005).

Short-term Objectives

Every firm has both the short and long-term objectives. Short-term objectives encompass the desired results that a firm seeks to achieve within a period of twelve months (Pearce & Robinson, 2007). In the short run, RLK hopes to have completed the creation of the device, which it seeks to collaborate with Inova for its development. Such a goal is important in steering the partnership in the right direction. Another short-term goal relates to RLK’s desire to have the product on Best Buy’s shelves ahead of its competition. These objectives create some sense of urgency in the project calendar and it will guide the production and design teams towards achieving the set objectives.

Functional Tactics

Functional tactics outline the exact means of attaining the short-term objectives and competitive advantage (Pearce & Robinson, 2007). Assuming that RLK chooses to collaborate with Inova on the project, then they will be able to hit the market ahead of their competition. This will enable the firm gain a competitive advantage over its rivals. In this case, the partnership is a functional tactic because it will enable the firm to outpace its closest competition by having the product in the stores in record time (Nohria, 2005).

Policies that Empower Actions

RLK needs to come up with policies that will redirect the R&D department towards a new way of doing business. Ray and his team need to be educated on the need to revise the old and outdated policy that confines the design and production processes to the firm’s labs. Instead, the firm should seek to open up its innovation process to other strategic partners. The R&D department at RLK should embrace a working philosophy that promotes a culture of give and take, similar to that practiced by the Inova team (Nohria, 2005).

Reengineering, refocusing, and restructuring the firm

This is a very important part for any manufacturing firm. RLK must restructure its operations in such a way as to allow Inova to contribute its expertise in software engineering. As established earlier, RLK lacks competency in this area and it needs Inova for the product to succeed in the shortest time possible and within a low cost framework.

Strategic Control and Continuous Improvement

It is imperative that the management keeps a tab or controls the innovation process. This will help the management ensure that the innovation process proceeds in line with the generic strategy and aligns itself with the company’s mission. Additionally, the management is also keen on ensuring that the innovation process is sustainable over time. Innovation is part of the company mission. However, sustainability is pegged on the signing of the partnership deal and the partners working together on the project (Nohria, 2005).

Factors to consider in deciding whether to support an in-house R&D function or outsource all Research & Development.

The primary objective why firms seek to outsource a function is because of the low cost and new knowledge associated with such a move. However, before embarking on outsourcing, the firm must first consider a myriad of factors. The support of an in-house R&D is preferred particularly if the firm can comfortably foot the bill associated with the process of innovation (Dess, 2012). One inherent advantage of supporting an internal R&D is that such a construct will see the business maintain all the rights and royalties to the product developed. ‘

The benefits that accrue to outsourcing make it a viable undertaking. These benefits include addressing the shortage of labor in the outsourcing firm, as was the case in RLK, the outsourcer may have more expertise in the area, as in the case of Inova, the outsourced function may be less expensive, and might reduce the production time as in the case of RLK-Inova collaboration (Nohria, 2005).

Factors such as propriety character, timing, risk, cost, cultural difference, and employee attitude come to play. Propriety character looks at the characteristic of the innovation. It is easier to protect hardware than software. Because of this, it is therefore unwise to invest so much in developing a software product that can be duplicated or stolen by a disloyal employee. Outsourcing would therefore be the better choice in this case (Pearce & Robinson, 2007). If the market growth is slow then an internal R&D would be preferred; however, if the market is growing at a fast pace, then outsourcing would be the best alternative. The risk and cost components go hand in hand (Dess, 2012). If the perceived risk and cost of the innovation is high then the management should consider outsourcing. The management should also consider the attitude of the employees as regards the planned outsourcing particularly if the outsourcer is expected to work with the employees of the outsourcing firm. Differences in organizational culture should also be factored in as these have the potential of making the venture a success or a failure.

Implications of outsourcing R&D for middle managers

Middle managers play an important role in the outsourcing process. Apart from supervising the daily operations at the outsourcing firm, they are expected to collaborate with middle managers in the outsourcer firm. In fact, the success of the outsourcing process depends on how the middle managers perceive the whole process (Dess, 2012). For instance in the RLK case, Ray is a middle manager who is openly vocal over his disapproval of the firm’s intention to outsource the software engineering phase of their product development. Such an opinion from a middle manager has the potential of stalling the project. The senior management must play their role and sell the outsourcing idea to the middle managers. Once the managers are on board, then the process can proceed smoothly (Dess, 2012).

Recommendations to the management team

In order to succeed in the electronics industry, RLK must consolidate its position as a leader in the market. This feat is achievable if the company will exploit its strengths through innovation and brand equity. From the case analysis, it is apparent that collaboration between RLK and Inova will raise RLK’s value and afford it sustainable competitive advantage. However, this can only be achieved by a deliberate decision on the part of RLK to cede some ground and allow for drastic changes in corporate culture and mindset. The firm must grow to a place where it readily accepts external contributions to its innovation processes. Additionally, RLK must change its reward system and start rewarding people not for their innovativeness at the labs but for the success of their creations in the marketplace.

The collaboration opportunity afforded to RLK can easily birth a long-term strategic alliance, which will benefit RLK’s R&D department. This outsourcing decision if approached in a sober manner is likely to shift the direction of the whole firm and cause it to look into new areas of collaboration with outsourcer for the benefit of the two firms.

References

Dess, G. G. (2012). Strategic management: text and cases (6th ed.). New York: McGraw-Hill/Irwin.

Nohria N., (2005). Feed R&D or Farm it Out. HBRCase Study

Pearce, J. A., & Robinson, R. B. (2007). Strategic management (10th ed.). New York: McGraw-Hill Higher Education ;.