Holding the Line on R&D

Holding the Line on R&D

Through their STEADY commitment to R&D -- tempered by CAREFUL scrutiny of projects' alignment with corporate objectives -- manufacturers such as Parker Hannifin and Texas Instruments are ensuring that innovation doesn't become a victim of the economic dow

In June, General Electric Co. Chairman and CEO Jeffrey Immelt unveiled a five-point plan detailing his strategies for reviving the U.S. economy. Immelt, speaking to the Detroit Economic Club, called for a commitment to clean energy, an overhaul of the nation's health care system and creation of performance-based compensation policies for company executives, among other strategies for spurring what he described as "a dramatic industrial renewal."

Of the five strategies that he outlined, the first focused on the importance of investing in research and development.

"GE has never forgotten the importance of R&D," Immelt says in the speech. "Each year, we put 6% of our industrial revenue back into technology -- so much that more than half of the products we sell today didn't even exist a decade ago. As a consequence, we are a huge exporter."

Noting that federally supported R&D as a percentage of the gross domestic product has been declining since 1985, Immelt praised President Obama's stimulus plan for increasing "basic research funding for the first time in recent memory" and asserted that the United States needs to "significantly increase investment in research and development from an all-time low of 2% of the GDP."

Immelt also issued a challenge to U.S. companies. "GE's R&D budget has not been cut," Immelt says. "And that's a course of action I'd recommend to every company that wants to get through the economic crisis even stronger than before."

"GE has never forgotten the importance of R&D."
-- Jeffrey Immelt, Chairman and CEO, General Electric Co.

Immelt isn't the only executive to speak out recently on the importance of organizations maintaining healthy R&D programs during the recession. In her keynote address at the Industrial Research Institute's (IRI) 2009 Annual Meeting in Boston, DuPont Senior Vice President and Chief Science and Technology Officer Uma Chowdhry urged companies to "remain committed to innovation, accelerate new product launch plans, partner through open innovation and focus on business transformation in order to take advantage of emerging opportunities and recognize the new reality."

Research conducted by IRI supports the notion that R&D is a critical ingredient for economic recovery. A study published in 1995 in the IRI journal Research Technology Management found that companies investing more than 5% of sales in R&D during the recessions of 1981-1982 and 1990-1991 fared better when the recessions ended compared with companies that invested less than 3% of sales in R&D. Specifically, according to the study:

  • Of those companies that spent more than 5% on R&D, 70% showed sales increases in the 1981-1982 recession and 74% showed sales increases in the 1990-1991 period.
  • Of the 113 companies experiencing sales declines in 1982, 92 (81%) spent less than 3% of sales on R&D during the recession. In 1991, 41 of the 66 companies experiencing sales declines (62%) spent less than 3% of sales on R&D during the recession.

"Historically, companies that invest in R&D do better coming out of recessions than those that do not," IRI President Edward Bernstein says.

Even so, the current recession appears to have at least slowed R&D spending. According to IRI, nearly half of the institute's member companies anticipate flat R&D budgets in the coming year, following growth the last three years. Funding in support of existing products and directed basic research is expected to drop, while funding for new business projects is expected to increase in all sectors, according to IRI.

Meanwhile, the 2009 Global R&D Funding Forecast, a joint effort between R&D Magazine and the nonprofit R&D firm Battelle, predicts that total U.S. R&D spending -- by academia, government and industry -- will decrease by 1.57% from 2008 totals, when adjusted for anticipated inflation.

Martin Grueber, research leader in Battelle's Technology Partnership Practice, explains that overall R&D spending has been "a pretty consistent metric" over the years, with only minor deviations from year to year. However, due to the severity of the current recession, "There's probably a somewhat bigger share of companies that are looking at their R&D budgets now than in any other particular time."

"Given the current climate and uneasiness and how unsure they are of the future prospects, there are more companies now that have tightened their R&D belts, along with overall tightening, than typically in the past," Grueber says.

A More 'Selective' Approach to R&D

While Battelle's Grueber observes more R&D belt-tightening than usual, he also points to data from the 2009 Global R&D Funding Forecast that reveals a "dichotomy of how individual companies and individual industries are thinking of their R&D budgets right now."

According to Grueber, roughly 50% of the companies responding to the R&D Magazine/Battelle survey indicated that they will experience a decrease in their R&D budgets based on their original 2009 budget planning. However, another 50% of responding companies indicated that their R&D budgets will stay the same -- or even increase -- in 2009.

"So as we look at the data, there are sort of two R&D environments," Grueber says. "There are some companies that are belt-tightening and cutting some R&D in this current environment, but then there are also a significant number of firms that view R&D as part of what they have to do now to get ready for the economy to turn back around, or they view R&D as how they're going to pull their company out of where they're at now."

Rita McGrath, a Columbia University associate professor who focuses on innovation, corporate growth and new business, has observed less of the "across-the-board, off-with-their-heads mindset" toward R&D than in previous downturns. McGrath, who recently penned a book on corporate innovation strategies, "Discovery Driven Growth," believes that many companies learned their lesson the hard way in the 1980s and 1990s.

"When the dot-com bubble burst, and then prior to that during the sort of mini depression of the early 1980s, a lot of companies cut R&D, they cut innovation -- they really cut down to the bone," McGrath says. "And then when things came back again in the mid-2000s, they missed a lot of growth opportunities."

Those companies that are maintaining their focus on R&D during the current recession "are being much more intelligent about it," she adds. "I do see some evidence that companies are being more selective when it comes to R&D," McGrath says.

Making smart, selective investments in R&D has been a guiding principle for Parker Hannifin Corp. since 2003, when the Cleveland-based manufacturer of motion and control technologies launched "Winovation" -- a standardized corporatewide process for product development. Based on an adaptation of the stage-gate practice, Winovation brings together cross-functional business management teams -- including "alpha" customers -- that meet regularly with R&D leaders to measure the progress of R&D initiatives against specific business metrics.

Craig Maxwell, vice president, technology and innovation, for Parker Hannifin, explains that the five-stage Winovation framework injects structure, rigor and discipline into an R&D process that once seemed almost "mystical."

"Historically, companies that invest in R&D do better coming out of recessions than those that do not."
-- Edward Bernstein, president, IRI

"What typically would happen in the past is we would say yes to a project, and then we'd work on it; three years later it would emerge, and hopefully it would be successful," Maxwell says. "Now we have regular reviews -- business reviews, not technical reviews -- in which we say, 'With everything we've learned over the last, say, six months, are we still feeling good about this project? Are we hitting all of our milestones? Have we hit any technical hurdles that we can't get over? Are we still on budget? Is this thing going to turn into a much more expensive project than we had originally forecast? Does the market still look attractive to us?'"

In 2001, Parker CEO Donald Washkewicz unveiled "Parker's Win Strategy," a codification of the company's long-term vision, goals and strategies ("Profitable Growth," which includes innovation, is one of three major pillars in the Win Strategy). You don't have to flip many pages in Parker Hannifin's 2008 annual report to see that the company views innovation as a core component of that strategy. A sizable chunk of pages up front are dedicated to Winovation, the company's goals for "growth from within" (Parker aims to have 10% compound annual growth, with half of that coming from organic means) and emerging technologies such as wave buoy energy, actuators for solar tracking, hybrid hydraulic systems and wind turbines. Those emerging technologies, by the way, offer market potential estimated at more than $6 billion, according to Parker.

Even with such ambitious goals for innovation, the recession has put extra pressure on corporate leaders -- and Parker is no exception -- to justify expenditures. Maxwell credits the Winovation process for helping Parker determine where to direct its "very strategic and of course limited R&D resources" during the current downturn.

"By having this process that we rolled out in 2003 and really got going in 2005, it's really helped us to say, 'Look, these things that we are working on are really important and really meaningful to the long-term health of the business. They're not something that can be sacrificed,'" Maxwell says. "So for the most part, we've held the line on R&D during the downturn."

'Optimizing our R&D Dollars'

Like Parker Hannifin, wise spending of R&D dollars is the modus operandi of Texas Instruments Inc. Despite cutting its R&D budget from about $1.9 billion in 2008 to about $1.5 billion in 2009 -- still no small sum -- the Dallas-based manufacturer of analog, embedded processing, RF and DLP semiconductor technologies views R&D as a fundamental component of its success and survival.

"R&D really is the lifeblood of a company," says Kevin Ritchie, senior vice president for Texas Instruments' Technology and Manufacturing Group. "If you're not developing future products, you're going out of business. So while the economy certainly dictates the need to make changes, you have to have a balance of R&D moving forward focused on the products that you believe are going to be needed in the future."

During the recession, Ritchie points out that Texas Instruments is focusing its R&D efforts on markets and technologies that the company believes will be "even stronger a year or two, three, four years down the road" -- areas such as energy, "analog in general space" (a category that encompasses power management solutions for mobile devices such as cell phones and Blackberries) and medical devices. A few cases in point:

  • On June 30, the company unveiled what it called "the industry's first medical development tool set with a complete signal chain and software offering for multiple medical diagnostic and patient-monitoring applications." The three new medical development kits are designed to help medical electronics manufacturers meet the "increasing need for the most advanced devices that offer sophisticated features in a battery-powered, portable design," according to Texas Instruments.
  • On June 10, Texas Instruments introduced two new TMS320C550x low-power digital signal processors (DSPs), which "offer up to 40% additional battery life for voice, biometrics, medical and other portable devices." The C5505 DSP is designed for end equipment such as noise-cancellation headphones, musical instruments, medical monitoring, biometrics and seismic detectors, while the C5504 DSP is designed for portable voice recorders, MP3 players and other emerging portable applications that do not require as much on-chip memory.

"R&D really is the lifeblood of a company. If you're not developing future products, you're going out of business."
-- Kevin Ritchie, senior vice president, Technology and Manufacturing Group, Texas Instruments

While Texas Instruments continues to churn out new products in promising markets, it is scaling back R&D in other areas. For example, the company in October announced that it is cutting spending in its wireless baseband business and divesting its cellular broadband operations. At the time of that announcement, the company noted that it would focus its remaining wireless investments "in OMAP applications processors, which are at the heart of many of today's most exciting smartphone products."

"We're focusing our R&D in those areas that we believe have the greatest growth potential for the future," Ritchie adds. "So that's the way we're optimizing our R&D dollars."

To further ensure that its R&D dollars are being spent wisely, Texas Instruments carefully tracks the number of R&D projects that actually make it to production. Through a formal process, the company on a regular basis measures ongoing R&D projects against benchmarks such as their alignment with customer needs, their revenue potential and whether they are progressing on time and on budget.

"Every project we start doesn't end in a viable product," Ritchie explains. "So while a project is in progress, we constantly examine whether it is still what the customer wanted, if there is still a market for it, if the assumptions that we started with are still valid. And sometimes the world changes and things that you started may no longer be valid, so you have to stop that project, redeploy that money and those people and resources into other projects."

What isn't likely to change is Texas Instruments' commitment to R&D, even in the most challenging economic environments. "Even in the tough times, you have to maintain a balance of looking forward to the future," Ritchie says. "Otherwise you have no future."

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