Why do businesses like Intel and others invest in research and development?
Intel (NASDAQ: INTC) is the largest chipmaker in the world that supplies computer chips to many original equipment manufacturers like HP, Dell, and several more. You must have seen the Intel inside logo on several computing products. It’s a globally famous brand known for its technology products. It is a leading provider of programmable semiconductors and related products. The company generated net revenue worth $77.87 billion in fiscal 2020, an increase of around $5.9 billion compared to the previous year. Its investment in research and development has remained flat over the past three years at around $13.5 billion for each year.
Why do companies invest in research and development?
Research and development is not a central focus for a large number of companies around the globe. However, the tech industry is replete with several such examples where the companies invest a huge portion of their annual net revenues in research and development. One reason is that the tech industry is marked by heavy competition. There are several large tech players that enjoy the status of monopolies. Every large tech brand invests a heavy sum in research and development to maintain its competitive edge against its rivals.
However, several tech players invest in research and development because it is a core part of their organizational culture. Apple is known for its focus on innovation and R&D is a part of its core culture. Even if it does not release a new product, it will continue to improve the existing ones to maintain their attractiveness for customers worldwide. The case of Microsoft, Google, Amazon, Facebook, Oracle, Salesforce, and several other tech businesses including Intel is also similar. While the main purpose of a company investing in research and development is to maintain its competitive edge, it is not the sole purpose. For most leading brands, R&D is important because they believe in continuous innovation. If the pace of innovation falls, it will cause a drop in popularity, sales and revenue.
Tech brands cannot stay dependent on a core set of products/services. They have to continuously innovate. If they do not focus on innovation, bringing new sets of products/services, improving the existing products/services and expanding their portfolio, they will stop growing. The result will be stagnancy. Such companies will not enjoy growth in sales or customer base. New products and technologies allow companies to hack into new customer segments and find faster growth.
Companies must invest in research and development for all the above reasons. They must invest in R&D to avoid stagnant sales and profits, to avoid a decline in popularity of products/services, to maintain market share and growth momentum, customer satisfaction and above all their competitive advantage against their rivals.
Intel’s focus on research and development:
As a well known brand in the world of technology, Intel has secured a distinct position for itself among several tough contenders. The technology industry is growing all the more competitive. Apart from Samsung, there are several more players that compete with Intel. However, despite the fierce competition, Intel’s position has remained secure. The company has continued to strengthen its business portfolio and market position driven by a strong focus on innovation and product quality. In recent years, it has also invested in diversifying its product portfolio. Its strong focus on innovation is a critical reason that it enjoys strong popularity worldwide.
Intel’s research and development expenditure has remained flat over the past three years. The company spent $13.5, $13.4 and $13.6 billion on research and development in 2018, 2019 and 2020. The company spent more than 17% of its net revenue in 2020. In 2020, Intel experienced a solid improvement in its net revenue compared to previous several years. However, it has maintained its research and development costs at the same level as the previous two years. The company made changes to its business model and product portfolio in recent years to align with the recent development in the technology industry.
The industry environment has changed fast in recent years and the level of competition has grown a lot more fierce compared to five or ten years ago. With increasing competition and changing demand patterns, consumer preferences and growing technology needs of individuals and businesses, Intel needed to make changes to its business model to serve its customers efficiently. It has turned its business into a data centric business from a PC centric business. Intel has maintained its focus on the development of new products and services and growing its portfolio to serve the customers globally.
With time, the set of challenges before the tech industry have also changed. Intel is also facing a vast new set of challenges. Maintaining market dominance against a large number of players, growing its customer base, bringing new technologies that help it grow its market share and several other challenges (mainly technological in nature) have made it essential for Intel to invest in research and development.
Research and development is a necessary evil. Companies invest a huge portion of their annual sales and profits in research and development. Intel’s case is no different. It needs to maintain its growth momentum and cater to the changing demand patterns and needs of customers. All these factors require a critical focus on innovation. However, Intel’s focus on R&D has proved highly profitable for the brand, reflecting in the form of increased sales and revenues. Innovation is also a part of Intel’s organizational culture. It invests in R&D to maximize customer satisfaction. Technologies grow obsolete fast. Each new technology makes an existing one obsolete. If Intel does not invest in continuously improving its technology products and service, the company may get left behind its competitors.