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

While 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 public firms.

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

The 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 well.

4. Specialization of Work

Process 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.

5: Performance

Declining 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

As Middle Market firms expand into businesses that are not core to their operations, they are better off outsourcing both R&D and manufacturing.

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