R&D: USA, Europe and Japan increasingly challenged by emerging countries

This UNESCO report titled Research and development: USA, Europe and Japan increasingly challenged by emerging countries from few months ago has some interesting data:

While the USA, Europe and Japan may still be leading the global research and development (R&D) effort, they are increasingly being challenged by emerging countries, especially China.

I wish the report had a concise definition of what they include in R&D.  For example, according to the report, there are 1.1M researchers in China and the number in US is similar.  Does that include all product development engineers?  If so, the number sounds a bit low (1 in a 1,000 persons in China is an engineer?) .  In any case, one of the key reasons for the rise of emerging economies is the Internet:

This transformation is being helped by the extremely rapid development of the Internet, which has become a powerful vector for disseminating knowledge. Throughout the world, the number of connections leaped noticeably from 2002 to 2007. But this advance is even more significant in emerging countries. In 2002, just over 10 out of 100 people, globally, used the Internet. There are over 23 users per 100 today. And this proportion rose from 1.2 to 8 in the same period in Africa, from 2.8 to 16 in the Arab States, and from 8.6 to 28 in Latin America.

In any case, here is a bit of benchmark data about R&D  budgets:

Even if it is hard to quantify the effects of the 2008 financial crisis, the Report points out that the global recession could have an impact on R&D budgets, which are often vulnerable to cuts in times of crisis. American firms, which are among the most active in terms of R&D, slashed their budgets by 5 – 25% in 2009. As a result, the USA has been harder hit than Brazil, China and India, which has enabled these countries to catch up faster than they would have without the crisis. Finally the Report stresses the need to intensify scientific cooperation, particularly between countries in the South.

The full report is here.

Why effective R&D management is challenging

A recent article in Tech-On (Mitsubishi Unveils Ultra-high-speed Elevator for Skyscraper) highlights the challenges involved in managing R&D. First one being the number of technologies that need to come together:

To realize the world’s fastest speed of 1,080m per minute, Mitsubishi Electric used new technologies for higher safety, lifting height and comfort as well as for the motor for the winch.

Specifically, the 40+ mph elevator needed new ceramic brakes, new low weight elevator rope, a roller guide with anti-phase vibration, and a new aerodynamics shape to reduce drag.  R&D managers have to ensure all required subsystems mature simultaneously for the final product to be delivered. This is an R&D management challenge because most subsystems take years to develop and most organizations have many different products in the R&D pipeline at various stages of maturity. Maintaining visibility across such disparate projects is quite difficult.  However, guiding development (through resource investment) so that the technologies mature when needed requires a rare combination of technical and financial knowledge.  (See Prof. Teece’s research for some interesting perspectives)

A second major challenge is the number of engineering disciplines that need to be working together to realize the final product.  The ceramic brakes alone needed material scientists, thermal engineers, structural engineers and manufacturing engineers.  The aerodynamic shape required computational fluid dynamics in addition to overall design among other disciplines.  Coordinating all of these skillsets and disciplines, extremely challenging in itself, becomes even more difficult when we consider multiple companies and organizations involved in development.

Another key challenge results from integration required to build a product from subsystems.  Most physical systems have complex interactions and interdependencies.  For example, the new rollers not only impact the rails/guides, but also brakes, ropes, control systems etc. Hence any changes to the brake design will cascade into changes in all other subsystems.  R&D managers need to effectively coordinate and synchronize progress across these development projects.

How leaders kill meaning at work

I have been meaning to summarize the article How leaders kill meaning at work from McKinsey Quarterly:

“In our book and a recent Harvard Business Review article,3 we argue that managers at all levels routinely—and unwittingly—undermine the meaningfulness of work for their direct subordinates through everyday words and actions. These include dismissing the importance of subordinates’ work or ideas, destroying a sense of ownership by switching people off project teams before work is finalized, shifting goals so frequently that people despair that their work will ever see the light of day, and neglecting to keep subordinates up to date on changing priorities for customers.” 

But specifically, the article points out the following traps:

1. Mediocrity Signals: Executives encourage mediocre behavior through their actions, while describing greatness in missions statements.  For example, some executives talk at length about innovation, but innovation projects  never receive investments.  In one company the top executive asked to eliminate non-strategic R&D investments.  The portfolio manager ranked all the projects and developed a list lowest ranked projects.  The executive overruled the entire list without any justification (they were his pet projects).

2. Strategic “Attention Deficit Disorder”: Executives do not allow adequate time to mature strategic initiatives and see their results.  I have seen this many times.  Most new technology or product development takes time.  Executives loose interest and change priorities.  This is very demoralizing for R&D teams.

3. Complex bureaucracies lacking accountability: Many times executives set up complex organization structures to satisfy (mainly) executive politics.   Other times, there are overlapping roles and responsibilities.  In either case, there is lack of accountability for different functions.  One part of the organization not working hard impacts morale everywhere.

4. Unactionable strategies and goals: Many times executives set up big goals but most teams do not know what to do to achieve those goals.  In one company the executives wrote a strategic plan which said cut costs and improve innovation (literally).  They then proceeded to tell everyone to achieve those goals.  No one knew what to do!

It is essential for managers to avoid these traps.  One key would be to keep employee perspective in mind and provide clarity on how everyone can contribute.  Other is to assess if there is a disconnect between the executive team perspective and that of employees at large.

Sony’s Next President Announces Future Plans

A quick note about Sony’s new CEO from Sony’s Next President Announces Future Plans from Tech-On:

First, Hirai pointed out that the current electronics industry is suffering from commoditization and price drops and Sony is no exception. He said that, to survive this severe competition, he will have a strong heart and a sense of responsibility to lead the company and establish a “one-management” system that allows him to quickly make judgments on various issues.” 

 I guess one management system could be very important in a company as vast as Sony.  Otherwise, here are the new CEO’s top priorities:

As important measures that Hirai will take as a CEO, he mentioned (1) reinforcement of Sony’s core business, (2) rebuilding of its TV business, (3) reformation of its business portfolio and (4) acceleration of innovation.

Focus on the core business means become number one in digital imaging and grow in mobile phones.  In TV Sony wants to move away from the difficult LCD market (See the Economist for some background) to hopefully higher margin OLED and Crystal LED TV. The thought about OLED is interesting in that Sony just quit consumer OLED TV market (See Engadget).  Acceleration of innovation seems to mean focus on medical markets!

We should see how this turns out.

How to Innovate When Platforms Won’t Stop Moving

The article How to Innovate When Platforms Won’t Stop Moving in MIT Sloan Review has several interesting pointers towards R&D management:

Businesses must cultivate agility — the ability to adapt quickly to or even anticipate and lead change. Businesses must develop deep differentiating capabilities that enable them both to separate themselves from competitors and endure disruptions. Companies such as Apple and IBM show how agility and capabilities can enable organizations to shape-shift as industry models rapidly change.”

Prof. Cusumano has four suggestions on how to be more agile (rearranged based on needs for R&D):
1. Emphasis on flexibility: As markets, customer needs and platforms are changing rapidly, we need to change our development approach so products can be successful despite changes.  This is hard to do using current processes and tools for R&D management, however, it is good to keep in mind.

The key for many firms is not to always be creating plans and pushing products out to market but to find ways to react very quickly to new information or responses from customers and other partners to what you are doing or intending to do. 

2. Capabilities rather than strategy: One approach to flexibility is to develop capabilities that can be reused if market changes.  Capabilities are broad tools while products are targeted towards specific needs.  My suggestion is for R&D managers to characterize plans and projects as leading towards key capabilities in addition to products that satisfy particular strategies.  This way a minor change in processes can help lead us to flexibility.

For example, the future is unpredictable, so strategy needs to change, but companies can still build unique capabilities that provide a stable base for new products and services as well as help them navigate through change. 

3. Economies of scope rather than scale: In case flexibility adds costs to development, one way to make the business case for the additional investment is to see that a broad set of capabilities will let companies address more market niches.

Economies of scope are also useful here because customers today often want a variety of new products and features but do not want to pay much money for them. Companies need to go beyond traditional scale economies and find ways to leverage existing knowledge in the form of reusable components and frameworks to produce a variety of products and services as efficiently as possible.

4. Information Pull Rather than push:  To understand what capabilities to focus on, companies need better market information.

Managers also need to create mechanisms that “pull” information from the market in something resembling real time, such as customer-driven product development processes or production management systems that allow firms to change their product mix very quickly.

How do we identify what market information to focus on?  Look for “megatrends”:

Managers certainly need to ask themselves — and the smartest people they can find around themselves, inside and outside the company — what are the potential megatrends that could disrupt their businesses in the future or make their business models obsolete. In the industries that I study, for example, there have been two such trends emerging over the last several decades: the rising importance of industrywide platforms as opposed to stand-alone products, and the rising importance of services or service-like versions of products.

That brings us to platform-based design (PBD), which underlies points 1 to 3 above.  Prof. Cusumano is focusing on computing industry where platforms provide standards (e.g. PC, WCDMA, 802.11) and standard interfaces (e.g. PCI express, USB) that can be used to define flexibility.  There are other forms of platform-based design that can be used in industries such as medical devices which do not depend on standardization.  I recently presented a paper on this form of PBD.  Please email if you would like to find out more.

Finally, this focus on flexibility may require more significant changes than just R&D:

IBM did a number of studies and figured out that it had all these processes that were designed to ensure quality, but they also meant that it was extremely slow to develop anything new. Different markets, like the PC market and then later the Internet market, required much faster decision making. They didn’t require the same kind of quality standards, but different kinds of standards. And so IBM did decentralize its decision making, but without physically breaking up the company. IBM reorganized into a small number of groups that mapped better to how customers needed to integrate the new technologies.

Kodak’s 30-year Slide into Bankruptcy

The article What’s Wrong with This Picture: Kodak’s 30-year Slide into Bankruptcy in [email protected] makes some interesting points.  Here is my summary.  Kodak, once an industry leader and an innovator could not succeed because of the fear of cannibalizing existing film business.

The technology is one of countless innovations that Kodak developed over the years but failed to successfully commercialize, the most famous being the digital camera, invented by Kodak engineer Steven Sasson in 1975. Digital technology has all but done in the iconic filmmaker. Since 2003, Kodak has closed 13 manufacturing plants and 130 processing labs, and reduced its workforce by 47,000. It now employs 17,000 worldwide, down from 63,900 less than a decade ago.

The challenge in innovation is getting it into a product. Most companies either focus on incremental improvement of current products or long-term research.

Innovations that reach a middle ground — such as envisioning new product lines in the next two to five years — are much more elusive and often don’t have a champion pushing for them in the organization.

One of the root causes is that innovation disrupts the business model. Kodak made money on film and gave cameras away. They could not do the same with Digital imaging.

The company didn’t envision making money off cameras themselves, but rather the images it assumed people would store and print. “If you look at R&D, they were superfast. In terms of the business model, they were quite the opposite.

The problem is the the existing business model is the one generating all the profits.  It is very difficult to divert those into new competing business models (because most companies I know allocate R&D resources to each product line based on the revenues they generate). Furthermore, many times Wall Street expectations drive businesses away from innovation.

Over the years he watched digital projects lose battles for research dollars. Even though film’s market share was declining, the profit margins were still high and digital seemed an expensive, risky bet.

Furthermore, a successful business model leads companies to try to change the customer needs to fit existing business model instead of trying to change the business model to fit the market needs.

“It succumbed to inside-out thinking,” says Day — that is, trying to push forward with the existing business model instead of focusing on changing consumer needs. Accustomed to the very high film margins, the company tried to protect its existing cash flow rather than look at what the market wanted.

So, one lesson is to periodically ask the question about what is our core competency? What is our businessbeyond our business model – the way in which we are making money right now? Is our competency in customer understanding (e.g. Nordstrom), technological superiority (e.g. Intel) or execution efficiency (e.g. Walmart).  Then focus the investment around the competency:

Innovation is “the match between a solution and a need, connected in a novel way,” Terwiesch says. Kodak had a choice in how it pursued innovation: If it focused on the need, it would have to find new ways to take and store photos. If it focused on the solution, it would have to find new markets for its chemical coating technologies. Kodak’s competitor, Tokyo-based Fujifilm, focused on the solution, applying its film-making expertise to LCD flat-panel screens, drugs and cosmetics. “You have to make a decision: What are you as a company? Is it understanding the need or understanding the solution?” Terwiesch asks. “These are simply two very different strategies that require very different capabilities.

Another approach is to spin out companies that focus on new innovation and business model. It is hard to focus on disruptive innovation within an existing business.  

He recalls efforts in the 1980s to drive innovation by setting up smaller spin-off companies within Kodak, but “it just didn’t work.” Venture companies in Silicon Valley are “pretty wild,” Larish adds. “In Rochester, people come to work at 8 and go home at 5.”

On the other hand, the same problem makes spinning out businesses also hard.  Who is going to decide how much investment should go into which spin off?  Does one set up completely separate infrastructure for the spin off or bring it back once it succeeds?  How does one measure success of the spin off? Hence, once the spiral of business model driving the business starts, it is difficult to get out of it.

The digital era pushed Kodak into “a position of reacting,” and the company seemed to lose focus. “They had reorganization efforts … [and] brought in CEO after CEO. When you have that much disruption and change,” it becomes difficult to implement a long-term strategy

The final quote is one we should all remember:

“Don’t assume that just because you’re not willing to do it, somebody else won’t.”

Why Open Innovation is hard to implement

We have often discussed how innovation has become a buzzword with many myths surrounding what drives innovation. I was recently discussing Open Innovation with an R&D executive.  He made a pretty significant remark: There are lots of positive articles around open innovation, but there do not seem to be many balanced evaluations of the approach.  Fortuitously, [email protected] has an interesting note about The ‘Flip Side’ of Open Innovation that addresses some of the concerns. 

A lot of people have been writing about open innovation,” says Wharton management professor Felipe Monteiro. A typical example, he adds, is Procter & Gamble’s Connect + Develop strategy, which encourages collaboration with outside organizations as a way to bring new products to market faster and more efficiently. 

While the P&G approach “has gained a lot of traction,” Monteiro notes, it also raises questions about whether, and when, companies should be concerned about protecting their own knowledge. Monteiro’s research into this issue has led to a paper titled, “Does Strategic Protection of Knowledge Undermine the Effectiveness of External Knowledge Sourcing?” co-authored with professor Michael Mol from the Warwick Business School, and professor Julian Birkinshaw from the London Business School.

I am going to use the article as backdrop to summarize four key concerns about Open Innovation and why it appears that many companies are not really recouping their open innovation investments (much less earn a return on them).  We should all think carefully about these before investing in open innovation:

  1. Valley of Death: A key concern in innovation is getting it transitioned into delivered products.  Many companies I have worked with fail pretty frequently at this stage. We have discussed the valley of death extensively. The more disruptive (and hence the most valuable) the innovation, the more difficult it is to get it to market because it disrupts company culture and bureaucracy.  When accessing innovation from the outside, this becomes even more difficult because of “Not Invented Here” mentality.  Unless one can find an internal technologist or champion, open innovation just withers on the vine.  This is very hard to overcome and needs active management involvement.
  2. Trade Secrets Protection: We have often discussed how innovation is not about an aha moment or one brilliant idea.  Innovation happens at the interface of multiple disciplines and technologies.  (For example, iPhone could be seen as combining a capacitive touch screen with low power processing and an intuitive user interface.  Each was available in the market, but the integration generated value). To access innovation from the outside, companies will need to share their problems in enough detail that potential suppliers can describe solutions.  However, this description will also be available to all competitors – which defeats the whole purpose.
  3. Evaluation / Management costs: As discussed earlier, managers need to consider many potential issues before deciding on accessing any innovation from the outside.  A key issue that is forgotten is the time involved in evaluating innovation ideas.  Because of trade secrets related problems described above, most companies use open innovation to access ALL innovation.  Broad ideas need to be filtered before they can be sent to the technical teams – a task that requires management involvement.  Companies quickly realize that this is VERY expensive.  Even when ideas sound interesting, the value is difficult to estimate.  Innovation needs to be accessed when needed – we can not just let innovative ideas sit on a shelf and get to them when the need arises.  Innovative ideas require maturation and many cospecialized assets to get them to market.  This is not cheap to evaluate.
  4. Liability: When suppliers submit their ideas to companies, how should they be protected? Any implied protection exposes the company to potential litigation liability.  Disregarding inadvertent public release,  consider the possibility of independent discovery.  The company may have independently developed  ideas similar to those accessed through open innovation.  If they decide to use internal ideas, they might still be exposed to IP litigation.  Hence, most companies ask suppliers to submit ideas with all rights released!  Most people are not willing to do so…
I welcome comments…

More Effective Financial Incentives

Over the weekend I had a long discussion with a friend about Occupy Wall Street and what is wrong with our corporations. A few themes emerged that may actually be interesting for R&D management as well.  It has been shown that executive remuneration has grown much faster than average worker.  It is also felt that the pay is disproportionately large.

A key problem with driving executive performance is the inability to tie pay to performance.  Decisions made by executives have impact months (if not years) later.  So, rewards based on current stock price do little to guide executive performance.  Traditional approach has been to provide stock options that vest over a long period.  However, stock options have shown to be ineffective in driving performance.  This is mainly because the vesting of options does not have a direct relationship to the decisions made by the manager.  Stock price in the  future will depend on performance across multiple products. Furthermore, options will vest either with time, no matter what happens in the future.

So, here is a proposal: Why not tie rewards to performance based on actual performance of new products developed by a set of executives?  R&D executives are responsible for deciding which products to develop and how.  The primary and largest reward could be a fraction of the profits generated by these products when they actually reach the market (True Profit Sharing).  Most organizations develop (and maintain) a business case for pursing any new product.  Hence the executive reward can be built directly into that business case.  Boards of directors can monitor performance using the same business case.  This approach ties rewards to actual decisions executives make on new product development.

One concern of this approach might be that True Profit Sharing will generate bonuses over a long time frame.  Executives are also responsible for managing  R&D execution, operations and guiding sales. So, We need other bonuses that encourage performance for near and mid-term.  To do that, we can tie a part of bonuses to operational effectiveness:

  • Health of R&D pipeline (various metrics can be used) generates annual rewards (bonuses)
  • Cost and schedule performance of each new product generates near-term rewards
  • Third party reviews and market reaction when the product is introduced contributes to mid-term rewards
We can construct similar approaches for marketing, sales, manufacturing etc. This model has the advantage that each decision has direct consequences to rewards.  Just a thought…

A wake-up call for Big Pharma

Another interesting article in the McKinsey Quarterly “A wake-up call for Big Pharma” describes how big pharmaceutical companies are becoming less innovative. We had discussed the same trend in the past (Big Pharma’s Stalled R&D Machine). This chart from the article has great data about declining contribution of new products to the bottom line:

Some more evidence of this lack of innovation is in the Booze’s Global Innovation 1,000 list which does not rank pharma companies as very innovative.  The article further suggests that some fundamental changes are necessary:

The good old days of the pharmaceutical industry are gone forever. Even an improved global economic climate is unlikely to halt efforts by the developed world’s governments to contain spending on drugs. Emerging markets will follow their lead and pursue further spending control measures. Regulatory requirements—particularly the linkage among the benefits, risks, and cost of products—will increase, while the industry pipeline shows little sign of delivering sufficient innovation to compensate for such pressures.

The article suggests that the pharmaceutical industry might evolve away from vertically integrated model like the automotive industry.

A look at the evolution of the automotive industry may offer some lessons. For many years, it was vertically integrated and dominated by large, primarily Western corporations. But the value chain has been disaggregated into companies specializing in narrow parts of the process. Today, component manufacturers, design houses, and basic-materials companies share much of the industry’s revenues: the automakers are responsible primarily for the design of major components (such as engines), assembly, sales, and marketing.

This whole article is a very interesting read. I suggest you consider reading it.

Creating Leaders

The article The NY Jets’ Mike Tannenbaum and SAP’s Bill McDermott: Creating Leaders On and Off the Field in [email protected] has some interesting pointers for all R&D managers.

1. Provide precise and candid feedback (even when negative):

“The most important thing a leader can do is give people feedback,” McDermott said, recalling a meeting where an executive was complaining about a mistake made by an employee. “‘What did he say when you told him about it?’ I asked, but there was silence.” Employees deserve the respect of candor, McDermott noted, and they need to know what is expected of them and have a clear understanding of their employer’s strategy and culture.

2. Provide a big long-term vision that can get the team excited.

McDermott and Tannenbaum agreed that a leader has to focus on promoting an overall vision for his or her organization rather than dwelling on the small stuff.

“Our thing is to go big or go home,” McDermott said, noting that SAP has had many opportunities to buy companies that would catapult the firm into a new business category.

3. Be careful in selecting team members and look beyond resume / technical capabilities:

“When he was on the cell phone in the car, did he treat the person on the other end with respect? … How did he act with the waitress? Your character is what you do when no one is looking. That will make for a better team, where everyone knows what everyone else’s job is, and we all work together.”

Something we can all learn…