UK: THE INNOVATION IMPERATIVE - RESEARCH AND DEVELOPMENT. - To be inventive is to succeed in the global marketplace. UK companies, with a stake in high technology, which lose sight of the need to invest in R and D will exclude themselves from membership

by Geoffrey Foster.
Last Updated: 31 Aug 2010

To be inventive is to succeed in the global marketplace. UK companies, with a stake in high technology, which lose sight of the need to invest in R and D will exclude themselves from membership of the first division.

'We are such a wonderfully inventive nation,' enthused the chairman of ICI pharmaceuticals division. That was several years ago, before Zeneca was a gleam in Sir Denys Henderson's eye. The pharmaceuticals divisional chairman has long departed, but his successor would very likely echo those comforting words, and just as fervently. Major pharmaceutical businesses cannot exist without devoting a lot of resources to research and development, and they have to be inventive in order to succeed in what is probably the first and most completely global of global markets. Happily, Britain still has three or four contestants near the top end of the world pharmaceuticals league.

Elsewhere the picture is less reassuring. The signs are, across whole sectors of British industry, that R and D is going out of fashion. Certainly, R and D spending is on a slide.

After inching up year by year through the 1980s, expenditure reached a high point in 1989 and then began to fall away. Official estimates suggest that in 1991 British business as a whole spent 10% less on R and D, in real terms, than in the year before. In electronics, which has historically poured more into R and D than any other sector, expenditure is reckoned to have dropped by 14%.

Britain was in recession, of course. It was a time for hacking away at indirect costs of every kind. Nevertheless it should cause some concern that so few big British companies with a stake in high technology can begin to compare with their international rivals when it comes to investment in R and D. Only ICI and Glaxo make it into the top 50 worldwide, a fact which was highlighted in the recent CBI/DTI joint report, Innovation - The Best Practice, published in January. On the other hand, British companies are definitely at the top of the table for rewarding shareholders. Come rain or shine, they regularly pay out a higher percentage of net earnings than the Japanese or Germans, or even the Americans.

It is not that the British are unconcerned about whether they are 'world class' in other respects. Put a British manager on a platform and he will talk about little else, unless it is how he found redemption through Total Quality Management. Companies devote a vast amount of effort these days, and considerable sums of money, to teaching their employees about TQM; also to 'empowering' them, to beating corporate 62e hierarchies as flat as pancakes and replacing departmental structures by multi-disciplinary teams - all in the hope of transforming their performance, of making themselves world class, or something like it.

And why not? The CBI/DTI study 'confirmed that innovation can be commercial, technical or organisational'. The CBI/DTI team also noted that, 'Best practice companies ensure an open, cross-functional and multi-level team working approach to projects and problem-solving, and empower employees at the lowest level'. Fair enough, but companies must also have a sense of proportion. The empowerment of research workers - or formation of multi-functional teams of researchers, production engineers and manufacturing and marketing people - is not on a par with empowering the postroom.

The fact is that management is every bit as fashion-conscious as the rag trade. Empowerment is the latest fad. Of course there is every reason to adopt a fashion if it suits you. But in the absence of the shared values upon which it is supposedly based (and which it is intended to reinforce), empowerment is just another manipulative device like, say, 'management-by-objectives', which used to be popular 25 years ago. Companies delude themselves if they believe that they can control the minds of those they employ simply by seeming to change the way that certain things get done.

For almost any ambitious manufacturer (and for many service organisations, too) R and D is not a fashion, nor is it an option; it is an essential business activity. It is also, obviously, a prerequisite for membership of the first division: the company that does not keep up with the technology loses its ability to compete. This is one reason - by no means the only one, but important nevertheless - why, in so many sectors of industry these days, there is no British player of international stature left.

The shortage of British businesses with a strong technological bias is of more than casual concern to Gerald Avison, managing director of a small firm called The Technology Partnership, based in the village of Melbourn, near Cambridge. The Technology Partnership generally avoids calling itself a technological consultancy, although that is what it is: a concentration of brainpower (some 90 brains qualified in a variety of disciplines) brought together 'to improve our clients present and future performance through the development and exploitation of technology'. In other words, if a company could use help with its manufacturing processes or product development, the partnership - its directors and employees do own a majority of the shares - will be only too pleased to oblige.

During the five-and-a-half years since it was formed, by way of a management walk-out from PA Technology, the firm has built up to a turnover of over £11 million, and has been consistently profitable. It has been retained by German, Swiss, Swedish, American businesses, even by Japanese; but only a minority of its clients have been domestic. 'We would prefer to work for UK companies,' says Avison (he claims that 21/2% of turnover goes on 'flying around'), 'but in a lot of the areas where we're active, the most successful companies are outside the UK.' British industry could be a great deal more innovative than it is, Avison maintains. The trouble is that 'it doesn't think it could'. Successful innovation gives a company a large measure of control over where it is going. The same applies to a national economy. 'Where we're heading is towards being a cheap place to make things, which is not very encouraging... Inward investment gives you a potential for making a product but it doesn't give you a car industry... Value added comes from owning the market. Technology (among other things) makes this possible... I'm greatly disturbed by the idea that if you have a factory then you have a manufacturing industry.' Having set out its stall, the partnership clearly had to demonstrate its own capacity for innovation. It could not expect to cover the technological waterfront, but it had inherited from PA an expertise in mechanical engineering and electronics, also in bioscience. Robert Bosch was an early user of its skills in the first category.

The importunate British boffins were asked to devise a simple means of tightening a jigsaw blade without resort to a screwdriver. Their solution led to an extended relationship involving modifications to a long list of Bosch power tools, the Melbourn firm becoming a kind of 'rapid resource' of the German division. 'They have a resource equivalent to ours, but we can do things faster,' claims Avison. A more recent task was to design a state-of-charge indicator for a cordless drill. Hardly high technology, again, but the component had to be designed down to a price which even the client did not think feasible. In all these instances, the aim was to add functionality and value to a consumer product.

At a more sophisticated level, the partnership designed a hybrid chip for a Japanese company. 'You can't do that kind of thing unless you've done it before,' remarks Avison. It built a number of highly specific machines of the automated teller type for NCR Corp, to enable the client to test a corner of the banking market. It worked with the Swedish firm, Ericsson, on mobile telephony. Indeed communications has emerged as yet another area of expertise. At its own expense, the firm has developed a telephone system for rural parts of Eastern Europe. This conforms to recognised digital standards, and consists of a wall-mounted box plus a small aerial that points at an exchange aerial. The system costs 'significantly less than half that of copper cable', and Avison is trying to negotiate funding with potential partners.

The rural telephone incorporates some of the firm's own silicon, a by-product of an earlier job. There are several more examples of spec developments that have sprung out of funded programmes. ('That's how technology companies grow,' comments Avison.) One is an electronic aerosol with a whole range of possible applications. But much the most important so far is a machine which is now widely used in the pharmaceutical sector for the automated manufacture of cell cultures.

It began with a contract from a UK company, Celltech, which needed to scale-up production of a particular culture. If carried out manually the work would have required 40 graduate biochemists to perform an exceedingly boring task to a consistently high standard. The solution was to automate the process by developing a machine which consists, in essence, of a robot installed within a clean cabinet. A mark 2 system was sold to Merck Sharpe and Dohme, the world's biggest drugs company, and was taken up by a number of other major producers. The Cellmate system has since been completely re-designed at the partnership's expense, and third-generation models are on offer to the industry. This ability, not only to devise but to manufacture and supply, is a great source of strength, Avison believes.

Aside from developing or refining products - either for clients or on its own account - the partnership fills a rather more conventional consulting role in relation to manufacturing. Its engineers helped Glaxo overcome space constraints in a tablet-making plant, for example. A third leg is strategic consulting, again with a pronounced technological bias. The firm was asked to review R and D strategy and help to formulate long-term programmes at Laporte; also to kick-start the innovation process in a part of BOC.

David Connell, who heads the strategy group, argues that the weakness of R and D in the UK stems, in large measure, from the attitude of the conglomerates. 'The idea of sticking to your knitting runs through the philosophy of most manufacturing conglomerates'. These closely monitor unit performance according to strict financial criteria and are highly effective at stifling initiative. Moreover, conglomerate managements do not themselves provide the right strategic direction.

The British preference for squeezing overheads rather than direct costs, when the going gets tough, is not necessarily the best policy, Connell suggests. 'What we have here is a huge lack of resource devoted to business development. The way to get global is through the business development process.' It needs vision (which implies long-term thinking), and ceaseless effort directed towards turning the vision into reality. No one knows how long this might take: it could be 'a 30-year exercise'. But whatever the period, R and D has an essential role to play throughout. In Britain 'business development' usually means finding potential acquisitions (if it means anything), and falls to a senior manager who has neither responsibility for, nor understanding of, R and D.

The starting point for any appreciation of R and D, according to Connell, is the notion of the 'R and D pipe-line'. In-house R and D cannot be considered in isolation from the processes by which technology is gathered from outside the business, he argues, nor from the markets that it is supposed to serve. The main aim of R and D management, incidentally, is not to develop gizmos or blockbusters: it is to access technology, to identify the contribution that technology can make, and to develop 'core competences'. It is neither necessary nor wise, in Connell's view, to invest lavishly in central laboratories, as companies used to do. Better to keep internal R and D somewhat constrained financially, and use external sources as appropriate.

Another mark of these straitened times: the CBI/DTI report noticed that R and D has tended to shift away from 'technology push' and towards 'market pull'. The distinction between push and pull gets slightly blurred once people think in terms of 'competences', rather than 'innovations', but it does not disappear entirely. The authors of the report add that 'technological advantage (the objective of technology push) can still be a key factor for innovative success, and its value should not be underestimated'. Indeed not, for it is the possessor of technological advantage who - if he can exploit it effectively - will become the market leader and make all others dance to his tune.

In the 1960s and early '70s Canon was known as a camera company, becoming the biggest in the world. It still is. But these days 80% of the business is office equipment. The '50s were not over before Canon was applying its knowledge of optics to office needs. The '60s and '70s brought a succession of new products which eventually knocked Xerox off its high perch above the copier field. The '70s also saw the introduction of the laser beam printer, another product category in which Canon leads (as provider to Hewlett-Packard). In the '80s came the bubble-jet printer, a brand new process far removed from optics. Canon has had its product failures too - notably in computers - but they are far outweighed by the successes.

As each new technology reached the market, Canon continued to support the earlier processes with a stream of lesser innovations. Yet the company is simultaneously developing competences on a massive scale. At the company research centre in the hills above Tokyo (of a splendour matched only by the grandest in more palmy days in the West), most of the 300 researchers are working on six leading-edge technologies which management believes could find their way into products from about the year 2000: optoelectronics, super precision controls, materials, electron beam applications, new printing technologies, biotechnology. Why biotechnology? Because Canon came to it via image processing. 'We are now finding out where the possibilities exist,' says an executive. The British managing director who ostentatiously proclaims that, 'There's not a lot of R in our R and D' may no longer be in the race.

One measure of technological excellence that impressed the CBI/DTI team was the number of patents granted to companies each year in the US. Year after year Canon adds another 800-900 patents to its name. It belongs, with Toshiba and Hitachi, to an exclusive Japanese club dominating the top of the list. But then Canon, like Toshiba and Hitachi, is world class.

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