Deciding what the right level of R&D spending is can be done through a bottom-up approach, based on the probability of technological and commercial success among the opportunities identified, and on the corresponding expected project development costs, timing, markets and profits. This can also be done through a top-down approach, based on the benchmarking of peers and/or on strategic decisions about the areas the organizations wants to learn from and build its future on. The first approach fits well with an exploitation strategy focused on incremental innovations, while the second is more in line with an exploration strategy where more radical innovations are expected.
Having decided how much of its resources to invest in R&D and where, the firm’s next step is to design and implement the R&D organization that will best support those choices. In particular, in the context of multibusiness and/or multinational firms, R&D departments are no longer merely corporate black boxes attached to headquarters and with limited monitoring of their activities and output. How and by how much they are centralized or distributed has become a key decision in terms of business process, corporate structure and geographical scope.
First, as R&D activities and performance become integral parts of their business’s processes, firms must decide how much R&D activities are managed through dedicate formal structures, gaining focus, accountability and discipline, or through relatively informal networks, gaining flexibility, market orientation and agility (see the discussion on ambidextrous organizations in Chapter 4).
Second, as the corporate structure combines businesses active in different competitive environments, R&D activities must be balanced carefully between corporate (typically long-term) and divisional (more decides on and who pays for the projects) and of absorption (who integrates and who implements the opportunities developed).
Third, firms active across various must define the geographic scope of their R&D. This should take into account local market characteristics but also where the best talents and expertise can be found, which might be far away from corporate headquarters. In the latter case, R&D should be balanced between, on the one hand, global or regional structures connected with a wide array of production units, potential recruits and customers, and on the other more local structures fostering local connections and close collaboration. This is particularly critical considering the emergence of a highly skilled workforce, sophisticated customers and very competitive firms in emerging countries such as the BRIC countries (Brazil, Russia, India and china).
As a consequence, firms have adopted a wide array of R&D organizational structures, from networks of specialized regional centers with local market reach and focused technology scope, to centralized structures with broad technology scope and global market reach. Others have developed transverse approaches based either on technology centers of excellence, with a focused technology scope and global market reach, or on regional centers with a broad technology scope and local market reach. Which style is chosen should be based on what best fits the R&D and overall strategy of the firm, considering its specific resource, environment and purpose, and in particular balancing local flexibility with global efficiency.
But while deciding effectively how much, where and how to develop R&D capabilities might be a necessary condition to compete in many industries, there is ample evidence that it is not a sufficient condition for success. Other sources of innovations must be leveraged in order to compete effectively, which will be discussed in the next section.