“R&D has received scant attention in management teaching and textbooks”

Ideas concerning the management of research and development have undergone rapid development in the last few years and several new management methods have come into use in companies. For eighty years or more R&D activity expanded in medium and large companies, but it has perhaps now reached saturation level. Scientists and engineers in companies often pursued research of their own devising while having only slight awareness of the commercial requirements. At the same time corporate managers tended to leave R&D to its own devices, both from a feeling that this was something they did not understand, and because R&D issues are never so urgent as the problems of production start-ups and market launches. This was often unwise because the products being launched determined the futures of the companies, yet were sometimes selected for development by R&D without due attention by senior management.

Company spending on R&D varies from 0.1 per cent of turnover to over twenty per cent, with an average of perhaps four per cent. Despite its importance R&D has received scant attention in management teaching and textbooks. R&D management almost never features in business school syllabuses or faculty lists, or in the indexes of standard management texts. It is however covered in really excellent handbooks of management.

“difficult but convincing tools”

New Thinking

Pressure for change has come from the deep worldwide recession of the early nineties causing companies to look closely at all classes of expenditure , and also from rather belated recognition of technology and innovation as competitive elements. It has been recognised that although competition does indeed take place on the classic grounds of efficiency, price, promotion and marketing, ownership of a technology can also give a profound advantage. Mastery of the difficult art of making silicon chips restricts that business to a few, while legal ownership of drug formulations enables pharmaceutical companies to make monopoly profits. Both of these advantages originate in the R&D laboratories of the companies concerned. Innovation is of course broader than technology development by R&D, and can occur for example when business advantage is gained simply by buying -in new technology machinery from outside. Innovation is a concern of all the company, and the role of R&D in this is best defined simply as that part of innovation which happens to be done by the people in the R&D department.

Major contributions to new thinking about the management of R&D are the concepts of “third generation R&D” brought together by the consultancy company Arthur D Little [Roussel et.al. 1991], the Stage-Gate system of managing new product development [Cooper 1993], portfolio management theory of R&D projects [Roussel et. al. 1991 and Cooper 1997] and the methodology of technology foresight. These provide difficult but convincing tools for managing an activity that has caused much anguish in the past, and they enable constructive dialogue to take place between R&D and the rest of the company.

“risk in return for the chance of greater reward”

The Nature of R&D

R&D work is intrinsically risky. Almost by definition R&D tries out new ideas to see how well they work, seeks information that is as yet unknown, and hopes for ideas as yet unthought of. This means that success cannot be commanded, and most R&D is managed in terms of probabilities. The laboratory is gambler territory. It is useful to contrast R&D with design, where the assumption is that all the knowledge required exists, and if the design is competent the product will work (see chapters 38, 44 and 45). Products that are designed tend to be of modest profitability because the knowledge required is likely to be fairly widely available. By moving into the unknown, R&D accepts risk in return for the chance of greater reward. Managers of R&D have to be able to live with a lot of failure.

“the question of how much should be spent on R&D has often been debated”

Creating Intellectual Capital

New technology creation is nowadays usually more important than capital asset creation. The old idea that a company exists to exploit a capital asset does not so often apply now, as can be seen by the fact that stock markets now often value companies at far more than the value of their capital plus assets. Software and biotechnology are clear examples of fields in which capital assets are trivial and copyrights, patents and know-how are much more important. A company can more usefully be viewed as existing to trade in these intellectual assets [Budworth, 1996]. Just as a traditional company had to make provision for renewing its capital assets as they wore out, so a modern company must make provision for continuously renewing its intellectual assets, and R&D often plays the major role in this. R&D spending depresses current profits, and the question of how much should be spent on R&D has often been debated. Budworth proposes that to maintain the current level of turnover in a mature company, the required ratio of R&D spend to turnover is equal to the ratio of the average expenditure on R&D per new product to the contribution per new product to revenues for the particular company. This can be calculated from records of past performance.

“work . . . by R&D and the company to develop a common language”

Three Generations of R&D

In the fifties and sixties it was felt that creativity must not be fettered, and the results of research were unpredictable, so a fixed percentage of turnover was given to the R&D department to spend on projects of its own devising. This was first generation R&D. The problem was that the company could go out of business while waiting for a new nylon or transistor to emerge. In the seventies and eighties second generation R&D decreed that no R&D would take place unless there was a customer in an operating division who was prepared to pay for it. The problem was that only short-term work was funded, and work which might start a new division or protect against long-term problems, was not undertaken. In the early nineties third generation R&D emerged, in which no simple formula is applied: instead considerable work has to be undertaken by both R&D and the company to develop a common language which enables them to work together to consider their best policy for committing work on the company’s technical future.