Global R & D

Harnessing innovation: R&D in a global growth economy, Economist Intelligence Unit, 2004

The Economist Intelligence Unit has published a new white paper: Harnessing Innovation. It is based on an online survey and in-depth interviews with companies such as Agilent, IBM, AMD Siemens, BMW and Nokia.

From the results:

Market- and customer-driven innovation has moved from buzz-word to reality, although keeping customers focused on innovation projects is a significant challenge once initial enthusiasm has ebbed.

The survey clearly indicates that R&D is high up the hierarchy of corporate priorities — asked to identify their overall strategic priorities, respondents put product development third, just behind cost-cutting and strengthening customer relationships. But the emphasis rests heavily on the D(evelopment)part of the equation. Market pressures to keep up with competitors’ innovations and to satisfy more demanding customers are the two top drivers of R&D activity, according to survey respondents. In this environment, anything companies can do to reduce the odds of failure as they embark on new research projects is critical.

A more market-oriented approach to R&D is driving R&D leaders to work more closely with customers as they develop new products and services. But there are challenges in this approach. While collaboration is key for creating demand-driven innovations, survey participants also noted that maintaining customer involvement ranked as one of the leading roadblocks to successful R&D projects. This evolving innovation landscape promises a more effective R&D process, one that sharpens the decision-making process as firms choose where to allocate their R&D spend and that increases the chances of launching commercially viable new products. It may also encourage an even more pronounced division of labour in the world of research, with governments, universities and start-up companies focusing on “blue-sky” research projects and companies working on more incremental development activities.

R&D has gone global with many firms distributing their R&D centers around the world. This is driven by quality and time-to-market factors rather than just cost-cutting. In some cases research is still centralized and locations further afield focus on development and process innovation.

Competition for talent, new technologies and easier market access have accelerated the process of R&D globalisation, with countries such as India and China hosting significant volumes of R&D activity for multinationals. Cost is a driver of globalisation too, but its significance can be overplayed as far as R&D goes. Once infrastructure and coordination costs for managing distributed R&D facilities are included, the total savings are not as huge as popular headlines suggest. Speed of development is a more important benefit of the global research economy.

The survey finds organizational problems to be the single greatest challenge for R&D efforts. It is therefore especially interesting to note the different models implemented by firms that distribute R&D activities globally.

If you have research and development activities in time zones around the world,how do you coordinate that activity?

30% Research and development is coordinated on a regional basis (eg,EMEA,the Americas)
30% Research and development is managed globally,with round-the-clock teams who work consecutively on the same projects
25% Research and development is carried out separately in each country
16% Other

The report provides very little information on how global R&D management is implemented, although the challenges are certainly highlighted.

Although there are clear economic reasons for locating certain R&D work in lower-cost countries, relocating R&D resources solely because of labour costs is a losing proposition. “There is no such thing as low-cost intellectual property”, declares IBM’s Dr Horn. Aside from the travel, coordination and communications expense, the labour rate itself is climbing as recipient countries become more sophisticated economies. The current rule of thumb among India’s IT professionals is to expect a 15% pay rise every year. Such narrowing becomes even more pronounced once top management cost is included.

More important to the globalisation trend is the ability to innovate around the clock. But it is no small task to manage this process. According to Fred Weber, chief technology officer for AMD, a leading semiconductor manufacturer, companies must avoid the pitfalls of compartmentalisation. “Whenever possible, we try to ensure that a remote site does not build up its own little fiefdom of products that it is making. Rather we aim to develop an integrated global engineering force. So we might split projects across multiple locations.”

AMD ’s latest Opteron processor resulted from teams working simultaneously in Texas, California, Singapore and Dresden in Germany, for example. But the challenges posed by this structure can be formidable, acknowledges Mr Weber. “When you see somebody everyday and you have lunch with them, you understand them a lot better than when you talk on the phone to them once a week and see them once a year.” Cultural differences further exacerbate this lack of face-to-face contact.

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