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Corporate R&D spends 80 percent of its time and talent on “product improvements” and 20 percent on really new stuff. Last year my friend Kenan Sahin, a former vice president of software technology at Lucent Technologies’ Bell Labs, addressed this issue a different way (see “Our Innovation Backlog,” TR December 2003/January 2004). Kenan bemoaned the shrinking amount of research-and more importantly, commercialization of research-done by our largest companies and suggested that we reverse this trend. Let’s look at it another way: since corporate R&D departments do so little with all the money they get now, shouldn’t corporations spend less on research?

CEOs ride a perpetual roller coaster. Outsource R&D or bring it back in-house? Invest in venture capital funds to get a “window on technology” or suck up to the major research universities? Obtain technology by acquiring upstarts or make strategic investments in younger firms? Sign a codevelopment contract or build a distribution agreement? All are efforts to make this damn thing called R&D work. When did financial engineering replace real engineering?

One way to look at the research and development universe is to divide the world into two groups: attackers and defenders. The defenders are all the companies you know-AT&T, IBM, Wal-Mart. Once these giants were young and aggressive attackers-when the defenders were Western Union, National Cash Register, and Woolworth. But now they are the kings of the mountain. The defenders have markets and customers and capital and hired expertise. They believe in an orderly R&D process, and they’re generally driven by financial concerns. In any market, every defender must protect its best products and customers and also attack the adjacent markets. It can either take its existing products and retool them for new markets or take its existing customers and find other products or services to sell to them. Or both.

What innovators from the defender side want to do is to keep the status quo-although they firmly deny that. But if they can keep their margins and their market share relatively steady, the results are fine. The stock will appreciate 10 percent or 15 percent per year, and senior management’s stock options will make them wealthy by retirement time. Yes, they talk about “attacking”; they use every war and football analogy known. But when all is said and donethey want to sleep well at night.

The attackers are companies you’ve probably never heard of-Alkermes and A123Systems and Kubi Software. [Anderson’s YankeeTek Ventures has invested in A123Systems. Ed.] The best way to describe them is as true samurai, aggressive warriors. The attackers have no market share, no customers, and sometimes no clue. What they do have is an open field. Innovators from the attacker side want to topple the big boys and become defenders themselves-or at least to attain a version of success by selling out to defenders. And they throw all their energy into inventing new technologies to realize those goals.

The defenders, meanwhile, see these new technologies and go through a few predictable phases-not unlike those popularly associated with grieving.

Denial. “This new technology won’t work (or is dangerous or doesn’t conform to standards), and our customers don’t want it!”

Anger. “How dare our good customers (friends, fellow members of the club) give even a little of their business to these interlopers! Don’t they appreciate the great service and support we’ve been giving them?”

Reluctant acceptance. “Okay, there is some merit to the technology. So let’s make it available-but only to those customers who want it and whom we might lose anyway. And let’s tell them why they really don’t want it, even though they think they do-and keep trying to sell as much of the older, more profitable product as possible.”

Capitulation. “Look-the market is moving away from us faster than we thought! Our own R&D is horribly late again; when they finally get the product ready it will be so hobbled as to be worthless. So let’s invest in (or buy) the damn competition now, before they get too big.”

Which brings me back to Edison. His model is expensive and probably did the job as long as companies had virtual monopolies in their areas. But with the advent of venture capital, the model began to change. Now “the competition” is rarely a bigger company but a smaller, focused one. Companies such as Motorola and Kodak and Boeing are finding themselves whipped by upstarts with specialized technology and faster feet.

The old model of the corporate R&D lab as the engine for invention lasted 70 years. What every company needs now, regardless of size, is the single-mindedness and sense of urgency of entrepreneurial firms.
The old model is dead. Time to build a new one.

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