R&D effectiveness

Roads to R&D success – part 2

Posted on July 27, 2012 by Ray in Corporate growth, Decision making, Executive leadership, R&D measures, Visionary leadershp, Visionary organizations

This is the second part of a multi-part post. In part one (found here) we spent some time going over some prime examples of corporations that generated outsize success from their R&D activities, highlighting AT&T with Bell Labs, IBM with IBM Research, and Apple.

I see two viable models for outsized organic R&D success:

One is based on a visionary organizational structure which creates an independent R&D lab. IBM has IBM Research, AT&T had Bell Labs, other major companies have their research entities. These typically have independent funding not tied to business projects, broadly defined research objectives, and little to no direct business accountability. Such organizations can pursue basic research and/or advanced technology wherever it may lead.
The other is based on visionary leadership, where a corporation identifies a future need, turns completely to focus on the new market, devotes whatever resources it needs and does a complete forced march towards getting a product out the door. While these projects sometimes have stage gates, more often than not, they just tell the project what needs to be done next, and where resources are coming from.

The funny thing is that both approaches have changed the world. Visionary leadership typically generates more profit in a short time period. But visionary organizations often outlast any one person and in the long run may generate significant corporate profits.

The challenges of Visionary Leadership

Visionary leadership balances broad technological insight with design aesthetic that includes a deep understanding of what’s possible within a corporate environment. Combine all that with an understanding of what’s needed in some market and you have a combination reconstructs industries.

Visionary leadership is hard to find. Leaders like Bill Hewlett, Akio Morita and Bill Gates seem to come out of nowhere, dramatically transform multiple industries and then fade away. Their corporations don’t ever do as well after such leaders are gone.

Often visionary leaders come up out of the technical ranks. This gives them the broad technical knowledge needed to identify product opportunities when they occur. But, this technological ability also helps them to push development teams beyond what they thought feasible. Also, the broad technical underpinnings gives them an understanding of how different pieces of technology can come together into a system needed by new markets.

Design aesthetic is harder to nail down. In my view, it’s intrinsic to understanding what a market needs and where a market is going. Perhaps this should be better understood as marketing foresight. Maybe it’s just the ability to foresee how a potential product fits into a market. At some deep level, this is essence of design excellence in my mind.

The other aspect of visionary leaders is that they can do it all, from development to marketing to sales to finance. But what sets them apart is that they integrate all these disciplines into a single or perhaps pair of individuals. Equally important, they can recognize excellence in others. As such, when failures occur, visionary leader’s can decipher the difference between bad luck and poor performance and act accordingly.

Finally, most visionary leaders are deeply immersed in the markets they serve or are about to transform. They understand what’s happening, what’s needed and where it could potentially go if it just apply the right technologies to it.

When you combine all these characteristics in one or a pair of individuals, with corporate resources behind them, they move markets.

The challenges of Visionary Organizations

On the other hand, visionary organizations that create independent research labs can live forever. As long as they continue to produce viable IP. Corporate research labs must balance an ongoing commitment to advance basic research against a need to move a corporation’s technology forward.

That’s not to say that the technology they work on doesn’t have business applications. In some cases, they create entire new lines of businesses, such as Watson from IBM Research. However, probably most research may never reach corporate products, Nonetheless research labs always generate copious IP which can often be licensed and may represent a significant revenue stream in its own right.

The trick for any independent research organization is to balance the pursuit of basic science within broad corporate interests, recognizing research with potential product applications, and guiding that research into technology development. IBM seems to have turned their research arm around by rotating some of their young scientists out into the field to see what business is trying to accomplish. When they return to their labs, often their research takes on some of the problems they noticed during their field experience.

How much to fund such endeavors is another critical factor. There seems to be a size effect. I have noticed small research arms, less than 20 people that seem to flounder going after the trend of the moment which fail to generate any useful IP.

In comparison, IBM research is well funded (~6% of 2010 corporate revenue) with over 3000 researchers (out of total employee population of 400K) in 8 labs. The one lab highlighted in the article above (Zurich) had 350 researchers, covering 5 focus areas, or ~70 researchers per area.

Most research labs augment their activities by performing joint research projects with university researchers and other collaborators. This can have the effect of multiplying research endeavors but often it will take some funding to accomplish and get off the ground.

Research labs often lose their way and seem to spend significant funds on less rewarding activities. But by balancing basic science with corporate interests, they can become very valuable to corporations.

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In part 3 of this series we discuss the advantages and disadvantages of startup acquisitions and how they can help and hinder a company’s R&D effectiveness.

Image: IBM System/360 by Marcin Wichary

Roads to R&D success – part 1

Posted on July 24, 2012 by Ray in Executive leadership, IBM Watson, R&D measures, Visionary leadershp, Visionary organizations

Large corporations have a serious problem. We have talked about this before (see Is M&A the only way to grow, R&D Effectiveness, and Technology innovation).

It’s been brewing for years, some say decades. Successful company’s generate lot’s of cash but investing in current lines of business seldom propels corporations into new markets.

So what can they do?

Buy startups – yes, doing so can move corporations into new markets, obtain new technology and perhaps, even a functioning product. However, they often invest in unproven technology, asymmetrical organizations and mistaken ROIs.
Invest internally – yes, they can certainly start new projects, give it resources and let it run it’s course. However, they burden most internal project teams with higher overhead, functioning perfection, and loftier justification.

Another approach trumpeted by Cisco and others in recent years is spin-out/spin-in which is probably a little of both. Here a company can provide funding, developers, and even IP to an entity that is spun out of a company. The spin-out is dedicated to producing some product in a designated new market and then if goals are met, can be spun back into the company at a high, but fair price.

The most recent example is Cisco’s spin-in Insieme that is going after SDN and Open Flow networking but their prior success with Andiamo and it’s FC SAN technology is another one. GE, Intel and others have also tried this approach with somewhat less success.

Corporate R&D today

Most company’s have engineering departments with a tried and true project management/development team approach that has stage gates, generates requirements, architects systems, designs components and finally, develops products. A staid, steady project cycle which nevertheless is fraught with traps, risks and detours. These sorts of projects seem only able to enhance current product lines and move products forward to compete in their current markets.

But these projects never seem transformative. They don’t take a company from 25% to 75% market share or triple corporate revenues in a decade. They typically fight a rear-guard action against a flotilla of competitors all going after the same market, at worst trying not to lose market share and at best gain modest market share, where possible.

How corporation’s succeed at internal R&D

But there are a few different models that have generated outsized internal R&D success in the past. These generally fall into a few typical patterns. We discuss two below.

One depends on visionary leadership and the other on visionary organizations. For example, let’s look at IBM, AT&T’s Bell Labs and Apple.

IBM R&D in the past and today

First, examine IBM whose CEO, Thomas J. Watson Jr. bet the company on System 360 from 1959 to 1964. That endeavor cost them ~$5B at the time but eventually catapulted them from one of many computer companies to almost a mainframe monopoly for two decades years. They created an innovative microcoded, CISC architecture, that spanned a family of system models, and standardized I/O with common peripherals. From that point on, IBM was able to dominate corporate data processing until the mid 1980’s. IBM has arguably lost and found their way a couple of times since then.

However as another approach to innovation in 1945, IBM Research was founded. Today IBM Research is a well funded, independent research lab that generates significant IP in super computing, artificial intelligence and semiconductor technology.

Nonetheless, during the decades since 1945, IBM Research struggled for corporate relevance. Occasionally coming out with significant IT technology like relational databases, thin film recording heads, and RISC architectures. But arguably such advances were probably put to better use outside IBM. Recently, this seems to have changed and we now see significant technology moving IBM into new markets from IBM Research.

AT&T and Bell Labs

Bell Labs is probably the most prolific research organization the world has seen. They invented statistical process control, the transistor, information theory and probably another dozen or so Nobel prize winning ideas. Early on most of their technology made it into the Bell system but later on they lost their way.

Their parent company AT&T, had a monopoly on long distance phone service, switching equipment and other key technologies in USA’s phone system for much of the twentieth century. During most of that time Bell Labs was well funded and charged with advancing Bell system technology.

Nonetheless, despite Bell Labs obvious technological success, in the end they mostly served to preserve and enhance the phone system rather than disrupt it. Some of this was due to justice department decrees limiting AT&T endeavors. But in any case, like IBM research much of Bell Labs technology was taken up by others and transformed many markets.

Apple yesterday and today

Then there’s Apple. They have almost single handedly created three separate market’s, the personal computer, the personal music player and the tablet computer markets while radically transforming the smart phone market as well. In every case there were sometimes, significant precursors to the technology, but Apple was the one to catalyze, popularize and capitalize on each one.

Apple II was arguably the first personal computer but the Macintosh redefined the paradigm. The Mac wasn’t the great success it could have been, mostly due to management changes that moved Jobs out of Apple. But it’s potential forced major competitors to change their products substantially.

When Jobs returned, he re-invigorated the Mac. After that, he went about re-inventing the music player, the smart phone and tablet computing.

Could Apple have done all these without Jobs, I doubt it. Could a startup have taken any of these on, perhaps but I think it unlikely.

The iPod depended on music industry contracts, back office and desktop software and deep technological acumen. None of these were exclusive to Apple nor big corporations. Nevertheless, Jobs saw the way forward first, put the effort into making them happen and Apple reaped the substantial rewards that ensued.

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In part 2 of the Road to R&D success we propose some options for how to turn corporate R&D into the serious profit generator it can become. Stay tuned

To be continued …

Image: Replica of first transistor from Wikipedia

Posted on March 9, 2010 by Ray in R&D measures, Strategy, Visionary leadershp

A recent Gizmodo blog post compared a decade of R&D at Sony, Microsoft and Apple. There were some interesting charts but mostly it showed that R&D as a percent of revenue, fluctuates from year to year and R&D spend has been rising for all the companies (although at different rates).

R&D Effectiveness, (C) 2010 Silverton Consulting, All Rights Reserved

Overall from a percentage of Revenue basis, Microsoft wins, spending ~15% of revenue on R&D over the past decade, Apple loses, spending only ~4% on R&D and Sony is right in the middle at spending ~7% on R&D. Yet viewing the impact on corporate revenue R&D spending had significantly different impacts on each company than what pure % R&D spending would indicate.

How can one measure R&D effectiveness.

Number of patents – this is often used as an indicator, but unclear how this correlates to business success. Patents can be licensed but only if they prove important to other companies. However, patent counts can be gauged early on during the R&D activities rather than much later when a product reaches the market.
Number of projects – by projects we mean an idea from research taken into development. Such projectst may or may not make it out to market. At one level this can be a leading indicator of “research” effectiveness, as this means an idea was deemed at least of commercial interest. A problem with this is that not all projects get released to the market or become commercially viable.
Number of products – by products, we mean something sold to customers. At least such a measure reflects that the total R&D effort was deemed worthy enough to take to market. How successful such a product is still to be determined.
Revenue of products – product revenue seems easy enough but often can be hard to allocate properly. Looking at the iPhone, do we count just handset revenues or include application and cell service revenues. But assuming one can properly allocate revenue sources to R&D efforts, one can come up with a revenue from R&D spending. The main problem with revenue generated from R&D ratios are all the other non-R&D factors confound it, e.g., marketing, manufacturing, competition, etc.
Profitability of products – product profitability is even messier than revenue when it comes to confoundability. But ultimately profitability of R&D efforts may be the best factor to use as any product that’s truly effective should generate the most profits.

There are probably other R&D effectiveness factors that could be considered but these will suffice for now.

How did they do?

Returning to the Gizmodo discussion, their post didn’t include any patent counts, project counts (only visibly internally), product counts, or profitability measures but they did show revenue for each company. From a purely Revenue impact one would have to say that Apple’s R&D was a clear winner with Microsoft a clear second. Although we would have to say that Apple started from considerable smaller revenue than Sony or Microsoft but Apple’s ~$148B of revenue in 2005 was only small in comparison to other giants. We all know the success of the iPhone and iPod but they also stumbled on the Apple TV.

Why did they do so well?

What then makes Apple do so good? We have talked before about an elusive quality we called visionary leadership. Certainly Bill Gates is as technically astute as Steve Jobs and there can be no denying that their respective marketing machines are evenly matched. But both Microsoft and Apple were certainly led by more technical individuals than Sony over the last decade. Both Microsoft and Apple have had significant revenue increases over the past ten years, that parallel one another while Sony, in comparison, has remained relatively flat.

I would say both Microsoft and Apple results show that “visionary leadership” has a certain portion of technicality to it that can’t be denied. Moreover, I think that if one looked at Sony under Akio Morita, HP under Bill Hewlett and Dave Packard or many other large companies today, one could conclude that technical excellence is a significant component of visionary leadership. All these companies highest revenue growth came under leadership which had significant technical knowledge. There’s more to visionary leadership then technicality alone but it seems at least foundational.

I still owe a post on just what constitute’s visionary leadership, but I seem to be surrounding it rather than attacking it directly.