India's Most Influential Business and Economy Magazine - A Planman Media Initiative 
 Search  
  Other Sections
  
  • Home
  
  • Cover Story
   Testimonial
  • Snapshot
  • Spotlight
  • B School
  • Scrutiny
  • Stratagem
  • Policy
  • Hipshot
  • Finance
 


Share |
Cover Story
 

Does R&D Really Pay?

Issue Date - 03/02/2011
 
R&D leaders of India: 2010
All BSE 500 cos with R&D exp. amounting to 0.5% of revenue or above


 
Case Analysis : OIL & GAS
Taking calculated risks
R&D might be considered a risky proposition but ongc has proved that calculated risk is what can turn the tables.

Renowned management guru Peter. F. Drucker once said that “an established company which, in an age of demanding innovation, is not able to innovate, is doomed to decline and extinction.” If one were to observe, the global thought has been well captured by the India’s largest oil & exploration company, ONGC, which is ranked at 413th in the list of Fortune Global 500 companies. In fact, ONGC has been responsible for single-handedly scripting the hydrocarbons saga in India which is evident from the latest ‘Maharatna’ award bestowed upon it in November 2010.

No doubt, management thought leaders have been debating about the impact of R&D investments on shareholder value for ages, but despite anecdotal support from leaders of top global corporations, exhaustive research has more or less proved that in most cases, investment in R&D destroys shareholder value. In fact, a study conducted by Tsinghua University’s China Centre for Financial Research goes on to prove that ‘how a decrease in R&D expenditure creates more shareholder value rather than destroying it’. However, for the oil and exploration industry, success has all been about making the right kind of investments in R&D and no one seems to have understood this better than ONGC. What’s more? The exploration and production (E&P) major has almost doubled its R&D investments in the last five years, from Rs.1.1 billion in 2006 to over Rs.2 billion in 2010. This roughly represents 0.35% of the total revenue which stood at a staggering Rs.182.39 billion for the quarter ending September 2010. In fact, the result of this carefully formulated R&D strategy has been a subsequent increase in ONGC’s net worth from Rs.535 billion in 2006 to Rs.864 billion in 2010. A few months ago, in an exclusive interaction with B&E, R. S. Sharma, Chairman, ONGC, too had exclaimed that E&P remains one of the most challenging businesses where inputs are deterministic and outputs are probabilistic. Sharma had stated that “as far as ONGC is concerned, making major new discoveries and sustaining production level from the existing ageing fields remain critical challenges.” But then, to overcome these challenges, ONGC has already invested a total of Rs.209.44 billion in close to 21 redevelopment projects (which also comprise R&D initiatives) since 2001. Result: ONGC added over 83 million tonnes of oil and gas reserve to its kitty in FY2010 alone – the highest reserve accretion by it in the last 20 years.

Further, an OVL (ONGC’s overseas arm) led consortium too has taken up a major assignment (Carabobo Project) in Venezuela with a 40% partnership. This seems to be a smart move as investing in R&D outside home countries is increasingly been considered as a viable strategy. In fact, a 2008 study titled ‘Beyond Borders: The Global Innovation 1000’ conducted by Booz & Co. proves that companies which invest more than 10% of their total R&D spend in low costs countries perform better than others. No doubt, ONGC is one company which, time and again, has set example that the risk of treading the path of R&D is worth taking. And this time won’t be an exception too.

By Buvnes Telwar

          

Share |
   


      
Comments   
   
      
Leave your first comment

   


     Leave Comments to this story    
     
Name:  
Comments:  
Email id:  
City:  
 
 
Busines & Economy is also associated with :
©Copyright 2008, Planman Media Pvt. Ltd. An Arindam Chaudhuri Initiative. With Intellectual Support from IIPM & Malay Chaudhuri.