Tuesday, 3 June 2008

Bloody useless lab rats – or are they?

Can you have a useful R&D department that is perfectly useless? Perhaps I should explain the question... Most R&D departments are supposed to generate new technologies, products, processes, etc. But not all do. Some R&D department seem to never come up with anything that makes it to market. Clearly a waste of money, these lab-rats, right?

Well, maybe not.

For a long time, economists and other folks studying organisations assumed that R&D departments are supposed to come up with stuff. And only if they come up with good stuff – which eventually makes it into a sellable product and reaps a profit – is an R&D department worth the investment. Clearly, if they never come up with anything at all, that’s money down the drain – or at least, that’s what everybody assumed.

Then, two professors of strategy (note, not economists!), Wesley Cohen and Daniel Levinthal, discovered an interesting insight. To put it in a simplified nutshell: sometimes, firms with R&D departments that never come up with anything at all still seemed to benefit from them?! How can such a seemingly useless bunch of Gyro Gearlooses still be worth their while?

The trick is that, in many industries (and in most industries to some extent), whatever firms invent comes into the public domain, much like radio signals or air pollution. Hence, other firms can easily access and imitate it. Economists always assumed that this process is costless; you just pick it up and do it too. Therefore, unless you’re in one of those rare industries in which patents really work, it’s actually kind of nice if your competitor invents something new; you can do it too without having had to spend all this R&D money!

However, this turned out to be a bit of an oversimplistic view of the world. Imitating your competitor is not that easy. It turns out that firms that never invest anything in R&D actually have quite a lot of trouble nicking ideas from others. They just don’t quite understand them well enough. In contrast, firms that do have an R&D department – even if the geeks never invent anything themselves – appear to be much better at copying others. That’s the unexpected benefit of having your own R&D: R&D equips you, as a firm, to be better at “stealing” things from others. Because of your investments in R&D, you are better able to really understand the technology and apply it in your own products and processes.

Wes and Daniel examined this phenomenon at length and wrote a series of articles about it in a bunch of heavy-weight academic journals, with telling titles such as “Innovation and learning: The two faces of R&D”, “Absorptive capacity: A new perspective on learning and innovation” and, my favourite, “Fortune favors the prepared firm”. It shows that there are two benefits from investing in R&D: the first one is to invent stuff; the second one is to build up the capacity to understand, assimilate and apply the things that others come up with in your own products and technologies.

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