“content for their own R&D departments to work even for direct competitors”

There is one reservation to be made about what has been said in this chapter so far, which is that the methods described all apply to corporate R&D, just at a time when R&D can be seen to be undergoing fundamental change: much R&D is now being contracted out, and independent laboratories supply an increasing share of R&D. Surveys show that companies expect that this trend will continue, and that they will in the future buy-in most of their new development rather than source it in-house.

Companies are now willing to outsource even the pacing technology that is intended to give them their competitive edge. The term “virtual R&D” has been coined to describe a situation in which a company has no actual R&D laboratory, but by placing contracts for development and testing, by collaborating with others to procure pre-competitive research, and by establishing links with laboratories carrying out fundamental work, it can procure all the components of a complete R&D programme. An advantage of contracting out is that the work can go to wherever the best specialists and facilities are available. The pharmaceutical industry has for some time recognised that compliance testing of new drugs is a routine operation that they can contract out to specialised testing companies. The industry is now going further and arguing that all stages of the R&D process can be contracted out, even the initial drug discovery programmes, so long as ownership is secured by contract.

A company can prosper without carrying out R&D. Marks and Spencer argue that if it developed its own products then it would have to try to sell to the public whatever it happened to have developed, whereas it is better to concentrate on its speciality of understanding customer needs, and then source widely to meet those needs. R&D is then the concern of their suppliers. Companies around the world which mine tin or use tin in their products are content to buy technical information as and when needed from the International Tin Research Institute, which is sustained by contracts and service provision for a worldwide clientele.

Many companies are content for their own R&D departments to work even for direct competitors, and this is sometimes a stage towards floating these departments off as independent R&D companies.

“emerged as credible R&D contractors”

Independent R&D

A corporate R&D laboratory needs to convince the parent company that its costs are justifiable, and this has often been difficult. The independent laboratory is in business on its own account and has changed objectives. These are to be sure that the client is satisfied with each contract, and to make a profit on each activity. Independent laboratories typically sell to a world market, and a key objective for an independent laboratory is to be the best in the world in its specialist area. In the case of the water industry, hundreds of water companies worldwide are likely to have similar problems. When these industries are state-run, their laboratories tend to work cooperatively. Under privatisation, water companies tend to appoint technology managers to source new technology and to float off their laboratories. The independent laboratories each come to specialise in a narrow part of water technology, such as metering, purification or pipes.

Independent laboratories tend to do a different range of work from corporate laboratories or the government laboratories from which many have developed. This work includes far less long term research, and more consultancy, problem solving, information supply, market research, prototype development and initial manufacture. These laboratories are often companies limited by guarantee, so they are limited to organic growth. They sometimes spend their surpluses on supporting their own basic research in order to maintain their science bases. Some have a membership scheme whereby subscribing companies have access to their research results, and to an information service.

A rationale for independent laboratories is that it is a better deal for a company to take a licence on new technology than to develop it independently. Some laboratories do set out to create and own a particular technological capability, and do have a substantial licence income.

Many independent laboratories in the UK are members of AIRTO, the Association of Independent Research and Technology Organisations, P O Box 330, Cambridge CB5 8DU, England. Many university and government laboratories in the UK have emerged as credible R&D contractors, able to handle contracts, confidentiality and intellectual property rights issues.

“in favour of this resource of free or greatly subsidised research”

The problem of basic research

There is widespread complaint by companies that they are unable nowadays to justify doing long term research. They do “small r, large D” and they sometimes claim that the universities are ceasing to do research as well. Results of fundamental research may turn out not to be applicable to the company that pays for the work; benefits may accrue in the far future, beyond present management’s tenure; and results are usually made public and so are available to competitors. It can take a very long time for a fundamental research finding to turn into a company’s major profit earner. It took Chester Carlson twenty five years to develop the photocopier. Sir James Black’s research on Beta blockers took about twenty years to become a major revenue earner for ICI pharmaceuticals. During such a long time it is easy for management to lose faith in the project and close it down. After twenty years developing the vacuum interrupter used in power distribution, General Electric was put off by the failure of the first marketing attempts, and sold the technology very cheaply to Mitsubishi, who did very well with it. There is of course the difficulty of knowing which research projects will be winners and the very real danger of a long term project being a drain on resources long after its purpose has become irrelevant.

An argument in favour of a company employing its own researchers is that this is necessary in order to have access to the research output of the whole world in the company’s fields of interest. It is argued that research publications and conferences need to be assessed and interpreted by appropriate scientific specialists in the same way that a company needs legal specialist to interpret law books and cases.

The UK government supports large laboratories which carry out basic research and argues that these provide a science base which supports UK industry. Companies are often in favour of this resource of free or greatly subsidised research, but there are those who argue that the benefits are hard to identify and that the research output is available free to the world’s industries. Kealey [1996] argues that industry prospers when governments withdraw from supporting science.

Technology Foresight

One approach to the problem of long term research is to try to bring together those generating the research with those likely to be able to exploit it, before the research is committed or even formulated. Foresight exercises are carried out within large companies, within industrial sectors, and on a national scale. Foresight is a systematic methodology for collating expert views on likely long term technical, economic and social developments. Benefits are found to arise not just from the view of the future that results, but from the meeting together of researchers and research users. Corporate managements give their time to such extramural exercises in the hope that the information accruing will help their strategy processes. Governments hope to ensure that the research they fund will be in areas where they have industrial strengths able to exploit the likely results.

References and further reading

Budworth D 1996. Finance and innovation, Thomson Business Press.

Cooper R G 1993, Winning at new products, Addison Wesley.

Cooper R G, Edgett S J and Kleischmidt E J, 1997. Portfolio Management of New Products, Michael De Groot School of Business, McMaster University, 128 Main Street W, Hamilton, Ontario, Canada.

Kealey T 1996. The economic Laws of scientific research, Macmillan.

McNulty T and Whittington R 1992. Putting the marketing into R&D. Marketing Intelligence and Planning 10 (9) 10-16.

Newton D P and Pearson A W 1994. Application of option pricing theory to R&D. R&D Management 24(1) 83-90.

Roussel P A, Saad K N and Erickson T J 1991. Third Generation R&D, Harvard Business School Press.

For further information

Older books on R&D Management have been rendered out of date by the developments outlined here, and there are widely different situations ranging from corporate laboratories operating securely in the traditional manner through to well established independent laboratories. One description of the effects of changes in R&D towards accountability was given by McNulty and Whittington in 1992.