Pittsburgh, November 1995 

Organization of R&D to Support Global and Regional Markets

 by 

Valerio Aisa, Merloni Elettrodomestici spa, Italy 
Carlyn Case, Hoechst Celanese Corporation, USA 
Dr. Gezinus J. Hidding, Andersen Consulting, USA 
Dr. Peter Kilgenstein, Robert Bosch Corporation, USA 
Dr. Bruce McKern, Carnegie Bosch Institute, USA 
Masahide Mitsuoka, Sony Corporation, Japan 
Kiyoshi Momoki, Akebono America Inc., USA 
Dr. Egbert Schneider, Robert Bosch GmbH, Germany 
Dr. Heinz Schulte, CarnegieBosch Institute, USA 
Heinrich Timm, Audi AG, Germany 
Shuji Yamagata, Nissan, Japan 

 Edited by Gezinus J. Hidding 

Introduction

 The audience of this report is the particpants of the Forum and R&D executives in similar positions at large multi-national organizations. This report aims to provide practical suggestions (inspired by academic research) for optimizing the performance of an international R&D organization. 

 The remainder of the report describes a number of the issues that international R&D executives are facing. Such issues have to do with strategy and organization of global R&D, human rescource management coordination among business units, the role of R&D in innovation, and getting support from top management for risky projects. For each of the issues, the workshop participants discussed a number of suggested solutions, which are described as well. Finally, the Appendix to this report shows different organization structures of various R&D organizations. 

Definitions

Strategy and Organization fo Global R&D

R&D Strategy: Global versus Regional

 The particpants felt that a global R&D strategy might be more appropriate when the R&D is about pursuing a "dream", e.g., an entirely new generation of technology. The key aspect of that type of R&D is basic research. It was felt that a regional R&D strategy is appropriate in pursuit of regional market opportunities when certain regions are dominant in certain expertise. As one participant pointed out, the US is dominant in Software development and Europe is dominant in Communication systems. 

 The total cost of product development (including, for example, manufacturing costs) could favor one strategy or another: A plant located in a particular region may be most efficient in producing a certain product. Also, there may be certain tax advantages for locating production in certain regions. Given that a certain amount of development is always co-located with manufacturing, location of production can have a strong influence, therefore, on the location of R&D for such products. 

 In summary, the particpants felt that the key factors driving R&D strategies to be either global or regional are: 

 

Global	Regional
Global market	Several important markets
Similar requirements	Diverse requirements
Cost leadership	Differentiation
Basic research	Development
Global expertise	Special regional expertise
Many locations	Few locations

R&D Organization: Global versus Regional

 In a transnational network organization, the arrangement is that one R&D group is the global R&D leader for a given product line/Strategic Business Unit (SBU). "Central" RD for that SBU should be located in the most important market for that product line or where the greatest core of expertise exists. Ideally, that "central" group understands the market needs of all regions and has a worldwide responsibility. Consequently, for the organization as a whole, R&D leadership is not concentrated in one location, say company headquarters. R&D leadership is also not distributed to national organizations or manufacturing locations. But the R&D leadership is decentralized to several "central" groups. 

 In pursuit of this organization structure, one company had teams from different continents collaborate on a project for a particular product line. After the (successful) completion of the project, the company concluded, however, that the results were not worth the effort. The major reason was differences in boundary conditions and cost of travel (due to the number of people involved) which adversely affects the cost of the finished product. One way to resolve that issue migh have been to co-locate the project team or to limit team size. 

 The ideal situation is often very hard to achieve in practice. As an example, a regional R&D group was nominated to be the central R&D group for a certain product line. That then required a shift from a regional mindset to a transnational mindset, which is very hard to do. Time zones do not overlap enough to enable frequent communication between regions and the central R&D group. Customers in the region where the central R&D group is located are heard more than customers from other regions. The resulting products fit the market of the central group's region quite well, but may not be optimal for other geographic areas. 

 This may even lead to a self-fulfilling prophecy: a central R&D group may remain central simply because it perhaps unintentionally optimizes the product design for its region (whose R&D group may become the central R&D group for that product line), but the market becomes much bigger over time in another region. 

 One of the companies present has R&D groups in multiple regions. As a result of a merger, these groups have overlapping responsibilities. Each center designs products for its own region as well as for other regions. For different products, one region or another has the major market and, therefore, ideally should have the central R&D group. But the organization of R&D does not yet correspond to this ideal. 

 The participants had a number of suggestions for how to shift from the current situation to the ideal: 

• Transfer engineers to R&D centers in other regions in an effort to increase their knowledge of the needs of other markets.
• Put personnel from other regions into the central R&D group as a liason, e.g., as all members of the project's steering committee. The risk is that such a person may have no real power because he has no resources.
• Instead of sending people on assignment to other regions, one could change the reporting relationships. For example, put some people located in one region under the organizational control of another region. In particular, put some people from the region with the dominant market opportunity under the control of the center from another region. In this way, the region with a smaller market can still control part of the R&D process. Also, the people in the central R&D group that are controlled by another region will likely better take into account both regions' needs, because they live in one region and are controlled by another.
• Select the R&D leader for a product line based on market opportunity and move the leaders to R&D Headquarters.

Human Resource Management

Managing Multi-Cultural Project Teams 
One particular issue faced by one of the companies participating int he forum is how to manage American, European, & Japanese engineers working on eone project to design one product. Due to their national culture or their home division's policies, team members may disagree about the specification for a new product. For example, some emphasize low cost, others emphasize product characteristics, or flexibility of the design. Team members may disagree with the specification after it has been approved. The original specification may have come from one region or another, or even headquarters. Requirements from one region or country may dominate the specification too much. Despite everybody's good intentions a specification may not be clear enough. There are many ways to misunderstand the same words or specifications. 

 Consider the example given in the 1994 Issue Report of the requirement by Geman customers that a car produce "less rattle or wind noise at higher speeds." The interpretation of what "higher speeds" means is quite different for a German engineer as opposed to an American engineer. 

 In order to have two regions work together to come up with one product, a number of suggestions were offered: 

• Improve the continuous information flow among the team members. For example:
• hold regular meetings to promote consensus about the specification and or the design.
• establish a data base to share information widely, possibly on a world-wide basis. Information sharing is likely to be expensive, but is a necessity.
• Set up the design process such that it has several explicit checkpoints, in order to ensure that the design meets the expectations of the customer.
• Similarly, build prototypes of the product and perform early testing in several countries.
• Assign the design, or parts of it, to teams from different regions based on unique local capabilities. For example, a US team may be strong in software design, a European team may be strong in communication systems, etc. Of course, a unique capability may not only be due to national or cultural factors, but possibly to the talents, capabilities, or personalities of certain individuals.

Exchanging Engineers Between Contintents 
One of the questions concerned with exchange of personnel on expatriate assignments is the mix of engineers from different regions. Clearly, there are significant costs associated with expatriate assignments. Also, there are intercultural issues in multinational project teams (see above). Among companies present at the Forum, the percentage of home-country personnel in the foreign operation ranged from 8% to 95%. There is no optimal percentage. The mix depends on the objective of the project(s) and on relationship of the policy to strategic objectives over time. 

 One Japanese company, for example, wanted to develop certain components for the US market. It staffed the R&D project 95% with Americans. That same company wanted to start a new division fast in the US and initially brought in many Japanese and a few Americans. Another company set up a division in the US and staffed it initially with employees from the home country. It is now trying gradually to send them back and replace them with American engineers. Another company has decided on a policy to become a "borderless" company. It has set long-term targets for exchanging engineers among continents and countries. One company staffed a start-up in Mexico with members from a US team that had just completed a similar start-up in the US and with Mexican personnel who knew the local circumstances and who would become part of the permanent operation there. 

 Retaining Key Personnel 
One issue that many comapnies are facing is that key personnel leave the company and go to work for competitors. This is a problem particularly when those people have knowledge of R&D secrets or other sensitive information. In essence it has to do with confidentiality of the R&D results: How to keep the unique knowledge inside the company and out of competitors' hands. This issue is exacerbated in the US, where "job hopping" is a common practice, more so that in Europe or Japan (with its tradition of life-long employment). 

 One way to deal with the issue is to write "non-compete" clauses in the employment contract, such that employees cannot work for competitors for up to one year after leaving the company. This practice is used often in Europe. It is also practiced in the US, but may be less powerful, because of its tradition of individual freedom, freedom of competition and so on. Also, the non-compete clause may not be legally binding if the employee is fired. However, there are discussions in the US regarding possible changes to the relevant law. 

 In order to keep sensitive information inside the company, some Japanese companies try to keep the related research work in Japan. Alternatively, if the research work is done elsewhere, say, in the US, it is staffed with Japanese engineers. Of course, this can bring cultural tensions inside the company wen only a certain group always gets to work on the sensitive (and more interesting) projects, and other group only on the less interesting projects. 

 The participants of the Forum felt that a key means of keeping people in the company is to make the company an attractive place to work. One way to track this is to make sure that the rate at which people leave (attrition rate) is lower than the attrition rate in the industry or the region. One manager reported that employees need to be satisfied about at least two of the following three factors: like the work; be paid well; like the people they are working with. If, for any given employee, at least two out of these three are true, the likelihood that he or she will stay is great. Another company holds interviews with all employees who leave. The company found that they left because the actual work they performed did not match the expectations when they began their employment with the company. 

Attracting Good Personnel

 The overriding issue is one of name recognition of the company among a broader audience. Ways to get name recognition include: 

• Start an advertising campaign similar to, say, "Intel inside." Aside from name recognition for recruting purposes, this may also have positive effects on, e.g., bargaining power over customers.
• Less expensive ways are to become active in professional (engineering) societies and/or to foster good relationships with universities, e.g., through offering scholarships, meeting students and faculty, offering research support to key professors and so on.

Managing Overseas Labs

 Particularly at startup in a different country the overseas lab may be more of an implementer: adapting products or technology that originated elsewhere to the local market needs. When the company wants to make the overseas labs integrated players over time, there are questions of how to dapat the role of the overseas labs over time. One company experienced tensions with three new regional cetners because they all wanted to do basic research which the company considered too risky. Participants suggested that the development path may be to evolve the centers from being Implementers to first becoming Local or Global Innovators (i.e., "taking" less knowledge from the organization and start to contribute more) before becoming an Integrated Player. 

Coordination Among Business Units

 In one company, the responsibility for a given platform is assigned to a particular SBU. That SBU then takes the lead in design of that platform, with all related SBUs involved in the design. Those SBUs will then build their products around that common platform. However, assigning the lead responsibility to one particular SBU may cause the platform to be regarded as that particular SBU's platform, not a common platform for all related SBUs, with consequent lack of suitability to other SBUs or regions. 

 Participants had several suggestions to deal with this problem: 

 Communicate the organization structure, who is responsible for what, why and how the SBUs should collaborate and why this way of organizing was chosen. This is one of the simplest things to do. 

• The company should ensure that people from the less sophisticated SBUs are involved on the design team, so that they can learn the more sophisticated approaches. One way to do this is by very frequent communication, e.g., through video conferencing.
• Have the design team first define the common components of the platform so as to bring out the different end-product needs at an early stage.
• Implement, over time, one engineering system and one CAD system, which should also lead to a more homogeneous company culture.

The Role of R&D in Controlling Innovation

Expanding the product portfolio

Introducing new technologies into an organization

 First, and foremost, R&D needs to think through all the changes to the company: the product itself, marketing, production, and so on. Once it has performed an adequate analysis and found that the introduction of new technologies still makes sense, R&D needs to be in "sales" mode. This entails convincing the company of lover costs and/or the benefits and added value to the product, the customers, production, marketing, and so on. The difference needs to be sufficiently large to make the significant switchover worthwhile. For software products, in aprticular, a good argument may be that software is easy to change, which may prove helpful in case of certain product problems in the market place. Another approach is to demonstrate that competitors already have the new technology (or will soon have) and that the company risks losing significant market share to those competitors because of the new technology. 

 Assuming the company decides to adopt some new technology, the next challenge is to integrate it into the existing culture. In the case of integrating new "electronic" technologies into a "mechanical" culture, one company decided to first keep the engineering team(s) for the mechanical part of the product separate from the team(s) for the electronic pars. Later on, the mechanical team(s) was taught about electronics as a way to introduce such technologies gradually into the existing culture. 

Getting support from top management for risky projects

• Display personal commitment. the more personal commitment the project's originator displays, the more he or she may win the company's commitment.
• Break up the development process into small incremental steps with periodic points for continue/abort decisions. That way, management is not asked to fund "all or nothing", but rather to make small investments in a controlled way towards a goal that is potentially very attractive.
• Find somebody in the line organization,e.g., a high-level executive in a geographic or SBU organization, who can be convinced of the idea and who is willing to be a "champion" for it towards the board or top management.
• Whenever possible, provide an early prototype or a sample of the product so that executives can personally experience the benefits of the new idea.
• Create a formal process, say, periodic meetings, where risky ideas can be discussed freely. One company found, however, that such meetings were often used to resolve urgent, day-to-day issues. This must be avoided.

Appendix: R&D Organization Structures -- A Review

 

 

 

Organization 5