Jim Berges can point to satisfying results from his determination to help build and maintain technological leadership as president at Emerson Electric Co., St. Louis, Mo. Last year net sales were a record $15.6 billion, up 12% from $14.0 billion in fiscal 2003. Sales were driven by 20% gains in the company's major growth initiatives. These included strong performance in the emerging markets of Asia-Pacific, Eastern Europe, Latin America and the Middle East (for information on how another manufacturing leader, CEO of Alcoa, is approaching emerging markets, see 3 Quick Questions).
Early on, Emerson, like many firms, heavily leveraged mergers and acquisitions as growth engines. The strategy fueled growth from sales that were in the $800 million range only three decades ago. But today Berges says the company is also actively harnessing technological leadership to drive organic growth.
For example, Emerson's investment in R&D continues to climb -- from $486 million in 2003 to $603 million in 2004. In addition, to speed innovation, the company has created engineering centers around the world to facilitate around-the-clock collaboration.
But Berges may be an exception -- although a happy one -- when it comes to how executives feel about their company's R&D efforts, says Chicago-based consultant Douglas A. Engel, vice chairman and U.S. manufacturing industry leader, Deloitte & Touche U.S.A. LLP.
Consider: Earlier this year a Deloitte study of 650 companies in North America and Europe revealed that while manufacturers cite launching new products and services as the No. 1 driver of revenue growth, they also view supporting product innovation as one of the least important priorities.
Engel says the research shows the observation holds true in just about every industry Deloitte has analyzed -- from consumer products, automotive and chemical to pharmaceuticals and high tech. Enigmatically, he also notes that the data suggest that overcoming this "innovation paradox" is crucial, not only to success, but for survival in increasingly complex global markets.
The study asserts that few companies have resolved the paradox. However, those making inroads by mastering value-chain improvements such as product lifecycle management generate better business performance with profit levels up to 73% higher than all other companies studied. Those winners are resolving the paradox by synchronizing their global operations amidst massive complexity. Engel calls those leaders "complexity masters."
Deloitte's research predicts that nearly every manufacturer will have to master such complexity over the rest of the decade. Engel says the pressures to innovate are unrelenting. The study reveals that executives expect new product revenue as a share of total sales to hit 34% in 2007, up from just 21% in 1998. During the next six years, products representing more than 70% of manufacturers' sales today will be obsolete due to changing customer demands and competitive offerings. For companies in the fastest-moving industries such as high tech and fashion goods, Engel says such obsolescence may take only a year or two. Without innovation, companies are doomed to decay.
Engel says survival depends on three decisive steps -- creating innovation, exploiting innovation, but above all, building innovation capabilities.
Trends Shaping R&D
For 2005, strategies enabling innovation are becoming more important with overall U.S. R&D spending by industry essentially flat, says Battelle Memorial Institute, Columbus, Ohio. The spending increase is a mere 2%, reports Jules Duga, a Battelle senior research scientist and co-author of the annual funding forecast with R&D Magazine.
Private industry is expected to fund $191 billion compared with the $187 billion estimated for 2004. That continues the essentially flat funding pattern that has been in effect for about the past four years, says Duga.
"As we look toward the anticipated levels of R&D support and performance, it is important to consider some of the major factors that are either active at the present or which will surely be the precursor of megatrends in the near future," says Duga. He sees major R&D opportunities in the following categories:
- Materials technologies. The development of new classes of materials suitable for medical implants and other high-performance applications.
- Medical diagnostic imaging. The expansion of techniques for rapid and less expensive, non-invasive medical diagnostics methods, with emphasis on obtaining and interpreting images.
- Information mining and assessment. The development and expansion of techniques for the gathering and mining of information in a wide range of topics and the capacity to rapidly analyze content.
- Environment. The management of the environment including, but not limited to, the reduction of factors that contribute to global warming.
- Energy production and distribution. Renewable and/or low-waste production, including nuclear options, bioenergy, hydrogen and fuel cells.
- Medical technology. Emphasis on the development and deployment of methods for diagnostics and therapeutics -- including feedback systems, early-warning systems and emergency response equipment.
- Anti-terrorism technologies. Identification, isolation and deactivation of materials, systems and devices that can produce physical, economic and psychological disruptions.
Advantages Of Outsourcing
Duga also identifies what could be a fundamental shift in R&D -- the evolving trend to outsourcing what was traditionally considered a manufacturer's core competence. "Specifically what started as a movement toward utilizing captive facilities located primarily in Japan and Western Europe has blossomed into a significant increase in the support of R&D in non-captive, independent-performing institutions in developing or re-developing countries."
He says the most visible examples are the major increases in outsourced R&D to China and India and the growing efforts in other parts of the world. Companies that have developed globally distributed R&D capabilities can leverage significant operating benefits.
Emerson is an example. "No longer can we assume that new engineering and development should take place in North America or Europe and be applied to global markets," says Berges. "The key to continued company growth is in maximizing our technology and engineering investment by shifting the efforts to best-cost countries and expanding our engineering resource network. Over the past three years we've done just that -- aggressively extending our innovation efforts to regional locations worldwide to better serve our growing customer base."
Berges cites the Emerson Design Engineering Center in Pune, India, as an example: "It came together very quickly, opened in mid-2003 and is now producing work for 17 Emerson divisions. A new Motor Technology Center was opened in Qingdao, China, in mid-2002 and now has more than 50 engineers."
But does the outsourcing/off-shoring of R&D really constitute a business shift more radical than the pursuit of low-cost labor?
What's different today is that some of the variations of R&D outsourcing seem to reflect fundamental changes in the current corporate business model. Much of it is fallout from management's new global strategies for revenue growth.
An example is General Electric Co. Of 2003's $134.2 billion in global revenue, $2.6 billion came from sales in China. All of GE's industrial businesses have set up operations in China with about 12,000 employees. GE has established more than 40 legal entities in China with a total investment exceeding US$1.5 billion. GE began doing business in China in the first decade of the 20th century, at about the time that its R&D operations opened at Niskayuna, N.Y. Today, that R&D headquarters site coordinates global research efforts with facilities in such locations as Shanghai, Bangalore and Munich. Those facilities support GE operations in more than 100 countries.
In September 2003, Jeffrey Immelt, GE's chairman and CEO, delivered his global R&D rationale at a presentation at the Massachusetts Institute of Technology: "We did it to have access to markets. But also we did it to get access to the best brains everywhere in the world. Today we run a very global network of R&D."
Immelt also rationalizes GE's global R&D strategy as the way to escape the "forces [driving] each of us to commodity damnation. In this regard the only source of profit, the only reason to invest in companies in the future is their ability to innovate and their ability to differentiate. Today, organic growth is the key. It's going to determine who gets rewarded and it is absolutely the biggest task of every company."
Organizing for that organic growth is the focus of six long-range, corporate funded projects at GE Global Research. The strategy is to provide the technology foundation for products that the divisions will fund and develop in the next decade, says Christine M. Furstoss, global technology leader for ceramics and metallurgy. Furstoss and her 10 peers monitor and help direct progress in molecular medicine, light energy conversion, pulse detonation propulsion, hydrogen energy, nanotechnology, and power conversion.
Holistic Approach
To maximize global success, Deloitte's Engel warns that innovation issues have to be integrated and considered holistically with other elements of the business network. In addition to R&D, he's referring to the entire value chain, including such things as suppliers, production facilities and enablers such as finance and information technology.
Engel says a Deloitte globalization study revealed that more than 80% of companies are not capturing the full value of their global investments. "Many of the global organizations studied realized a value loss from sub-optimization of 50% or more of bottom-line profits. Only about one in 10 companies has undertaken significant efforts to optimize global networks over the last three years."
On-Shoring R&D
Want to outsource R&D domestically? U.S.-based options go beyond contract researchers such as Battelle or universities.
U.S. design firms such as IBM Corp.'s Engineering & Technology Services (E&TS) are evolving to service R&D needs, not in the fundamental research project manner, but as product development facilitators. GE entered the market space about 2 1/2 years ago. The mission: facilitate the product development processes of clients -- directing them on better ways to get their technology into the hands of their customers, says Pat Toole, general manager. He says the focus is on helping clients cut time to market, reduce costs and integrate technologies in their product offerings.
"The concept is being accepted by customer organizations that are no longer frozen to the thinking that every nut and bolt and design feature has to be organically developed," Toole says.
IBM's client projects range from one-time product development projects to multi-year agreements.
For the New York Stock Exchange, Toole's group developed a wireless handheld device that would enable traders to access buy-and-sell orders on the trading floor. Conventional PDA's were too small and had a low resolution. Tablet computers were too large and heavy.
IBM's E&TS helped to develop a wireless handheld with a customizable minitablet platform that is well suited for vertical applications requiring small, lightweight, networkable computers.
In a project for Medtronic, IBM E&TS helped design an electronic system to monitor and reprogram their full range of pacemakers and other personal cardiac systems. "Since Medtronic wanted to keep their internal design team focused on their first-line products, they turned the job over to us," says Toole.
With Honeywell, IBM E&TS is working under a 10-year agreement that covers electronics for aircraft, munitions and space and surface vehicles. "Working with IBM will allow us to accelerate the development of new defense and space technologies," says Ed Wheeler, vice president and general manager for Honeywell's Defense and Space Electronic Systems. "IBM's expertise in high bandwidth communication and protocols as well as their high-performance information processing and networking management tools for use on vehicles will provide our military customers with advanced systems quickly and more cost-effectively."
Evaluating R&D Strategies
To maximize R&D's contribution to business success, don't start by optimizing R&D. Start by evaluating and optimizing the competitive power and value various R&D strategies deliver, advises Paul Wilbur, president and CEO, ASC Inc., Southgate, Mich.
Adds Jerry Mosingo, ASC's COO: "This industry, ever since Alfred P. Sloan, has been somewhat blinded by the illusions of big volume manufacturing. Mass production has a downside. Suppliers lose when their contributions become commodities, and OEMs lose when lack of sustained product demand leads to mounting over-capacity."
Wilbur proposes -- and practices -- a highly collaborative R&D business model dedicated to product hyper-segmentation, the anathema of mass-production followers. An eye-popping example of ASC's success is Chevy's SSR, a sporty convertible/roadster pickup.
Not only did ASC's design for the niche vehicle successfully compete with GM's internal design and development efforts, but ASC also plays a major supplier role unique by conventional standards. In its 150,000 square foot plant, it builds all of the sub-assemblies -- 47 of them -- and ships them across the street where a GM plant does the final assembly and painting. The design, which attractively and playfully exploits retro Chevy pickup themes, is intended to appeal to specialty buyers and draw customers for GM's more conventional brands.
At the last Detroit Auto Show, ASC, with its growing reputation as a specialty vehicle builder, displayed a unique four-door convertible, a design it would like to supply to an auto company. (Production of the last four-door convertible, the Lincoln Continental, ended in 1967.)
Using suppliers for collaborative R&D strategy is spreading as more manufacturers seek the benefits of improved time-to-market coupled with enhanced design and cost benefits. For example, Boeing is depending on its suppliers for the development of the 787, says Hamilton Sundstrand Aerospace, a subsidiary of United Technologies Corp., Windsor Locks, Conn.
For Hamilton Sundstrand, collaborative R&D presents a unique opportunity as well as a challenge. While the R&D costs for Hamilton Sundstrand are higher, that supplier has doubled its typical contributions to a Boeing plane. Hamilton Sundstrand contributes nine complete sub-assemblies to the 787.
The challenge comes from the communications complexity that collaborative R&D requires. An aircraft is orders of magnitude more complicated than any automobile design and development problem.
To solve the problem, Hamilton Sundstrand sought a PLM (product lifecycle management) solution that could facilitate R&D collaboration with partners both inside and outside the corporation. They can number in the thousands.
The challenge is in connecting with the diverse engineering software solutions used by its development partners. Hamilton Sundstrand found their solution from PLM vendor Centric Software Inc., San Jose, Calif.
"We needed a totally secure collaborative R&D environment for project teams distributed around the world," says Bob Guirl, program director for Hamilton Sundstrand's Aerospace Power Systems.
Centric's CEO Chris Groves says his PLM strategy is to provide applications that are flexible, open and scalable with deployment in a matter of weeks.
Deloitte's Engel notes that a 2001 study by the consulting organization identified PLM, PDM, CRM and APS software as significant contributors to success in corporate R&D initiatives.
