R&D Competence & Absorptive Capacity

1. R&D Competence & Absorptive Capacity

2. 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 The ideal R&D Organization is:

3. 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

4. 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

5. Where on the S curve is basic researchlikely to be most important? Maturity Performance Disruption Takeoff Ferment Time

6. But: does “basic” research alwaysprecede “applied” work? Basic: Applied: Understand the world Use that understanding to make widgets

7. Howeasy is it to make money from basic research? Complementary assets are: Freely available Tightly held Appropriability is: Tight Loose

8. Is “basic” research always “public” research? Curiosity driven Work for prestige, pleasure Work for money Directly applied: make the widget work

9. Research before the World Wars Goal: Understand the world First “gentlemen” & then Universities, Foundations Incentive: Make $$ Incentive: prestige, fun, the social good Firms Goal: Make the widget work

10. Research before the World Wars “Basic”, “Curiosity driven” research “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 ●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

11. Research before the World Wars • “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

12. Sputnik and the World Wars Goal: Understand the world Radar The Atom Bomb Penicillan The man on the moon Incentive: Make $$ Incentive: prestige, fun, the social good Firms Goal: Make the widget work

13. After the Wars Goal: Understand the world Universities, Foundations Central Research Labs Office of Naval Research NIH Incentive: prestige, fun, the social good Incentive: Make $$ Traditional Applied Research NASA DOD Goal: Make the widget work

14. Corporate Research Labsin the Golden Age • Bell Labs • RCA Sarnoff Labs • Xerox Parc • IBM & the Watson Labs • GE • Alcoa • DuPont • Kodak

15. The Golden Age Research Model “Build it and they will come” For Example: The transistor The CAT scanner Cohen/Boyer patent Nylon Protease Inhibitors Do the very best science Make major breakthroughs Take them to the market And get really rich

16. 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

17. 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…

18. 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

19. 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??

20. Building absorptive capacity • Reading the journals is not enough: to understand outside 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!

21. Current “best practice” attempts tobalance & integrate the two poles: “Basic” or “fundamental” science “Applied” research

22. Some firms continue to fund centralresearch aggressively “Basic” or “fundamental” science Genomics, Photonics Msoft, P&G “Applied” research

23. But others have moved away from central research completely “Basic” or “fundamental” science Intel “Applied” research

24. A variety of approaches are used tobalance 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

25. Many companies set explicit funding levels:

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

27. Or experiment with alternativeorganizational forms AR Science Science AR AR AR= Applied Research PD = Product development A= Acquisitions PD PD PD AR AR AR PD PD PD A A A A A A

28. Other firms have experimented with hybrid organizational structures Centers of Excellence Teams Matrix CEO CEO Heavyweight Project Team BV1 BV2 BV3 BVA BVB BVC Degree of Team Leader Influence Market function 1 concepts function 2 R&D Area 2 Team Leader ENGINEERINGMFGMKG R&D Area 3 function 3

29. All R&D structures have limitations that can (in principle) be managed with the right processes Making Central Research more Decentralized Making Decentralized Research more Central • Institute “contracting” mechanism whereby Business Units can invest their R&D dollars by sponsoring projects in central research • 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 require project transfer to the business at a future date or require projects to win matching funds 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 between research 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 preserve critical mass in scientific disciplines

30. Pay for Performance Managing technical professionals

31. Pay for Performance • Assume that: – Output, y = a + – Where a is the “action” taken by the employee – And is noise

32. 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

33. 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?

34. Getting what you pay for Managing technical professionals

35. 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)

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

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

38. Getting what you pay for (4) • Suppose: – y = a1 + a2+ – p = a3 + – What will happen?

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