MARATHA MANDIR'S BABASAHEB GAWDE INSTITUTE OF

MANAGEMENT STUDIES

Topic : R&D Cost in Marketing, Treatment of R&D Cost, ROI on New Product Development

Presented by :

Name Roll NumberA-22 Saumil Mehta

A-27 Affan Shaikh

A-34 Avinash DhawalPresented to :

Prof. Ganachri Sir

Research and Development Expenses In marketing

R&D expenses are a line item from many companies' income statements.

R&D expense (short for research and development expense) is essentially the amount of money that a company spends to develop new products and services each year.

For example, if a pharmaceutical firm hires research scientists to develop new drugs, the salaries of these researchers will generally be expensed in the R&D expense category.

Like marketing expenses, but unlike capital expenditures, R&D expenses are subtracted from revenues every year directly.

Therefore, accountants treat R&D spending as an expense rather than as an investment, though there is continuous debate over whether this is the correct classification.

This is the cost of discovering and developing new products or services that fill market needs, including any labour, raw materials, clinical trials, and other costs incurred during the process.

Research and development (R&D) can be thought of as investments to fuel new products that provide higher margins or increased market share.

Research and development expense is common throughout most companies that produce some product or service- companies like Nike (NKE), Procter & Gamble Company (PG), and Pfizer (PFE) all invest heavily in R&D.

Research and Development Expenses In marketing

Overall Global R&D spending

Geographical split of R&D spending

Vertical split of R&D spending

1

2

3

India presence of top1000 R&D spenders

4

Vertical wise Intensity of top R&D spenders in

India

5

• After witnessing a decline in the FY 2010, Global R&D spending has increased significantly in FY 2011. Both Net Sales and R&D Spending has increased significantly with a growth of 13.55 percent and 8.2 percent respectively

• The R&D spend for NA and EU is 36% and 34% respectively• As compared to last year the R&D spending for companies headquartered in

APAC has increased by 28% followed by NA 11%

• Telecom & Networking, Electrical & Electronic equipment witnessed a marginal increase in their Global R&D spending while Industrial sector witnessed a decline

• About one-third of the Global 1000 R&D spenders have centers in India• About 30 percent companies with HQs’ in EU are in India and about

15%which have their HQs’ either in Japan or APAC, are in India

• Software and Semiconductor are mature verticals in terms of R&D headcount intensity in India.

• Automotive and Aerospace are fast growing verticals

Source: Zinnov analysis of global top 1000 R&D spenders and India R&D landscape, The analysis has been done for FY2011

ize =Total India MarketUSD 6.9 Bn

India accounts for a small proportion of the totaldespite having a strong talent pool across verticals

R&D investments by global companies

MNC Subsidiary Talent Pool in IndiaMNC Subsidiary R&D Investment in India (USD millions)

MNC Subsidiary Installed Talent Pool inIndia = ~220,000

MNC R&D spend on headcount in India= 7.0 – 7.5 billion USD

Aerospace &Defense

2%ComputerHardware and E&E**

12%Telecom & Networking

Automotive9%E&E** and Computer Hardware

Others8.0% Software/

Internet34.0%

Semi799

Industrial7.0%

Semiconductors

10.0%Telecom &

Networking17.0%

17Source: Zinnov analysis of R&D landscape in India. **Electrical and Electronic equipment

Software/Internet2841

Tel1322

971

Semi conductors

Automotive773

Industrial595

Aerospace & Defense149

Others660

Global R&D spend has Increased; however,remained constant from 2007-08 to 2010-11

R&D Spending as percentage of Net Sales has

Global R&D Investments Growth Trends, 2007-11 Global Net Sales Trends, 2006-11(USD Billion) (USD Billion)

600 17,500

17,000580

16,500560

16,000540

15,500

52015,000

50014,500

480 14,000

13,5004602007-08 2008-09 2009-10 2010-112007-08 2008-09 2009-10 2010-11

R&D spending in FY 2011 witnessed an increase due to increase in spending of semiconductor, industrial &consumer hardware and Electrical and Electronic equipment companiesIntel, Samsung, General Motors, Pfizer, Volkswagen are the few companies which played a key role in increasingR&D spend in FY 2011

Source: Zinnov analysis of global top 1000 R&D spenders

*Conversion Ratio from EURO to USD- 1.324. 6

16,980*

16,684

15,336

14,953

582*

549

538

511

Treatment of R&D Cost

R&D expense is the amount of money that a company spends to develop Newproducts and services each year.

R&D Cost is subtracted from revenues every year directly. Therefore, accountantstreat as R&D spending as an expense rather than as an investment

As – 26 Describe the accounting treatment of R&D expenses is expenses incurredon research phase should be expenses as when expenses incurred ondevelopment phase should be capitalized by satisfying given conditions but it isnot possible to classify the same then all expenditure incurred should be treated as on RESEARCH phase and charged to P&L a/c.

Treatment of R&D Cost

R&D costs should be treated as capitalized or as a expenses

The allocation of the costs of research and development activities to accounting periods is determined by their relationship to the expected future benefits to be derived from these activities.

Research and development costs are therefore usually charged to expense in the period in which they are incurred.

Deferred research and development costs are allocated on a systematic basis, either by reference to the sale or use of the product or process or by reference to a reasonable time period

The need to provide depreciation on fixed assets used for purposes of research and development

ROI ON PRODUCT DEVELOPMENT

STEP 1: Understanding product lifecycles to determine payback periodTHE APPROACH STEP 2: Sales aging

Individual product profile

STEP 3: ROI

The ROI calculation can be expressed by this simple equation: ROI = First Year Profit Contribution / Product

Development Cost

STEP 4: Diagnosis and treatment plan:

CONTD…..

BENEFITS

Create a product development team scorecard

Define success

Focus efforts and resources on best profit potential products