R&D Competence &Absorptive Capacity

The ideal R&D Organization is: Fast Efficient Close to the leading edge of science Generating critical knowledge internally Creative and freewheeling Staffed by the best people

But close to the business and the customer But able to take advantage of outside developments But disciplined & focused But not dominated by prima donnas

Managing R&D thus means managing tension: Between the long and the short term Between basic and applied research Between the inside and the outside Between pure technology focus and pure market focus Between managing by results and managing by effort

Basic & Applied research Basic (Tier 1) Often upstream to applied research Often motivated by curiosity, rather than by the pursuit of profit Often focused on the longer term Often generates significant spillovers Applied (Tier 3) Usually more downstream and closer to the market Often engaged in in the hope of profit Less likely to generate spillovers

Where on the S curve is basic researchlikely to be most important?PerformanceTimeTakeoffFermentMaturityDisruption

But: does basic research alwaysprecede applied work?Basic: Applied:

Understand the world Use that understanding to make widgets

How easy is it to make money from basic research?Appropriability is:TightLooseComplementary assets are:Freely available Tightly held

Is basic research always public research?Work for prestige, pleasureCuriosity drivenDirectly applied: make the widget workWork for money

Research before the World Wars Goal: Understand the worldFirst gentlemen& then Universities, FoundationsIncentive: prestige, fun, the social goodFirms Incentive: Make $$ Goal: Make the widget work

Research before the World WarsBasic, Curiosity driven researchApplied research Researchers motivated by the intrinsic interest of the problem, orientated to their peers, not to application

Choice of problems dictated by individual researchers on the basis of curiosity Researchers motivated by the desire to make money, have an impact on the world Choice or problems motivated by the needs of the market place

Research before the World WarsBasic research makes enormous progress, but few firms invest in it. Except the German chemical industryMany major technological advances driven by engineers tinkering Steel, SteamAnd technological advances that do use science use old, publicly available science Electricity Telephony

Sputnik and the World WarsGoal: Understand the worldIncentive: prestige, fun, the social goodGoal: Make the widget workIncentive: Make $$FirmsRadarThe Atom BombPenicillanThe man on the moon

After the WarsGoal: Understand the worldIncentive: Make $$Goal: Make the widget workIncentive: prestige, fun, the social goodCentralResearch LabsUniversities,FoundationsOffice of Naval ResearchNIHNASA DODTraditionalApplied Research

Corporate Research Labsin the Golden AgeBell LabsRCA Sarnoff LabsXerox ParcIBM & the Watson LabsGEAlcoaDuPontKodak

The Golden Age Research Model Build it and they will comeDo the very best science Make major breakthroughsTake them to the marketAnd get really richFor Example:

The transistorThe CAT scanner Cohen/Boyer patent NylonProtease Inhibitors

Core assumptions of golden age research Curiosity driven understand the problems and the applications will followNot overly constrained by financial or cost goalsHire the very best people and give them freedomStay closely connected to the university and to the community of public science

More recently:The Golden Age model in questionMany firms unable to capitalize on major discoveries, or benefits take years to emerge: The RCA disc Xerox PARC Kevlar Lucent & Bell LabsA significant number of breakthroughs come through close user/market contact, not from the corporate labs EVH examples, others

Why would a private firm ever invest in basic research?Monopoly power (Tight appropriability or tightly held complementary assets!)Maintain & attract key people (Do scientists pay to do good science?)Build absorptive capacity

Absorptive Capacity:What: The ability to take advantage of knowledge generated outside the boundaries of the firm, the function or the business unitWhy: Much key knowledge generated outside: Basic research Competitive research Knowledge elsewhere in the firmHow??

Building absorptive capacityReading the journals is not enough: to understand outside developments one must invest in the science - to decode the signal one must build a receiverThus it may be necessary to: Invest in basic or leading edge research Reward individuals on the basis of their standing outside the firm -- and to allow publication Give away key ideas in order to be a player Take part in joint ventures or industry consortia that keep the firm in the loopNotice that such research tourism will have to be managed/incented differently!

Current best practice attempts tobalance & integrate the two poles:Basicor fundamentalscienceAppliedresearch

Some firms continue to fund centralresearch aggressivelyBasicor fundamentalscienceAppliedresearchGenomics, Photonics Msoft, P&G

But others have moved away from central research completelyBasicor fundamentalscienceAppliedresearchIntel

A variety of approaches are used tobalance this tension:Explicit funding levels (Tier 1, Tier 2, Tier 3)Organizational structureControl over the central research budgetProcesses or temporary structures: cross functional teams, working groupsIn-bound marketing

Many companies set explicit funding levels:

Many firms give some control over central research funding to the business units

Or experiment with alternativeorganizational formsARScienceARARPDPDPDAR= Applied ResearchPD = Product developmentA= AcquisitionsAAA

Science

ARARARPDPDPDAAA

Other firms have experimented with hybrid organizational structuresCenters of Excellence Teams MatrixCEOBVABVBBVCfunction 1function 2function 3CEOBV1BV2BV3R&D Area 2R&D Area 3Heavyweight Project Team Degree of TeamLeader InfluenceTeam Leader ENGINEERINGMFGMKGMarket concepts

Pros Supports necessary scale for critical technologies Manage career paths Avoid redundancy Focused cross functional coordination More efficient development Development of teamand management skills Focused attention to multiple objectives Best of both worlds: coordination and specializationCons Difficult inter-unit communication Restricted view of whole Can become too removed from the business Confusion of team roles Shortage of good project management Death by many teams Degradation of fxnl skills Confusion of roles High overhead Powerful individuals tip the balance of power Worst of both worlds

All R&D structures have limitations that can (in principle) be managed with the right processesMaking Central Research more Decentralized Making Decentralized Research more CentralInstitute contracting mechanismwhereby Business Units can invest their R&D dollars by sponsoring projects in central researchCreate Councils comprising senior technical members (e.g. TDOs) from the business units to win endorsement for Research programs and ensure relevanceProvide communication mechanisms for central Research to showcase their programs (conferences, technology fairs, catalogs, trolling)Institute funding mechanisms that require project transfer to the business at a future date or require projects to win matching funds from the businessSupport internship programs that lend researchers to the businessesOrganize by product technologyEmploy Portfolio process that ensures balance between platforms, derivatives, and breakthroughsCreate cross-Business Councils responsible for synergies between research done within the businessesFund outside research in universities, start-up companies, or other outside organizationsCo-locate Decentralized R&D resources within central labs to promote synergy and preserve critical mass in scientific disciplines

Pay for PerformanceManaging technical professionals

Pay for PerformanceAssume that: Output, y = a + Where a is the action taken by the employee And is noise

Pay for Performance (2)Assume that compensation, w is: w = s + b.y Where s is salaryWhere w includes not only wages but all forms of compensation

Pay for Performance (3)Will technical professionals (scientists, engineers) work harder if b is increased?What will happen if b = 0?Are there any circumstances in which a technical professional would work as hard for the owner as they would if they were self employed?

Getting what you pay forManaging technical professionals

Getting what you pay forSuppose that we cannot measure (in a way that would hold up in court) the agents contribution to firm value, yBut we can measure p, an approximation to yLet w = s + b(p)

Getting what you pay for (2)Suppose: y = a1 + a2 + p = a1 + What will happen?

Getting what you pay for (3)Suppose: y = a1 + a2 + p = a1 + a3 + What will happen?

Getting what you pay for (4)Suppose: y = a1 + a2+ p = a3 +

What will happen?

Getting what you pay for (5) How likely are these problems to arise when managing technical professionals?