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Industrial research and U.S. competitiveness.

During the last two decades, U.S. companies have gone to great lengths to improve the effectiveness of industrial research and development programs, and couple the output more closely to the needs of business operations. Research directors have become more closely attuned to their customers and have learned to explicitly include corporate goals and strategies in structuring their portfolios and core technical strengths. Throughout this period industry has supplied close to fifty percent of the total national funding for R&D, but has followed two distinct funding trends. From the mid 1970's to mid 80's, industry support for R&D grew substantially each year; but since 1986 real annual increases have been small. There are concerns within the technical community that these trends contribute to declining U.S. competitiveness. However, some recent studies imply that the process of technological innovation in the U.S. may be limited more by financing issues and a diminished appetite within industry for new products and services, than by the lack of new technical ideas.

Strategic Management of R&D

In the early 1970's many U.S. companies began to introduce strategic planning and management systems to better integrate operations and more clearly focus business objectives. Technical leaders were challenged to couple the output of their laboratories closely with the needs of operations, and to work within the mainstream management and planning systems in doing so. The development of these systems has turned out to be more complex and intellectually challenging than might at first be suspected. Part of the problem is that business and technical management often start with different notions of the relationship of technology to strategy. To the technical community, technical capability and know-how is frequently seen as the underlying source of corporate successes in the past and the likely path to future business opportunities. From this perspective strategy is very much about selecting the right technical ideas and funding them adequately over a sufficient period. General management on the other hand, is usually less enthralled with technology and frequently looks to markets and other external trends as a more obvious and direct source of business fortune. Technology and engineering are often perceived to be less dominant determinants of strategic direction, and are sometimes more easily thought of at the operating level, as internal functional capabilities, vying for resources with marketing, manufacturing, operations, and other elements of the organization.

In principle, strategic planning processes ought to comprehensively cover technology and although they differ in detail, many start with a generic series of analyses which deal with the primary factors affecting the business and work through a deductive process to determine priorities for action. Typically, studies of the external environment, including customer, market, and other externally driven trends, identify potential opportunities. ff not pre-empted by competitors, these may form the basis of future strategies for the business. To the extent that technology is a critical element in the environment, a key attribute of major competitors, or a strategic strength or weakness of the business entity being examined, it should emerge naturally from these analyses, as suggested by Figure 1. It is often argued, or at least used to be, that to give technology special attention over other elements or functions of the business would unreasonably distort the outcome of the analysis.

However, in recent years technological breakthroughs and the emergence of nontraditional and fast-moving technologies have transformed the competitive structure of numerous industries in ways that generalized planning approaches failed to predict. We have become painfully aware that simply establishing a place for technology in the strategic planning checklist in no way guarantees that U.S. corporations will avoid significant technological surprises.

New Frameworks

Recognizing these limitations and the need to provide a greater role for technology in the formulation of strategy, the technical and business communities in both industry and academia have been at pains to introduce frameworks which reconcile these different conceptual approaches to strategy.|1~ As a practical matter it has been important to develop ways to transform (in an almost mathematical sense), the objectives and strategies of the business into core technologies and technical program priorities. Ideally, changes in business objectives and direction will be routinely converted by this transformation process into modifications to technical programs and laboratory plans.

An essential first step in setting up these processes has been for technical management to get out of the laboratories and become intimately familiar not only with business operations, but with the process of strategy development throughout the corporation. Recent studies have shown that the credibility of technical management with their business colleagues is an overriding priority in achieving success.|2~ Business managers at corporate and operational levels, must be comfortable that they and technical management share the same vision for the company's future and that the technical programs deal with the highest business priorities.

Not all attempts to build such systems have been successful. The secret has been to recognize that it is critical to start with the discussion of business strategy, and then to identify the technical needs of operations before moving to priorities for the laboratory. A rich legacy of planning tools, charts and matrices have been developed during the last 20 years to deal with solutions to particular issues. Ultimately, it has proved more important to comprehensively define the problem by working through at least six generic questions, and while the technical community is wonts to start in the middle of the sequence, they do so at their peril.

Six Strategic Questions

The first question establishes a common view of the world:

1. To what extent is technology relevant to the business? This is usually straightforward if approached using the generic planning tools as illustrated in figure 1 and leads to the second question,

2. Which business strategies require technology? This assumes that the corporation has a reasonably explicit set of strategies or at least aspirations which can be mapped by product line or business. The technical needs implicit in business strategies are frequently more extensive than first expected. This usually leads in short order to question 3,

3. Where will we get the needed technology? At first pass this serves as check or audit on the major sources of technology. These inevitably break down into three fundamental choices; from within operations, from company laboratories, or from external sources. However, on reflection it is apparent that choices are constrained by history, and without previous internal exposure to the needed expertise, external sourcing may be the only available, though least desirable, alternative. Technology can seldom be acquired and turned to competitive advantage instantaneously and in most cases is better treated as a strategic asset, that is as an expertise to be nurtured and developed, rather than as a commodity or good to be picked up as needed.

4. What are our core technologies for the business? Before core technologies can be determined it is critical to agree on where the corporation intends to add value in the business chain between customer and supplier. A corporation's internal technical competence very much determines how it is able to compete.|3~ A common way to identify core technologies is by product line or business operation for the present and future company. This is illustrated in Figure 2, by asking where improved technical capability would improve competitive position. First the technologies axe identified and then the Xs are replaced by current and future resource expenditures. Several important conceptual issues are raised by this analysis. The technical community is usually concerned with the input to the process and tends to define technology in terms of skills and disciplines. General management by comparison, is typically more involved with the output of technology and what it does, i.e. the product, service or application. The matrix links the skills, (which clarify whom to hire), to the application or product, (which determines the importance or priority to the business), and thereby combines the two different perspectives of strategy into a single entity.
Core Technologies
TECHNICAL SKILLS Product Product Product
 Line 1 Line 2 Line 3
Integrated Circuit x
Integrated x x x
Circuit Design
System x
Software x x x
Top Ten R&D Spenders, U.S., 1990 ($b)
General Motors 5.342
IBM 4.914
Ford 3.558
AT&T 2.433
DEC 1.614
GE 1.479
DuPont 1.428
HP 1.367
Eastman Kodak 1.329
Dow 1.136
TOTAL 24.600 24%

5. In which few technical areas shall we focus our research effort? If the forgoing analysis is extended to give a full map of the technical needs of operations, it is relatively straight forward to select core technologies in the central research laboratory to complement, extend, or lead technical activity in the company businesses. If the technical area is well chosen, it will not only support the stated strategy of business operations, but will result in a continuous stream of benefits, many of which will be only partially recognized at the start. This leads to the last question,

6. What new strategic options could these core technologies provide? Considerable care and semantic ingenuity are often required to convey that in choosing core areas for long-range research, we are not so much picking targets that will not pay off for a long time (e.g., land a man on the moon in ten years), as we are positioning ourselves in areas in which it will prove fruitful to work for a long time. This distinction is often critical to the business case, but is often unstated, and is frequently a cause of much frustration between the two communities.

The second problem encountered when developing technical options is financial justification. The obvious difficulty is that many research "opportunities" are multi-stage investment decisions involving significant uncertainty, which inevitably fare badly if force-fitted without sufficient care to ROI or similar DCF approaches. Rather than committing to a major investment, we are often just paying to see the next card, reserving the right to make a major investment at some later stage if and when technical and business uncertainties resolve. In many cases, the underlying structure of the decision on research priorities has more in common with valuing a call option on the stock market.|4~ Recognizing this parallel often explains why the research community intuitively, and appropriately, frequently chooses projects which have higher uncertainty than would be considered justified by ROI.|5~

Trends in Funding

How successful has the research community been in making its case? One indicator is the funding corporations are willing to devote to R&D. The total for all U.S. corporations is estimated to reach $79b in 1992, and historically has represented about half the total national funding in the U.S. Industrial funding is dominated by major corporations; the top ten spenders alone account for 24% of the total as shown by Figure 3. The top 100 spenders account for over 50%. CEOs and general managers in the U.S. have been broadly supportive of R&D through most of the last twenty years. Between 1976 and 1985 aggregate R&D expenditures by U.S. corporations grew at a real average annual rate of 6.5%. Even stronger evidence of management support is indicated by the growth in R&D to sales ratio which increased from a historic level of 1.9% throughout the 1970s, to 3.4% in 1986.

However, these trends changed in 1986, long before the current downturn. Since then there has been no significant change in R&D to sales, and real aggregate R&D growth has averaged just over 1%, despite continued competitive attack. Projections look even less encouraging for next year and real declines are expected for many industries.

While a number of external influences impact decisions in this area,|6~ it is clear that U.S. management in general remains to be convinced that further increased spending on R&D is appropriate. This raises the question--Is this all we can afford? Or more provocatively--Is this all industry can effectively use?

The Innovation Pipeline

To address these questions we have to take a broader perspective. One way to view the process of industrial innovation, albeit simplistically, is as a pipeline. Industry's role in turning technology into new and improved products and services is sandwiched between the upstream supply of science, and technology, and downstream demand. A major constriction at any stage in the pipeline will slow down the process.

In total, a bewildering army of science and technology sources are assembled upstream from industry. U.S. research universities have long been recognized as a national asset. Federal funding for research in universities and colleges has been growing at a real average annual rate of 3.7% between 1982 and 1990.|7~ Sources of science and technology outside the U.S. have been proliferating and some have been growing even faster. For example, between 1972 and 1988, funding for non-defense R&D in Japan grew at a real average annual rate of 8.5%.|8~

As the costs of taking new technology to market escalate, as product cycles shorten and the rate of technical obsolescence increases, U.S. corporations have been highly selective in what new technologies they can accept, as present difficulties in commercializing technology from Government laboratories attest. Because of this wealth of input, it is perhaps difficult to argue that the industrial innovation process in U.S. industry is severely limited by a lack of access to new technical ideas.

There are however, major issues on the demand side, downstream from industry. The Commerce Department and U.S. Treasury recently organized some round tables to discuss the mismatch between our ability in the U.S. to invent, and our willingness and capability to fund and commercialize technology.|9~ All the usual suspects were rounded up in one room; the industrial R&D managers blamed corporate management for being too short sighted, corporate management pointed to accounting standards and Wall Street analysts, the analysts blamed pension fund managers and there was a spirited discussion over the natural tensions between the goals of institutional investors and those of operating management. There remained a lingering suggestion that the system as a whole led institutional investors in the U.S. to be more uncoupled from corporate management, and less informed and directly involved in the business than their Japanese or German counterparts, or with family owners in the U.S. Hence they are more risk averse and less likely to fund long-term technically driven opportunities. "The lack of mutual trust between investors and corporations has created greater uncertainty among shareholders and lenders about how effectively their money is being put to work."|10~

Similar concerns with the U.S. capital allocation system and its tendency to discount softer assets such as R&D and employee training, have been voiced by other recent studies on competitiveness,|11~ and there is wide recognition that a solution to the U.S. competitiveness issue will require demand side incentives in addition to increased expenditures on R&D.

Where does this leave us? Clearly the management of technology and the integration of R&D with operations has changed significantly in ways that are not always recognized within the wider scientific community. In general we have moved away from an era of technology push in which it was more readily presumed that scientific discovery would produce commercial advantage, to one in which customer and market needs are used to systematically determine the direction of our research programs and the focus of our core technologies. On the supply side we are faced with a bewildering array of technical choices, and significant market uncertainty made worse by rapid technological obsolescence. With sufficient market pull we can unclog the pipeline, resolve the supply side issues and streamline the innovation process within industry. While this is less familiar territory for many of us in the technical community, the demand for what we do and the climate for growth is part of the built or man-made environment, and ultimately more malleable than the laws of nature with which we wrestle on the supply side.


1. Mitchell, Graham R., "New Approaches for the Strategic Management of Technology," Technology in Society, (1985) pp. 227-239.

2. Uttal, Bro, Kantrow, Alan M., Linden, Lawrence H., and Stock, Susan, "Building R&D Leadership and Credibility" Research Technology Management. May-June 1992, 15-27.

3. Steele, Lowell W., Managing Technology: The Strategic View, Chapter 3, "Management conventions-The Ties that Guide and Bind," McGraw Hill Book Company, New York, (1989) pp. 69-93.

4. Myers, Stewart C., "Finance Theory and Financial Strategy," Interfaces 14:1, January-February 1984, pp. 126-137.

5. Hamilton, William F. and Mitchell, Graham R., "R&D in Perspective: What Is R&D Worth?" The McKinsey Quarterly, 1990, Number 3, pp. 150-160.

6. Ellis, Lynn W., "What We've Learned Managing Financial Resources" Research Technology Management July - August 1988 pp. 21-38.

7. National Science Foundation: Survey of Federal Support to Universities, Colleges, and Nonprofit Institutions FY 1992.

8. High-Technology Competitiveness Trends in U.S. and Foreign Performance, GAO report GAO/NSIAD-92-236 Sept. 1992 pp. 28.

9. "Financing Technology - A report of the financing technology roundtables" U.S. Department of Commerce and U.S. Department of the Treasury, April 1992.

10. Michael T. Jacobs "Short-Term America. The causes and cures of our business myopia" Harvard Business School Press (1991).

11. Porter, Michael E., "Changing the Way America Invests in Industry", Council on Competitiveness, Washington, June 1992.

Graham R. Mitchell is an independent consultant specializing in the management of technology and Director, Industrial Research Institute, Newton Centre, Massachusetts.
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Title Annotation:Symposium: Management of Technology
Author:Mitchell, Graham
Publication:Review of Business
Date:Mar 22, 1993
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