Organisational Design for R&D

Organizational Designs for R&DAuthor(s): Garardine DeSanctis, Jeffrey T. Glass, Ingrid Morris EnsingSource: The Academy of Management Executive (1993-2005), Vol. 16, No. 3 (Aug., 2002), pp.55-66Published by: Academy of ManagementStable URL: http://www.jstor.org/stable/4165868 .Accessed: 29/09/2011 05:45

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Academy of Management Executive, 2002, Vol. 16, No. 3

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Organizational designs for R&D

Gerardine DeSanctis, Jeffrey T. Glass, and Ingrid Morris Ensing

Executive Overview Research and development is becoming increasingly business-oriented, and corporate

reliance on new technology and innovation is greater than ever. How can R&D activities be organized to yield the greatest value for the enterprise? A study of 14 leading technology-intensive companies in six industries illustrates how three organizational designs are being used to manage distributed, flexible R&D organizations: (1) decentralized, (2) networked, and (3) integrated. Decentralized designs limit the role of a central R&D group; they direct R&D resources more toward products and markets rather than basic scientific activities. Networked designs push the boundaries of R&D outside the confines of a central R&D group and the firm as a whole. Integrated models use sophisticated communication linkages to tie centralized, science-based activities with the business needs of the corporation. Within the three design approaches, there are design variants, each with its positive and negative tradeoffs. We show how some designs for R&D are more effective than others and provide suggestions for how companies in search of an ideal organization design for R&D can select among possible configurations to promote adaptive, value-oriented R&D organizations.

How can R&D activities be organized to yield the greatest value for the enterprise? In an era when corporate strategy and survival can depend heavily on a firm's ability to innovate rapidly, with maximum business impact and rigorous cost control, organization design issues have moved to the foreground.' The dilemma is classic: how to simul- taneously yield value from centralized and decentralized forms of organizing; but the context is new: a heightened pace of innovation, reduced product life cycles, a global marketplace, growing reliance on intellectual property rather than hard-core technologies, and the massive infusion of electronic communication systems for creating and coordi- nating knowledge work.2 Organizations are moving from reliance on hierarchy and rigidity of structure to new forms that are flatter, cross-functional, and dynamic.

How can R&D activities be organized to yield the greatest value for the enterprise?

Within this context, R&D activities are increasingly business-oriented and capital-intensive. Firms seek to be both innovative and efficient,

global and local, disciplined and flexible. Master- ing paradox is paramount.3 The head of R&D for. GlaxoSmithKline recently put the issue this way: "We need to be big and small at the same time."4 More than ever, companies seek value from their R&D initiatives. The potential payoffs from organizing R&D effectively are enormous and the costs of ineffective organization structures extremely high. Executives confront a quandary: how to construct an ideal organization design for R&D among a sea of possible configurations.

Trends and Tensions

Historically R&D operations were centralized, and this organization design persisted long after World War II. Even as organizations grew, diversified, and spread across the globe, R&D remained centralized for many companies. Well-documented problems, however, arose out of centralized structures, among them weak links between R&D efforts and meeting the needs of customers and product lines. Product development cycles were perceived to be too slow and R&D costs too high. R&D was viewed as overly scientific and out of touch with the business enterprise. By the late 1980s, most large technology companies had decentralized R&D operations, breaking down (though not neces-

55

56 Academy of Management Executive August

sarily eliminating) corporate laboratories and moving R&D activities closer to business units.5 A move from a central R&D (CRD) design to a business unit R&D (BU-R&D) design shifted the strategy of R&D away from one of hope toward one of action-that is, from heavy emphasis on pure research to heavy emphasis on product development.6

Without doubt, R&D in technology companies has become more business relevant. But organization design choices for R&D are not without con- troversy. Classic tensions in R&D management persist. (See Figure 1.) Companies continually struggle with how best to reconcile the competing pressures associated with organizing R&D around science versus organizing R&D around products or markets. Executives wish for the benefits of both science and business-oriented R&D; however, developing both centralized and business-unit R&D groups is costly, and coordination needs become more complex as R&D activities spread throughout the enterprise.7 The organization design dilemma is that decentralized structures and formal ac- countability for R&D are more likely to bring more new products and incremental innovations, but major technology advancements are more likely when R&D is centralized and informal.8 These tensions are evident in industries as varied as chemicals, electronics, aerospace, communications, and pharmaceuticals.

Central R&D Business Unit R&D (CRD) (BU-R&D)

* Services the needs of the * Services the needs of corporation the market or product

line * Permits long-range thinking a Pushes short-term

results * Brings frame-breaking science . Develops technology in

to product innovation response to business needs

* Encourages risk taking * Promotes product success

? Attracts leading-edge scientists * Attracts business-savvy and engineers technologists

* Emphasizes research * Emphasizes development

* The balance of power within . The balance of power the management structure within the management tends toward centralization structure tends toward

decentralization

FIGURE 1 Competing Organization Design Pressures

in R&D

Companies continually struggle with how best to reconcile the competing pressures associated with organizing R&D around science versus organizing R&D around products or markets.

Insights from Leading Companies

We examined 14 leading technology companies from six major industries with the goal of identifying the various organizational structures that firms are using to arrange their R&D units. We sought out large, profitable, multinational firms with strong, established reputations for technology leadership and significant R&D investments. All of the firms rely on technology to support their core business strategies, and all have been operational for at least 10 years. On average, the firms we studied spend over $1.7 billion annually, or 8% of revenue, on R&D. They employ over 122,000 people and generate approximately $303,000 of sales annually per employee. With one exception the companies have a history of maintaining large corporate laboratory facilities and attracting the best scientists and engineers in their industries.9 We identified the dominant organization designs for R&D in these firms. We compared and contrasted the firms on some basic financial parameters and then documented in detail how centralization- decentralization tradeoffs were managed via organization design. Because theorists emphasize paradox in new organizational forms, we were especially interested in the structures used to meet basic science and product development needs si- multaneously.10

Organization Designs for R&D

We observed that three general models are being used today for design of R&D: (1) decentralized models, (2) networked models, and (3) integrated models. Decentralized models place R&D close to or within BUs, limiting the role of any centralized R&D function. Networked models link BUs to R&D sources inside and outside of the organization. Inte- grated models combine centralized with decentralized R&D structures and use special communication mechanisms to tie these structures together. All of the models address current pressures to simulta- neously meet the competing R&D goals of long-term research and short-term product development.

Figure 2 summarizes some basic financial and related parameters and shows the dominant organization design associated with each of the firms in

2002 DeSanctis, Glass, and Ensing 57

Firm's Percent Organization Design Annual R&D Annual Total Firm's Percent of Industry of Industry Value

Company' for R&D Expenditures2 Revenue3 Employees R&D Expenditures Revenue Ratio4

F DECENTRALIZED 2279 33900 251900 37.04% 13.70% 01.47 E DECENTRALIZED 3524 23200 234000 5.96% 3.53% 02.53 A DECENTRALIZED 394 15128 70400 7.92% 11.61% 20.81 B DECENTRALIZED 92 2363 150000 0.34% 1.41% 27.92 Average 1572 18648 176575 12.82% 7.56% 13.18 L NETWORK 3648 30147 141600 6.17% 4.59% 05.25 P NETWORK 1308 39150 101000 16.51% 18.67% 11.20 C NETWORK 1020 8458 15000 1.73% 1.29% 49.72 Average 1992 25918 85867 8.14% 8.18% 22.06 G INTEGRATED 1930 100469 293000 31.37% 40.60% 04.42 I INTEGRATED 5046 81667 291067 8.54% 12.43% 05.00 M INTEGRATED 1297 8648 31800 16.37% 4.12% 07.92 T INTEGRATED 2674 26273 64500 4.53% 4.00% 13.70 D INTEGRATED 807 18441 39029 10.18% 8.80% 22.13 X INTEGRATED 701 4809 25000 2.56% 2.87% 44.75 H INTEGRATED 35 1300 2000 0.41% 0.18% 216.19 Average 1784 34515 106628 10.57% 10.44% 44.87 Overall 1768 28140 122164 10.69% 9.13% 30.93

Average

1 Companies E, L, C. T, and I are in the information and electronics industry. Companies P, D, and M are in the chemicals industry. Companies F and G are in the machinery and equipment industry. Companies B and X are in the medical/pharmaceuticals industry. Company A is in aerospace, and Company H is in the industrial materials industry.

2Millions of U.S. dollars. 3 Millions of U.S. dollars. 4 The ratio is calculated as ((Firm's % of Industry Revenue/Firm's % of Industry R&D) * 1,000,000)/total employees. The larger the ratio,

the more revenue the firm generates from R&D expenditures, relative to industry averages and controlling for firm size.

FIGURE 2 Organization Design, Size, and Financial Measures for the 14 Companies

our study. The integrated model is the most popu- lar, and this is probably due to its many advantages relative to the other design types, as we shall discuss below. Note that there is no dominant organization design type as a function of industry. For example, firms in the information and electronics industry fall across the three organization design categories.

The data in Figure 2 reflect a few general patterns. Firms that adopt the decentralized approach to organization design have smaller R&D budgets, generate less revenue, and employ more people than firms adopting the other two organization design models. Firms that adopt the network organization design are smaller, relatively speaking, in terms of number of employees, and spend more on R&D than firms using the decentralized and integrated models. Firms using the integrated design are mid-range in the size of their R&D budgets and number of employees, yet they generate the highest corporate revenue, on average. To account for variations in R&D budgets and revenue across industries, we calculated for each firm its percent- age of overall industry R&D expenditures and its percent of industry revenue." So, for example,

firms using the decentralized designs spend an average of 12.8% of their industry's R&D budget, yet generate only 7.6% of industry revenue. In contrast, firms using integrated designs expend about 10.5% of industry R&D budgets and generate about the same portion of industry revenue.

As a simple measure of each firm's ability to generate value from R&D within its industry, we divided each firm's percent of industry revenue by its percent of industry R&D expenditures. To account for firm size, we then divided the result by the firm's number of employees.'2 The larger this ratio, the more revenue the firm generates from R&D expenditures, relative to industry averages and controlling for firm size. The data in Figure 2 are displayed in order of increasing values of this ratio for each organization design type. On average, integrated designs are associated with greater value generation from R&D, but it is important to note that there is wide variation in value ratios within each design category. Looking across the three right-hand columns of Figure 2, it seems that integrated and network designs are associated with lower cost and greater value generation from R&D relative to decentralized designs. The


variation between companies within each organization design category, however, suggests that specific implementation of the models varies across firms. Value generation is possible within each organization design approach, perhaps depending on the specific ways in which firms apply the models. With the data in Figure 2 as a back- drop, we can now look more deeply into the organization designs of the 14 companies.

Integrated and network designs are associated with lower cost and greater value generation from R&D relative to decentralized designs.

(1) Decentralized Models

Four of the fourteen firms maintain a decentralized approach to R&D management, though their strategies and approaches to decentralization suggest three forms. (See Figure 3). Companies A and B adopt the first form, whereas companies F and E use the second and third forms, respectively. Note that companies A and B are more successful in

their use of the decentralized approach-in terms of achieving value relative to their industries. (See the value ratios in Figure 2.)

Decentralized designs hold in common the fact that they limit the role of a central R&D group. In the purest form of decentralization, there is no central R&D at all. All R&D activity takes place within the BUs. R&D groups across BUs may or may not be coordinated through a central office, such as the Chief Technology Officer. This purely decentralized approach puts R&D close to the customer or product and is consistent with what Miles and Snow labeled a defender strategy.13 Scientific and engineering expertise is directed toward the specific product and/or market domains of the business, and any innovation effort tends to be highly targeted. If R&D budgets are held relatively low, monies can be directed toward projects with high payoff, thus yielding value from R&D activities. Despite these advantages, there is little learning or leveraging of R&D capabilities across the enterprise as a whole, because the R&D group of one business unit is not likely to interact with the R&D groups of other BUs. Research support for firm- wide strategic initiatives is difficult if not impos-

Chief Technology Officer

No CRD 0 > >>fi> Segmented CRD

BU 1 CRD R&D~~~~~~~~~~~R

BU 2 R&D

BU 2~ ~ ~ ~ ~~~~B

R&D D3R&

R&D ...................

Dispersed

BU 1| BU 1 R&D 1 R&D 2 CRDD

Product \ \~~~~~~~trtg

LU2 group 1 Figure Legend

BU 3 \ t strategy }D = person R&D, p< \\ \ group 2 Product = department or division

BU4 strategy = cross-functional team

R&D eas grop 3= computer system

FIGURE 3 Decentralized Models for R&D Organization Design


sible. Economies of scale from R&D spending are not available, since laboratories and scientists are duplicated and not shared across the enterprise.

Companies E and F have attempted to overcome some of the downsides of the no-CRD approach but with mixed success. Company F adopts a segmented CRD model in which R&D personnel associated with specific markets or products are con- solidated into a central location but operate independently of one another. CRD is essentially a shell operation, a physical location and/or logisti- cal unit for managing R&D personnel and related resources. The major advantage of the segmented model over the no-CRD model is that it increases possibilities for knowledge transfer across the R&D groups of the various BUs. Co-location can facilitate informal collaboration and joint problem- solving. Further, this model offers cost advantages. Scientists and engineers in co-located laboratories can be managed together, thus streamlining hir- ing, training, and other personnel costs. On the other hand, co-located BU-R&D groups risk becoming out of touch with the BUs that they were designed to serve.

Company F is not achieving high value from its segmented model, perhaps because the firm's R&D strategy is not consistent with its organization design. Company F is pursuing what Miles and Snow would call a prospector strategy; the firm is very aggressive with regard to searching for opportunities beyond immediate customer and product lines, and the BU-R&D groups are having trouble staying aligned with BU needs due to their distant location from them. R&D expenses are very high relative to industry averages, and value from R&D expenses is difficult to achieve. Like the no-CRD approach, a segmented model may be better used with a defender approach to R&D strategy, since in the segmented model R&D remains organized along product or market-oriented lines.

The dispersed model for R&D management scatters R&D throughout the enterprise, anywhere and everywhere there is deemed to be opportunity and business need. Company E in our sample exempli- fies this model. BUs that need and can afford R&D create R&D groups. Some BUs may have more than one R&D group. Other BUs may have no R&D. Cross-unit product-strategy groups form on an as- needed basis to develop and/or support new technologies. In the dispersed model, there may or may not be a CRD. Where a CRD exists, its role is not so much to coordinate R&D efforts as it is to take on special projects that fulfill particular product- development needs that cannot be met inside of the BUs. In Company E there is no central coordination or control unit for R&D. Rather, there is

continual (though not monitored or required) informal information exchange among the many, diffuse R&D activities. Informal information exchange occurs via electronic discussion groups, seminars, and workshops made available to technical employees.

The dispersed model for R&D management scatters R&D throughout the enterprise, anywhere and everywhere there is deemed to be opportunity and business need.

The advantage of the dispersed approach is that it fosters a culture of product innovation and ex- perimentation. The model fits a prospector approach to R&D strategy. As one manager in Com- pany E put it, "New product ideas come from anywhere and everywhere." The problem, of course, is that ensuring adequate information exchange is difficult when operations are scattered, and good ideas and research resources can be squandered in the fray. Recognizing this potential weakness, Company E has established an "ideas database" into which technology development ideas from throughout the enterprise can be placed for later use by others. Still, the reliance on an information system to integrate R&D information, without an organizational unit or other authority role, is problematic. The dispersed model risks becoming decentralization run amuck, and although value through growth may be achieved in the long run, it is an extremely expensive approach to organization design.

(2) Networked Models

Much is written today extolling the value of the so-called network organization design in which the walls of corporate divisions or BUs-or indeed the organization itself-are opened, allowing fluid exchange of information across corporate and BU boundaries.'4 For R&D, networked models facilitate transactions-on-demand in which R&D resources are applied when and where they are needed, regardless of where the technical capabilities lie-whether inside a CRD, inside a BU, or outside of the organization. Networked models are compatible with the prospector approach to R&D strategy, as they deliberately aim to link basic technology developments to business needs. Firms adopting a networked approach create and nurture a set of relationships to link basic technology sources to business demands. As business needs change, new relationships are established, and so


there is flexibility in R&D ventures. We observed three networked models. (See Figure 4.)

The internal-market model relies on informal interaction between CRD and BUs whereby BUs scout for relevant projects within CRD, and CRD groups, in turn, seek BU sponsors for basic science initiatives. Specific CRD groups are not necessarily designated to work with specific BUs; rather, linkages are developed depending on how a research group's technology or expertise can be applied to the BU. In Company L, where we observed this model in action, no single person within CRD is assigned to manage CRD-BU relationships; the incentives for all of the researchers are designed to encourage proactive, targeted relationships with BUs. In turn, BUs are free to approach researchers in CRD with requests for technical assistance or full-blown research projects. Project milestones and costs are negotiated to meet the specific needs at hand. Extensive CRD-BU interaction is promoted via face-to-face meetings, regular visits to project teams, job rotation between CRD and BUs, conferences and discussion groups around research areas, and various social functions. Ongoing interaction between BU and CRD personnel increases the likelihood of successful initiatives. An incentive structure can also be used to reward employees who take initiative to cross the BU-CRD boundary.

The acquisition model is based on forming R&D relationships with entities outside the firm. Tech- nologies are imported in accordance with the firm's strategy and specific needs, and then integrated into the firm's existing product-development efforts inside BUs. The acquisition model in- cludes the purchasing of technology in the broadest sense, whether research data or methods, R&D staff, or even entire organizations surround- ing the technology. Several companies in our sample use the acquisition approach on a limited basis to acquire risky, cutting-edge technologies from small and start-up firms. Only one company we studied-Company C-uses acquisition as its dominant organization design. The acquisition approach allows it to keep its R&D costs relatively low and its value ratio high as acquisitions sub- stitute for a corporate CRD function, transferring external R&D resources to BUs as they are needed. The advantage of this outreach model is that it reduces the internal need for scientific staff and laboratories and, more importantly, facilitates rapid fulfillment of specific R&D needs. It also reduces the risk of R&D investments since acquisitions can be made after desired technology development milestones have been achieved. On the other hand, identifying and developing external relationships require special business and legal

Internal-Market Model Acquisition Model

Companyy BU 3BCp3

BU 4 ~~~~~BU 4 Cmpany 5

R&D done in acquisitions

Extended-Enterprise Model

BU I Figure Legend

URjniversity Research = person

BU_ C] = department or division

= external entity

CorporateR&D Partnerships

FIGURE 4 Networked Models for R&D Organization Design


skills. Further, the company is dependent on a vibrant external marketplace to meet its internal R&D needs.

The extended-enterprise model pushes the network notion further to include formation of R&D relationships with a wide set of internal and external partners. For example, CRD may form alliances or joint R&D ventures with government laboratories, universities, or other companies; the R&D department of one BU may form an agreement to support the R&D needs of another BU; or the CRD may work with university laboratories to supply specific R&D needs of several BUs. The idea is to form R&D relationships that meet R&D needs, no matter where the R&D source might be located. CRD may broker these relationships for the BUs, but BUs are not bounded by CRD and can form relationships with external parties or with one another on an as-needed basis.

There has been a general trend among technology companies toward external sourcing of R&D from universities, start-ups, private labs, alliances, and so on.'5 Among the firms we studied, Company P is using the extended enterprise as its dominant organization design for R&D. Many others practice external sourcing on a limited basis, relying more heavily on internal CRD and/or BU-R&D resources. The findings from our interviews suggest that the extended-enterprise model requires organizational incentives that foster coordination and collaboration efforts across organizational boundaries. For example, both BU and CRD staff should feel free to identify and create research contracts or partnerships without concern for turf wars when dealing with a common external lab or research site.

There has been a general trend among technology companies toward external sourcing of R&D from universities, start- ups, private labs, alliances, and so on.

In addition, effective external partnerships require recognition of parties' common and differing needs, and the ability to coordinate technology plans and negotiate conflicts as they arise. Sophis- ticated legal, technical, and business skills are needed to manage a wider range of relationships than in the internal market or acquisition models. But the payoff can be high for companies that are able to manage a multitude of ventures. The extended-enterprise approach is particularly attrac- tive for simultaneous support of basic scientific research along with fast-paced growth; and rela-

tionships can be scaled back in times of economic downturn.

In a sense, networked models replace the traditional, centralized CRD organization with modern twists: either an open CRD or location of basic scientific activities outside of firm boundaries. Successful implementation of networked models requires a host of corporate capabilities-monitor- ing and support of the internal and/or external R&D marketplace, careful review and selection of available technologies, and strong internal social- ization and leadership skills to broker relationships. R&D success is dependent on the network of relationships. Networked models offer high potential value, but they are tricky to implement, especially as dominant organization designs.

(3) Integrated Models

Integrated organization designs for R&D incorpo- rate both short-term product development initiatives and basic science initiatives with long-run potential. Integrated models practice a "mixed mode" strategy for innovation, and CRD takes on a key governance role in implementing this strategy. The strong governance role of CRD differentiates firms with integrated organization designs from companies with dominantly decentralized or networked models. CRD is not necessarily large in size, but it takes on an R&D leadership role for the corporation. CRD serves as an important hotbed of scientific energy and as a hub in the wheel of R&D efforts throughout the enterprise. There is a strong philosophy that "technology belongs to the corporation, not the business units." The goal of CRD is to help BUs "steal freely," as one manager in our study put it, by developing cross-unit technology platforms and meaningful information sharing in order to "look for exploitations and assure that the company will not be blindsided by new technology developments." CRD may have some laboratories that are isolated to pursue basic research, but CRD as a unit is anything but isolated. It has vibrant ties to the BUs. CRD links BUs with one another, and it links firm R&D efforts with the company's overall, strategic goals.

Among integrated models, the typical CRD in- cludes dedicated research project teams, laboratories, and functional support groups. Some companies have only central R&D facilities (e.g., Companies G, I, M, T, and X), whereas others also have BU-R&D groups (e.g., Company D and Com- pany H.) Both approaches can be effective. For example, Companies X and H are yielding great value from R&D, yet they have different balances of BU and CRD resources for R&D. Company X has


a large CRD unit with many laboratories and functional groups. CRD is responsible for supporting the R&D needs of the corporation and promoting new product development, both short term and long term; almost no R&D is conducted inside of BUs. In contrast, Company H conducts R&D ventures largely within specific BUs or via cross-BU R&D projects rather than inside CRD. The CRD unit has no laboratories, but it does have a visible, prestigious group of managers and scientists who set leadership direction and facilitate firm-wide scientific support for R&D ventures. In both Com- pany X and Company H, CRD is directly funded by the corporation and not from a "tax" or charge- back system to BUs on a project basis.

Within the integrated-design approach, the choice of whether to develop CRD as a large or small entity is secondary to the decision of how to coordinate extensive corporate-wide R&D efforts. We observed two general approaches to structur- ing interaction between CRD and the BUs. (See Figure 5.) Team-based coordination involves formal mediating groups that consist of BU and CRD personnel. For example, Company H has standing tech teams and tech services groups that include BU members and CRD members organized around specific types of technology. Usually these teams include members from multiple BUs. As other ex- amples, Company M has joint BU/CRD groups associated with each major product line, and Com- pany X creates ad hoc project teams with CRD personnel to address specific BU research needs.

Liaison-based coordination occurs when managers within CRD are given designated responsibility for linking CRD to the BUs. As an example, Company G appoints relationship managers within CRD to serve as the interface between CRD and BUs. There is one designated relationship manager per BU. These relationship managers have no line responsibility, but they are provided with enormous implicit authority by reporting to the head of CRD. They are an integral part of the strategic planning for CRD, and each relationship manager is evaluated in part by the success of joint CRD-BU projects. Relationship managers who have been transferred to CRD from a BU view the position as a rotation that is good both for the BU and CRD. Other relationship managers have been long-time CRD researchers who are well informed about corporate R&D capabilities.

Regardless of whether teams or individual liai- sons serve to mediate CRD-BU relationships, as they work with a particular BU on technical issues these facilitators become knowledgeable about R&D strategy and specific BU needs. This outcome encourages a high probability of matching BU needs to CRD capabilities and R&D activities to corporate strategic directions.

Along with a formal coordination structure, constant communication is a cultural imperative in firms adopting integrated organization designs. Most firms that we studied use R&D information systems that are accessible by both BUs and CRD. The information collected for these systems may

Team-based coordination Liaison-based coordination

BU 1 Or R CRD B

BU 2

BU 3

R&D~~~~~~~~~~&

BU 4 R&D ABU 4

rr i SR&D

Cross-unit / technology tea:ms Rela[tionship G

t R&D information support system Remantogers R&D information support system

Figure Legend

O = person

IEI = department or division = cross-functional team

= computer system

FIGURE 5 Integrated Models


include market intelligence, technology discussion databases, information on competitors' R&D initiatives, research data, R&D project tracking systems, and so on. Though it may be tempting for companies to rely on these systems in place of more traditional forms of communication, we found that the most successful firms rely as heavily on people-based communication mechanisms as on computer-based systems. For example, Companies D, G, H, and I use R&D information systems support, but they take care to design and support mediating groups and managers for knowledge transfer. Further, they promote a culture of communication via multiple methods, such as bulletins, conferences, and discussion groups. Information systems are used to support the R&D organization design, but they do not replace it.

Along with a formal coordination structure, constant communication is a cultural imperative in firms adopting integrated organization designs.

A Value-Driven Approach

Figure 6 summarizes the major advantages, disadvantages, strategy, and other implementation guidelines for the three major models of R&D organization design. Reviewing these models, we find that there is no "one best" organization design. Indeed, a host of factors might dictate the specific model implemented by any given firm, such as firm goals, resources, existing infrastructure, mar-

Organization Preferred R&D To implement for Design Advantages Disadvantages Strategy success..

DECENTRALIZED * Supports a business * Difficult to share Defender: . Use when R&D needs orientation in R&D knowledge or leverage Innovation is are decidedly different

* Focuses R&D efforts on R&D capabilities across targeted toward across business units current customers the enterprise improving * Avoid this approach if a needs * Research support for firm- existing products prospector strategy is to

* Short-term benefits from wide strategic initiatives or searching for be pursued R&D investments are is difficult new technologies . Keep R&D expenditures emphasized * Economies of scale in within specific low through careful

R&D facilities, personnel, product or market targeting of projects etc., are difficult to lines within business units achieve

NETWORK . Can be used to support * Requires business, legal, Prospector: new * Use to support growth in basic scientific research and social skills for product and new markets or new at lower cost than developing effective market product ventures traditional CRD relationships between opportunities are . Troll for value

* Effective matching parties in the network aggressively opportunities that lie process puts research . Network dependencies are pursued; outside of the firm resources when and created, thus increasing exploration of (acquisition or extended- where they are needed risk if parties withdraw or new technologies enterprise models)

* Relationships are do not meet commitments is wide in scope * Invest in skills and flexible and can be * Tends to be more costly if processes to support expanded or reduced as network reaches only effective management of research or business inside the firm (internal relationships needs change market model)

INTEGRATED * Mixed mode of business * Requires cross-functional Analyzer: a mixed * Invest in coordination and science orientation teams or designated mode approach structures and in R&D relationship managers to to strategy, with communication

. Supports both short- coordinate CRD-BU targeted R&D for mechanisms to link CRD and long-term R&D relationships some products or with BUs projects * CRD can be high relative markets and . Empower CRD with a

* Helps link R&D to the to most decentralized and aggressive governance role for R&D strategic direction of network models pursuit of new * Build a reputation for the technology-based opportunities in R&D excellence that is firm other areas recognized inside and

outside the firm

FIGURE 6 Summary of Advantages, Disadvantages, Strategy, and Implementation Guidelines for the

Organization Design Models


ket opportunities, and so on. Most important is that executives recognize the tradeoffs associated with the design choices they make and take steps to realize specific design advantages and overcome potential disadvantages. We synthesized the attributes of effective R&D management from across the three design types found in our sample to suggest the general recommendations for organization design that follow.

(1) Strategic Mechanisms

Regardless of the specific corporate strategy, value-driven companies adopt practices to link R&D ventures and progress with the corporation's strategic goals. In Company H, for example, R&D appointments are considered important and given an elite status. Company D has established an intellectual property department with intellectual asset managers who undertake valuation analysis for each R&D project. The value of the technology to the market and/or to the firm is assessed as a project is approved and as funding is renewed. Company M uses information systems to bring R&D progress and updated technical information to customers. Company A has a chief growth officer who scouts for high-potential projects from BU- R&D units and then advocates them for executive- level sponsorship

(2) Executive-Level Attention

To extract value from whatever organization design is implemented, the executive level of the firm devotes significant attention to R&D. This attention feeds downward and outward into all R&D operations. Executive involvement can be very heavy, such as in Company G where R&D projects of $lM or more require executive council approval. In some companies a corporate executive council de- termines all R&D initiatives. The CRD director may also be the chief technology officer and serve on an executive council (e.g., Company G) or even on the company's board of directors (e.g., Company P). Executive appointments and ongoing involvement in R&D reflect the recognition that nearly every aspect of the company is technology-based. In Company H the CEO sends out weekly reports prepared by R&D, adding comments and stressing the importance of various R&D activities to every- one in the company. As one executive put it, "Re- search is the basis of our business, not something we do on the side."

(3) An Entrepreneurial, Communications-Oriented Culture

Value-driven organizations engage in continual interaction between the BUs and R&D groups. They not only create relationship managers, project teams, R&D information systems, and so on; they use these mechanisms constantly. This constant level of communication contributes to a sense of partnership between general managers and R&D managers and reinforces the importance of innovation as a value in the firm. In this way, the managerial matrix between BUs and R&D operates well beyond the reporting structure and deep within the company.

This constant level of communication contributes to a sense of partnership between general managers and R&D managers and reinforces the importance of innovation as a value in the firm.

(4) Putting Sharing Where It Matters

Value-driven firms overcome the isolation of R&D from the rest of the company by promoting sharing where it matters, rather than haphaz- ardly or everywhere. For example, teams are created where the payoff is likely to be greatest, and chief technology officers or relationship managers target high-probability projects. Most importantly, formalities are replaced by expedited review procedures and ad hoc methods of selecting people for projects and getting work done with the highest level of excellence possible. For example, Company G has replaced elaborate methods for selecting and managing projects with the use of simple evaluative spreadsheets and project milestones that can be specified rapidly, usually within a few hours. Company D has replaced pacing of project requests with R&D requests on demand-whenever there is a need. One manager referred to this approach as a "pick-up basketball game" as opposed to the "formal league games" typical of previous years.

(5) Externally-Oriented R&D

Value comes from using capabilities both inside and outside of R&D, and both inside and outside of the firm, to create new technology-based options. Value-driven R&D organizations look for scientific and business opportunities outside traditional R&D walls- to individuals, groups, companies,


and information systems both inside and outside the firm. Technology found in the marketplace might be the basis of a new product line, provide incremental development, or fill in the missing piece of an ongoing R&D effort. Though specific laboratories and projects may operate in isolation from time to time, BU-R&D and CRD operations are run with business objectives in mind, and managers are customer or product oriented. They recognize the need for collaboration and engage in ongoing scouting for new ideas and opportunities.

(6) Willingness to Mix and Match Structures

Varying R&D needs across a business enterprise can require different degrees of CRD and/or BU- R&D attention, or different types of teams to coordinate R&D efforts. Dynamic economic conditions, corporate consolidations, or moves to spin off or acquire businesses likewise put pressure on R&D organizations to be flexible in their organization designs and use different structural or communication mechanisms as R&D demands change. Val- ue-driven companies meet these challenges by recognizing that there is no one-size-fits-all approach to organization design; they maintain a coherent overall structure for R&D but vary the specific design attributes as needed. As one example, Company P in our study relies on an extended enterprise model as its dominant organization design but complements this with use of joint CRD/BU R&D teams for technology transfer. Both technologists and general managers are willing to use different R&D structures for different products or at different periods in time.

Achieving Value from R&D

To conclude, organization design does not directly determine corporate success, but it is one critical factor that comes into play in determining whether companies are able to yield value from their R&D spending. Both science-oriented companies and business-driven companies can use new organizational forms to yield value. The integrated model is an excellent starting point for most firms as it accommodates both product development and basic science initiatives. From there, organizing R&D for value means pursuing centralized and decentralized R&D activities that collectively facilitate the firm's overall strategic objectives.

To design mechanisms to accommodate scientific and business units in the firm, executives can review the range of possible organization design options and identify the advantages and disadvantages of each model in light of organizational

resources and goals. They can then take steps to implement the kinds of structural, communication, and other mechanisms we have described to break down organizational boundaries and satisfy research and development needs when and where they arise. The result is an adaptive and progres- sive model of organizing for R&D directed toward achieving value for the enterprise.

Acknowledgment

Gerardine DeSanctis would like to thank INSEAD for sponsor- ing her sabbatical leave during which this article was completed.

Endnotes ' Daft, R. L., & Lewin, A. Y. 1993. Where are the theories for the

"new" organizational forms? Organization Science, 4(4): i-vi; and DeSanctis, G., & Fulk, J. (Eds.). 1999. Shaping organization form: Communication, connection, and community. Newbury Park, CA: Sage.

2Drucker, P. F. 1999. Knowledge-worker productivity: The big- gest challenge. California Management Review, 41(2): 79-94; and Doz, Y., Santos, J., & Williamson, P. 2001. From global to metanational: How companies win in the knowledge economy. Boston: Harvard Business School Press.

3 Child, J., & McGrath, R. G. 2001. Organizations unfettered: Organizational form in an information-intense economy. Acad- emy of Management Journal, 44(6): 1135-1148.

4Dyer, G. GSK considers spinning off its research units. Com- panies & Markets. Financial Times, 25 January 2002, 15.

5Jankowski, J. E. 1998. R&D foundation for innovation. Re- search Technology Management, 41(March-April): 20; and Lar- son, C. F. 1998. Industrial R&D in 2008. Research Technology Management, 41(November-December): 19-24.

6In this paper we use the term Business Unit (BU) to refer generically to any product, customer, or other business-oriented group within the organization. Central R&D (CRD) refers to any stand-alone R&D group that reports to corporate headquarters rather than to a business unit. Business Unit R&D (BU-R&D) refers to any R&D group that reports to a product, customer, or other business-oriented unit.

7 Birkinshaw, J., & Hagstrom, P. (Eds.). 2000. The flexible firm: Capability management in networked organizations. New York: Oxford University Press; Kreiner, K., & Schultz, M. 1993. Informal collaboration in R&D: The formation of networks across organizations. Organization Studies, 14(2): 189-205; and Kuemmerle, W. 1997. Building effective R&D capabilities abroad. Harvard Business Review (March-April): 61ff.

8 Ettlie J. E., Bridges, W. P., & O'Keefe, R. D. 1984. Organiza- tion strategy and structural differences for radical versus incremental innovation. Management Science, 30 (June): 682-695; and Van den Bulte, C., & Moenaert, R. K. 1998. The effects of R&D team co-location on communication patterns among R&D, mar- keting, and manufacturing. Management Science. 44(11): Sl-S18.

9 The exception is Company C. We conducted in-depth interviews with key informants in each company. We also reviewed documents and reports made available to us by the companies and by publicly available sources such as annual reports, industry publications, and SEC filings. The companies partici- pated in our study with the understanding that they would not be identified by name.


? Child & McGrath, op. cit.; and Heydebrand, W. V. 1989. New organizational forms. Work and Occupations, 16(3): 323-57.

" Industry figures are based on data provided by the Office of Technology Policy of the U.S. Department of Commerce and the Division of Science Resources Studies in the Directorate for Social, Behavioral, and Economic Sciences of the National Sci- ence Foundation. See U.S. Corporate R&D: Volume 1: Top 500 Firms in R&D by Industry Category, September 1999; and U.S. Corporate R&D Investment, October 2001.

12 To aid interpretation of the value ratio, we multiplied each ratio by $1,000,000, which is the denomination of the revenue and R&D budget numbers shown in Figure 2.

13 Miles and Snow outlined four types of corporate strategy for innovation: reactors, defenders, analyzers, and prospectors. See Figure 6 for definitions. Miles, R., & Snow, C. 1978. Organi- zational strategy, structure, and process. New York: McGraw- Hill. This framework is widely used in research on corporate strategy. For example, see Forte, M., Hoffman, J. J., Lamont, B. T., & Brockmann, E. N. 2000. Organizational form and environment: An analysis of between-form and within-form responses to environmental change. Strategic Management Journal, 21(7): 753-773.

14 For example, see Ebers, M. (Ed.). 1997. The formation of inter-organizational networks. Oxford: Oxford University Press; and Birkinshaw & Hagstrom, op. cit.

15 See R&D trends forecast for 2001, a report published by the Industrial Research Institute, November 2000, http://www.irinc. orglwebl.

Jeffrey T. Glass is the Joseph F. Toot, Jr. Professor of Engineer- ing and Co-Director of The In- stitute for the Integration of Management and Engineering at Case Western Reserve Uni- versity. He received his Ph.D. in materials science and engineering from the University of Virginia and his Global Execu- tive MBA from Duke University. Contact: [email protected].

Gerardine DeSanctis is the Thomas F. Keller Professor of Management in the Fuqua School of Business at Duke Uni- versity, Durham, North Caro-

a_ lina. Her interests are in the general area of organization design, especially the growing role of information technology in new forms of organizing. She holds a Ph.D. degree in business administration from Texas Tech University. Contact: gd@ mailduke.edu

Ingrid Morris Ensing is a doc- toral student in management at the Fuqua School of Business, Duke University. She holds an MBA from Kellogg Graduate School, Northwestern Univer- sity, with majors in organizational behavior and strategy. She also holds a BA with honors in economics from Claremont McKenna College. Her areas of research include organizational structure, organizational learning, and knowledge management. Contact: icm@mail. duke.edu.

Organisational Design for R&D

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