Flashpoint

By Charles F. Larson

(This throwback article originally appeared in the 2007 January-February issue of RTM as part of the journal’s 50th anniversary.)

Leaving Purdue in the spring of 1958, I had no idea that an organization called the Industrial Research Institute (IRI) had just launched the first issue of a new journal called Research Management (RM). The chair of the Editorial Advisory Board explained that this new publication was initiated because “we need one place to turn for the latest ideas regarding research management.” RM was, of course, sent to all Representatives of IRI, but it was also intended for use by research leaders in university and government labs, with an annual subscription price of $7.50. At that time, industrial R&D investment was $3.6 billion, total R&D investment in the United States was $10 billion, and the average salary of an R&D professional was $9,000.

Creativity in an Era of Linear Innovation

Coming in the era of Second-Generation R&D, in which innovation was nearly always perceived as a linear process, the first paper published in RM focused on “Creativity Techniques in Action,” written by three chemists from National Cash Register, one of whom, Bob Chollar, became chairman of IRI in 1961. They described the challenging development of carbonless paper at NCR in the 1950s (see “The Management of Research When Research-Technology Management was Born,” p. 21).

The strong interest in creativity was reflected by several papers and IRI meetings on the topic in the late 1950s, following up on a detailed study of creativity sponsored by IRI at the University of Chicago in the 1940s. Other topics covered in the early issues included free inquiry in industrial research, human resources, salary administration, R&D finances, patent policies, dual ladder, and job descriptions. The focus was largely on internal rather than external operations.

Stuart Schott’s paper in the Autumn 1959 issue asked, “Are Research Administrators Getting Lazy?” He was not implying that they were failing to put in the necessary time and thought to the solution of routine problems, but suggesting they were “proceeding in an arbitrary manner with the task of handling wisely the extremely complex gambling nature of the research process,” again touching on the need for free inquiry that was later addressed by Andrew Odlyzko’s article, “We Still Need Unfettered Research,” in the January 1996 issue of RTM. Indeed, the founder of IRI, Maurice Holland, wrote in the Winter1959 issue that “the biggest gamble in business is to do no research at all.”

Early Learning Programs

Learning programs were created by IRI in 1959, also with an initial focus on creativity. This activity was taken so seriously for nurturing first-line managers that proceedings of each session were summarized in RM. One IRI Representative even took a leave of absence from his company to monitor sessions and prepare the summaries.

At that time, all participants were men. In fact, all of the IRI representatives were male. The women in industrial research at Kodak, 3M, Procter & Gamble, and other member firms began to participate in IRI during the1960s. Study groups for mid-level managers were created soon thereafter, along with a three-week seminar for senior leaders in R&D to learn about finance, marketing and human-resource management. Other programs were developed in the 1970s–1990s, including study groups for women only.

Research-on-Research

From the mid-1960s, the challenge of managing the innovation process received increasing attention, leading to the creation of an IRI Research-on-Research Committee (ROR) in 1969. The first chair of ROR said, “More than any other area, R&D is managed by policies and practices stemming from folklore rather than facts. Thus, the goal of the ROR Committee was to develop pertinent, factual information on a variety of topics about the research process of interest to IRI members, working through its subcommittees.”

Five topics identified by a survey of the IRI membership provided the first areas of study by ROR. The topics were:

• Relationship of R&D to organizational objectives
• Project selection
• Creativity
• Evaluation of research results
• Relationship of R&D to other corporate functions

Articles on each of these studies were published in RM. Indeed, ROR studies have provided some 10 percent of the some 2,000 articles published in the journal over the years, providing a substantial body of knowledge on management of R&D, technology and innovation. Recent ROR projects include:

• Project selection and review under high uncertainty
• Advanced marketing and R&D
• Managing geniuses
• Measuring R&D effectiveness
• R&D leadership skills

Not surprisingly, these topics are nearly the same as the first five selected by ROR back in 1969, demonstrating that no simple formula exists for managing R&D, technology and innovation because of the changing conditions under which these processes operate. For example, the first note of global competition in RM came in a January 1971 article titled, “R&D in Japan—A Future That Will Challenge the U.S.” Since then, globalization of R&D and competitiveness have become the two most prominent challenges for technical leaders, along with outsourcing innovation. All three of these issues are also on the current list of ROR projects and are the real drivers of change in a new era of innovation.

Third- and Fourth-Generation R&D

During the 1970s, R&D began to work more closely with manufacturing and marketing, leading to a more team-based innovation process. This process later became known as Third-Generation R&D, linking R&D to corporate business strategy (1). This linkage was deemed by Edward B. Roberts to be one of the two most important keys for R&D success (2). The other key was accessing external technology, now known as open innovation, which was implemented by Procter & Gamble through its connect and develop strategy, prompted by a deal-making/technology-trading expo in 2000 (3).

A number of studies were published in the 1970s and1980s on the relative importance of market-pull and technology-push in innovation. Ultimately, it was concluded that both are needed. A similar argument arose in the 1980s about the relative importance of incremental versus radical innovation. Here again, it was agreed both are needed, but the discussion led to a series of studies on how to stimulate radical innovation through different management techniques and organizational patterns (4). William Miller calls this approach Fourth-Generation Innovation Management, emphasizing dominant design, different management practice and strong CEO leadership (5).

During the 1980s, the focus of technical leaders shifted from managing research to managing technology, i.e., the product of research. IRI chairman Warren Stumpe declared in a 1986 address that the most important challenge for technical leaders between then and the end of the century would be the effective management of new technology. Two years later IRI changed the title of RM to Research-Technology Management to reflect this priority.

Another issue for technical leaders has been the delicate tradeoff between managing for short-term profits versus developing new, risky technology to take advantage of long-term opportunities. This issue is more of a concern when the economy turns downward and R&D budgets come under pressure, and has been reflected as a priority in IRI’s list of “biggest problems” during those times.

Competitiveness

In the late 1980s, the United States found itself in the second ten of most-competitive nations. Dramatic changes during the early 1990s in board oversight, R&D organizational structures, and management practice rapidly moved the U.S. to a number-one ranking in global competitiveness, according to IMD in Switzerland. This position has not changed for 12 years. The May 2004 MIT Technology Review presented a global invention map describing the national innovation capacity of many nations in the world. The United States ranked first, followed by Finland, the UK, Japan, and Germany.

It is never easy, however, to stay on top. Everything goes in cycles. Thus, new actions in U.S. industrial R&D are essential to maintaining the top position in the years ahead. One area where the U.S. has led is in service R&D and innovation, providing a decided advantage over foreign competition. Others are process R&D and innovation, leading to the creation of hundreds of rapidly growing new firms such as Amazon, eBay, Yahoo!, and Google, plus supply-chain management, epitomized by Wal-Mart. The newest area of focus is invention on demand and acquisition of intellectual property, exemplified by Nathan Myhrvold’s start-ups Invention Science and Intellectual Ventures, and IBM’s new consulting service to help other firms develop more patents.

Numerous articles and presentations have covered these dramatic changes over the years, along with the vital importance of leadership and effective management practice (6–8). Leadership and management practice have been a primary focus of IRI since the ROR Committee was formed. A description of what the IRI membership thought industrial R&D might look like in 2008 was published in 1998 (7). A brief summary of the three most significant of these changes follows.

R&D Investment

As noted earlier, U.S. industry’s R&D investment was$3.6 billion in 1958 (9). Battelle’s projection for industrial R&D in 2006 was $212 billion, a 59-fold increase and an average annual rate of just under 9 percent (10). Impressive! During this time, there were only three periods when R&D investment slowed significantly: 1986–1987, 1992–1993, and 2001–2002. By 2008, industrial R&D should be up to $240 billion, with much of the increase accounted for by IT and biotech firms.

R&D intensity in various industries has remained fairly constant over the years, with an all-industry average around 4.4 percent for the past several years. Expenditures for basic research in industry grew from $252 million in 1958 to a projected $8.3 billion in 2006. Industry’s share of the total U.S. investment in basic research dropped from 27 percent in 1958 to an estimated 13 percent in 2006, but it is still there. Industry support of academic research grew from $24 million in 1958 to a peak of $1.52 billion in 2001. This support has slowly decreased since, partly due to growing concern with intellectual-property practices at many universities in the United States. Science suggested in 2005 that a cost-benefit analysis be carried out to determine if it may be time to reconsider the Bayh-Dole Act of 1980 (11).

R&D Human Resources, Productivity

The number of scientists and engineers in industrial R&D rose from 25,000 or so in 1958 to over 1 million today. This growth in human resources has been somewhat less than the increase in R&D investment due to the more-rapid increase in the cost—and capabilities—of capital equipment. As Paul Horn of IBM stated at IRI’s 1998 Annual Meeting, “information technology will change everything” (12).

IT has also greatly improved the productivity of research professionals, gradually reducing the professional headcount in many industrial R&D labs, although some are still growing rapidly. High-performance computing has evolved from an expensive in-house capital investment to an hourly rental charge from an outside vendor so the cost is incurred only when the service is used. Information systems have encompassed knowledge-management processes, an essential element for all R&D operations, along with competitive-intelligence capabilities.

Diversity in human resources, noted earlier, has become a key element for R&D success in understanding customer needs. The dual-ladder system, discussed in RM’s Summer 1958 issue, has become standard practice in most R&D labs. Effective performance appraisals are still a challenge and the review has moved from an annual exercise to a bi-annual or even a bi-monthly event. Some firms have outsourced their human-resource management, in addition to accounting and many other functions.

External sources for leadership development of research professionals, such as the IRI Study Groups described earlier, have shifted to internal programs conducted by in-house experts, senior leaders and outside consultants. Some of this shift was due to travel restrictions imposed within firms after Sept. 11, 2001. That date also had many other long-lasting impacts on the way business and R&D are operated in this country.

3M’s 15% “free time” policy in R&D, which led to the creation of “Post-it” notes and hundreds of other innovations, has expanded to Google’s 30% “free space” and “blue sky” time for its researchers. Creativity and idea generation, so prominent in RM’s early issues, continue to be a vital element in R&D success. Within GE, and many other firms, ideas are expected from all employees, not just those in R&D. The best way to transfer those ideas is still to transfer people.

The title of Director of Research, so common in the1950s, evolved into VP of R&D, Senior VP of R&D, Senior VP of S&T, Executive VP of Technology, Chief Technology Officer and, in 4G firms, to Chief Innovation Officer. The use of CIO, sometimes confused with Chief Information Officer, is still rare. The importance of titles has not changed and well-trained, well-managed, happy human resources remain the most important element in the innovation process.

R&D Management, Organization and Leadership

A pervasive culture of innovation has become essential for firms to compete in the global marketplace. It is often said that “innovation is the life blood of the game.” The April 24, 2006 Business Week reported that since 1995,the world’s 25 most innovative companies achieved 3%higher annual median profit-margin growth than the S&P Global 1,200 firms.

But a traditional R&D laboratory is no longer an essential element in the firm’s innovation strategy or organization structure. High-quality R&D can be done all around the world, resulting in a proliferation of new R&D labs in many other countries, notably China and India.

In 1998, one participant in an IRI workshop indicated that traditional R&D labs might disappear in the future. The speculation was that the R&D function would be subsumed under an innovation function carried out solely by computers and managed by marketing. Current trends are in this direction. R&D in many firms is being combined with external R&D by connecting with outside resources here and abroad. These resources include competitors, which would not have been considered back in1958, other firms, contract R&D labs, government labs, and universities. Some firms conduct all of their R&D at other firms or universities, with well over 100 contracts underway at any one time.

A new report from the Government-University-Industry Research Roundtable (GUIRR), titled “Here or There? A Creativity and idea generation are now a vital element in R&D success. Survey of the Factors in Multinational R&D Location,” emphasizes the important role of collaboration with universities in the global innovation system, along with the importance of intellectual-property protection. Survey respondents anticipated a decrease in technical employment in the U.S. and Europe over the next several years and an increase in technical employment in China and India.

Metrics for measuring R&D success, which were just evolving in 1958, were developed by IRI as the Technology Value Program (13). However, metrics remain a challenge to manage, particularly when overlaid with Six-Sigma practices in R&D. Along with quality, environmental awareness of processes and products has become an important part of the R&D process, particularly during this new decade. Stage-gate project and innovation management, which evolved in the 1970s and1980s concurrent with Third-Generation R&D, has permeated firms in most industrial sectors. R&D now collaborates on a team with other corporate functions. This seamless innovation will be further advanced in the future by new IT programs.

Although R&D now has a voice in setting corporate business strategy, CTOs still have to prove the value of the investment their firms are making in R&D. Thus, R&D metrics are particularly important to them, as are metrics for measuring innovation, three of which are new business development, profit margin, and shareholder value. R&D cycle times, which were as much as 5 to 10years in the 1950s, have steadily shortened to a few years and, in some cases, to a few weeks.

As mentioned earlier, entrepreneurship has become important in large firms. If one has a great idea, it is now possible to run with it quickly and help manage the new business. Another new responsibility for CTOs is the development of new business models that make a strategic difference. A recent summary of CEO views on the importance of corporate R&D concluded that they want R&D to be market-focused, collaborative and adaptive to change (14).

In the 1950s, most firms had a central R&D lab and technical support labs at manufacturing facilities. Decentralized R&D grew during the 1980s and was strong in the 1990s. Central labs held on, however, and are again considered essential. These labs are now known as Global R&D Centers or Global Innovation Centers, with fewer, higher-payoff projects. GE recently renamed its Global Research Center the House of Magic. It is generally agreed that no one organizational structure is best, but depends on the firm’s corporate culture, its manufacturing and marketing structure, and preferences of the CEO.

Unfortunately, the NIH (not-invented-here) syndrome remains alive and well in many labs, something that has not changed since 1958. It is also still nearly impossible to kill a project. The pressure on R&D leaders to do more with less has also grown steadily over the years. These trends are clearly counterproductive and should be changed. On the bright side, financial analysts, now seen regularly at IRI meetings, have come to understand and appreciate the value of long-range, science-based, strategic investment in R&D and technology. The last big change is that jackets and ties are out and casual dress is in, and not just on Fridays! Enjoy, but remember, everything goes in cycles.

Looking Ahead

What changes will the future bring for industrial R&D? Will current trends continue, or will there be even more radical changes? Most likely it will be the latter, and there will be more Houses of Magic before they transform into something else. New business strategies will drive major changes in R&D, enabled by new techniques to create knowledge and convert it into profitable products, processes and services. The U.S. investment in basic research, now almost equal to that of the rest of the world, will help drive the creation of thousands of new businesses.

A resurgence in capital investment and venture capital, combined with continued growth in industry’s R&D investment, will bring about dramatic change in business and society. In 2004, Business Week devised a new index combining R&D and capital spending, calling it the BW Investing for the Future Index. Biotech and IT firms led the way in their ranking based on the index. They will continue to lead, but other industries will evolve and compete in new areas of technology.

Quantum technology could offer nearly infinite computing and networking power in another decade or two, dramatically impacting the R&D function, making the need for imagination and creativity more important than ever. Researchers will have to be even more adaptable to change. The intellectual capacity of the R&D organization, supplemented by competitive intelligence and comprehensive internal data bases, will continue to grow to compete in the global marketplace. New ways of identifying threats to, and opportunities for, innovation and market leadership will evolve as an integral part of corporate culture. Simulation of all steps from concept development to manufacturing, in 3-D, will further shorten product-development times. Mind-driven control of computers and other equipment will become a key R&D and business tool. Risk-taking will truly be encouraged and rewarded. Project success will increase, but the payoff will have a shorter life span due to the rising flow of new technology from R&D labs just now being created in China, India, Russia, and other nations.

During IRI’s 50th Anniversary Meeting in 1988, IRI chairman Geoff Place looked ahead another 50 years to2038, suggesting the coming “trans-nationalization of industrial research” hand-in-hand with total multi-nationalization of markets, of competition, and of companies. It is clear that the times have moved faster than he could have imagined in 1988, for that scenario is coming closer to reality every day. What this will do for R&D, innovation, profits, and shareholder value in the future is unknown, but I can hardly wait to see. One conclusion is quite clear—competition will be even more intense and that will lead to a growing number of mergers and acquisitions. The firm you work for now will likely have a different name, and a new business model, within5 to 10 years. Complacent firms will no longer exist.

References

1. Roussel, Philip A., Saad, Kamal N. and Erickson, Tamara J. 1991. Third Generation R&D. Harvard Business School Press, Boston, MA.
2. Roberts, Edward B. 2001. Benchmarking Global Strategic Management of Technology. Research-Technology Management, Vol.44, No. 2, March-April, pp. 25–36.
3. Sakkab, Nabil Y. 2002. Connect and Develop Complements Research and Development at P&G. RTM, Vol. 45, No. 2, March-April, pp. 38–45.
4. Leifer, Richard, et al. 2000. Radical Innovation. Harvard Business School Press, Boston, MA.
5. Miller, William L. 2006. Innovation Rules! Research-Technology Management, Vol. 49, No. 2, March-April, pp. 8–14.
6. Larson, Charles F. 1980. Management for the 80’s—A Challenge to Change, Research Management, Vol. 23, No. 5, September, p. 7.
7. Larson, Charles F. 1998. Industrial R&D in 2008. Research-Technology Management, Vol. 41, No. 6, November-December, pp.19–24.
8. Larson, Charles F. 2001. Management for the New Millennium—The Challenge of Change. RTM, Vol. 44, No. 6, November-December, pp. 10–12.
9. National Science Board. 2006. Science and Technology Indicators 2006, Vol. 2, Arlington, VA.
10. Battelle. 2006. 2006 R&D Funding Improves Amid Increase in Restraints. R&D Magazine, January.
11. Kennedy, Donald. 2005. Bayh-Dole: Almost 25. Science, Vol. 307, March 4, p. 1375.
12. Horn, Paul M. 1999. Information Technology Will Change Everything, Research-Technology Management, Vol. 42, No. 1, January-February, pp. 42–47.
13. Tipping, James W., Zeffren, Eugene and Fusfeld, Alan R., 1995. Assessing the Value of Your Technology, RTM, Vol. 38, No. 5, September-October, pp. 22–39.
14. Radjou Navi. 2006. Does Corporate R&D Still Matter? RTM, Vol. 49, No. 4, July-August, pp. 6–7.

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Charles “Chuck” Larson is president of Innovation Research International, Washington, D.C., and president emeritus of the Industrial Research Institute, Inc. He served as chief staff officer of IRI and publisher of Research-Technology Management for 26 years, during which numerous initiatives were undertaken to help member firms develop new techniques to effectively manage and measure their R&D efforts. A Fellow of AAAS and a Life Fellow of ASME, he serves on the selection committee for the National Inventors Hall of Fame, the National Advisory Council for the Federal Laboratory Consortium, and several other boards and advisory committees. He received a B.S. in mechanical engineering from Purdue University and an M.B.A. from Fairleigh Dickinson University.