Commentary - Sir David McMurtry

R&D for product innovation and differentiation

In modern manufacturing markets, where firms are increasingly exposed to global competition, many products have become commodities, even those containing sophisticated technology. Manufacturing excellence is merely a requirement for survival, not a guarantee of long-term success.

Throughout its 29-year history, Renishaw has pursued a simple and effective business strategy based on innovation. We had the initial good fortune to pioneer a new market sector – touch-trigger probing on co-ordinate measuring machines (CMMs) – and our first products were unique. This allowed us to charge what they were worth to customers, not merely a small mark-up on what they cost us to produce. These healthy margins got the company off to a good start, giving us the profits we needed to expand our sales, marketing and manufacturing facilities to meet growing demand.

Success soon gets noticed, however, and our growth could have been quickly snuffed out if a larger company with greater resources had entered our market, reducing prices to commodity levels. Patents, which we vigorously defended, provided us with the space we needed to build a global network of sales, service and support companies, which provided steady year-on-year growth in revenues.

Innovation as a long-term strategy for growth

Having read the above, you might be excused for thinking that we had one good idea and then exploited it for all it was worth. Far from it, for to do so would have invited a collapse in revenues and profits once the initial patents expired. The key to Renishaw’s commercial success has been a sustained investment in research and product development, which has provided a stream of innovations. Each successful product provides a flow of margins that fund the development of future products and processes.

Renishaw has applied innovation within our core markets – probing on CMMs and machine tools – to continually regenerate our products to meet the changing demands of our manufacturing customers. Whilst our efforts have not invariably met with success, there have been enough hits to pay for the misses. As each new generation of products replaces the last, providing more performance and productivity, we benefit from existing and new customers seeking to further improve their manufacturing processes.

Profits from innovative products can fund expansion into new markets and enable a long-term perspective to be taken. A good example of this is our encoder product line, which took more than five years to develop into a profitable business, but which is a major contributor to current and future growth.

Renishaw is unusual in that we manufacture as much of our products as possible in-house, meaning that process innovation is a vital element of our strategy. This requires regular investment in capital equipment and ongoing development of new machining and assembly processes, which ensures that we keep costs on a downward path and that we are in full control of our quality. It also gives us great credibility in our manufacturing markets – it’s easier to promote process improvement when you do it yourself.

Building the capability to innovate

Innovation cannot insulate a company totally from competition, nor from the business cycle – Renishaw saw its sales fall by 17% in the year to 30 June 2002 as demand in the metal-cutting, electronics and semiconductor sectors contracted. However, it offers the best prospect of underlying growth in turbulent markets. Our organic growth strategy has allowed us to build a business with a turnover in excess of £100 million with no net borrowing and cash resources of over £30million whilst returning a profit each year.

Renishaw’s greatest asset is not the patented products that have come from past R&D investments, it is the people, culture and knowledge – the organisational capability – to produce future innovations. Recognising this, we continue to expand our R&D investments – a 15% increase last year – the engine that will secure the long-term success and growth of our business.