 |
|
|
|
|
|
|
|
|
 |
 |
 |
 |
 |
 |
 |
 |
|
|
|
||||||||||||||||||
|
|
Understanding Private-Sector
Decision Making for Early-Stage
Technology Development
V. Emerging Corporate Strategies and ResponsesWhile the fraction of corporate R&D dollars devoted to ESTD investments is small, the market pressure to innovate weighs heavily on the backs of all technology firms. During our interviews, we discovered emerging responses and strategies being used by corporations to strengthen their innovative capacity, even in the face of systemic pressures that bias corporate focus away from long-term, early-stage research. PORTFOLIO MANAGEMENT MODELSMost of the companies we interviewed used a formalized R&D portfolio management process to select, balance, and manage R&D investments. According to many of our respondents, these portfolio management strategies often favored projects that met near-term research and product delivery goals. Only occasionally were managers required to reassess the balance of projects within their R&D portfolios, particularly as they hit discontinuities in the expansion of their core businesses. Several respondents described deliberate efforts to restructure their R&D portfolios by increasing the allocation of funding to earlier stage basic and ESTD work after discovering that they had allowed their technology portfolios to swing too far towards the product development end of the spectrum. The vice president of R&D for a $30 billion chemicals company noted, “In the mid-1990s, our R&D portfolio was skewed heavily towards value preservation and product development investments. These made up two-thirds of our R&D spending.” Recognizing the danger of not investing in projects that would open up new markets and rejuvenate its innovation base, the firm took action to reverse the trend. Today, 40% of R&D is targeted at ESTD activities, and another third is aimed at earlier stage concept/invention work. While no two companies used the same approach to managing their R&D portfolios, several common elements were apparent. These include the definition of a set of technical core competencies to guide investment decisions, the splitting of funding control between business units and a central corporate organization, and the discretionary allocation of limited funds to foster new ideas (e.g., senior scientists with slush funds, central investment fund dedicated to long term investments). Many also had established dollar or percentage spending targets for specific types of investments and used a classification system similar to the four-step model in Figure 1 or other original classification schemes. Overall, the companies that appeared most active in investing in earlier stages of R&D appeared to have more formal mechanisms in place to sustain this type of funding. No company interviewed was able to cite a formal analytic process which justified allocation of funding to ESTD activity. Instead companies recognized the necessity for growth and the importance of ESTD activity to their growth objectives and used funding target levels as a means of sustaining investment in this difficult to quantify activity. ALLIANCES, ACQUISITIONS, AND VENTURE FUNDSCorporate innovation strategies are increasingly extending beyond traditional corporate and industry boundaries. On numerous occasions, alliances, acquisitions and other external ventures were cited as a common way of maintaining access to a steady flow of new technologies and ideas, while holding back research infrastructure costs and risk. A senior executive at a $16 billion consumer products company told us, “We see no need to re-invent good research. We are always prepared to acquire technology from external sources, when it makes sense.” The companies interviewed also indicated that they have become increasingly focused and methodical in their selection of partners and technology rights. Adopting a market-like approach to acquiring new innovations as opposed to developing them internally helps limit the scale of R&D required to sustain their organization while allowing them to pay for only the portion of the ESTD activities they intend to use. Several different types of partnership are typically pursued, each with differing objectives. Most outright acquisitions or licenses of earlier stage technologies result from interactions with other corporations or start-ups. An alternative is to form some form of alliance, such as a joint venture with these types of partners. Most interviewees also indicated that they had partnerships with university laboratories. These interactions can be somewhat broader than an outright alliance, but are generally targeted at providing a window into more basic or concept-level research in specific fields of interest. Several interviewees indicated that they have become much more targeted in these investments, and tend to be more interested in establishing relationships with specific professors or scientists rather than an academic department or entire school. Government laboratories also occasionally serve as partners, but they typically lack the infrastructure to partner effectively with corporations. According to one senior executive we spoke with, “Scientists at government labs have good intentions, but no real business support. This tends to result in unrealistic expectations and makes the process of negotiating an agreement difficult.” Another form of alliance that was frequently mentioned was relationships with venture funds. In some cases, an internal venture fund was formed to help profit from and foster start-ups in fields of interest to the company. Alternatively, companies invested in established private funds, securing the rights to actively benefit from offerings of potential commercial benefit. OUTSOURCING OF EARLY STAGE R&D: ESTD ENGINES FOR HIREAn alternative strategy used by corporate R&D managers to mitigate risk and maintain firm focus while continuing to explore new opportunities is a growing reliance on outsourcing of early stage research. The chief technology officer of a large machinery manufacturer told us, “as a result of the de-emphasis of earlier stage R&D investments and the move to a more conservative investment posture by most established firms, the responsibility for developing breakthrough technological advances rests disproportionately on the shoulders of startups and universities.” This trend was noted by many of our respondents. A senior machinery industry executive cautioned however, “Sourcing ESTD and earlier stage R&D from the outside works well for discrete technologies and small, very-focused inventions. But coordination becomes enormously difficult with larger projects requiring infrastructure or business model changes.” We spoke with one firm that specializes in contract R&D work for other large firms. The company had been the corporate R&D arm of a Fortune 500 firm, but was spun out as a private entity and now concentrates on early stage research work on behalf of other firms. Nearly 80% of its R&D expenditures are allocated to ESTD type research. Essentially, it has become an ESTD engine for its client companies. According to the CEO, “Our strategy is to leverage our capabilities in electronics, optics, and other hightech areas by linking development and taking them to a wide range of markets.” Since it is not captive to the same narrowly tailored business priorities of its individual clients, it can exploit benefits of scale and scope of its ESTD work by structuring its relationships to maintain rights in fields that are not of interest to its clients. The CEO explains why ESTD work is so attractive to the firm: “The apparent commercial potential for ESTD projects is often not large enough to attract VC or corporate support. But what looks like a very narrow market niche at the ESTD level can become broadly applicable as the implications of the research unfold.” As it develops new technologies through its research, the firm then either licenses or commercializes products in these new areas to other firms looking to acquire new technologies. Return to Table of Contents or go to next section. Date created: October 7, 2005 |
 |
ATP website comments: webmaster-atp@nist.gov / Technical ATP inquiries: InfoCoord.ATP@nist.gov. NIST is an agency of the U.S. Commerce Department |
 |