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How To Get Value from Industrial R&D

Charles Duke, Xerox Corporation

The competitive environment for industry has been transformed over the past 10 years. Markets, suppliers and partners have become globalized. Information technology has resulted in new ways to work. The international scene has changed from one of military to economic competition. The net result has been an industrial pace of unprecedented tempo and intensity, with profound effects on the working lives of physicists, especially those in industry.

So how does R&D contribute to the success of individual firms? Two commonly held models describe the process: the "big bang model" and the "evolutionary universe model," named after analogous models that physicists know well. A third, the "big brother model," deals with the macroeconomic value of research to a nation or society as a whole.

In the big bang model, novel research discoveries or inventions spawn entire new industries. Familiar examples include nuclear power and nuclear weapons (1940-1960), xerography (1960s), the transition from vacuum tube to semiconductor electronics (1960-1980), the switch from propeller to jet aircraft (1950s), and the rise of the personal computer and the Internet (1980 to date). These new industries have a fragmented structure, containing many competing firms, particularly small ones. New products evolve rapidly, being generated in a highly creative but often relatively unstructured fashion.

In the evolutionary universe model, existing technology is continually refined, driven by gradual changes in market, manufacturing and technology - particularly technology generated by R&D. Familiar examples include electric power, jet aircraft, cars with internal combustion engines, and xerographic copiers after their initial development. The model is characterized by mature markets and an established industry structure containing relatively few, mostly large firms. Personal computer software and hardware is evolving rapidly into this model. Waves of evolutionary technological change are interspersed with quiescent periods, during which only minor variants of existing products are launched. Marketing, manufacturing and product development are all highly structured.

The big brother model, however, is a macroeconomic construct, in which government investment in R&D is believed to drive macroeconomic growth on a national scale. The public investment supplies pre-competitive knowledge, technology and trained personnel as inputs to the big-bang and evolutionary-universe models. The big brother approach presumes that R&D investment and macroeconomic growth are correlated, without inquiring into the detailed mechanisms within firms and industries by which this correlation is generated. The model is characterized by publicly funded research at universities, government institutes, and private contractors. Examples include national military prowess enabled by R&D, especially during the Second World War and Cold War; and technology foresight programs like those in the United Kingdom, Australia and Japan. Research funds are provided by government agencies or by site funding mechanisms, such as overhead charges on military procurements. This is the environment in which most physicists have spent their professional careers.

Selecting the Right Model

So which model works? Well it depends. The way in which R&D contributes to a firm's success depends on which quadrant of the "market-technology" matrix, shown in the figure, that the company lies in. For example, the big bang model is most appropriate for those working with emerging technologies in emerging markets. For companies with established technologies in established markets, the evolutionary universe model is more relevant. The established technology/emerging market quadrant belongs to the "global marketeers" — firms like Coca-Cola and McDonald's, which take Coke and Big Macs to developing economies. For them, physical science research, as opposed to market research, is irrelevant to their success.

Meanwhile, the established markets/emerging technology quadrant is the province of technology explorers, who seek to satisfy recognized needs in new ways. This is difficult to do. History is replete with the wreckage of firms that were dominant when one technology held sway, but failed to make the change to another. (Remember when the now-defunct RCA dominated color TV production, or when General Electric was an important vacuum tube manufacturer?) Firms wishing to succeed in this quadrant must combine advanced technology with a keen insight into how to package it in order to satisfy an understood market need in a dramatically new fashion. This activity transcends physical science research in its conventional sense.

However, when it comes to setting national macroeconomic policy, no clear answer suggests itself. The devil is in the details. A nation must span all four quadrants: One size does not fit all. The big brother model is an article of faith, based on military successes that were generated in large part by circumstances and policies beyond its purview. In today's global economy the validity of this thesis is being tested in real time, and we can no longer be sure that it will remain appropriate. Physicists cannot assume with confidence that the future will be like the immediate past.

New Industrial R&D Paradigm

What is a firm to do? A large diversified firm has no "right" model of R&D value. Instead, each individual segment of its businesses must embrace the model that describes it best. Large firms like Xerox seek to institutionalize the pursuit of value from R&D by adopting management and funding policies that encourage this process. In particular, management policies are designed to focus R&D activities on meeting customer needs. In Xerox, we do this through a structured market-technology-product development process which we call "time to market". This process encompasses all the steps from market and technology identification, through product definition, design and delivery to delighting the customer.

The time-to-market process is structured so that the process can be improved from year to year, the hallmark of any quality company. It ensures that new ideas and discoveries of researchers are quickly cast in the form of "technology investment options," which are "actionable" propositions for new Xerox businesses. Therefore when deciding which of the many good ideas to scale up and pursue, both the business and the technical aspects of the idea are considered in a balanced way.

To realize the benefits from its R&D investments, a firm must invest far more in its product design, delivery and manufacturing processes than in R&D. The rule of thumb is that for every $1 invested in R&D, a company should spend $10 in product design and $100 in product delivery and manufacturing. R&D investment per se is rarely the limiting factor in generating economic growth. More often, the product design, delivery and manufacturing costs form the bottleneck.

By using different funding mechanisms for different classes of R&D, Xerox incorporates the insight gleaned from the market-technology matrix into its own R&D funding process. The company also adopts specific R&D management practices to focus the attention of every employee on the fact that the primary goal of R&D is to create business value. The company's researchers co-develop business options; they do not "transfer technology" in the conventional sense. Researchers — working both on their own and in teams — are empowered to define and solve business problems, and are rewarded financially in proportion to the value of their solutions. Last, but by no means least, most "basic" (knowledge-oriented) research is done in partnership with universities, on topics such as materials research and control theory.

Array of hope — the way that R&D contributes to a firm's success depends on which quadrant of the “market-technology matrix” the company lies in.

Impact on Physicists

The new paradigm I have described exerts a profound impact on the individual players who practice it. There are three classes of players: those who make things happen, those who help things happen, and those who watch things happen.

Those who make things happen are the committed players, who work directly on industrial R&D as an employee or contractor. They play by the paradigm's rules, and they create value for modern industrial firms. Those who help things happen are the company's partners, be they universities, government institutes or contractors. They may have their own agendas, but they must nevertheless deliver their contribution to industrial value creation under the new paradigm in their role as suppliers. Those who watch things happen comprise the bulk of the physics profession. Supported generously by government largess for more than three decades until recently, they could - and often did - look with disdain at the supposedly mundane world of industry. Unfortunately, young physicists cannot enjoy this luxury because according to statistics collected by the American Institute of Physics, at best one in seven of them in the U.S. will find "traditional" physics employment.

For those who are or wish to be "players" in industrial R&D, you might consider three actions. First, the big bang value system is inappropriate in your new life; discard it. Second, commercial value rather than technical novelty or elegance is rewarded; so generate it by doing the right thing. Third, structured work processes that lead to continuous improvement are an essential vehicle for generating value at a competitive cost; embrace them by doing the right thing the right way. These may not be lessons you learned in college, but you ignore them at your peril.

The new global competitive environment has made firms take a more focused approach to their R&D investments, and the new industrial R&D paradigm described above has replaced the rather more comfortable one based on the big brother model of the past. The future, at least in industry, belongs to those who recognize this fact and exploit it.

Charles Duke is vice president and senior research fellow of corporate research and technology at Xerox Corporation in Webster, New York. Adapted from an article in PHYSICS WORLD, Volume 10, number 8, August 1997, pp. 17-18.