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Programmed Innovation Strategy for Success H. W. COOVER In He future, new technologies will require much closer zntegra- tion of R&D with engineering, manufacturing, and marketing, arm thus also with corporate and business-un~t strategic planning. In the fixture, virtually every major industry in the developed world, whether now classified as high-tech or smokestack, must in fact be high-tech to succeed in international competition. Industries will survive and thrive only by integrating advanced information, manufacturing, and computing technologies into their designs, products, and processes, and only through high levels of innovation, quality, and reliability. This chapter is about the future and how to plan for it. The future Is what we make it. Time and circumstance only accidentally shape our experience and our response they do not set our boundaries; they do not determine the limits of our imagination; they do not define He reach of our vision. The spirit of science is alive and well today. We have our Lavoisiers, our Pasteurs, our Carotherses, our Sales. They are among us, and they are more compelled than ever. Science and engineering have learned to deal with change. Indeed, that is close to our mission as scientists and engineers. Creativity and change go hand in hand. How many times has it been said that "We live in a changing world"? Most often it is said in awe, bewil- derment, or dejection. And sometimes, as a Great. I hasten to point out that even the rate of change is subject to the same law it is changing, as well. And it is changing faster by the minute. To put the pace of change in perspective, let us take a quick look backward, through He eyes of He U.S. chemical industry and its changing place In the environment of He last 30 years. Will He U.S. chemical industry survive? Can it survive? And why should we talk about this specific industry in a book devoted to He broad subject of economics and technology? 399

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400 H. W. COO VER The chemical industry is both old and new. Descended from the medieval alchemists, the first industrial chemical company in the United States (Du Pont) is nearly 200 years old. Yet today the industry is bow a "smokestack" and a "high-tech" industry, very competitive internationally (where only the British and the Germans are strong, the Japanese are feeble, and Here is a possible eventual role for the oil-rich Middle East), and very market oriented, as well. It has enjoyed a favorable balance of trade for the postwar period, peaking at nearly $12 billion in 1981, dropping to $9 billion in 1983 (and probably lower in 1984 as the hard dollar continues to erode compet- itiveness). It spans an enormous range of products including fertilizers, pet- rochemicals, drugs, synthetic fibers, plastics, rubbers, petroleum products, detergents, insecticides, and venous other highly specialized products used by consumers and industries alike. Its product value is about 7 percent of GNP, with a much less than proportional direct employment. This industry was automated starting 50 years ago. It spends an average of some 3 percent of sales on R&D and almost three times that much in capital investment. But some of the leaders do much more Du Pont, ex- cluding Conoco, spends almost 6 percent of its sales on R&D, much of it in electronics, life sciences, and over special areas far from its usual line of business. This company's long history epitomizes the history of change- from black powder to high explosives, to basic chemicals and dyes, to synthetic polymers and fibers, and now to agricultural chemicals, health- care products, and electronics. It is research-intensive and capital-intensive, but not labor-intensive. It is almost entirely private, unlike in countries such as Italy, Prance, and Holland. However, structural change is under way in the chemical industry, which was perhaps our first truly high-tech industry in the l950s and 1960s, and which is now maturing. This is necessitated by new competition, the oil shocks that raised energy costs, deregulation of feedstock prices, He heavy indebtedness of its many customers overseas, the greater international flow of formerly exclusive technology, environmental restrictions, greater product- liability problems arising from the increasingly litigious nature of U.S. society and its increasing desire for a riskless world, the decreasing attractiveness of investing abroad (witness the Bhopal disaster), and the hard dollar, among over factors. Hence, more of He capital spending in the industry in recent years has been for replacement and modernization, rather Han new capacity or overseas investment, and a research-led shift to higher value-added spe- cialty and proprietary products. Examples are the moves of Du Pont and Monsanto into biotechnology, the increasing efforts in phannaceu~acals, elec- tronic chemicals, new materials, and so forth and so on, by numerous com- panies. The companies in these areas that are product-intensive are using R&D to look for new products, perhaps "home runs," to market quickly. Well-known examples of such companies are Lubrizol, Raychem, Great Lakes, Pall, and M~llipore.

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PROGRAMMED INNOVATIONSTRA TEGY FOR SUCCESS 401 Thus, clearly, the environment for business and the role of the research organization have changed dramatically over the past several decades. And nowhere is that more true than in the chemical industry, a splendid case history to illustrate what is happening in many other companies and industries. The chemical industry is in fact representative of a broad cross section of American industry, which now performs about three-quarters of the country's R&D (now approaching the level of $100 billion per year). Industries like aircraft and missiles, electrical equipment, machinery, motor vehicles and other transportation equipment, and instruments are also mainly privately funded in their R&D (over two-thirds on the average) and are research- intensive; some of these industries are also capital-intensive. All technolog- ically based industries together account for 75 percent of total R&D private funding. Aircraft and missiles in this group are exceptional in that over two- ~irds of their R&D funding comes from the government. R&D funding has been increasing at ~ percent per year. Hence, this chapter discusses the chemical industry specifically, looks at its past, but above all considers its future a future we can guide through programmed innovation a strategy for success. Research has progressed from being an affordable luxury to becoming an expensive requirement. But the question today is: Where do we go from here? Assuming that governmental and societal factors provide a favorable cli- mate for innovation, the future of the chemical industry is in our own hands. Innovation is the sum of invention and implementation, of which the latter is the more difficult part because it deals win risk and capital formation. It will be our responsibility to manage our resources, to manage the innovation process in tomorrow's rapidly changing environment. In that environment, the only constants will be ambiguity, surprise, and change that moves forward at an ever-increasing pace. That environment will require the research director to be part scientist-eng~neer with an eye on the future, part business person with a film understanding of corporate goals and objectives, and part manager win an ability to guide. Following are some ideas on how we can be all that- and more. The discussion is organized around the answers to five questions: 1. How can research be made central to determining a company's future? 2. What is the role of planning in a research organization? 3. How can we manage and guide the process of innovation? 4. What are the business aspects of managing an R&D program? 5. How do ~ see the future of the chemical industry and of industry generally? To answer these questions, I will draw on my experience win Eastman Kodak's Eastman Chemicals Division, of which, in 1965, I was named director of research.

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402 H. W. COOVER EASTMAN CHEMICALS: A CASE STUDY OF THE CHEMICAL INDUSTRY Making Research Central to a Company's Future Our approach to research in 1965 was much like that of other companies. Research was somewhat of an island unto itself; there was very little interaction with other company functions. And the director of research was not considered an integral part of the top-level management team. The problem was that the division was successful. Its sales In 1965 were $368 million, up 15.4 percent from the previous year. After-tax earnings were a healthy 16.3 percent of sales. But those of us in the research community have never been interested in what lies behind uswe are always looking forward. And when I looked forward into the late 1960s and early 197Os I began to wonder: How can research be made central to determining the company's future. That led to a further array of questions, many of which were of a corporate nature. For example: What is our company's culture? What businesses are we really in? And, coincidental with that: What is our approach in our various lines of business? Do we concentrate on commodity products, or products that are differentiated? Are we leaders in a few areas, or competitors across a broad spectrum? And, how important are quality and technical service? Once we were able to define our immediate course of action, we needed to know where we were heading for the future. We asked ourselves: What businesses should or couldwe be in? What will the future environment be in those lines of business? What will be the best role for our company in Hose areas? And so on. Today, those questions are obvious. In fact, author John Naisbitt, in the popular book Megatreruis, writes, "The question for the 1980s is 'What business are you really in?' When the business environment changes, a company or organization must reconceptualize its purpose in light of the changing world."* At Eastman we had the "long haul', in mind, back in 1965, when we directed many of our questions at our own organization. We asked: How should R&D participate in the decision-making process of the corporation? And, how should He strategic thinking of R&D be made a part of the planning of the corporation? The questions continued: How should we be organized to ensure full coordination of the total corporate R&D program? How can we keep R&D focused on those areas that are most important to the corporation? How do we get our technical people in close touch with the marketplace? *John Naisbitt, Megatrends (New York: Wamer Books, 1982), p. 85.

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PROGRAMMED INNOVATIONSTRATEGY FOR SUCCESS 403 What we were really asking was this: What role should research play in the future of our company? And, if we could define that role, could we program or manager the innovation process to achieve it? We needed answers to these questions. But in 1965 we had essentially no mechanism for providing the answers. In fact, few of the questions had even been asked in a formal way. We took on the challenge, nevertheless, and what we really began was a slow but vital evolutionary process in search of excellence in innovation. One critical element in the process was gaining company-wide recognition that research management had a major respon- sibility for defining the future of the company: that we had responsibility for new products, for new technologies, for new business opportunities to achieve the company goals for growth and profitabilityand for providing strategic plans for their achievement. Research needed to be repositioned from the isolation of the ivory tower to involvement with the corporate offices as part of the top-management team. The total R&D program needed to operate under the direction of a competent scientist and skilled manager. He or she needed to be a member of top corporate management and a high-level officer of the company. Our research and development mission, we said, was threefold: 1. To generate the new products that are needed to enable our company to achieve its objectives for growth and profitability. 2. To ensure that all company products are based on the most advanced technology consistent with sound economics. 3. To maintain an excellent knowledge base in those areas of science and technology of current or potential interest to our company. In other words, we defined our responsibility as both applied and basic. But we maintained that all research must be consistent with current and future corporate directions. Because we were a part of the company's business, we, too, had to be a business enterprise and emphasize planning, innovative thinking, and the well-respected principles of sound management. The Role of Planning in a Research Organization We were coming out of our ivory tower and getting involved in "the business of our business." That meant a greater reliance on planning. The second of the five questions listed earlier in the chapter phrases that this way: What is He role of planning in a research organization? Research does not usually take place in well-charted territory. No one has clearly defined the new products that need to be invented or the problems that need to be solved. Research management has the responsibility of developing ways of perceiving and conveying to the research scientists those things that He corporation really needs from research.

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404 H. W. COOVER To tackle the overall planning problem, we found that we had to subdivide the total job into separate business segments or strategic business units. Most of these segments correspond to current lines of business, and a few of them are new areas of potential business interest to our company. These segments are broad enough to be challenging but narrow enough to be manageable. For each business segment we make a technology and market projection. This is a study to determine the various factors that are likely to affect the product category over the next 15 years. We project the future technological, economic, market, political, and social occurrences that can be expected to have an impact on the products and technology in each business segment; and we try to determine the hme frame for each. We identify the new products Hat will be required to maintain our current market share, and we define new product opportunities that could lead to significant growth for us in the business. We do a critical analysis of current and potential competitors in We business segment and their strengths and weaknesses. In the technology and market projection, we define what we need to do and when we need to do it to enjoy a timely participation in future oppor- tunities. We also project the financial consequences of pursuing those future opportunities. As a general principle, our target is to achieve a position of leadership in our key business areas, and these studies give us the basis for deciding what we must do to achieve such a position. Our technology and market projections are developed by teams of five or six people. One member is from the research and development division, and one is from marketing. Each team also has a representative from our man- ufacturing organization, a market analysis person, a financial analysis person, and a staff person skilled in He techniques of technology forecasting. Con- sultants and other outside expens are brought in whenever we need to sup- plement our in-house capabilities. Through this combination, the team is able to take into account all of He influences Hat are likely to affect He business segment and the interaction of Lose influences. These studies be- come He fundamental knowledge base for business planning for the business segment. They are reviewed with top management, and decisions are made about what part of He identified opportunity we want to pursue and to make a part of our corporate plans. These studies are a form of research. They look into the future and identify technical and market needs and opportunities and give us a world view of science and technology. In our company, R&D management first recognized the need for these studies and took the initiative to develop the needed methodology. Management responsibility for these studies con- tinues to reside with R&D management. R&D managers, by the nature of their work and their responsibilities, are future-onented thinkers. And R&D is one of the principal users of the information. The technology and market projections work well when we are dealing with an existing line

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PROGRAMMED INNOVATIONSTRATEGY FOR SUCCESS 405 of business or a business area that is rather closely related to some existing product line. For unfamiliar business areas, we prepare a business area analysis. The objective of this study is to provide the best understanding possible of the target business area. We evaluate the size of the business and the opportunity that might be available to us, the projected grown, and the economic at- tractiveness. We consider present and projected products; the producers; the customers; He competitors- Weir capabilities, strengths, weaknesses, and strategies; and the factors necessary for success in serving the target business area. The results of the study are presented to an opportunities panel comprising our most knowledgeable people from marketing, manufacturing, general management, and R&D. The panel decides which market segments, if any, offer the greatest potential. After additional studies, a new business oppor- tunity may be identified and accepted by top management for furler de- velopment. Then, the responsibility is assigned to a special venture team operating within an existing venture-management structure. The head of R&D serves as the venture general manager and is given the full responsibility for the program. A venture team comprising representatives of all needed func- tions is fanned and reports to the venture general manager for the duration of the project. The venture team develops and implements a strategic plan for gaining the desired position in the business area. When the new products are commercialized and the new business is established, management re- sponsibility is assigned to existing line organizations or, if appropn ate, a new organizational structure is created. My point in describing our process of analyzing new and existing busi- nesses is this: it underscores our belief that R&D management has a leading role in helping the company define new opportunities for the future. Defining new opportunities for the future requires us in R&D to be involved fully in planning for current businesses. To do that most effectively, Easunan's re- search and development members participate at three levels of corporate business planning. The first is a line of business. Our company' s total business is divided into 35 business segments. A business team, with representation from all We important company functions including researchhas been appointed to develop and implement a strategic plan for each business seg- ment. An R&D manager is assigned the principal responsibility for the R&D program in support of that business segment, and he is responsible for de- veloping and implementing He appropriate R&D strategy. The next higher level of planning in our company is one that deals win a grouping of business segments which share raw materials and production facilities. We call these product streams. The strategic plan for each stream is based largely on the plans for each business segment but is optimized for the total steam and may necessitate changes at the business segment level.

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406 H. W. COOVER Oh J CO Basl! G oath ///////~ : : : : .. .................. , , :. . . . .. .................... : : A/////// a////////////.' " ' '.' ' ' . 2 .'.'' '' ' " """' " "' "" """''' ""' ""' '///////////////////////~. : : : . / C ~ ............ : I/ ~ I / /~ E x ~ so ~ n g 1984 1994 FIGURE 1 Components of base program in R&D planning for a business segment. There are four such product streams, each of which is headed by one of our manufacturing company presidents. At this level, R&D is represented by one of the top people, either the director of research or the director of development. Finally, there is a level of planning that covers the total company. At this level, the plans for the four major product streams are optimized from an overall corporate point of view, and plans for developing new businesses are incorporated. At this level, R&D is represented by He company's director of research and development. These three planning levelscorporate, product stream, and line of busi- ness are all working toward corrunon goals: the company's goals for Be future. To help achieve those goals, we in research subdivide each goal into three components and analyze what is needed from R&D for each component. The first component is a base program for each business segment (see Figure 11. It is made up of things that we as a company know how to do, Dings that we fully intend to do, and things for which resources have already been provided. It is what we expect to achieve. The base program is made up of three parts. The first is our program for existing products. Left to themselves, these products would decline. The next part is me R&D projects

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PROGRAMMED INNOVATIONSTRATEGY FOR SUCCESS 407 that are necessary for maintaining, market share, at satisfactory profitability. The third part of the base program is those R&D projects that will allow us to increase market share, always provided that profitability is maintained or improved. After all, one can always gain market share by giving away the product below cost. The second component is a "stretch" position achievable, but chal- lenging (see Figure 2~. This position would include growth opportunities that are identified, but for which implementation plans are not yet approved. The third component is the goal itself where the company would like to go in the business (see Figure 31. Looking at the elements building up to the goal helps us quantify for each business segment what needs to be done from an R&D point of view toward achieving the company goal. The gap between the base program and Me line represented by the stretch position in Figure 2 represents ~ challenge to R&D to find ways to make attractive opportunities (which are already identified) into profitable realities. The gap between the stretch position and the corporate goal in Figure 3 represents a challenge to identify new opportunities. Again, it is R&D that must help formulate a response to this challenge, because the solution usually involves new products and new technologies. Oh J at: Stretch Position Base ~ Maintenance '//////~ ,.,.,, ,.: ///////////~ .... ... ///////////////~.2 '.'. '.; ' :' ''' '''' ' ~/////////////////~.''. '" ' 22 '2 22""'""""""'" """"""""""""' '//////////////////////////~;2' 2. .' 2.' ' ' 2 ' ~ ~ Ex~st~r~g 984 1994 FIGURE 2 The ''stretch" position in R&D planning for a business segment.

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408 H. W. COOVER it: Goal Stretch Position Base ~ Maintenance ///// .. . .: : . ~/////////~''''.'.'''22""'""""""""""'"""'"""'""''""""'"""""""""""""""""""''""'""""'""" ~////////////////~'.2''2'' ''.2'''.'''22'''''"' ' " ' ' ' ' ' ''"" ~////////////////////////~2.'2.'.'2 '''. '''2''.'.'""''""""'"' " """"'" I// ~/~//= Existing 1984 FIGURE 3 The corporate goal for a business segment. 1994 In looking for opportunities, we look to build on the strengths we already have we seek to become even better at what we already know how to do. We concentrate our attention in areas where our capabilities are s~ong, and we seek to expand our position from that base of strength. We also follow a principle of seeking breakthrough technologies. This is a more difficult and challenging approach than making incremental improvements, but it is vital if we are to maintain a position of technological leadership. Managing and Guiding the Process of Innovation Let us now consider He answer to the third of the five questions listed earlier: How can we manage and guide the process of innovation? Today it is increasingly important to improve our effectiveness by guiding the process of innovation. At Eastman Chemicals, there are three stages in the innovation process: 1. needs 2. projected products and processes 3. innovation projects

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PROGRA~fMED INNOVATION =^TEGY FOR SUCCESS 409 Each successive stage represents increased certainty of success for the project and increased commitment of company resources to co~x~nercialize the prod- uct or process. Following is a description of each stage. A "need" is simply a description of a valid new product or process for our company. In the case of a new product, the need would profile the properties and performance required for the new product to find utility in the marketplace. For a new process, the need describes the process char- actenstics that are desired, or the changing economic conditions that neces- sitate new future techniques. These descriptions then become targets toward which the research and development people can direct their creative efforts. The identification of needs is critical to the whole process because the usefulness of the subsequent steps is totally dependent on the validity of the original need. People throughout the company, in research and development, in marketing, in manufacturing, and everywhere else, play a role in describing these needs. In this needs-identification stage, we are looking beyond the obvious. We are seeking ideas for value-added products and next-generation products Cat represent the major opportunities of the future. We use the projected technology changes and the projected market trends as a base for identifying new products and new technologies that will exist in the envi- ronment of the future. To help identify needs, we have a major program to get our research scientists out into the marketplace. We have assigned R&D people to each market segment of major interest. This assignment requires that they become expert in the market. It enables them to find out what our customers expect from our current products and services and to identify future potential needs. These experts participate in the needs-identification research that is part of each technology and market projection. With one foot in the laboratory and one foot in the marketplace, our scientists are in a position to make a major contribution to the innovation process. Clearly, if you cannot define what you need, you cannot innovate it. Half the work of innovation is knowing what to innovate. Studies of performance show Hat success in innovation goes up with increased knowledge of real market needs. Through their involvement in the marketplace, our scientists help us to gain Hat knowledgeto identify real future needs and to stay ahead of our competition, which is also looking for . . new opportunities. This process of needs identification results in a needs list, which shows our R&O scientists and engineers the kinds of things that the company requires for continued progress toward its goals. As progress is made toward a solution to He need and we reach the point where the R&D manager judges Hat there is a better Han 50 percent chance that He product or process can be successfully commercialized, the project then becomes a "projected prod- uct or process."

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410 H. W. COOVER When a need becomes a projected product or process, a commercialization target date is established, and specific responsibility is assigned. Before recommending Hat a product enter this stage, the R&D manager must obtain from our market analysis group the potenna1 market value of the product. He also must obtain from marketing its commitment to add the resulting new product to its market basket of products for commercial sale. Similarly, for a projected process we require an estimate of the economic benefits that will result. The R&D manager must also review the proposal with the engineers who would have to design and build it and win the manufacturing manager in the area where the process would be used to ensure that if it is successful it will be utilized in the manufacturing area. My point is this: by the time a project gets to this stage, it is more than a project solely for R&D. We have involved the appropriate organizations outside of R&D to get broad company commitment to the project. As additional experimental work is done on one of these projects and the scientist or engineer reaches the point where he has developed a specific concept that will satisfy He need and which he believes the company should push forward to commercialization, the product or process moves into the third stage, He "innovation project" stage. This is ~ critical and sensitive phase in the life of a project, and we believe that our R&D effectiveness can be greatly influenced by how we handle it. At the innovation project stage, an innovations committee, with represen- tation from all major areas of He company, reviews the concept and provides the necessary approvals. This group also assigns responsibility and determines priorities needed to commit the R&D organization to translating the concept into commercial reality. A project team is appointed, and the members de- velop a plan to cover all elements necessary for the project, up to and including commercialization. The project team is composed of representatives from R&D, manufacturing, marketing, and other functions necessary to He success of the project. Team members become fully knowledgeable about He project in the very early stage. They provide input to the direction of He project, and they are committed to its success. This team is responsible for He project from inception to commercialization. The successful conclusion of an innovation project results in the commercialization of a new product or in the commercial practice of a new process or some new technology. Even after a product has made He long and carefully managed journey through our innovation process, our work is not completed. We learned long ago that marketing is as vital to our company as research or manufactunng. And so, many years ago, we established a New Products Marketing Division to assist in the introduction of new products to Be marketplace. Personnel from this division become involved as team members at the innovation project stage. They assume an increasing role for paving the way for market accep- tance of He new product as it moves closer to commercial reality.

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PROGRAMMED INNOVATION=~TEGY FOR SUCCESS 411 Thus far, I have talked mostly about management responsibilities on the basis of individual R&D organizational units. Beyond this, we have assigned R&D unit managers to also- manage the R&D program in a given business segment. They are responsible for working with the other R&D managers in Hat product category to develop an R&D strategy and to implement that in a coordinated and effective manner. Another element in our management system is our project-management concept. For each innovation project, we assign a project team and a project manager to lead that team in carrying, out its mission. The project-manage- ment concept gives the project managers the principal responsibility for the success of their project. They call on upper management only when obstacles arise that are beyond their ability to handle. The innovation project plan is approved by management, but implementation of the plan is the responsibility of the project manager. This pushes down responsibility to the people who are in the best position to know what is required for their projects. The project manager is expected to be a champion and advocate of the project. The way he or she performs the job can mean the difference between success and failure. No R&D management program would be complete without a meaningful way of assessing performance. We evaluate our own performance by com- parina the new products and processes that are commercialized each vear against the objectives we had set for the year. Each year we obtain a sales forecast for the new products that have been commercialized. These forecasts are prepared by marketing. Using appropriate assumptions, we calculate and compare the net present value of the new products and processes with the cost of the R&D program for that year. This value-to-cost ratio (see Figure 4) Is an indicator of the effectiveness of the R&D program. We share this kind of evaluation with our R&D managers and use it in reporting to top .,: ::,T, ~ Ail: ... ~.i' .... it, ...,~, ...... ~ ...,^.......................... ... _ ..... ,. :,, it. -. , , . . :. .;; . .~ .: . . .. ... , ,.~ ,, ....... ~ ....... , . _ I ... ,.,, ,.,.,., :, , ,. ............ . ...... ~ ;. , ., ._ ..... , .. , .... .. .. ~ ........ ... _ .. : ,, .. ., , : hi:: ~ 1 -I 1 ~ 1 :1 ~1 ~~:~ ~ ~~ 1 ~ 1 ~~: 1975 1976 1977 1978 1979 1 980 1981 1 982 1 983 FIGURE 4 Product and process achievement value-to-cost ratio, Eastman Chemicals Division, 1975-1983.

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412 H. W. COOVER management. We have a goal of improving our effectiveness along We trend line indicated by our past performance, which Is about a 20 percent im- provement per year. As we look ahead, we realize we have far to go; but as we look back at We history of our company we are pleased with the results of our emphasis on managing innovation. Figure 5 provides a brief overview of Nose years. Period New Products Sales 1920S 4 1929 - $2 million 1 930S 2 7 1 939824 m; I I ion 1 940S 67 1949 - $1 00 million 1950S 172 1959 - $243 million 1960S 214 1969 - $563 million 1 970S 425 1 979 - $1 ,800 mi ll ion 1 980-1 984 320 1984 - $2,482 m; I I ion FIGURE 5 New products, by decade, Eastman Chemicals Division. Business Aspects of Managing R&D Let us turn now to the fourth question: What are the business aspects of managing an R&D program? ~ will begin win the matter of budget. In our company, all budgets are based on providing the resources to do the job we need to do; they are not based on a percentage of sales. Each R&D manager is expected to justify 80 percent of his budget request based on approved projects. Twenty percent of the budget request can be for pioneering research. New products and new technology count on the company's bottom line, but we also recognize that the innovation process is centered on creative people, and we must allow and provide for scientific freedom. We do Hat in part by our provision for pioneering research. The company's budget also provides for a number of non-mission-oriented research projects aimed at achieving a fuller understanding of the science and technology of our present operations and of new business areas. This work is not directed toward the innovation of new products and processes but toward establishing an improved knowledge base on which innovations of the future might be made. Our non-mission-onented research program is administered by Be director of research as chairman of a science advisory committee. This committee is made up of We key research managers and

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PROGRAMMED INNOVATIONSTRATEGY FOR SUCCESS 413 the senior scientific staff. It gives guidance on the scientific merits of new proposals and evaluates programs already under way. The overall strategy of the various types of R&D projects for which we budget is well integrated win the company goals for the future and results in a level of support for each business segment that is consistent with its value, mission, and technological potential, plus a balanced commitment to the future by support of new areas of technology. The Future at Eastman Chemicals What of the 1980s? In just four years, sales have reached $2.4 billion and we have already introduced 320 new products to market. Where will we be when the decade ends? No one knows, but we are confident that we will continue to see progress from our efforts based on programmed inno- vation. Programmed innovation is not a secret. It is a system. While the system is magical in its effects, there is no magic formula for accomplishing it. It is a slow process to build a comprehensive and integrated system that involves all of the necessary elements. For us, it was an evolution in search of excellenceexcellence in innovation. We changed He role of research from passive, to positive, to dominant. We moved research from the ivory tower to a central position in He planning and management of the company. We integrated technology strategy with business planning strategy. We coupled R&D with general management, manufacturing, and marketing,. We assigned research management a major responsibility for defining the future of the company as it pertains to new products, new technologies, and new business opportunities. We gave R&D He responsibility for providing a strategic plan to achieve company-wide R&D goals for growth and profitability. We de- velop~ed the skills and capabilities for programmed innovation. INTEGRATING TECHNOLOGY WITH CORPORATE STRATEGIC PLANNING That is the story of Eastman Chemicals. But I believe there is a lesson here for all of us who have responsibility to direct the course of our business and our industry. Assuming the government adopts a "proindus~ial" strategy based on a firm commitment to create conditions under which industry can operate effectively and competitively on the world scene, then the growth and pros- perity of the chemical industry, which I have been describing as an exemplar of many others, are in our hands. In the days ahead, the pace of change will be rapid; the choices will be unparalleled, the opportunities will be unlimited.

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414 H. W. COOVER Our challenge Will be to increase our own effectiveness in dealing with change, in making choices, in evaluating opportunities, and in integrating technology into business strategic planning. The first stage of strategic planning, begun many years ago, was in reality only financial planning. It focused largely on looking, at the financial side of He business and cranking out numbers. The second stage of strategic planning, pioneered by the Boston Consulting Group, occurred mostly during the 1970s and had a very different type of onentation. It focused more on markets and analysis of the market partici- pation of organizations and less on financial measures. This reorientation to markets did not ask a key question of why market shares had been generated. It only gave us labels (dogs, cash cows, and stars) to show how well we had done, not why we had done so well or so poorly. We are now entering the third stage in the evolution of strategic planning, in which the thinking is based on the recognition that technology has become of primary importance in domestic and international competitiveness, market share, and financial performance and must therefore be reflected in the bases for corporate plans and strategies. This new orientation asks for the causes, not just the results. The successful corporate strategists must better understand the management of technology, its development, its innovation, and its in- teg~ation into corporate strategic planning. I have inquired of a number of other leading companies what their current policies are for regularly integrating technological and strategic planning, and they were most cooperative.* After all, there is a relative handful-of companies in the it&D-intensive industries I have mentioned previously that conduct the overwhelming amount of private R&D in the United States- companies such as GM, Ford, IBM, AT&T, Du Pont, United Technologies, GE, Eastman, Exxon, Xerox, I11, Dow, Boeing,, Westinghouse, Honeywell, Hewlett-Packard, and He like. Du Pont alone spends about $1 billion per year in R&D. I would like to summarize in this concluding section what I believe exists widely in such companies, recognizing that each company and industry must tailor its approach to its particular circumstances and culture. It is true that much innovation, perhaps a disproportionate share, arises from smaller, younger companies that basically have no problem in managing this strategic linkage communication from top to bottom is easy, the market and technology are tightly linked; and if the strategy is inadequate, the company fails! For such technological companies, venture capital is indis- pensable. Venture capitalists spread their risks over a whole portfolio of companies and sell their interests after a few years, obtaining a large overall retum. Large companies must evaluate their internal rate of return over the *I want to thank Ralph Landau for having assisted me in these inquiries and in the evaluation of He replies.

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PROGRAMMED INNOVATIONSTRATEGY FOR SUCCESS 415 life of an investment. The venture capitalist's return is larger because the second round of investors expect a large future stream of earnings after the initial, great start-up risks have been borne by the venture capitalists. Thus, for the large players, who contribute the wealth and the buLic of the GNP to the U.S. economy, the problems are obviously far more complex. In general, company and business unit strategic plans do include the relevant program of corporate R&D, and vice versa. Strategic planning currently involves less forestal documentation and more identification of issues that could impede or chan Be the direction of technological advances. Basically, planning is now the general line manager's responsibility, is an ongoing process, and is much less bureaucratic than previously. In fact, what is being practiced is strategic management, rather than simply strategic planning. Industrial R&D must confront the issues of international competitiveness, efficiency, and increased rate of change. Linear or assembly-line innovation is not what actually happens. New ideas and inventions occur at many stages in the process. People are being mixed up and moved around, not separated- from R&D into production, marketing, and general management, and the reverse. R&D is no longer isolated in an ivory tower in progressive com- panies. Increasingly, business managers whose culture is usually different a shorter time horizon, more financially oriented, less concerned about peer recognition must be synchronized with and knowledgeable about innova- tion to obtain truly novel results and avoid arteriosclerosis of the organization. Thus, it is neither "technology push" nor "demand pull'' innovation that emerges, suggesting outside energy for innovation. Much of the energy actually comes from within the innovation organization, from a strong tech- nology-business partnership. It is done by experiment. The longer-range view is more likely to be found at the top levels of companies, so that true, major, long-range research needs close interchange with top management, which must recognize that the very nature of the business itself may be at stake. Progressive multiproduct companies will also plan by taking "technological slices" through the organization, as well as product and business-unit slices, to make sure the interrelationships for planning and strategy integrate tech- nology fully. It helps to have the board of directors engaged, and some companies are already in possession of a board corrunittee on science and technology (such as Alcoa, GE, and Allied) or have science advisory com- mittees of outside technologists (such as GM, Kodak, Arco, Du Pont, Her- cules, and many others). It is true that technology is not always the key, or basis, to specific business strategies. The principal objective of any business strategy is to create and sustain a competitive advantage and thus a better-~an-average return on investment. If, however, technology is the basis, as in many of the companies and industries cited, it must be used strategically, and this necessitates large

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416 H. W. COO VER R&D expenditures. These generate higher market share and profitability, which in turn justify higher continued R&D spending. R&D is not an end in itself; it must be implemented by successful business strategy and must return better-than-average profits over the long run a virtuous circle. Tech- nology can also create major discontinuitiesopportunities and threats. It is this process Hat permits increasing competitiveness, productivity, and living standards for the United States. But one cannot forget that economic factors, such as interest rates and tax rates, exert an overwhelming influence on commercial innovation. Education levels are important, too, as are social and political attitudes that favor individual initiative and the entrepreneurial spirit, with less of a "zero nsk" or "zero sum" mentality. In the future, our leading industrial figures are convinced, new technologies (which are rapidly advancing) will require much closer integration of R&D with engineering, manufactunng, and marketing, and thus also with corporate and business-unit planning. In Be future, virtually every major industry in the developed world, whether now classified as high-tech or smokestack, must in fact be high-tech to succeed in international competition. Industries and their employees will survive and thrive only by integrating advanced information, manufacturing, and computing technologies into their designs, products, and processes, and only through high levels of innovation, quality, and reliability. Not every company is yet aware of the critical need for this by any means. They had better wake up before it is too late.