INNOVATION / MICHAEL SCHRAGE : R&D; Realignment : Research Funding Is Being Reduced, Labs Are Being Decentralized

The numbers don’t lie: American corporate research and development spending continues to drop. You can bet that General Motors, which now spends more than $5 billion a year on R&D;, will be spending $4 billion annually within three years.

International Business Machines invests about $4 billion annually in its high-tech research. Expect that number to drop by $500 million by the end of 1996. Indeed, a recent survey of corporate research directors reveals that more companies plan to cut capital spending on R&D; than increase it.

Throughout corporate America--American Telephone & Telegraph, General Electric’s Schenectady Labs, GM’s Tech Center, Alcoa, DuPont, etc.--once-giant central labs are being cut back and reorganized.

Research is being spread among companies’ business units--ostensibly to be closer to customers. For example, AT&T;’s Bell Laboratories, which once oversaw research in everything from new materials to communication network software, has transferred most of its scientists to its “lines of business.”

Why is this happening? Companies, desperate to get more bang for their R&D; bucks, are restructuring like mad.

An enormous and sometimes bitter ideological battle is taking place between the forces of innovation driven by costs and innovation focusing on opportunity. The winners of this battle--as much as any clever government policy or partnership--will determine the economic competitiveness of U.S. industry in the 1990s.

“For most companies, it’s been unclear what the payoffs of the central labs have been,” says John Seely Brown, a corporate vice president who runs Xerox’s innovative Palo Alto Research Center. “And there have also been tremendous problems with technology transfer--so companies have come up with the simple solution of putting R&D; into the divisions.”

In effect, Brown and other R&D; experts argue, too many companies are taking a structural approach to what may really be a conceptual problem.

“Reorganizing is taking the path of least resistance,” Brown says. “They’re trying to cope with the rate of change rather than capitalize on it--and that concerns me.”

Adds Joseph G. Morone, a former General Electric Labs researcher who is now a management professor at Rensselaer Polytechnic Institute: “There is a constant tension--if not an outright war--between the people obsessed with staying ahead in their existing competitive product lines by continuously improving them and ‘those flakes out in left field’ trying to create breakthrough products and services. This exists even in the best-managed firms.”

As Japanese and European technology companies became more competitive with their U.S. counterparts, some American firms overreacted.

Morone, author of “Winning in High-Tech Markets,” argues that at most companies there “was an overwhelming shift to the continuous improvement side, to do whatever is necessary to stay ahead. The focus is on making your R&D; more responsive to customers, and corporate labs have been caught right in the middle of that trend as they’re being reined in and decentralized. “

Morone says top management should instead be focusing on striking a better balance between the imperatives of existing product lines and the market opportunities embodied by aspiring breakthroughs. Successfully managing that balance, he observes, is “almost unbelievably painful.”

Others insist that it is precisely the move to rapid and continuous innovation that is creating the new balance that America’s R&D; establishment needs in order to become more competitive.

“I think the main outcome of this restructuring is superior effectiveness of medium-term technology,” says Lawrence Linden, a partner at the Goldman Sachs investment firm and former head of McKinsey & Co.’s North American Technology Management practice.

Morone, the Rensselaer Polytechnic professor, sees two kinds of restructuring occurring. “The first . . . says we’ve got to learn how to grow new business more effectively.” The second, he says, is “the 1980s model of ‘those flakes out in the country club lab’ that says we’ve got to tie them down to the existing businesses better. I’m afraid there are too many companies in that second category and not enough in the first.”

The importance of the struggle between the innovation incrementalists and the innovation radicals during a low-growth economy where resources are scarce can’t be overstated.

In this economy, is a balance even possible? Or will the measure of great management be an ability to pick which approach is best for which time?

The answers to these questions will determine whether an “industrial policy” will be designed to strengthen American industry--or merely prevent it from becoming weaker.