Can You Say What Your R&D Strategy Is?

Many, if not most, great innovations have technology as an enabler. With global research and development (R&D) spending of over $2T[1], R&D is essential to business success as science and technology are often the spark that creates opportunity and a critical basis for advantage. Consider the impact major technologies, such as AI, biologics, robotics, and blockchain, are poised to have across major markets such as automotive, chemicals, healthcare, and consumer electronics. AI, for instance, is estimated to drive between $13T and $16T in global economic growth by 2030[2], and will enable autonomous driving, change how we discover and develop materials, enhance patient diagnoses, and enable new types of consumer experiences.

Yet the promise of these technologies is taking place against a backdrop of declining R&D productivity.  According to research featured in Harvard Business Review[3], R&D productivity has declined as much as 65% over the last three decades. One of the causes of this decline is the increase in the number of technology spaces companies must monitor and pursue. In petrochemicals, for example, R&D teams that were once traditionally focused on hydrocarbon feedstock, process, and catalyst technologies today must also explore and build capabilities in areas like biologic feedstocks and materials, and digital technologies. Another driver of decline in R&D productivity is the increased complexity of technology development. In agriculture, for example, the number of researchers required to sustain increases in crop productivity has multiplied by as much as 23 times compared to the 1970s.[4]

The decline in productivity of R&D pursuits means that companies need to be more intentional about the technology spaces they go after as well as the capabilities they need to succeed. A future-focused R&D organization should manage a carefully designed portfolio of initiatives that advances the business strategy and builds options to deliver on such a strategy.

However, while most organizations are effective in justifying individual R&D project-level investments, there is often no strategy that globally optimizes priorities across multiple dimensions – for example, near-term vs. long-term investments, core vs. adjacent vs. new innovation, or market-facing vs internal capability development. This is, in part, because there is no common language to discuss R&D strategies and because R&D leaders often rise through technical tracks with limited exposure to strategy and portfolio management best practices.

As a result, instead of having a portfolio balanced by design, many organizations end up with an implicit “barbell” R&D portfolio. On one end of the spectrum, they support a host of projects that help sustain and evolve the current business. R&D is told what the priorities are and acts as a service organization to the business. On the other end, R&D has an assortment of future-oriented efforts, but because of a lack of strategic intent, these are not tied to clear long-term business priorities, so their likelihood of having impact is often low. As such, they are often under-resourced, make little progress, and are often criticized for being pet projects of investigators.

Five Key Questions for building an R&d strategy

Given the technology changes on the horizon and growing complexity, it pays for R&D leaders to invest in articulating a clear, succinct strategy. Based on our experience advising companies and a review of the R&D and innovation literature, we propose five questions that can help companies formulate one.

 

1. What is the purpose of your R&D organization?

With clarity into the fundamental problems an R&D unit is supposed to be solving for the organization, it is easier to gain alignment on a strategy that articulates the specific technologies and capabilities to pursue. Some R&D organizations, for instance, are designed to support the core business. Others are tasked with hedging against disruptive threats. Still others are charged with creating opportunities for new businesses. Some have an internal orientation as they drive a significant number of activities in house, while others primarily manage a network of external partners. In reality, most organizations need to find a balance between these activities and orientations according to their size/scale and enterprise strategy.

This alignment exercise is important because, in many organizations, technology development is no longer solely the responsibility of R&D. Ranging from corporate incubators to accelerators and corporate venture capital, over the last decade, the use of additional innovation structures to explore and make progress in technology spaces has increased. For example, corporate venture capital funds participated in $53B investments across 2,740 deals in 2018, an increase of 47% in capital invested and 32% in deals relative to 2017[5]. This wider range of development pathways complicates the decisions on how to invest resources to develop technology and also how to coordinate a larger collection of groups, particularly if there is no alignment on the problems that R&D is charged with solving relative to other organizations.

One chemical company we advised, for example, had a critical insight that R&D should own the job of creating optionality in the technology portfolio to account for the uncertainties in the future environment and the long materials development timelines. Before this insight, optionality had no natural, explicit home in the organization, despite the existence of multiple innovation structures and a number of significant disruptive threats on the horizon. With ownership clear, R&D leaders were able to have more coherent discussions on potential technology investment areas with senior leadership.

 

2. What is your aligned view of the future?

R&D is often tasked with thinking about and enabling an organization’s narratives about the future – by identifying key technologies on the horizon and providing critical perspectives on them. Yet, while leaders can often agree on which technologies are trending, they often do not agree on the specifics of timing, impact, and certainty. And these specifics are what drive action and investment. While no one can predict the future, creating and aligning on a testable and measurable point of view — which we call a ‘technology view of the world’ – can help R&D leaders prioritize investments and define an approach.

In automotive and related industries, for instance, there is a difference between acknowledging that electrification will be important in the future and having granular assumptions about issues such as when cost parity will be reached with internal combustion, the availability of charging, and adoption pathways (e.g., geographies, market segments). One automotive company we served, for example, developed and aligned on a technology view of the world consisting of over 15 specific technology assumptions. The assumptions covered electrification, autonomy, connectivity, and mobility, and were developed through secondary research, internal and external expert interviews, and exercises designed to drive alignment in organizations. This set of precisely worded statements ensures that the R&D organization, as well as the broader leadership, held a common set of beliefs about the future, which then drove their investment strategy.

 

3. What are the R&D organization’s focus areas?

By establishing clear boundaries around a portfolio of priority spaces grounded on a view of the world, R&D organizations can avoid the barbell portfolio described earlier. The goal is to frame – but not necessarily solve – focus areas that are expected to drive the most value to the organization. These should have an appropriate level of direction and granularity so that leaders can put resources against them, but leave room for pieces of the puzzle to emerge given the degree of technical and business uncertainty.

DARPA, for example, the advanced research projects agency that ignited breakthroughs such as the Internet and GPS, currently focuses on four areas: 1) rethinking complex military systems, 2) mastering the information explosion, 3) harnessing biology as technology, and 4) expanding the technological frontier.^[6] Within these areas, the agency intentionally lets program managers define and propose programs they believe would provide revolutionary change.

It is often helpful to have a common structure and language for “focus areas” to improve communication and cross-opportunity evaluation. We find promising technology focus areas generally are at the intersection of: 1) a technology that will be highly relevant in the future environment, 2) a capability or solution that provides a right to win and commercial advantage, and 3) a market opportunity that connects the technology and capability to market trends and customer jobs to be done. Leading technology organizations, such as Alphabet’s X, employ this type of structured approach for identifying and assessing their priorities[7].

 

4. How will you sync business and R&D?

A critical aspect to developing a successful R&D strategy is ensuring that its outputs fit in the context of the broader enterprise strategy. In engineering, this is typically known as an impedance match – where the design of a system aims to maximize power transfer and minimize signal reflection. In like manner, when the impedance between business and R&D gets out of balance, because the enterprise is not designed to utilize or act on the information, R&D strategy efforts can fail.

To avoid business and R&D being out of sync, it is often helpful to engage in proactive tactics, such as creating a shared technology view of the world, as discussed above, with input from R&D and business leaders, adding business advisors in early stages of R&D initiatives, or creating explicit processes that encourage technical talent to think about business assumptions (e.g., business model shifts) early on. For example, the R&D unit of a consumer electronics company we have advised proactively embeds what they call “triangle teams,” which consist of a technical lead, a user lead, and a business lead, into early stage R&D explorations. This ensures critical non-technical considerations are taken into account early on in R&D processes.

 

5. How will you program key initiatives?

The bridge between strategy development into execution, which we term strategic programming, is another area that can drive an R&D strategy to succeed or fail. In fact, one in two executives acknowledge a gap between strategy development and implementation.^[8] Lack of success is often the result of multiple failure modes that occur as R&D units shift from strategy to execution: lack of stakeholder buy-in, failure to account for new R&D initiatives in organizational structures and operating models, insufficient allocation of resources, and challenges in managing uncertainty and making difficult choices.

Three of the key elements of strategic programming are setting project charters, allocating resources, and establishing appropriate governance mechanisms. Getting projects defined properly is critical to ensure teams are working on things that will advance the strategy. This charter-setting stage involves translating the strategy into discrete workstreams, ensuring alignment on scope, guardrails and key performance indicators (KPIs), and ensuring the right type of team is staffed to the effort.

While the future seems to be arriving faster than expected, technology continues to take time to develop. The more intentional companies are about anticipating and generating optionality for their industry’s S-curves, the better the chances the organization will be prepared to respond.

 

[1] National Science Board. 2018. “Science and Engineering Indicators 2018.” Available at: https://www.nsf.gov

[2] Wladawsky-Berger, I. 2018. “The impact of artificial intelligence on the world economy.” Wall Street Journal. Available at: https://www.wsj.com

[3] Knott, A.M. 2017. “Is R&D getting harder or are companies just getting worse at it?” Harvard Business Review, March 2017

[4] Bloom, N., Jones, C.I., Van Reenen, J., Webb, M. 2017. “Are ideas getting harder to find?” NBER Working Paper No. 23782.

[5] CBInsights. 2018. “The Global 2018 Corporate Venture Capital Report.” Available at https://www.cbinsights.com

[6] DARPA. 2019. “Our Research”. Available at: https://www.darpa.mil/program/our-research/more.

[7] Guizzo, E. 2016. “Astro Teller, Captain of Moonshots at X, on the future of AI, robots and coffeemakers.” IEEE Spectrum, December 2016

[8] The Economist Intelligence Unit. 2013. “Why Good Strategies Fail: Lessons for the C-Suite.”