Philip Fisher part 4 and the Fisher method, Company research, points 2,3 /15

 2. Is management ready to develop new products and processes when the growth potential of the current ones has already been used up?

Few companies have enough current products to sustain decades of growth that will bring the best returns to investors. The company should invest in scientific research and product development. These are the best ways to increase sales in the long term. New products and the development of old ones improve opportunities. Investors usually get the best returns by investing in companies whose new products are related to the current ones.

This does not directly mean that the company should focus only on certain products. It can have several product groups for which it develops new products. A company that creates a foundation for its future growth and focuses on its research foundation will produce the best opportunities for future growth. Developing new products for completely new businesses that do not correspond to the company's current business is more likely to fail.

3. How efficient is the company's product development activities relative to its size?

Many companies report their product development costs, so measuring their efficiency in relation to the size of the company and other companies in the industry does not sound like a complicated task. One big problem with this is that not all companies measure the same cost items in the company's results. An investor can only use the figures to make rough estimates of whether a company is doing an abnormal amount of product development, only clearly less than others. Even in well-managed companies, the differences in efficiency can be a ratio of two to one. The differences between well-managed and poorly managed companies are even greater.

Creating new products and methods requires high-level expertise in several fields. New products are rarely developed by a single genius. Expertise alone is not enough; high-quality management is also needed, which makes people with different backgrounds work efficiently towards a common goal. Coordinating product developers, production and sales is not easy. If this is not done, new products will not be manufactured as cheaply as possible and the new products will not achieve the best possible sales. In this case, the risk is that the market will be taken over by more efficient competitors.

Senior management must also understand the importance of product development processes. Development projects should not be expanded in good years and suddenly reduced in bad ones. Some in senior management may suddenly transfer experts from other important projects to their own purposes, temporarily suspending projects for the sake of a momentary important project. This is rarely sensible. The essence of successful commercial research is that the company focuses only on projects from which the highest profits are expected compared to the costs. Many in the company's management did not understand this since Fisher. Company management must avoid the temptation to invest heavily in projects whose markets are too small to make significant profits.

If an investor cannot find the company's reported figures for product development investments, he can try to find answers himself by talking to researchers in the field at universities and research institutes, competitors and statistical offices. A simpler approach might be to examine a company's profits and sales growth compared to its R&D investments over a longer period. Fisher suggests ten years as one possible period.