Pfizer says 24% cut in R&D is good for the company

Most high tech companies have ferociously guarded their R&D spending even through the great recession. In fact, cuts in R&D spending have been much smaller than the reduction in revenues. Hence, the R&D as a fraction of overall expenditure has actually increased through the recession. It is known that R&D spending does not guarantee increased profits. Many observers have pointed out that companies might actually be protecting the wrong investments.

Reuters had an interesting article recently about Pfizer cutting their R&D budgets by 24% in 2011 (See Pfizer R&D chief upbeat despite smaller budget):

Mikael Dolsten, Pfizer’s president of worldwide research and development, said making choices about research priorities was a ‘sign of a healthy company culture.’ ‘Our action was more a thoughtful deliberation after looking at how the industry has performed as a whole,’ Dolsten said in an interview on the sidelines of the Bio-Windhover Pharmaceutical Strategic Outlook conference in New York. ‘We feel that the amount of investment in R&D that we are committing to is really the right number to drive the priorities we have put in place.’

May be the cut in R&D spending will actually force managers to think through the R&D pipeline and remove pet projects and dead wood. This is especially important because Pharma R&D seems to have declined in efficiency and return on R&D investments have been falling (See Big pharma’s stalled R&D machine).

However, it is also quite common for CTOs to claim that cutting R&D budgets is a good thing AFTER the R&D funding has been cut. TI’s CTO suggested that their 25% cut in R&D spending actually sharpened their focus. What can R&D managers do to actually get the positive results? Freescale’s CTO made some great points about cutting R&D budgets:

Have a clearly defined strategy that drives investment decisions

Decide on what R&D you are NOT going to do and what you are.

Decide what R&D will be done internally and what will be outsourced to strategic partners

Tie marketing into the R&D planning and align roadmaps with customers

Great advice because pet projects have a way to stick around no matter what. Also, 90% of all cost cuts are reversed in three years unless there is a purpose and drive behind them. Here are some portfolio management best practices that you could follow. There is a lot more about portfolio balancing here.

Does modularity reduce innovation?

The Journal for Product Innovation Management had an interesting article on The Impact of Product Modularity on New Product Performance. We recently discussed the benefits of modularity to combat component shortages (Impact of component shortages on R&D). The article points out that modular design may have an impact on innovation. Availability of a large number of alternate modules allows designers to try multiple alternate solutions and select the best alternate:

In light of problem solving, system complexity, and dominant design theories, some researchers suggest that modular product design promotes product innovation through experimenting with many alternative approaches simultaneously. This leads to rapid trial-and-error learning and accelerates new product introduction.

The problem with modularity is that it requires compatibility and limits the solution space because modules need to fit together. Also, if a module is fulfilling 80% of the requirements is available, designers may not push for the rest and hence not be as innovative.

However, others argue that modular product design inhibits innovation because common modules can be overly reused, the degree of freedom for innovation is limited due to module compatibility, and knowledge sharing among module teams is weakened.

The paper has results based on a survey of 115 electronics companies that suggest that the relationship between modularity and innovation is indirect. The main recommendation is for R&D managers to be vigilant and monitor the negative impacts of modularity. One red flag may be too many alternate configurations. Another key concern is communication across different module R&D teams.

If there are any signs of diminishing product innovativeness, problems with poor communication across module teams, or excessive design alternatives, the manufacturers should stop further modularizing their products. Alternatively, manufacturers can take steps to reduce the negative effects of modularity. For instance, manufacturers can develop ways to strengthen communication among module teams. They can also use a set of design rules to reduce the number of design alternatives systematically or a design method to balance product commonality and differentiation during the development processes.

It is clear that as R&D becomes more modular, R&D teams for each module will become less engaged with other teams and more virtual. We have discussed several approaches to boost productivity or drive satisfaction in virtual teams. We could also try project networks to enhance communication.

Article first published as Does modularity reduce innovation? on Technorati.