RESEARCH AND DEVELOPMENT



Research and development (R&D) represents a large and rapidly growing effort in both industrialized and semi-industrialized nations. In 1997 the United States spent $151 billion on industrial R&D and $32 billion on military R&D, for a total of $183 billion, equal to 2.5 percent of the gross national product (GNP). Similar ratios exist for economically advanced countries, such as Germany, France, the United Kingdom, and Japan. In order to compete in the international marketplace, rapidly industrializing countries such as South Korea, Indonesia, and Brazil have national policies in place for developing indigenous R&D. The goal is substitution of strategic imports and development of exports. Major countries not politically aligned with the Western powers—notably Russia, China, and India, and to a certain extent, France and Israel—perform significant levels of R&D for defense purposes, in order (1) to be technologically and logistically independent from Western sources, and (2) to export arms to third world countries. South Africa, Iraq, and North Korea spent inordinate amounts of their limited GNPs for military purposes in the 1990s.

The reason for this increased emphasis on R&D is that it creates new or improved technology that in turn can be converted through technology management into a competitive advantage at the business, corporate, and national level. While the process of technological innovation (of which R&D is the first phase) is complex and risky, the rewards can be very high, as witnessed, for example, by GE Engineering Plastics. Started in 1957 and based on R&D, the business grew to $7 billion in sales by 1997.

The relationship between R&D and economic growth is complex, but several economic studies have come to the conclusion that it is very significant. The "social" rate of return of industrial and agricultural R&D is on the order of 50 to 70 percent, while the "private" rate of return is on the order of 25 to 50 percent. The reason that the private rate is approximately half the social rate is that the originator of R&D cannot appropriate all the benefits of innovations and must share them with customers, the public, and even competitors. The Strategic Management Institute determined that, at the business level, the return of R&D for 42 major U.S. corporations was 33 percent in 1978. Therefore, R&D is a good investment for business, but a risky one—the majority of R&D projects fail to provide the expected financial results, and the successful projects (25 to 50 percent) must also pay for the projects that are unsuccessful or terminated early by management .

OBJECTIVES AND TYPES OF R&D

The objective of academic and institutional R&D is to obtain new knowledge, which may or may not be applied to practical uses. In contrast, the objective of industrial R&D is to obtain new knowledge applicable to the company's business needs, that eventually will result in new or improved products, processes, systems, or services that can increase the company's sales and profits.

The National Science Foundation defines three types of R&D: basic research, applied research, and development. Basic research has as its objective a fuller knowledge or understanding of the subject under study, rather than a practical application thereof. As applied to the industrial sector, basic research is defined as research that advances scientific knowledge but does not have specific commercial objectives, although such investigation may be in the fields of present or potential interest to the company.

Applied research is directed towards gaining knowledge or understanding necessary for determining the means by which a recognized and specific need may be met. In industry, applied research includes investigations directed to the discovery of new specific knowledge having specific commercial objectives with respect to products, processes, or services.

Development is the systematic utilization of the knowledge or understanding gained from research toward the production of useful materials, devices, systems, or methods, including design and development of prototypes and processes.

At this point, it is important to differentiate development from engineering, which can be defined as utilization of state-of-the-art knowledge for the design and production of marketable goods and services. In other words, research creates knowledge, and development develops and builds prototypes and proves their feasibility. Engineering then converts these prototypes into products or services that can be offered to the marketplace or into processes that can be used to produce commercial products and services.

In modem industrial practice, the distinction between R (research) and D (development) is not always clear. At General Electric's (GE) R&D Center, a relatively small percentage (5 to 10 percent) of the total effort is devoted to "exploratory research," with results expected within a span of 10 to 15 years and no specific commercial applications. All the remaining efforts are lumped together and accounted for as R&D. Also, the relative importance of R&D varies according to a company's strategy and culture. Some companies, such as E.I. du Pont de Nemours & Co. and Sony, still rely heavily on research to eventually develop new products such as Kevlar or the VCR. Other companies prefer to conduct little or no research and instead develop new products from the results of research generated by others that may be generally available in the public domain or acquired legally. In the United States, Apple Computer Inc. and Microsoft Corp. conduct relatively little research but are exceptionally creative at development. The Japanese consumer electronics industry initially utilized the results of American and European research creatively and effectively to enter the international marketplace through new low-cost, high-quality products, which were developed, designed, and manufactured in a relatively short time. As technology became harder to acquire, many Japanese companies switched from development to research. For instance, in the 1950s, Toshiba was heavily dependent on GE's technology, but it now has a major independent R&D laboratory. Thanks to this change in R&D strategy, several Japanese firms have become world leaders in specific technological areas, for instance Canon in ink-jet printers, Toray in carbon fibers, Honda in small internal combustion engines, Fanuc in factory automation , and Toshiba in portable computers .

R&D AND TECHNOLOGY ACQUISITION

In many cases, technology required for industrial purposes is available in the marketplace, usually for a price. Before embarking on the lengthy and risky process of performing its own R&D, a company should perform a "make or buy" analysis and decide whether or not the new R&D project is strategically and economically justified.

The following influencing factors should be considered: proprietariness, timing, risk , and cost.

PROPRIETARINESS.

If a technology can be safeguarded as proprietary, and protected by patents , trade secrets, nondisclosure agreements, etc., the technology becomes the exclusive property of the company and the value is much higher. In fact, a valid patent grants a company a temporary monopoly for 20 years to use the technology as it sees fit, usually to maximize sales and profits. In this case, a high level of R&D effort is justified for a relatively long period (up to ten years) with an acceptable risk of failure. Typical examples are the pharmaceutical companies and some high-tech materials producers. For instance, more than ten years and expenditures in excess of $1 billion dollars were required by Pfizer to develop Viagra, a treatment for male impotence, but the potential market is very large and will continue for a long time. Similarly, GE developed man-made industrial diamonds in its research laboratory in the early 1950s. Although the original patents have expired, GE is still the world's leading supplier. Its major competitor, De Beers, acquired a GE license in the late 1950s and still produces diamonds with the GE process.

On the contrary, if the technology cannot be protected, as is the case with certain software programs, expensive in-house R&D is not justified since the software may be copied by a competitor or "stolen" by a disloyal employee. In this case, the secret of commercial success is staying ahead of the competition by developing continuously improved software packages, supported by a strong marketing effort. MapInfo, a new venture founded in 1986, developed the first software program for displaying maps and related databases on a personal computer. They are still the world leader, thanks to the improved and expanded versions of the original mapping system and to a broad spectrum of application packages issued regularly since first commercialization.

TIMING.

If the market growth rate is slow or moderate, in-house or contracted R&D may be the best means to obtain the technology. On the other hand, if the market is growing very fast and competitors are rushing in, the "window of opportunity" may close before the technology has been developed by the new entrant. In this case, it is better to acquire the technology and related know-how, in order to enter the market before it is too late. For instance, in December 1998 America Online acquired Netscape, the company with the most expertise in Internet browser software, in order to be able to compete effectively with Microsoft, Yahoo!, and many other Internet providers. Because of the Internet explosion, America Online had neither the people nor the time to develop its own proprietary software, and was consequently willing to pay $4.21 billion for Netscape.

RISK.

Inherently, technology development is always riskier than technology acquisition because the technical success of R&D cannot be guaranteed. There is always the risk that the planned performance specifications will not be met, that the time to project completion will be stretched out, and that the R&D and manufacturing costs will be higher than forecasted. On the other hand, acquiring technology entails a much lower risk, since the product, process, or service, can be seen and tested before the contract is signed. This is the reason why rapidly industrializing countries represent a major fast-growing market for technology available from the more advanced nations. In the past such countries acquired older, obsolescent versions of technology, but now they demand the latest, in order to be competitive in the global marketplace.

Regardless of whether the technology is acquired or developed, there is always the risk that it will soon become obsolete and be displaced by a superior technology. This risk cannot be entirely removed, but it can be considerably reduced by careful technology forecasting and planning. If market growth is slow, and no winner has emerged among the various competing technologies, it may be wiser to monitor these technologies through "technology gatekeepers" and be ready to jump in as the winner emerges. For instance, in the development of nonimpact magnetic printers, several technologies were researched and developed: lasers, laser xerography, electrostatic, magnetic, and ink jet. In the 1970s, GE jumped on the magnetic technology bandwagon without considering alternative technologies; after spending nearly $10 million and ten years to develop its product, the company found no takers for its poor performing printer. In the meantime IBM, Xerox, Honeywell, and several Japanese companies had developed successful printers using the other technologies listed above. In retrospect, GE could have reduced its risk by monitoring the various competing technologies through gatekeepers in its R&D center and by starting a crash program (as it did with computerized axial tomography, a medical diagnostic imaging system) as soon as the market was ready and the winning technology had emerged.

COST.

For a successful product line with a relatively long life, acquisition of technology is more costly, but less risky, than technology development. Normally, royalties are paid in the form of a relatively low initial payment as "earnest money," and as periodic payments tied to sales. These payments continue throughout the period of validity of the licensing agreement . Since these royalties may amount to 2 to 5 percent of sales, this creates an undue burden of continuing higher cost to the licensee, everything else being equal. On the other hand, R&D requires a high front-end investment and therefore a longer period of negative cash flow. There are also intangible costs involved in acquiring technology: the licensing agreements may have restrictive geographic or application clauses, other businesses may have access to the same technology and compete with lower prices or stronger marketing. Finally, the licensee is dependent upon the licensor for technological advances, or even for keeping up to date, and this may be dangerous. As a typical example, GE gave a general design and manufacturing license for heavy electrical equipment (hydraulic turbines, transformers, circuit breakers) to its subsidiaries in Italy, CGE (Compagnia Generale di Elettricita), and in Spain, GEE (General Electrica Espafiola), for only 1.5 percent of sales. The problem arose when GE Power Systems decided to abandon the three businesses and drastically cut back R&D on steam turbines. The GE subsidiaries were stuck with obsolescent technologies and had to scramble to find other sources, since they lacked the resources and the time to perform in-house R&D.

MOVING AHEAD WITH R&D

Once the decision has been made to perform R&D, the company should decide where and how such R&D should be carried out. There are various possibilities: in-house R&D in the company laboratories, externally contracted R&D, and joint R&D. In-house R&D commands a strategic advantage, since the company is the sole owner of the technology and can protect it from unauthorized uses. In addition, since R&D is basically a learning process, the company can develop a group of experienced scientists and engineers that can be employed in developing more advanced products and processes and in transferring the results of their R&D to operations and to customers. Since R&D personnel do not like to work alone and are stimulated by peers, however, the laboratory should have a critical mass in the core technologies and support services. In some cases, critical mass may exceed the company resources, and external R&D will have to be contracted.

External R&D is usually contracted out to specialized nonprofit research institutions, such as Battelle Memorial Institute or SRI International in the United States, or to universities. The advantages are that these institutions may already have experienced personnel in the disciplines to be researched, as well as the necessary laboratory and test equipment. This will save money and especially time in comparison with in-house R&D. The disadvantages are that the company will not benefit from the learning experience, and may become overly dependent on the contractor. Also, the technology transfer may be difficult and there is always the possibility of leaks to competitors. In the case of universities, costs are usually lower and there is the additional benefit of identifying graduate students who may be hired later and researchers who may be employed as consultants when needed.

Joint R&D has been carried out systematically in Europe and Japan and has now become popular in the United States after antitrust laws were relaxed and tax incentives offered to research and development consortia. In a consortium, several companies with congruent interests join together to perform R&D, either in a separate organization (such as SEMATECH, the Semiconductor Manufacturing Technology Consortium), or in a university. The advantages are lower costs, since each company does not have to invest in similar equipment; a critical mass of researchers; and the interchange of information among the sponsors. The disadvantages are that all the sponsors have access to the same R&D results. Because of antitrust considerations, however, the R&D performed must be precompetitive, and each participant in the joint R&D must separately apply to its products, processes, and services the information obtained. In some countries (for example, Japan), this joint research is sponsored, if not imposed, by the government and the companies have no choice but to comply with the "directives" of MITI, the Ministry of Technology and Industry.

R&D LABORATORY ORGANIZATION
AND FUNDING

For reasons of efficiency and control and to facilitate communications and synergy among researchers, R&D is usually performed within R&D laboratories, also called R&D centers. The organizational positioning and the funding of these laboratories is often a controversial matter and is still evolving. There have been three phases in the evolution of R&D in large and medium companies since the 1950s.

PHASE 1.

After World War II, it was believed that R&D was the key to the success of a technology-based company. All that was needed was to have the "best" (in terms of creativity and training) scientists available, give them well-equipped research laboratories, plenty of money, maximum freedom to do their own research, and wait for the inevitable scientific discoveries. According to the director of research of Eastman Kodak Co. "the best person to decide what research shall be done is the man who is doing the research." The laboratory, in order to ensure full independence, was part of the corporate staff and was entirely funded by the corporation, which "assessed" its cost to operations. Little attention was given to how to transfer the research results to operations, or how to couple R&D activities with the company business strategies. In effect, technology management was not practiced.

Unfortunately, this laissez-faire management approach produced few useful results. In some cases, the scientists met insurmountable technical barriers (for instance, high-efficiency low-cost solar cells) or made important discoveries unrelated to the firm's strategic and business thrust (for instance, Nobel prizes in astrophysics and cosmology awarded to a telephone company). Some laboratories were unable to transfer their new technologies to the company operations and, in frustration, turned to more receptive audiences, including competitors. A well-publicized example is the development of the STAR PC by the Xerox Palo Alto Research Center (PARC). The computer business unit of Xerox was interested only in mainframe computers and disdained the STAR as a toy. Steve Jobs, the founder of Apple Computer, visited PARC, realized the potential of the new technology, hired the PARC researchers, developed the Lisa and Macintosh personal computers, and made a fortune.

PHASE II.

As a reaction to these problems, operations were encouraged to set up their own laboratories, mostly to do development for a specific business. GE, for instance, had two central laboratories: the Research Laboratory and the General Engineering and Consulting Laboratory (later renamed the Advanced Technology Laboratory), both located in Schenectady, New York. These were later joined to form the present GE R&D Center. In addition, GE set up an Electronics Lab in Syracuse, New York, a Space Sciences Lab in Valley Forge, Pennsylvania, an Appliance Lab in Louisville, Kentucky, and a Plastics Application Lab in Pittsfield, Massachusetts. The R&D Center's mission was to perform research and longer term development of benefit to several operating units. The mission of the other laboratories was to perform shorter term research and mostly development for the businesses to which they were organizationally responsible and from which they received funding. To ensure closer coupling between the R&D Center and operations, only about two-thirds of the required funds came from the corporation through assessments. The remaining one-third was obtained through contracts that had to be negotiated with the interested operations. Naturally, operations would fund contracts only for short- or medium-term results, usually less than three years, and would not renew the contract annually unless they were satisfied. A separate "liaison office" was set up in the R&D Center to ensure close coupling with operations, to listen to their requirements (market pull) and to persuade them to adopt the new technologies (technology push), and to help sell the R&D contracts.

PHASE Ill.

This system worked relatively well until the economic crises of the 1980s and the intensification of international competition. Many large and medium-sized corporations, faced with staggering losses and major reductions in employment, questioned the need for, and the role of, the corporate laboratory, especially its funding. Some central labs were simply eliminated, or drastically reduced in size, with their mission restricted to R&D for developing new businesses at the corporate level. Most researchers were transferred to operations, where the climate was less benign, others resigned, moving to universities or starting their own businesses. In the case of GE, there was a major cutback in the support functions of the R&D Center, and the liaison function was eliminated. The laboratory and section managers are now responsible for coupling with operations. At the same time, the funding sources of the laboratory were reversed. Before 1982, the corporation was contributing 67 percent of the budget in assessed funds, and contracts with operations amounted to the remaining 33 percent. Under the new president, Jack Welch, contract funds now amount to 75 percent and assessed funds to 25 percent. In theory, assessed funds are for exploratory research and for new business development. In practice, some may be shared with operations, for projects of longer range impact or higher risk, which operations are unwilling to fund alone. This new funding approach does ensure close coupling with operations, but targets the R&D Center activities towards the larger, and richer, GE businesses, such as plastics, medical systems and aircraft engines, while neglecting the poorer, less glamorous core businesses, such as power systems.

An R&D laboratory can be organized internally according to three patterns: by functions, by projects, and matrix. In the functional organization, all researchers working in a specific discipline, for instance laser optics or polymers, are grouped in a unit and report to a manager, who is a recognized expert in the field. This organization is similar to the various academic departments of a university. The advantages are close interaction with peers and competent evaluations of the scientific value of the researchers' work. The main disadvantage is that most industrial R&D projects require the contributions of different disciplines, and there is often nobody responsible for managing the project and integrating the work of the researchers.

In the project organization, all researchers working on a given project report to a project manager, who is usually not an expert in the researchers' specific disciplines. The project manager evaluates the researchers on the basis of practical results, time, and money, rather than on the value of their scientific and technical contributions. The advantages are that the project can be professionally managed and corrective actions taken if the results expected are not forthcoming or budgets are not met. The main disadvantage is that projects have, by definition, a limited life. A project team, as an organization, is disbanded as soon as the work has been completed. The researchers now have no "home" and must look for work on new projects, which may or may not be forthcoming.

The matrix organization attempts to combine the best features of the functional and project organizations, by assigning every researcher to two supervisors: a functional manager and a project manager. The functional manager is responsible for evaluating the scientific value of the researcher's work, planning his or her career development, and providing a "home" between projects. The project manager is responsible for evaluating the researcher's contributions to the project and giving him or her the resources needed to get the job done. Obviously, the two managers must work closely together in assigning the duties of the researchers, integrating their evaluations, and reporting them to higher management.

In practice, small and shorter term projects are run according to a functional organization, with one researcher taking on the project administration (not management) duties. Larger, longer range projects, such as the GE CAT (computerized axial tomography) and MRI (magnetic resonance imaging) medical diagnostic imaging systems projects, are organized as independent projects with strong professional project management. When project responsibility is transferred to operations, some of the researchers move too, thereby ensuring an effective transfer of technology. In other cases, engineers from operations are invited to join the R&D team, and they transfer back home with the project.

R&D PROJECT SELECTION,
MANAGEMENT, AND TERMINATION

Industrial R&D is generally performed according to projects (i.e., separate work activities) with specific technical and business goals, assigned personnel, and time and money budgets. These projects can either originate "top down"—for instance, from a management decision to develop a new product, such as the first IBM PC—or" bottom up" from an idea originated by an individual researcher, such as the Toshiba Japanese language word processor. The size of a project may vary from a part-time effort of one researcher for a few months with a budget of tens of thousands of dollars, to major five- or ten-year projects with large multidisciplinary teams of tens of researchers and budgets exceeding millions of dollars. Therefore, project selection and evaluation is one of the more critical and difficult subjects of R&D management. Of equal importance, although less emphasized in practice, is the subject of project termination, particularly in the case of unsuccessful or marginal projects.

Normally, a company or a laboratory will have requests for a greater number of projects than can be effectively implemented. Therefore, R&D managers are faced with the problem of allocating scarce resources of personnel, equipment, laboratory space, and funds to a broad spectrum of competing projects. Since the decision to start on an R&D project is both a technical and a business decision, R&D managers should select projects on the basis of the following objectives, in order of importance:

Project selection is usually done once a year, by listing all ongoing projects and the proposals for new projects, evaluating and comparing all these projects according to quantitative and qualitative criteria, and prioritizing the projects in "totem pole" order. The funds requested by all the projects are compared with the laboratory budget for the following year and the project list is cut off at the budgeted amount. Projects above the line are funded, those below the line delayed to the following year or tabled indefinitely. Some experienced R&D managers do not allocate all the budgeted funds, but keep a small percentage on reserve to take care of new projects that may be proposed during the year, after the laboratory's official budget has been approved. These unallocated amounts are often purposely disguised as "proposal" or "exploratory" funds, or made available by over-budgeting some "safe" projects, or even hidden by working on "underground projects" without the knowledge of headquarters. For instance, the highly successful Toshiba laptop computer was vetoed twice by Tokyo headquarters, and was developed in the Ome factory by ten engineers who, protected by the general manager, pretended to be working on budgeted military computer projects.

Since R&D projects are subject to the risk of failure, the expected value (EV) of a project can be evaluated ex ante according to the following statistical formula:

where P is the payoff if the project is successful, that is, the stream of net income accruing to the company over the life of the new product (or process or service) resulting from the project. The payoff P is then multiplied by the probability of success, which is the product of three separate probabilities:

Consequently, project evaluation must be performed along two separate orthogonal real dimensions: technical evaluation, to establish the probability of technical success, and business evaluation, to establish the payoff and the probabilities of commercial and financial success. Once the expected value (EV) of a project has been determined, it should be divided by the forecasted cost C of the project, in order to obtain a benefit/cost ratio R of the form R = EV/C. Obviously the higher this ratio, the more desirable the project.

For more advanced and longer term projects, leading to major (rather than incremental) innovation, it may be difficult to establish reliable values of P, C, Pt, Pc, and pf. In this case, a "relative" comparison of projects is made based on their respective "technical quality" and "potential business value."

Technical quality is evaluated by analyzing and rating the clarity of the project goals; the extent of the technical, institutional, and market penetration obstacles that must be overcome; the adequacy of the skills and facilities available in the laboratory for carrying out the work; and, finally, how easily the project results can be transferred to an interested business unit.

The potential business value of a project is defined in terms of the market share of an existing market that can be captured by the new product, or by the size of a new market that can be developed by the new product, or by the value of new technology that can be sold by the company or transferred to its customers.

After the first tentative list of projects has been established in order of priority, it is "matched" with the existing laboratory human and physical resources to make sure that these resources are well utilized. In fact, creative human resources are the laboratory's most valuable asset, and these should not be wasted by asking researchers to do work outside their disciplines and interests. Also, it is difficult, in a short time, to change the "mix" of available disciplines and equipment, and to hire and fire researchers as is done for labor. Thus, a shift towards new disciplines should be done gradually, avoiding the underutilization or overloading of the existing resources.

Once the tentative list of prospects has been modified according to the above, the entire "project portfolio" of the R&D laboratory should be balanced, in order to control risk, according to the three types of probabilities listed above.

Technical risk is controlled in two ways: (1) by having a spectrum of projects ranging from low to medium to high technical risk; and (2) by avoiding "bunching" too many projects in the same technology, particularly if the technology could be replaced by a superior technology during the expected lifetime of the new product.

Commercial risk can be controlled by not having "too many eggs in one basket"—that is, by targeting different market segments (e.g., government, capital equipment, consumer, industrial, international) and attacking different competitors, since directly targeting a major competitor may trigger a dangerous counteroffensive and a price war.

Financial risk is controlled by having a majority of small and medium-size projects (in terms of R&D expense), a few large projects, and no projects that, in case of failure, could bankrupt the company. Financial risk, in terms of cash flow, is also controlled by having a spectrum (in time to payoff) of more short and medium-term projects than long-term projects. This type of spectrum is also psychologically important to maintain the credibility of the R&D laboratory in the face of upper-level executives who keep asking "What have you done for me lately?"

By definition, R&D is a risky activity, and there are no "zero-risk" R&D projects, since these would then be engineering projects. While the majority of the projects in an R&D portfolio should be categorized as low-risk, some medium-risk projects are justified, and even a few high-risk projects, provided their expected value is high. In other words, the higher the risk, the higher the expected payoff if the project succeeds.

Finally, project evaluation and selection should be made objectively, in order to develop and maintain a favorable climate for creativity and innovation. Researchers will be naturally disappointed when their projects are not approved. Some may even suspect that other projects were preferred for subjective reasons, such as the "halo" effect (the past track record and prestige of other, more senior, researchers), the reluctance of management to terminate less-deserving projects, and especially political influences to select" pet" projects of executives. If there is a feeling that project selection is not done objectively, many researchers, particularly the junior ones, will lose their enthusiasm and renounce proposing new projects of a high potential value for the company. Eventually, if this situation persists, the laboratory will lose its creativity and concentrate on routine low-risk (but also low-payoff!) or "political" projects, and it will have difficulty in keeping and attracting the best researchers. Therefore, it is desirable that the project evaluation and selection criteria be properly explained and that all researchers be asked to participate in the evaluation process. Also, the final project portfolio should be presented to, and discussed with, all the researchers.

The management of R&D projects basically follows the principles and methods of project management. There is, however, one significant caveat in relation to normal engineering projects: R&D projects are risky, and it is difficult to develop an accurate budget, in terms of technical milestones, costs, and time to completion of the various tasks. Therefore, R&D budgets should be considered initially as tentative, and should be gradually refined as more information becomes available as a result of preliminary work and the learning process. Historically, many R&D projects have exceeded, sometimes with disastrous consequences, the forecasted and budgeted times to completion and funds to be expended. A typical example is the Concorde supersonic aircraft, a high-visibility "national prestige" project of the French and British governments. The original budget was £150 million and 5 years to completion, while the actual expenditures were £1.1 billion and 12 years. As a consequence, the Concorde was a great technical success and a financial disaster! Although the Concorde was still flying in 1999, only the operating expenses were covered, and there was no prospect of recovering the initial investment. Therefore, in R&D, measuring technical progress and completion of milestones is generally more important than measuring expenditures over time.

Finally, termination of projects is a difficult subject because of the political repercussions on the laboratory. Theoretically, a project should be discontinued for one of the following three reasons:

  1. There is a change in the environment—for instance, new government regulations, new competitive offerings, or price declines—that make the new product less attractive to the company.
  2. Unforeseen technical obstacles are encountered and the laboratory does not have the resources to overcome them.
  3. The project falls hopelessly behind schedule and corrective actions are not forthcoming.

Due to organizational inertia, and the fear of antagonizing senior "prima donna" researchers or executives with pet projects, there is often the tendency to let a project continue, hoping for a miraculous breakthrough that seldom happens.

In theory, an optimal number of projects should be initiated and this number should be gradually reduced over time to make room for more deserving projects. Also, the monthly cost of a project is much lower in the early stages than in the later stages, when more personnel and equipment have been committed. Thus, from a financial risk management viewpoint, it is better to waste money on several promising young projects than on a few maturing "dogs" with low payoff and high expense. In practice, in many laboratories it is difficult to start a new project because all the resources have already been committed, and just as difficult to terminate a project, for the reasons given above. Thus, an able and astute R&D manager should continuously evaluate his or her project portfolio in relation to changes in company strategy, should continuously and objectively monitor the progress of each R&D project, and should not hesitate to terminate projects that have lost their value to the company in terms of payoff and probability of success.

In conclusion, by assuring a close coupling with the company's strategic goals and by maintaining close contacts with operations, the laboratory and the R&D function will maintain credibility and strengthen their strategic value for the corporation.

[ Pier A. Abetti ]

FURTHER READING:

Hampton, John J., ed. AMA Management Handbook. AMACOM, 1994.

Levy, N. S. Managing High Technology and Innovation. Upper Saddle River, NJ: Prentice Hall, 1998.

Martin, Michael J. C. Managing Technological Innovation and Entrepreneurship in Technology-Based Firms. Reston, 1994. Roussel, Philip. A., Kamal N. Saad, and Tamara J. Erikson. Third Generation R&D. Cambridge, MA: Harvard Business School Press, 1991.

Twiss, Brian. Managing Technological Innovation. 3rd ed. Pitman, 1985.



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