It’s often said that Thomas Edison’s finest invention wasn’t the light bulb or the record player; it was the concept of an ongoing industrial innovation and development process. Corporations from Edison’s own General Electric to Ma Bell, Corning, and Kodak took his idea and ran with it, setting the stage for the modern R&D lab.
While independent inventors were once the main source of patents, since the 1930s, corporate labs have been the dominant wellspring of invention. For decades, these organizations drove corporate growth, and they developed many of the fundamental inventions that run modern life: Bell Labs and the transistor, RCA and color television, GE and MRI technology. In the process, R&D has become the ultimate corporate sacred cow. Until recently, corporate gospel has been that sustained high investment in research will lead to a boatload of insanely great products that will carry a company to a new level, driving growth in profits and staking out vibrant emerging markets. But it’s time to ask some hard questions: Does corporate research and development really work? And if it does, why are so many prestigious and supposedly well-run firms continually blindsided by competitors?
The answer is, at best it’s not working well, and perhaps it just doesn’t work at all anymore. Corporations need to take a closer look at their devotion to internal research. We’re entering a new era of invention, and big companies must adapt and begin practicing invention triage-keeping only what works, fixing what can be fixed, and throwing out the rest.
IBM, for instance, employs 3,000 full-time researchers yet has rarely been a market innovator. It spent $5.1 billion on R&D last year-6 percent of its revenue and $16,000 per employee. Yes, Big Blue does make $1 billion each year licensing the technology these inventors create to other firms. But look at the companies that are whopping IBM: Cisco, EMC, Oracle, and Sun, among others. These companies spend far less on research than IBM. Oracle, which long dominated the relational-database market, took the idea right out of a paper by an IBM researcher! In external computer storage, EMC, a relative newcomer, has 19 percent of today’s $13 billion market to IBM’s 15 percent. Fifteen years ago IBM had 80 percent. And IBM is not alone in its R&D failures.
Look at Apple. It invented the personal-computer industry with the Apple II in 1977, popularized the graphical user interface, and pioneered intuitive software-and became the first personal-computer company to reach $1 billion in annual sales. But once Apple made it big, it stalled. Today the company has only 2 percent of the $180 billion personal-computer market. Apple spends $471 million a year on R&D, a full 7.6 percent of its revenue. I defy you to name me another company so innovative with so little to show for it.
How about Xerox? Okay, you win. Xerox makes Apple look like a stellar success story. Picture a corporate meeting back in 1970. Xerox is getting filthy rich. It wouldn’t even sell you a copier: you rented the damn things and paid for every copy you made. Research leaders convinced management that it had to plow back millions into research-without offering any guarantee that anything worthwhile would come of it. They hired the smartest people and built Xerox Palo Alto Research Center. PARC researchers invented the Ethernet, windowed computer applications, screen icons, and laser printers. Of the 10 most important developments in computing, Xerox PARC birthed at least half of them.
And how did Xerox management handle this windfall? They blew it. Choked. Perhaps the biggest screw-up in technology history. Almost every other company in Silicon Valley benefited from PARC’s innovations, but the only one Xerox managed to cash in on is the laser printer. And though printers now form a serious chunk of the company’s business, even in that space, Hewlett-Packard is the clear winner. Xerox still spends almost $900 million in R&D annually, almost 6 percent of its revenue. And do they have any knock-your-socks-off products to show for it? Nope. Can you think of a worse-run company over the last 20 years than Xerox-a company that did everything it was supposed to do to build internal innovation and has still failed spectacularly?
So what should the criteria be for seeing if R&D dollars are well spent? Number of patents? Patents per research dollar? Market share? Or market share of technology developed in-house? It’s kind of like a major-league baseball team seeing what percentage of its starting lineups has come from its farm teams. One winning metric: revenue growth of 15 percent to 20 percent a year, driven by internally developed products.
But few companies can claim such success. We have been evolving over the last few decades toward an age in which corporate R&D just doesn’t work. There are three reasons why.
Clayton Christensen delineated the first brilliantly in The Innovator’s Dilemma. Any new technology threatens to cut the profit margins of the bigfoot products that carry the market leader. Why would RCA or GE push solid-state technology when the profits from vacuum tubes were so high? Why would Kodak push for digital cameras when its real money was made in film? All eventually entered these markets, of course, but late, and only when change was inevitable. Major corporations much prefer “just-in-time” innovation-innovation that peaks just as older products are on the back half of their life cycle. But innovation does not choreograph so simply; it comes in fits and starts, defeats mixed with occasional breakthroughs.
The second reason: us venture capitalists. We have about $100 billion just sitting on the sidelines. We often will pick out the best research teams and set them up as independent companies-something a big firm is loath to do. And we can make company founders rich beyond belief (at least that’s what we tell them). We will steal the best researchers-those with a sense of urgency and a track record-and beat the big guns to market. That is our job, and we do it well.
The third reason we’re heading for a new model of corporate invention is execution. Every company likes to innovate; very few companies want to execute the plan to take a development and productize it. That’s hard work. Part of the problem is the internal barriers that corporations put up, but that isn’t the real key. Show me the internal compensation system for a company’s general managers, and I will show you why its execution is just plain awful. Companies reward managers for making their numbers, not for building new businesses. Who wants to risk her bonus for an upstart technology that threatens the cash cows?