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R&D As Investment In Learning

Research and development typically has aimed to generate innovation and products. But given the rapid pace of technological change in the 1990s, R&D must also be an ear to the wall of the scientific community.

The pace of technological innovation is more demanding than ever: Changes in the scientific base of particular industries outstrip the learning abilities of even the largest organizations. Kodak is moving to assimilate electronics technology into its production of cameras and film. Chrysler, Ford, and General Motors are looking to gain expertise in ceramic manufacturing to increase the heat resistance of engine blocks.

These changes require a reassessment of corporate research and development. Our research suggests the traditional view of R&D rests on two false premises. The first asserts that technical knowledge unprotected by patents flows without cost to all firms. The second is that the sole goal of research is to generate new products and to improve production processes.

Rapid expansion of the scientific base also has led firms to acquire technology and enhance R&D capabilities through strategic alliances and collaborative research efforts. Herein lies another dangerous assumption: Generally, it is a mistake to view such cooperative ventures as substitutes for the firm’s own efforts.

We maintain that knowledge does not readily diffuse to companies lacking sufficient technical expertise and that a firm’s research activity must both generate products and enhance its ability to learn. We label this ability absorptive capacity and deem it to be perhaps the most fundamental core technical competency. The challenge for management is to leverage this capacity.

Understanding the dual role of research, meanwhile, provides a fresh perspective on the allocation of funds to R&D and new insights into organizational design.

LEARNING FROM EXTERNAL SOURCES

In a sense, a firm’s research efforts are an admission ticket to a vast pool of research by universities, government laboratories, and competitors. However, technical knowledge, even if it is not protected by patents or other property rights, comes at a price. It is available only to those firms that maintain skilled researchers who tap into cutting edge “information networks.” These networks are defined not only by technical specialties, but also by geography. Germany, Japan, the U.S., or other countries may take the lead in a given technology. But wherever a firm sets up shop, it must have access to available expertise. This requirement motivates many firms to locate research laboratories abroad.

Another way to acquire technology is to form a strategic alliance. Cooperative research efforts can tap into emerging technologies and leverage a firm’s capabilities. Even so, consider the comments of a Xerox executive on his company’s investment in the Center for Integrated Systems at Stanford University, quoted in a publication of the Organization for Economic Cooperation and Development.

“Xerox’s contribution to CIS is very small compared to what we are investing internally in the same kind of research,” the executive said. “For a little additional investment, we enlarge our perspective by participating in a broad program of research.”

His comments indicate that Xerox’s involvement with CIS is part of a broader internal research effort. Without a complementary internal research effort, a firm is not well-positioned to translate the research findings of outside organizations into useful new products and processes. For instance, the Electric Power Research Institute has shifted its focus from longer-range, fundamental projects to narrower, shorter-term projects-partly because of the modest in-house research efforts of its member utilities and members’ resulting inability to apply EPRI’s more basic research.

Therefore, the most appropriate model regards joint ventures as complementary to a firm’s internal efforts.

Consistent with these arguments, firms that rely on external sources of information not directly targeted to their needs-such as university or government labs-spend more on R&D than firms that rely on more targeted information sources. Similarly, we find firms that draw from more basic fields of science, such as physics and chemistry, spend more on research than firms that rely on applied fields, such as agriculture and material sciences.

LEARNING FROM INTERNAL SOURCES

Obstacles to cooperative research may also prevent corporate R&D from filtering down to a firm’s business units. There is a fairly broad recognition of the failure of isolated R&D labs-campuses on the hill-to translate their research into tangible benefits. The failures of the Xerox PARC research center in the 1970s represent one example of this pathology. Among other innovations, PARC researchers developed a desktop computer driven by icons that preceded the Macintosh by several years. This revolutionary product, however, was never commercially developed.

The inability of Xerox and other companies to fully benefit from R&D results in part from difficulties in passing on technical information from a firm’s central labs to its operating units. But here’s another stumbling block: It has been widely acknowledged that innovation in a corporate setting often requires the support of a “product champion” or, more generally, someone who can make new initiatives relevant within the broader context of corporate activity. Thus, effectively leveraging research findings demands not just what Andrew Grove of Intel has referred to as knowledge power, but also positional or organizational power.

A case in point is the failure of Westinghouse to exploit its research in active matrix display technology, critical in the development of products ranging from laptop computers to high-definition televisions. Westinghouse was a global pioneer in this area. But project director Peter Brody faced opposition at the corporate and division levels from proponents of more established semiconductor technologies. Thus, he was never able to sell senior management on AMD.

On a smaller scale, corporations must also learn and transfer knowledge across functions. Complementary functions within an organization ought to be tightly meshed: Some redundancy of expertise may create desirable cross-functional absorptive capacities. In fact, the success of Japanese companies in commercializing research ideas is often attributed to tight manufacturing and marketing linkages.

BUILDING ABSORPTIVE CAPACITY

Training programs and job rotation aid external and internal learning. When Epson decided to develop a personal copier, it needed to meld expertise in mechanical and electronic engineering. To facilitate this process, it trained mechanical engineers assigned to lead the project in electronics. Elf-Aquitaine of France sponsors specialty “clubs” that offer seminars for division-level experts in like technical domains. At the gatherings, attendees share their experiences and explore solutions to common problems.

Can absorptive capacity be purchased, for example, by adding personnel, working with a consultant, or making an acquisition? Caveat emptor: The effectiveness of such an option is limited. In seeking to derive tangible benefits from technical findings, researchers rely on both “generic” and “firm-specific” knowledge. The latter-which comprises expertise on a company’s markets, products, and organizational procedures-is acquired only through years of hands-on experience in a corporate culture. Typically, R&D expenditures are in design and manufacturing engineering. These activities are often highly specific to a firm’s market.

An illustration: Several years ago, General Motors had trouble applying technology developed by Hughes Aircraft. Hughes employed electronics and material science to meet GM’s needs, but it ran into difficulties designing windshields and electronic products at a cost compatible with the auto maker’s mass market.

An excerpt from a technical report by Bell Laboratories on its placement within AT&T summarizes this point:

“For research and development to yield effective results for Bell System, it has to be done by … creative people who understand as much as they possibly can about the technical state of the art and about Bell System and what System’s problems are. The R&D people must be free to think up new approaches, and they must also be closely coupled to the problems and challenges where innovation is needed. This combination, if one is lucky, will result in insights which help the Bell System. That is why we have Bell Labs in Bell System, instead of having all our R&D done by outside organizations.”

In conclusion, it is worthwhile to note that a firm’s past investments in learning are a key determinant of its future success. Consider the transition from electromechanical to electronic devices in the calculator industry. The shift led to an industrywide shakeout and a radical change in market structure. Firms without a prior base in electronics couldn’t develop expertise rapidly enough to remain competitive. They also failed to gauge the impact of electronics on cost and on the functions calculators could perform.

The lesson is that firms seeking to increase their absorptive capacity are faced with a Catch-22: They may not realize they should develop this capacity because they need to have it in order to value it appropriately..


Daniel Levinthal is the May Department Stores Term Associate Professor of Management at The Wharton School of the University of Pennsylvania. This article is based on joint research with Wesley Cohen, an associate professor at Carnegie Mellon University.

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