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| R&D in Industry
Charles F. Larson, IRI |
HIGHLIGHTS
INTRODUCTION This chapter reviews recent R&D investment patterns by U.S. industry, outlines projections for industrial R&D investment during 1999, describes some of the current changes in R&D organization and strategy, and summarizes results of the Industrial Research Institute's (IRI) annual R&D trends forecast for 1999. R&D INVESTMENT
 Figure 1. Strong growth in industrial R&D investment continued in 1998, making it the fourth consecutive year with increases above or close to double-digit percentage levels. The increase estimated for 1998 by the National Science Foundation's (NSF) Science Resources Studies Division was 9.7 percent, bringing industry's R&D funding to $144 billion (see Table I-11). IRI's trends forecast for 1999, indicating that the recent growth would moderate somewhat, was confirmed by Battelle's forecast that industry's funding would rise 9.3 percent, to $157 billion. The growth of R&D investment by industry since 1987 is shown in Figure 1. Year-to-year percentage changes are shown in Figure 2, indicating that 1993 was a significant turning point for industrial R&D investment in the U.S. It is expected that the recent strong growth will continue into 2000 and beyond.  Figure 2. Including government funding of R&D performed by industry with industry's own funding of R&D, Battelle indicates that total industry performance of R&D will be $179 billion in 1999. Government-funded R&D in industry is expected to increase slightly, interrupting perhaps temporarily a downward trend seen since 1988. Thus, industry will fund nearly 67 percent and will perform about 76 percent of the total of $236 billion that Battelle expects to be spent on R&D in the U.S. during 1999. The $179 billion in R&D that U.S. industry will perform this year represents well over one-third of the entire world's R&D effort. R&D ORGANIZATION While there are over 14,000 industrial R&D laboratories in the U.S., most of them employ only a few persons. On the other hand, some have many thousand, such as Bell Laboratories of Lucent Technologies, with over 24,000 employees. In addition to highly educated and talented human resources, most industrial labs have highly specialized, expensive equipment in addition to the usual tools for testing and analysis. The effective organization and management of these physical and human resources is essential to achieving the highest return on the financial resources being allocated for R&D. Organizational structure can influence the output of a laboratory, and varies by type of business, mission of the laboratory, personal preferences of the CEO and chief technical officer (CTO), and company tradition. In today's fast-paced environment, however, a laboratory's communications and networking structure is as important as its organizational structure, because information technology is having a major impact on R&D productivity. Nevertheless, R&D organizations are undergoing constant change in most companies, to align their work with the changing needs of their businesses. This trend is expected to continue in the quest for ever higher productivity and efficiency. The most typical organizational structure in large companies consists of one or more corporate or central R&D labs, plus one or more technical departments or labs in each business unit or division. DuPont, General Electric, and 3M are examples of these hybrid R&D organizations. Business-unit labs focus on development activities with shorter time frames. Central or corporate labs generally have longer and more fundamental research efforts with both current and future business potential. Funding of business-unit labs is usually supported entirely by the business units themselves. Funding for corporate labs may come from corporate resources, from business units, or from both. The past 10 years have seen a gradual shift away from corporate sources of funding and toward business units. It is estimated that 75 percent of all funding for industrial R&D comes from business units, up from 50 percent 10 years ago, but still well below the 90 percent level anticipated 10 years from now. A decentralized R&D organization is one in which there is no corporate or central laboratory. An example is AlliedSignal, which recently eliminated corporate funding for R&D and changed the title of its chief technical officer to Vice President and Chief Growth Officer. This person serves as a technical coordinator for the business-unit R&D labs and as a catalyst for the company's current focus on growth. Decentralization is seen as a way for R&D to be closer to the company's external customers. Some companies have a totally centralized R&D structure, with all funding from corporate headquarters. An example of a rapidly growing, centralized R&D organization is Microsoft, which is expected to become one of the top five industrial R&D investors in 1999. Most pharmaceutical companies also have centralized R&D activities. The advantage of this type of structure is control and coordination of technology development, and provision for discovery research. A unique organization for R&D is the 1990s-style skunk works unit, which may be located within a corporate lab or business unit, or elsewhere, but outside the control of either. The intent of a skunk works, which operates with a small, autonomous, counter-cultural team, is to conduct special projects that require exceptional achievements, such as rapid development or commercialization of a product or process. The number of such units in U.S. industry is surprisingly high and growing. R&D STRATEGIES Each company has its individual culture, its own innovation strategies, its unique competencies to support the strategies, and its individual management styles and control systems to execute the strategies. The current strategy in many companies is to carefully control R&D costs and to do more with less, while at the same time reducing time to market and managing for current and future growth. Globalization of product lines is another current strategy. Companies also want to maximize the return on their R&D investments and carefully protect their intellectual property, such as patents, trade secrets, and databases. IBM is a good example of this strategy. In 1998, they were again at the top of the list of companies receiving U.S. patentsfor the sixth consecutive yearand again received over $1 billion on royalties from those and earlier patents. Moreover, many of the 2,657 patents they were awarded in 1998 were already in commercial products, illustrating speed to market. Companies are using a variety of techniques to manage for growth. Examples include new products for existing markets or new products for new markets. Both categories include the potential for products that are not just new, but are revolutionary in that they change the nature of competition in an existing business, i.e., "change the rules of the game." Such breakthroughs may come from a skunk works, a manufacturing unit, or some other function in a company. The basis for breakthroughs is idea generation, creativity, and opportunity identification, not only from R&D but from other parts of a company as well. Thus, effective knowledge management throughout a company is also a key to growth and competitiveness. Other techniques in the quest for corporate growth are acquisitions and technical alliances. The volume of corporate acquisitions in 1998 was $1.7 trillion, double the amount in 1997 and a large share of the $2.2 trillion worldwide total. Indeed, the ten largest mergers in American history occurred in 1998. General Electric, for example, may have been the acquisition leader with 108, worth $21 billion. Lucent Technologies made 12 acquisitions; Cisco Systems made nine; and Microsoft made six, facilitated by the rising value of their stock. Acquisitions can strengthen existing technical competencies or provide new competencies for new lines of business or new markets. Corporate alliances are also growing rapidly due to the lower level of risk and the option for termination if they are unproductive. One-quarter of the earnings of America's top 1000 companies now comes from alliances, double that in the early 1990s. CEOs and their strategic planning teams allocate financial resources to R&D, new plant and equipment, human-resource development, acquisitions, advertising, and shareholder dividends, among other things. Growth in new plant and equipment has been running well ahead of R&D, but advertising has been rising somewhat less than R&D. The ratio of R&D to advertising expenditures varies by the type of product or service a company is selling, and by the type of market it is serving. Overall, industry spends almost as much on advertising as it does on R&D, but considerably less than it does on plant and equipment. Data Resources Incorporated has forecast a long-term decline in the growth rate of capital spending because technology can provide a higher return. A growing strategy for profitability in many companies is services, which will become a more important contribution in the next decade. General Electric and Xerox are good examples of this strategy. 1999 FORECAST IRI's annual trends forecast for industrial R&D in 19991, based on replies from 108 IRI member companies during August and September 1998, indicated somewhat reduced growth for industrial R&D in the U.S. The percentage of respondents planning increases in R&D of more than 5 percent was 22 percent, compared with 32 percent the year before, and the projected average increase in R&D budgets was 4.2 percent, compared with 4.8 percent for 1998. The reporting companies also expected an average R&D intensity (R&D as a percent of sales) of 3.0 percent (down slightly from the 3.1 percent that had been forecast for 1998), about the same level of attention to R&D by top management, and about the same level of growth of most other areas of activity, reflecting a continuation of the upswing in R&D funding seen in 1995. Highlights of the 1999 R&D trends forecast are summarized below:
CONCLUSIONS R&D investment by industry will reach some $157 billion in 1999, extending the significant increases first seen in 1995. Real gains continue to be made in research as well as development. Accompanying these strong gains in industry funding are constant changes in R&D organization and strategies. Development and protection of intellectual capital and new competencies are of utmost importance. Skunk works are one way to stimulate this development. Acquisitions and alliances are another. Effective management of knowledge, and the ability to adapt to change, are two critical keys for the future success of innovation and competitiveness in U.S. industry.
1 "Industrial Research Institute's Annual R&D Trends Survey for 1999," Research-Technology Management, January-February 1999, pp. 19-23. | |
