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Measuring R&D performance—U.S. and German practices
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J PROD INNOV I998:15:82-94
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search, rewarding innovative and entrepreneurial behavior by managers, supporting cross-functional teams, and delivering a clear, unified message to the customer. Nissan’s Infiniti Division wanted to capitalize on the success of its QX4 luxury sedan by rolling out a sport utility vehicle version. To understand the marketplace, Infiniti polled existing customers in Westchester County, New York, by means of face-toface interviews, letters, and surveys. Soon enough, the picture of the new vehicle began to emerge: rides like a car, low step for easy entry, priced under $40,000. Five different designs were developed around this description and tested with Infiniti owners and onowners nationwide who comprised the target market: 35-64 years old, over $125,000 annual income, with a willingness to buy a luxury car. The selected design was developed into clay and fiberglass models with the input of customers and dealers. A heavy promotional campaign stressing placements in upscale magazines like Smart Money was worked up. The official launch was accompanied by a jazz concert at Madison Square Garden. Dealers were not neglected: they were invited to a central location to test drive the car, and a training team visited key dealers to provide sales and marketing assistance. Sales have greatly exceeded expectations (1,600 a month versus 1,000 a month projected). Marketing director Steve Kight noted that “The secret [to a successful launch] is that we make sure we understand exactly what our customers want. The QX4 was designed expressly for them.” 3M is, of course, well known for the support it provides to NPD. Over the past five years it has invested about $4 billion in R&D and develops about 500 new products per year. Award programs reward employees for entrepreneurial thinking, and up to 15 percent of employee time can be set aside for idea generation. This devotion to innovation is clearly illustrated by 3M’s 1995 launch of Scotch-Brite Never Scratch soap pads. 3M’s objective was to increase its business in the home-care market with a new soap pad despite the presence of two strong competitive brands, SOS and Brillo. Focus groups from 1993 indicated that standard pads scratched expensive cookware. A cross-functional development team was charged with designing a product around this concept. A gentler material was identified to make the product do less damage to cookware. Prototype products were developed and extensively tested in malls. Marketing personnel feared that a product too different from Brillo and SOS would be confusing to customers, so 3M
ABSTRACTS
paved the way for Never Scratch by first introducing Never Rust in 1993 which was a direct competitor to the two giants. Never Rust created brand recognition, making the launch of Never Scratch in 1995 much easier. CoreStates Banks of Philadelphia launched CoreXchange, which is a machine similar to an ATM that provides deposit and cash exchange services to mall merchants, in 1996. A major problem identified by merchants was that it was difficult to get change or do other banking activities after 1:30 p.m. The ATM-like CoreXchange provided convenient services to merchants right in their shopping mall. The launch was announced at a breakfast for merchants at the large King of Prussia mall near Philadelphia, one month before the official unveiling. Direct mail and followup phone calls were used to promote the breakfast. As of mid-1997, CoreXchange is close to breaking even and CoreStates plans to roll the service our to 10 to 15 malls per year. Gustke concludes with several key questions that need to be answered to help assure a successful product launch: 1. Is the product truly new or improved? 2. Is there real market demand for this product? 3. Can you deliver the quality demanded by customers? 4. Can you assess the result of each element of the launch plan to decide if your investment in launch is being spent the best way? 5. Have you done market research into customer and channel acceptance? 6. Are you prepared to withstand competitive reaction?
Measuring R&D Performance-U.S. and German Practices, Bjorn M. Werner and William E. Souder, Research-Technology Management (May-June 1997),
pp. 28-32 The United States and Germany are the two predominant Western countries in terms of R&D spending. Both have a large number of R&D-intensive firms, and products developed in these countries are well known throughout the world. How, then, do they compare in measurement of R&D performance? To answer this question, Werner and Souder undertook a study of top R&D firms in both the U.S. and Germany in selected R&D-heavy industries: chemicals, materials,
ABSTRACTS
electronics, aerospace, automotive, petroleum, and pharmaceuticals. The authors conducted interviews with several respondents from forty firms (about half from each country). The interviews centered on products, R&D spending and strategy, R&D monitoring methods, R&D measurement approaches used, and applications of z.pproaches. They arrived at some surprising differences between the two countries in terms of both philosophy of measurement and perception of its usefulness. IJ.S. managers tended to look at output measures like patent counts, rates of return, total quality management, audits, and assessments of cost, time, and per’ormance. All U.S. companies track R&D project per”ormance, usually evaluating projects at several points in their life cycles. Most U.S. managers prefer a combination of several measures including both quantitative and qualitative ones, rather than relying on a simple metric. These measures tend to be expressed in terms of outputs per input (for example, patents per dollar spent). By contrast, German managers distrusted R&D metrics, in particular output measures. These tended to be seen as an “act of mistrust against their scientists.” Input measures such as annual expense per R&D employee were more common instead. It seems that Germa:1 managers seek to “control” R&D by providing top quality inputs (the best scientists, the best labs, and high-achievement goals), and therefore measure input indicators of R&D activities. Other metrics typically used include investment in R&D per year and ratio of scientists per employee. The authors note that the German philosophy seems to be to monitor input to ensure that adequate amounts are invested in R&D. The differences seen above may be attributable to differences in management philosophy. German managers tend to use a long-term (20-30 year) planning horizon and therefore are more concerned with a stable. continuous input policy. U.S. firms, on the other hand, are more driven by short-term, financial considerations and are more likely to monitor outputs. Furthermore, many German CEOs in this study came out of engineering backgrounds, and may view technology as an end in itself. U.S. CEOs typically had advanced business degrees and were more likely to view technology as a tool to improve company performance. I! was interesting to find that managers from both countries expressed some dissatisfaction with their measurement of R&D. U.S. managers feared that they placed too much emphasis on R&D control, thus pos-
J PROD INNOV 1998;15:82-94
MANAG
89
sibly demotivating researchers rather than providing a climate of creativity. German managers expressed a desire to make R&D more productive. It seems that managers recognized the inherent weaknesses in the R&D measurement techniques they currently employ. As a result, the authors suspect that managers from both the U.S. and Germany will make changes to R&D measurement in the future. U.S. managers have figured out how to “harness the R&D monster” and now recognize the need to move to more flexible R&D practice to boost U.S. competitiveness. Conversely, German managers are increasingly recognizing that they must assess R&D productivity more rigorously in order to stay competitive. In short, managers from each country may be naturally moving toward a common midpoint in terms of R&D measurement. Creative Destruction as a Market Strategy, Michael C. Neff and William L. Shanklin, Researck-Technology Management (May-June 1997), pp. 33-40 Years ago, the economist Joseph Schumpeter discussed “creative destruction,” a macro-level process by which firms will explore technological innovations to exploit profit opportunities. As competitors enter, the technological leader loses profit margin and hence redoubles its efforts in technical research in order to regain its lead. Neff and Shanklin argue that product cannibalism is creative destruction taken down to the individual firm level. A technologically strong firm replaces profitable products and processes with new, higher-performance offerings in order to stay ahead of competitors. They note that cannibalism is sometimes called “owning the leading edge and sharing the trailing edge of competition.” Gillette is a commonly cited example: Trac II was replaced by Atra, which was replaced by Sensor. Gillette would rather cannibalize itself than let, say, Wilkinson do the job. A company has to develop a strategic philosophy regarding innovation. While much is written about innovative R&D leaders like 3M and Johnson and Johnson, there are far more imitator firms, who are “short on R and long on D.” Innovation strategy is probably appropriate for no more than a few companies in any industry; the majority of competitors will follow an imitative strategy. This has important strategic consequences for all competitors. Leader firms compete on the basis of technological skill and have no choice but to build their R&D strategy around product cannibalism. The success of imitator firms rests on following along and improving performance.
J PROD INNOV I998:15:82-94
MANAG
search, rewarding innovative and entrepreneurial behavior by managers, supporting cross-functional teams, and delivering a clear, unified message to the customer. Nissan’s Infiniti Division wanted to capitalize on the success of its QX4 luxury sedan by rolling out a sport utility vehicle version. To understand the marketplace, Infiniti polled existing customers in Westchester County, New York, by means of face-toface interviews, letters, and surveys. Soon enough, the picture of the new vehicle began to emerge: rides like a car, low step for easy entry, priced under $40,000. Five different designs were developed around this description and tested with Infiniti owners and onowners nationwide who comprised the target market: 35-64 years old, over $125,000 annual income, with a willingness to buy a luxury car. The selected design was developed into clay and fiberglass models with the input of customers and dealers. A heavy promotional campaign stressing placements in upscale magazines like Smart Money was worked up. The official launch was accompanied by a jazz concert at Madison Square Garden. Dealers were not neglected: they were invited to a central location to test drive the car, and a training team visited key dealers to provide sales and marketing assistance. Sales have greatly exceeded expectations (1,600 a month versus 1,000 a month projected). Marketing director Steve Kight noted that “The secret [to a successful launch] is that we make sure we understand exactly what our customers want. The QX4 was designed expressly for them.” 3M is, of course, well known for the support it provides to NPD. Over the past five years it has invested about $4 billion in R&D and develops about 500 new products per year. Award programs reward employees for entrepreneurial thinking, and up to 15 percent of employee time can be set aside for idea generation. This devotion to innovation is clearly illustrated by 3M’s 1995 launch of Scotch-Brite Never Scratch soap pads. 3M’s objective was to increase its business in the home-care market with a new soap pad despite the presence of two strong competitive brands, SOS and Brillo. Focus groups from 1993 indicated that standard pads scratched expensive cookware. A cross-functional development team was charged with designing a product around this concept. A gentler material was identified to make the product do less damage to cookware. Prototype products were developed and extensively tested in malls. Marketing personnel feared that a product too different from Brillo and SOS would be confusing to customers, so 3M
ABSTRACTS
paved the way for Never Scratch by first introducing Never Rust in 1993 which was a direct competitor to the two giants. Never Rust created brand recognition, making the launch of Never Scratch in 1995 much easier. CoreStates Banks of Philadelphia launched CoreXchange, which is a machine similar to an ATM that provides deposit and cash exchange services to mall merchants, in 1996. A major problem identified by merchants was that it was difficult to get change or do other banking activities after 1:30 p.m. The ATM-like CoreXchange provided convenient services to merchants right in their shopping mall. The launch was announced at a breakfast for merchants at the large King of Prussia mall near Philadelphia, one month before the official unveiling. Direct mail and followup phone calls were used to promote the breakfast. As of mid-1997, CoreXchange is close to breaking even and CoreStates plans to roll the service our to 10 to 15 malls per year. Gustke concludes with several key questions that need to be answered to help assure a successful product launch: 1. Is the product truly new or improved? 2. Is there real market demand for this product? 3. Can you deliver the quality demanded by customers? 4. Can you assess the result of each element of the launch plan to decide if your investment in launch is being spent the best way? 5. Have you done market research into customer and channel acceptance? 6. Are you prepared to withstand competitive reaction?
Measuring R&D Performance-U.S. and German Practices, Bjorn M. Werner and William E. Souder, Research-Technology Management (May-June 1997),
pp. 28-32 The United States and Germany are the two predominant Western countries in terms of R&D spending. Both have a large number of R&D-intensive firms, and products developed in these countries are well known throughout the world. How, then, do they compare in measurement of R&D performance? To answer this question, Werner and Souder undertook a study of top R&D firms in both the U.S. and Germany in selected R&D-heavy industries: chemicals, materials,
ABSTRACTS
electronics, aerospace, automotive, petroleum, and pharmaceuticals. The authors conducted interviews with several respondents from forty firms (about half from each country). The interviews centered on products, R&D spending and strategy, R&D monitoring methods, R&D measurement approaches used, and applications of z.pproaches. They arrived at some surprising differences between the two countries in terms of both philosophy of measurement and perception of its usefulness. IJ.S. managers tended to look at output measures like patent counts, rates of return, total quality management, audits, and assessments of cost, time, and per’ormance. All U.S. companies track R&D project per”ormance, usually evaluating projects at several points in their life cycles. Most U.S. managers prefer a combination of several measures including both quantitative and qualitative ones, rather than relying on a simple metric. These measures tend to be expressed in terms of outputs per input (for example, patents per dollar spent). By contrast, German managers distrusted R&D metrics, in particular output measures. These tended to be seen as an “act of mistrust against their scientists.” Input measures such as annual expense per R&D employee were more common instead. It seems that Germa:1 managers seek to “control” R&D by providing top quality inputs (the best scientists, the best labs, and high-achievement goals), and therefore measure input indicators of R&D activities. Other metrics typically used include investment in R&D per year and ratio of scientists per employee. The authors note that the German philosophy seems to be to monitor input to ensure that adequate amounts are invested in R&D. The differences seen above may be attributable to differences in management philosophy. German managers tend to use a long-term (20-30 year) planning horizon and therefore are more concerned with a stable. continuous input policy. U.S. firms, on the other hand, are more driven by short-term, financial considerations and are more likely to monitor outputs. Furthermore, many German CEOs in this study came out of engineering backgrounds, and may view technology as an end in itself. U.S. CEOs typically had advanced business degrees and were more likely to view technology as a tool to improve company performance. I! was interesting to find that managers from both countries expressed some dissatisfaction with their measurement of R&D. U.S. managers feared that they placed too much emphasis on R&D control, thus pos-
J PROD INNOV 1998;15:82-94
MANAG
89
sibly demotivating researchers rather than providing a climate of creativity. German managers expressed a desire to make R&D more productive. It seems that managers recognized the inherent weaknesses in the R&D measurement techniques they currently employ. As a result, the authors suspect that managers from both the U.S. and Germany will make changes to R&D measurement in the future. U.S. managers have figured out how to “harness the R&D monster” and now recognize the need to move to more flexible R&D practice to boost U.S. competitiveness. Conversely, German managers are increasingly recognizing that they must assess R&D productivity more rigorously in order to stay competitive. In short, managers from each country may be naturally moving toward a common midpoint in terms of R&D measurement. Creative Destruction as a Market Strategy, Michael C. Neff and William L. Shanklin, Researck-Technology Management (May-June 1997), pp. 33-40 Years ago, the economist Joseph Schumpeter discussed “creative destruction,” a macro-level process by which firms will explore technological innovations to exploit profit opportunities. As competitors enter, the technological leader loses profit margin and hence redoubles its efforts in technical research in order to regain its lead. Neff and Shanklin argue that product cannibalism is creative destruction taken down to the individual firm level. A technologically strong firm replaces profitable products and processes with new, higher-performance offerings in order to stay ahead of competitors. They note that cannibalism is sometimes called “owning the leading edge and sharing the trailing edge of competition.” Gillette is a commonly cited example: Trac II was replaced by Atra, which was replaced by Sensor. Gillette would rather cannibalize itself than let, say, Wilkinson do the job. A company has to develop a strategic philosophy regarding innovation. While much is written about innovative R&D leaders like 3M and Johnson and Johnson, there are far more imitator firms, who are “short on R and long on D.” Innovation strategy is probably appropriate for no more than a few companies in any industry; the majority of competitors will follow an imitative strategy. This has important strategic consequences for all competitors. Leader firms compete on the basis of technological skill and have no choice but to build their R&D strategy around product cannibalism. The success of imitator firms rests on following along and improving performance.