r&d competence & absorptive capacity

R&D Competence &Absorptive Capacity

The ideal R&D Organization is:

� Fast � Efficient � Close to the leading edge of Ð But close to the business

science and the customer � Generating critical Ð But able to take advantage

knowledge internally of outside developments � Creative and freewheeling � Staffed by the best people Ð But disciplined & focused

Ð 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 research likely to be most important?

Performance

Ferment

Takeoff

Maturity

Disruption

Time

But: does “basic” research always precede “applied” work?

Basic: Applied:

Understand the world Use that understanding to make widgets

How easy is it to make money from basic research?

Complementary assets are:Freely Tightly

heldavailable

Appropriability is:

Tight

Loose

Is “basic” research always “public” research?

Curiosity driven

Work for prestige, Work for money pleasure

Directly applied: make the widget work

Research before the World Wars

Goal: Understand the world

Incentive: prestige, fun, the social good

Incentive: Make $$

First “gentlemen” & then

Universities, Foundations

Firms

Goal: Make the widget work


“Basic”, “Curiosity driven” 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

“Applied” research

� 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


� “Basic” research makes enormous progress, but few firms invest in it. – Except the German chemical industry

� Many major technological advances driven by engineers “tinkering” – Steel, Steam

� And technological advances that do use science use old, publicly available science – Electricity – Telephony

Sputnik and the World WarsGoal: Understand the world


Incentive: Make $$

First “gentlemen” & then


Firms

Radar The Atom Bomb

Penicillan The Man on the Moon


After the Wars

Goal: Understand the world


Incentive: Make $$


Traditional Applied Research

NASA DOD

Office of Naval Research

NIH

Central Research Labs


Corporate Research Labs in the Golden Age

� Bell Labs

� RCA Sarnoff Labs

� Xerox Parc

� IBM & the Watson Labs

� GE

� Alcoa

� DuPont� Kodak

The Golden Age Research Model “Build it and they will come”

For Example:

The transistorDo the very best science

Make major breakthroughs

Take them to the market And get really rich

The CAT scannerCohen/Boyer patentNylonProtease Inhibitors

Core assumptions of “golden age” research

� Curiosity driven – understand the problems and the applications will follow

� Not overly constrained by financial or cost goals � Hire the very best people and give them freedom � Stay closely connected to the university and to the

community of public science

More recently:The Golden Age model in question

� Many firms unable to capitalize on major discoveries, or benefits take years to emerge: – The RCA disc – Xerox PARC – Kevlar – Lucent & Bell Labs

� A 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 unit

� Why: – Much key knowledge generated outside:

» “Basic” research » Competitive research » Knowledge elsewhere in the firm

� How??

Building absorptive capacity

� Reading the journals is not enough: to understandoutside developments one must invest in the science- “to decode the signal one must build a receiver”

� Thus 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 loop” � Notice that such “research tourism” will have to be

managed/incented differently!

Current “best practice” attempts to balance & integrate the two poles:

“Basic” or “fundamental” science


Some firms continue to fund central research aggressively

“Basic” or “fundamental” Genomics,

Photonics Msoft, P&Gscience


But others have moved away from central research completely

“Basic” or “fundamental” science

Intel


A variety of approaches are used to balance this tension:

� Explicit funding levels (Tier 1, Tier 2, Tier 3) � Organizational structure � Control over the central research budget � Processes or temporary structures: cross functional

teams, working groups � “In-bound” marketing

Many companies set explicit funding levels:

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

Or experiment with alternative organizational forms

PD PD

AR= Applied Research PD = Product development A = Acquisitions

PD

AR ARA R

Science

AR AR

PD PD PD

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Other firms have experimented with hybrid organizational structures

�Confusion of roles �High overhead �Powerful individuals tip the

balance of power �Worst of both worlds

�Confusion of team roles �Shortage of good project

management �Death by many teams �Degradation of fxnl skills

�Difficult inter-unit communication �Restricted view of whole �Can become too removed

from the business

Cons

�Focused attention to multiple objectives �Best of both worlds:

coordination and specialization

�Focused cross functional coordination �More efficient

development �Development of team

and management skills

�Supports necessary scale for critical technologies �Manage career paths �Avoid redundancy

Pros

MatrixTeamsCenters of Excellence

Heavyweight Project Team

Market

MFGMKGENGINEERING

Degree of TeamLeader Influence

Team Leader

Product Concept

BU 1 BU 2 BU 3

Ceo

R&D Area 1

R&D Area 2

R&D Area 3

BU A BU B BU C

Ceo

Function 1

Function 2

Function 3

All R&D structures have limitations that can (in principle) be managed with the right processes

� Institute “contracting” whereby Business Units can invest their R&D dollars by sponsoring projects in centralResearch

� Create Councils comprising senior technical members (e.g. TDOs) from the business units to win endorsement for Research programs and ensure relevance

� Provide communication mechanisms for central Research to showcase their programs(conferences, “technology fairs”, “catalogs”,“trolling”)

� Institute funding mechanisms that requireproject transfer to the business at a future date or require projects to win matchingfunds from the business

� Support internship programs that lend researchers to the businesses

� Organize by product technology

� Employ Portfolio process that ensures balance between platforms, derivatives, and breakthroughs

� Create cross-Business Councils responsible for synergies betweenresearch done within the businesses

� Fund outside research in universities, start-up companies, or other outside organizations

� Co-locate Decentralized R&D resources within central labs to promote synergy and preservecritical mass in scientific disciplines

Making Central Research more Decentralized Making Decentralized Research more Central

mechanism

Pay for Performance Managing technical professionals

Pay for Performance

� Assume 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 salary

� Where “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 for Managing technical professionals

Getting what you pay for

� Suppose that we cannot measure (in a way that would hold up in court) the agent’s contribution to firm value, y

� But we can measure p, an approximation to y

� Let w = s + b(p)

Getting what you pay for (2)

� Suppose: – y = a1 + a2 + �

– p = a1 + 1

– What will happen?


� Suppose: – y = a1 + a2 + �

– p = a1 + a3 + 1



� Suppose: – y = a1 + a2 + �

– p = a3 + �



� How likely are these problems to arise when managing technical professionals?

r&d competence & absorptive capacity

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