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“Destroying the culture!” cried the masses in my post about rose-colored glasses. It is a unique fiction in Silicon Valley that Bil Hewlett and Dave Packard were friendly to anything but an engineering culture that demanded results and held managers personally accountable for their decisions. I once got in trouble with the company’s director of  marketing and communications for suggesting otherwise in a public forum.

Even in an engineering company with “Invent” in its name, fundamentals matter.  In the Fall of 2001, I was giving a series of speeches at HP labs around the world. Part of my job was to clearly communicate progress to the technical staff of HP’s far-flung divisions, but–increasingly–it involved keeping a lid on things.

The share price free-fall of November 2000 was due in part to a significant earnings miss that had undermined the markets confidence in CEO Carly Fiorina’s ability to execute her way the kind of growth and market share she had promised.  The senior management of the company had fixed on the idea that growth meant growth in market share and profits. Market share was the ever-present  context for discussing why HP’s computer businesses were not performing. Fiorina talked incessantly about it.  It was penciled into my speeches to industry analysts.

Growth was supposed to be the result of wrenching changes, but it seemed to me like HP’s employees wanted to talk about the “wrenching” part.  It was, however, a combination of events that was the hardest to contend with.

The IT industry was in chaos, and most of HP’s employees had never experienced a bursting bubble. The number of companies that only a few months ago had seemed incapable of making a bad bet  but were now winking out of existence.was terrifying. Pessimism spread throughout the company in early 2001.

Then, in rapid succession, the announcement of the Compaq merger and the terrorist attacks of 9/11 seemed to push everybody over the edge. I remember walking into the executive suite after an especially difficult visit to the East Coast, to find much of the corporate staff huddled around Carly’s TV.  It was tuned to CNBC, and an analyst was making doom-and-gloom predictions about the merger.  He was sour on HP’s strategy and technology stocks in general. The ticker flickering  at the bottom of the screen seemed to confirm every dire forecast. Someone looked up and said, “What’s going on, Rich?” It was not really a question. It was an accusation.

The engineers were in a particularly foul mood. Carly had embraced their strategy–three technology directions that they all believed would position HP as a serious internet contender (I’ll talk about that in a later post and about why I believe that HP’s fumbling of WebOS is such a tragedy). In truth, the CNBC guy was right. The merger was a massive distraction. Aside from the printing business–which continued to motor along by figuring out new ways making a lot of money out of selling colored water–execution was anemic. That was why I was pushed over the edge when in a  Town Hall meeting that was supposed to help build a fire under the development teams, someone in the back of the room called out, “Bill and Dave would not have done this to us!”

Anna Mancini, the HP archivist whose offices were just down the corridor from mine, had been in the audience, and a few days later she walked quietly into my office and plopped a folder onto my desk. It was a transcript of a David Packard speech that had been handed to her by Dave Kirby, HP’s first director of public relations.  Anna called them “give’em hell” speeches. I had seen one of the transcripts before.  They were circulated among line managers as graphic illustration that it was ok to raise your voice to employees.  These transcripts, however, were unvarnished. They were about fundamentals, and as Anna told me, they were about “the fact that he definitely held his managers accountable for their performance.”

Kirby’s cover memo gave some bakground for the speeches which were made in early 1974 to a group of HP managers:

HP had experienced a disappointing year in 1973, at least in the eyes of Packard and Bill Hewlett. Inventories,accounts receivable and other expense items exceeded appropriate levels and there was even talk among some managers of seeking outside funding–incurring some long-term debt–to get the company over its rough spots.

After apologizing for a Bill Hewlett PA system address during which

…you know Bill got a little mad about it and I guess he got carried away over the PA.

Dave got to the heart of the problem:

…I thought it might be helpful to take a few minutes and turn around see if we can really define what some of our management objectives in this company should be…for some reason we’ve gotten a little bit off track in the last couple of years…For some reason we’ve got this talking about one of our objectives is to increase the share of the market, and I want to start right out by telling you that that is not a legitimate management objective of this company, that it leads you to the wrong kind of decisions, and that hereafter if I hear anybody talking about how big their share of the market is or what they’re trying to do to increase their share, I’m going to personally see that a black mark get s put in their personnel folder.

It must have been a stem-winder, because he catalogs all the profit shortfall, division-by-division. Accounts Receivable comes under fire,

It’s your job to see that this gets done and we just didn’t do it last year. Everybody thought it was somebody else’s business, and I even found some cases where a salesman had gone out and…told a customer that he doesn’t have to worry about when he pays his bill.

So does engineering project management

…if anything you might argue that the R&D costs ought to be allowed to grow as rapidly as our sales,

and capital equipment,

We don’t have to have every goddamn thing we’re doing gold plated.

But what really struck me was the harsh tone he directed to a strategy that valued maximizing profit growth above all else. Packard was a student of Peter Drucker:

To Drucker, businessmen who talk about profit maximization are doing more to hurt the system than anyone else…What strikes Drucker as most moronic is that the maximum profit which management hopes to achieve with their maximum profit goals is often less than the minimum profit needed to keep the business healthy and growing.

In the Fall of 2001, the entire company was transforming itself for growth.  The kind of growth that the IT industry had become accustomed to. But in the early months of 1974, David Packard told his employees,

The growth company is not a sound investment.  Such a company sooner or later, and usually sooner, runs into real difficulties. Sooner or later it runs into tremendous loses, has to write off vast sums, and becomes in fact unmanageable.

HP’s transformational strategy was based on growth envy. Carly Fiorina was in a fierce battle with Scott McNeely of Sun Microsystems over his seemingly boundless capacity to chew up huge portions of the Unix server market. On the other hand, Apple’s share of the PC market hovered around 6% (even today it it only has 10% of the total PC market).  It ranked 287th in the Fortune 500. When Oracle acquired Sun in 2009, effectively shutting down a growth-driven powerhouse, Sun’s market cap was slightly under $8 Billion.  When the market closed last Friday, Apple’s market cap was well over $300 Billion. It was more valuable than Exxon, the next largest company.

What about HP’s transformational strategy? In January of 2001, the total market cap of HP, Compaq, and Agilent (which was in the process of being spun out in an IPO) was slightly over $75 Billion when adjusted for inflation. In July 2011, after a decade of mergers, acquisitions, and divestitures- all aimed at increasing size and market share–the market cap of HP hovered around $72 Billion.

in 1974, David Packard told his managers,

Now I guess that you’ve judged by now what what I am getting back to is that one of the traditional policies of this company has been that we were going to manage it so we would finance our growth from earnings, cash flow, and as we somehow seem to have gotten away from that I see absolutely no reason why that should not still be our basic objective.

It mattered, because

The market doesn’t give a damn about your sales, they don’t give a damn about your share of the market; the only thing that counts is the rate of growth of earnings if your going to be in a growth company, and a growth company is not growing in size, it’s growing in earnings potential., and this is the thing that is so important for all of us to understand and is so important to do something about because we’re just facing a disaster if we don’t.

If culture matters on the world of innovation, then it also matters in the world of execution.  The HP-Compaq merger and subsequent events were under the watchful eye of an experienced board of directors.  Many of them had long ties with both companies, and it’s possible that some of them were in Dave Packard’s audience that February day in 1974.  I never heard any of them talk about, though.

All non-director officers were tossed out of the boardroom when “strategic” matters were discussed, so I guess it’s possible that someone showed up to “giv’em hell” and I never knew about it. Culture trumped strategy in 2001, but not in the way that most people think. Strategy was in the hands of an executive culture that placed their bets on company size, market share, and earnings potential that never materialized.

NEWMAN: Wait a minute. You mean you get five cents here, and ten cents there. You could round up bottles here and run ’em out to Michigan for the difference.

KRAMER: No, it doesn’t work.

NEWMAN: What d’you mean it doesn’t work? You get enough bottles together…

KRAMER: Yeah, you overload your inventory and you blow your margins on gasoline. Trust me, it doesn’t work.

JERRY: (re-entering) Hey, you’re not talking that Michigan deposit bottle scam again, are you?

KRAMER: No, no, I’m off that.

NEWMAN: You tried it?

KRAMER: Oh yeah. Every which way. Couldn’t crunch the numbers. It drove me crazy.

Even Kramer got it. Fundamentals matter, but there is a persistent legend in many engineering organizations that culture trumps the bottom line. It’s a legend that propagates because, as change management consultant Curt Coffman has provocatively noted, “culture eats strategy for lunch” when it comes to execution. What Coffman and others who talk about “soft stuff” don’t tell you is that in the end culture doesn’t matter.

The reality is is this: culture only trumps the bottom line in organizations that are heading in the wrong direction. It’s easy to see why: bad execution can be excused when it is in the service of a higher calling.  Sometimes — the legend goes — cultural purity even demands failure. Briefings that begin with a retrospective tour of a company’s glory days or the exploits of its leaders are not going to end well.  It’s a malady that afflicts start-ups, Fortune 100 companies, universities, and political office holders.

It was a rare meeting at Bellcore or Bell Labs that did not begin with a bow to a century of innovation and accolades. Theirs was a tradition so rich that it was bound to color all projects in perpetuity. I knew a  business development managers who intoned “WE ARE BELLCORE!” at the start of engagements. It always sounded to me like a high school football chant designed to cow the opposition.

The remnants of the Army Signal Corp  research lab at Fort Monmouth New Jersey had long dispersed by the time I interned there in the early 1970’s, but stories of the famous scientists who once stalked the cavernous halls of the enormous hexagonal building near Tinton Falls were retold to each new class of PhDs as if  the great men would be dropping in any moment to don lab coats and resume their experiments.

Start-ups are not immune, either. A few weeks ago, I was nearly ejected from a meeting with a CEO who was raising early stage money for suggesting that the distinguished professors who had founded the company might have had less than complete insight into market realities.

The “We are great because…”  meme  is propagated by leadership at all levels. Even in this age of the decline of the celebrity CEO, countless university and corporate websites are travelogues for executive jaunts to far-flung campuses. Supporters of one prominent Silicon Valley CEO would muse to anyone who cared to listen: “I wonder what it feels like to always be the smartest person in the room?”  The phrase found its way into an industry analysts’ briefing at the very moment that the company’s stock was falling off the edge of a cliff. I watched the faces of the analysts, and it was clear that they were pondering entirely different questions.

I’ve had my share of run-ins with employees who were not at all shy about using vaguely remembered words of long-departed leaders to pit culture against execution. In one instance, a series of patents led to an ingeniously conceived system for streaming audio and video from conference rooms and lecture halls. Unfortunately every cost projection showed that the effort required to install and maintain the equipment swamped any conceivable revenue stream. When I confronted the inventors with the inevitable conclusion, I was excoriated in the most graphic possible terms because I had not taken sufficient account of  the intellectual beauty of the system.  The crowning blow: “Dr. [insert the name of any of my predecessors] would have understood my work!”

On another occasion, I was called upon to invest heavily in a newly conceived and revolutionary mathematical method that would transform not only our  business but scores of related industries.  The inventors’ local managers had been completely sold on the idea and were willing to put a substantial portion of their margins at risk to develop it.

Key to the idea was the notion that every textbook in the field had been written by authors who willfully ignored the power of the new theories. The invention involved an area in which I had done research in the past, but  I couldn’t make much sense of the claims.  I dutifully sent drafts of patent disclosures to experts, but the feedback was discouraging.  The claims in the patent disclosures were either false or so muddled that further analysis was useless.

I pulled the plug. Reaction was swift and heated.  Here’s what it boiled down to: the founders would have had faith in the employees, and I did not. They were right about me, but not about the founders.

It is in the nature of engineering organizations to reconstruct the past to suit the present.  Hewlett-Packard was famous for such rose-colored glasses.  When then-CEO Carly Fiorina combined ninety or so business units — each of them concentrating on a slice of a business that overlapped with a half-dozen others, driving down operating efficiencies and, with them, margins — into a total of six, howls could be hear from every HP lab on the planet.  “Bill and Dave would not have done that to us.” A casualty of Mark Hurd’s rapid moves to salvage the strategic advantages of the two year old Compaq merger by slicing investments that did not have a clear path to revenue was the revered software laboratory at HP Labs.  “Destroying the culture!” cried the masses.

Now I happen to think that both moves were unwise, but not because of any cultural imperative that had been handed down from Bill and Dave. The numbers were seldom that hard to “crunch”.  It always boiled down to fundamentals. Risks were taken, but only when the fundamentals made sense.

It is a unique fiction in Silicon Valley that Bil Hewlett and Dave Packard were friendly to anything but an engineering culture that demanded results and held managers personally accountable for their decisions. I once got in trouble with the company’s director of  marketing and communications for suggesting otherwise in a public forum.

“Culture” often reared its head during my tenure at HP — usually as an excuse for ignoring business fundamentals. It was a problem that plagued Joel Birnbaum, my precedessor, Dick Lampman, head of HP labs and others over the years. On those occasions, I was happy to have the words of Bill Hewlett and Dave Packard to fall back on.

I’ll talk about that in my next post.

Dilbert.com

There was a birthday celebration of sorts last week.  From the October 29th edition of  ABC News Science & Technology:

While the actual date of the Internet’s birthday is somewhat debated, many say that the Internet was born 40 years ago today at the University of California, Los Angeles, when a computer to computer message was sent for the first time from the UCLA campus to Stanford.

At the time, Leonard Kleinrock and his colleagues were charged with developing the Advanced Research Projects Agency Network (or ARPANET), a government-funded research project in global computer communications that eventually grew into the Internet.

I thought it would be a good occasion to  reflect on how easy it is for Loose Cannons to get smashed by colliding worlds.

In the days before ARPANET, computer-to-computer communications were homogeneous, and computer manufacturers liked it that way. The very idea of not owning every aspect of a technology stack seemed to be ridiculous.  Where’s the value if you can get critical components from anywhere?  What if competitors start using the same suppliers?  Heads of business units hated the idea, but Loose Cannons kept proposing technical architectures that looked, well, open.  The idea was playing out in many ways in many companies.

At IBM, two architectural revolutions were simultaneously  underway. We now know that they were related. In the summer of  1980, IBM executive Bill Lowe prepared to brief  the company’s Management Committee on development plans  for a personal computer:

It was a dangerous place to be.  The Management Committee — or, given IBMers’ fondness for acronyms, the MC — ruled on issues that couldn’t be resolved at lower corporate levels, so going before the committee was, to IBMers, like going before the Supreme Court.  It was actually rougher because the top IBM executives who sat in judgment were known to be brutal, especially if they thought someone was wasting their time.[1]

Bill Lowe had been beaten up by the MC before, but this time Lowes’ plan to use outside suppliers drew polite questions from MC members who expressed some concern about turning over even partial control of any of their businesses to “outsiders.” What Lowe and the vast majority of IBM engineers didn’t know was that earlier in the year the MC had received a  forecast for global PC sales that showed a peak market of 80,000 units in that began to rapidly decline in 1984 as the specialized customer  need for computers was satiated:

IBM had already been embarrassed by early missteps in the PC market but the corporate culture was focused on mainframes and services.  Problems might be created by opening up the hardware and software architecture of personal computers, but

The general attitude…was that you don’t have big problems in small markets, and we thought the personal computer was a very small market.[1]

The MC might have been more inclined to turn its attention to a market that had real legs.  Like, say, networking.  Ed Hendricks was an engineer at IBM’s Federal Systems Division in San Diego.  Hendricks had helped design VNET, at that time the largest computer network in the world.  VNET was  IBM’s internal corporate network, linking IBM mainframes at scientific data centers.  By 1980, VNET was a global asset with hundreds of  hosts in North America, Europe and Asia.

Meanwhile, ARPANET was growing into the Internet, and Ed Hendricks was interested in how IBM’s technology would continue to prosper when the world started connecting IBM mainframes to large UNIVAC computers, HP mini-computers,  PC’s, and supercomputers from Cray or Control Data.  Hendricks became an industry player in this arena, collaborating with my colleague Larry Landweber at the University of Wisconsin as the expansion of the ARPANET began in earnest. Ed  Hendrick’s IBM Internet Gateway Project was aimed squarely at insuring that IBM mainframes would not be stranded in a world in which they could only talk to each other:

The objective of this project is to begin to bridge the gap between IBM computer systems and network technology predominant among government agencies, conractors and universities.  More specifically, we are working to develop according to DOD standards the technical capacity to interconect networks of IBM computers and systems to similar but different computer networks used by government agencies and their affiliates.

Hendrick’s website preserves the sometimes heated but  thoughtful and deep technical discussions — involving Hendricks,  the legendary Jim Gray, and MIT’s Jerry Saltzer, among others —  that took place througout 1980 about the relative merits of ARPANET and IBM’s networking strategy. For reasons that are still unclear, IBM decided to move the Internet Gateway Project to IBM Research in Yorktown Heights, New York, an effort that Hendricks calls “screwy.”   Hendricks along with team members Gerot “Mike” Engel and Dale Johnson planned to spend a week at Yorktown Heights, getting comfortable with IBM Research’s Systems Laboratory, their proposed  new home:

…the Systems Laboratory was created to focus more directly on perceived business needs. Consequently, Systems Laboratory projects are evaluated and prioritized on the basis “leverage” they exert on the software product line…by design, ninety-five percent of the work carried out in the Systems Laboratory is so closely related to strategic product development that it cannot be discussed outside IBM.

Shocked, the Internet Gateway team concluded:

…a project such as ours which is intended to establish internet communication compatible across differing systems…could not be carried out under such guidelines.  Our overall reaction…was that the ARPANet Internet Gateway project could not have been started within the Systems Laboratory.

They concluded that if the project was to have any chance at all of success, there would need to be a formal review of management decisions, what  IBM called the “Open Door” process.

March 14, 1981

John R. Opel, President IBM Corporation

Dear Mr. Opel,

This letter is intended to invoke the IBM Open Door Policy.  My purpose in requesting this Open Door is to seek clarification of the decisions which led to a situation where a project which is clearly critical to IBM’s future posture in the data communications industry cannot be pursued…Bureaucratic accomodation for only that which is in the strategic plan is a very dangerous posture to be in while the data processing and communication industry is rapidly evolving.

[My team and I] have been working to carry out a project to establish a capacity…to cooperate with the U.S. Government and University Computer Science departments in the evolution of techniques to interconnect dissimilar computer networks…There is essentially unanimous agreement that this activity promises important advances for IBM and for computer technology in general.

In September 0f 1980 we were notified by our management that this work could not be carried out…On each occasion when this qustion [of where the work could be carried out in IBM] was being escalated to the proper level, my management would insist that I leave the management issue to them and to concentrate my own efforts of the technical work.

Last week I was informed verbally that no sponsorship for this project could be found.  My manager asked where hie should look to find me a job. My position was…that inability to find organizational sponsorship for the project is not equivalent to a decision that IBM should not be involved in developing the capacity to interconnect IBM networks to government and university networks…to look for other professional opportunities now and give up attempts to pursue this technology…would be to let the company down….

Sincerely yours,

Gernot Engel

19 March 1981

Mr. Thomas J. Watson, Jr., Chairman Emeritus

Dear Mr. Watson,

My employment with IBM has been terminated as a consequence of recent management decision which are incompatible with my professional goals…I believe I am justified in requesting more thorough and explicit responses to the following questions:

  1. What “business needs required the termination of our ARPANET Interconnection Gatweway Project and the abandonment of the…professionals we had been dealing with?
  2. What factors prevented alternative organizational arrangements that would have allowed our group to continue its work within IBM?
  3. What is IBM’s posture regarding professional cooperation with the computer scientists working in association with DARPA…to establish mutual techniques for interconnection of dissimilar computer networks?…

Sincerely yours,

Gernot Engel

May 15, 1981

John R. Opel, President IBM Corp.

Dear Mr. Opel,

On March 4, 1981 I sent a letter to your office requesting clarification of a decision which cancelled the internet gateway project…Your office’s attempt to analyze the internet decision appears to be stalled because it was handed back to middle management….I can only conclude in this instance the Open Door Policy has failed. My recommendation to salvage the situation is that you give fifteen minutes of your time to receive a presentation on the internet project and attempt to evaluation for yourself the value of this project to IBM’s future.”

Sincerely yours,

Gernot Engel

May 19, 1981

Dear Mr. Engel,

I have reviewed the results of [the] investigation into your concerns.  Your disappointment with the decision to terminate the VNET/ARPANET project is understandable; however, I conclude the decision was properly based on the need to fund other Ad Tech projects with greater business potential…

I understand you are currently considering a return to IBM, and I hope you choose to do so.

Siuncerely,

John R. Opel

Number 1-81: September 11, 1981 MANAGEMENT BRIEFING

TO ALL IBM MANAGERS:

Organizations seem to have an irresistable tendency to codify successful practices in rules, instructions and controls which soon begin to take the place of judgement. When that happens, the result is bureaucracy.

IBM is not immune.  Earlier this year, reports from many sources indicated to me that a growing bureaucracy is affecting the performance of our business…corporate staff heads, group executives, and the division presidents are exploring ways to reduce unnecessary controls, rules and approvals in their areas of responsibility…We will succeed in that effort only if you managers, at every level of the business,k are willing to stand up and fight bureaucracy wherever you find it…If you have all the information to make a decision, make it…

[signed by John Opel, president]

John Opel stepped down as IBM president in January 1985 and chairman in May 1986.  He was succeed by John Akers, and he was succeeded by Lou Gerstner in 1993. Gerstner, the former CEO of RJR Nabisco, described his transformation of IBM in “Who Says Elephants Can’t Dance?”[2].  Most observers agree that critical to IBM’s turnaround that took it from a free fall in the early 1980’s to unquestioned market  leadership in computers, software and services was the dismantling of a remote, hierarchical management culture that squeezed innovation in political pincers.  By the time I took over the computing research directorship at the National Science Foundation in the late 1980’s, IBM had become a major player in the growth of the Internet [3]:

In the mid-1980s, NSF decided the time was right to try to link its regional university networks and its supercomputer centers together. This initial effort was called NSFNET.
By 1987, participation in the new NSFNET project grew so rapidly that NSF knew it had to expand the capacity of this new network. In November of that year, it awarded a grant to a consortium of IBM, MCI, and a center at the University of Michigan called Merit to create a network of networks—or inter-net—capable of carrying data at speeds up to 56 kilobits a second. By July, 1987, this new system was up and running. The modern Internet was born.

REFERENCES

1. Paul Carroll, Big Blues: The Unmaking of IBM, Crown Trade Paperbacks, 1994

2. Louis V. Gerstner, Who Says Elephants Can’t Dance? Inside IBM’s Historic Turnaround, Collins, 2002

3. National Science Foundation, NSF and the Birth of the Internet, http://www.nsf.gov/news/special_reports/nsf-net/textonly/index.jsp

One of the reasons that the world of R&D collides with product worlds is that their agendas don’t quite line up the way you might think they should.  There are of course the questions of culture, incentives and time.  I will return to these questions in later posts, but today I want point out something more fundamental that I think helps explain why Alice and Edward in “Well, kind of fraud is it?” lived in worlds that were on a collision course from the beginning: many R&D managers are not even in the same business as their counterparts in product management and sales.

The Industrial Research Institute is an association of 200 R&D-intensive companies and is one of the most important forums for sharing data and best practices.  Among its members are recognizable brand names in consumer products, manufacturing, electronics and pharmaceuticals.  Alcoa, Xerox, and General Motors are members.  It is fair to say that the IRI represents traditional, orthodox R&D management thought.  Microsoft, Google, and Intel are not members.   It is interesting that innovation models based on the Internet, software, nanotechnology and other industries where startups often lead the way and product development cycles are compressed are notably absent from IRI.

The IRI Medal is awarded for impact on R&D in some of the largest corporations in the world, and in 1996 it was awarded to Robert A. Frosch, who for ten years led the General Motors Research and Development Center.  He anticipated by a generation the importance of industrial ecological impact. Frosch is a true visionary.  His Medalist’s Address to IRI was entitled “The Customer for R&D is Always Wrong!”.  It was a fascinating and very influential piece, but, because the IRI membership is not open to individuals, it is hard to find.

My first thought on hearing the address was that Frosch was talking about something like the “future value of research” (see “Loose Cannons”) until I read the published version of the speech[1]:

I have seldom, if ever, met a customer for an application who correctly stated the problem that was to be solved.

Frosch went on to describe many approaches to establishing and maintaining an effective R&D organization, and that’s what I remembered from the address until GM started its public foundering last year.

I started to wonder, “Did the GM R&D Center fail General Motors?”  I don’t think that’s a fair assessment. After all GM had for many years made vast research investments in efficient engine technology, telematics, and safety – many of the component technologies that we now know are important to the automobile industry,   I think the fault lies elsewhere: traditional R&D management often does not know who the customer is.  R&D managers talk mainly to each other, and senior management enables this behavior.  They worry – necessarily so I’m afraid – about sources of funding from the product divisions.  According to Frosch:

The R&D people must swim in an ocean of corporate problems, present and future.

To Frosch and many organizations charged with innovation, the customer is the one paying the bills for R&D not the one buying the products.  This is a bigger deal than you might imagine, because it shifts your perspective.   It helps explain why R&D organizations have been historically ineffective in resolving Clayton Christensen’s Innovators Dilemma[2], and it helps explain why Alice and Edward had such a hard time aligning their goals.

Frosch says that R&D performance should be measured by:

  • Past performance, not promises/predictions
  • Summing the value of the successes and comparing with the total cost of the research lab, not individual projects.
  • Projecting the value of successes ove their product or process life – the internal rate of return can be surprisingly high

These are internal measures, and there are many examples of R&D organizations that continued to be successful even as their parent companies spiraled into the ground. The IRI membership list is impressive but there are also members who make up  a veritable Who’s Who of companies that were stunningly wrong in their assessment of their markets, and had their R&D laboratories been focused on the real customers they might have avoided disaster.


[1] Robert A. Frosch, “The Customer for R&D is Always Wrong!”, Research Technology Management, November-December 1996: 22-27

[2] Clayton Christensen, The Innovator’s Dilemma, Harvard Business School Press, 1997