The New R&D: Making R&D Effective in the Age of Digital Transformation

Research is what I’m doing when I don’t know what I’m doing.

– Wernher von Braun

Are your company’s yearly revenues greater than $2B? Then according to a number of studies (see here, here, and here) this is what is likely in store for you.

1. Within 17 years there is a 50% chance that you will no longer be in the Fortune 1000
2. You are investing less and less in basic research (leaving it to Universities and Government)
3. The effectiveness of your R&D (your Research Quotient or RQ) is going down
4. Your core business is growing incrementally and you struggle to go beyond the core
5. New competitors are cropping up and creating offerings you never considered

The reason is that you are not creating new offerings and business models that will create significant enough growth fast enough. These new offerings and business models are the ones that you are not thinking of (or have thought of and rejected).

And the reason for the fact that you are not creating the right offerings and business models fast enough? You are not able to stay on top of, and incorporate the multitude of technologies, innovations, business models and socio-economic transformations that are clearly taking place today and which will have significant impact on our future lives. In other words, your R&D efforts are falling behind.

Most large companies are reacting to this phenomenon by reducing their R&D spend and/or by turning their R&D efforts into applied and advanced engineering activities. Increasingly, the R part of R&D is left to universities and government labs and the (non-incremental) commercialization of these technologies is left to startups and VCs. That leaves these companies with little option to achieve non-incremental innovation other than to: (1) seek out, work with and even fund startups or (2) partner with or acquire more mature companies. With both options, the value is largely captured by others due to the fact that these other companies saw and pursued the opportunity, and proved the value, way before it became clear to the large company.

Some companies are taking steps to prevent this from happening. In the articles on R&D reviewed below the authors collectively observe the following:

1. Overall, R&D effectiveness is declining – but the effectiveness of the top 10% of companies is increasing.
2. Innovations really are driven by research – including basic, applied and a combination of the two called ‘Pasteurs quadrant’.
3. The most influential technologies are the ‘humble and cheap’ ones and they are also the ones that are the most difficult to imagine

But what should these ‘next generation’ R&D efforts focus on? One indication of this new focus is articulated in the recent book by Andrew McAfee and Erik Brynjolfsson, authors of Machine, Platform, Crowd: Harnessing our Digital Future (reviewed below). In the book, they describe and document in detail three fundamental transformations that are rapidly changing the world we live in.

• Minds will be augmented by Machines
• Products (and Services) will be augmented by Platforms
• Core will be augmented by the Crowd

All companies, whether or not they deal in atoms or bits, better get darned good at the science and technologies that are driving these transformations and reimagine and transform their R&D in ways that acknowledge both the fundamental, value-creation role of R&D and the fundamental transformations that are taking place. Specifically, R&D needs to:

• Incorporate research in the sciences of Machine, Platform, and Crowd. For example, use AI for invention, create new (humble and cheap) platforms and tap into crowds for ideas.
• Focus on ‘Pasteur’s quadrant’ – the confluence of the quest for fundamental understanding and the consideration of use.
• Expand the capabilities of R&D beyond technology just new technologies but also to new business models, new designs and the systems that will adopt and adapt to the innovations that result.

These are somewhat radical ideas but represent a major opportunity to reimagine corporate innovation systems with a holistic conception of R&D that accommodates the way innovation will be done in the future.