A Tool for Analysis of Global R&D Organizations
Creating the right organization and control system for R&D is always a difficult task even when confined to only one geographical location. Managing numerous R&D units spread all over the world increases the complexity dramatically. How well corporations coordinate their global R&D is one of the key factors for success in many industries.
Two crucial parameters must be defined in order to understand the methods for managing global R&D:
1) The various functions filled by R&D units
2) The different types of organizations that can be applied to these units
Types of global R&D laboratories
In order to understand the functions that can be filled by R&D units the descriptions used by Ronstadt (1977) as seen in de Meyer’s and Mizushima’s article Global R&D management (1989) will be referred to. Ronstadt’s model is based on four types of R&D activities.
1) Transfer Technology Units or units established to help certain foreign subsidiaries transfer manufacturing technology from the parent while also providing related technical services for foreign customers.
2) Indigenous Technology Units or units established to develop new and improved products expressly for the foreign market. These products were not the direct result of new technology supplied by the parent organization.
3) Global Technology Units or units established to develop new products and processes for simultaneous application in major world markets of the company.
4) Corporate Technology Units or units established to generate new technology of a long term or exploratory nature expressly for the parent.
Types of organizations
To discuss the various organizations which can be used for global R&D, the model developed by Perlmutter (1965) as described in the book Managing the Global Firm by Bartlett, Doz and Hedlund (1990) will be applied. Although Perlmutter’s model was developed to describe different types of organizations for multi-national corporations, it is not unreasonable to apply the same models to the organization of global R&D units.
Perlmutter’s 3 organizational structures are:
1) Ethnocentric – overseas operations are managed primarily to protect the company’s competitiveness in the home market. Communication and information is top down and all strategic decisions are steered from corporate headquarters. Subsidiaries sell products designed and manufactured by parent with little or no local control.
2) Polycentric – overseas subsidiaries take more responsibility adapting designs and manufacturing product to meet local needs. Subsidiaries are managed as independent units with minimum interference from headquarters.
3) Geocentric – all units of the organization are in close communication. Global market segments are defined and technology is transferred rapidly to sell more or less the same product worldwide maximizing economies of scale both in production and R&D.
The Perlmutter/Ronstadt Matrix
The following matrix illustrates one way in which global R&D can be discussed. It is of course possible that a corporation can manage its R&D activities differently depending on the type of technology unit. For example, a transfer technology unit might be treated polycentrically while a corporate technology unit may be managed geocentrically. However for the sake of this paper the various types of technology units will be discussed individually with no significant attention paid to the communication flows between the different types of technology units.
Ethnocentric Transfer Technology Units (ETTU)
ETTU’s assume that the subsidiary does some manufacturing for the local market. In an ethnocentric company the transfer of technology from the parent to subsidiary is based on the transfer of a finished design to be implemented in local production. This design was originally created to meet the needs of the parent company’s home market and is transferred to the subsidiary in an opportunistic fashion. A positive reaction to this product from the market might be considered “good luck” because no real consideration was taken to local market need by the parent company. These R&D units could be located anywhere in the world, however, their responsibility is limited to adaption of the design from headquarters to the local manufacturing facility.
Ethnocentric Indigenous Technology Units (EITU)
The indigenous technology unit cannot exist by definition in an ethnocentric corporation since the local subsidiary would not be allowed the freedom to develop and manufacture product specifically for the local market. This type of operation could represent a transitory position from ethnocentric to polycentric.
Ethnocentric Global Technology Units (EGTU)
In the strictest sense EGTU’s cannot exist since in an ethnocentric organization a global technology unit is based at the headquarters and although simultaneous introduction of new technology may occur to capitalize on global scale, the product is primarily designed to meet the needs of the home market.
Ethnocentric Corporate Technology Units (ECTU)
Corporate Technology units are quite compatible with ethnocentric organizations. The ECTU is located in the headquarters and is focused on securing the long-term development of new technology or evaluating applicability of alternative technologies and processes for the parent corporation.
Polycentric Transfer Technology Units (PTTU)
If the polycentric corporation maintains transfer technology units, they will be located in the headquarters and used to transfer product designs or manufacturing technology to the subsidiary to then be adapted by the local organization. If a subsidiary were to develop a technology or design that is applicable to another market, the transfer would take place via the PTTU at the headquarters since there is no mechanism for communication between subsidiaries.
Polycentric Indigenous Technology Units (PITU)
The indigenous technology unit fits best in a polycentric organization. The freedom that the polycentric organization allows is an excellent environment for the development and manufacturing of products specifically for the local market.
Polycentric Global Technology Units (PGTU)
To operate global technology units in a polycentric organization would be very difficult since the various local organizations are accustomed to making adaptations to fit their local markets. If, for example, a PGTU, were to develop a product to be applied simultaneously around the world, the design would need to be so flexible as to allow for local adaption and additional time must be allocated, not only for product adaptation, but also for internally selling the concept to the relatively independent polycentric subsidiaries.
Polycentric Corporate Technology Units (PCTU)
Corporate technology units in polycentric companies operate as suppliers to the local subsidiaries. Probably located at the headquarters, the PCTU would “sell” to or take assignments from the local R&D units to evaluate new technologies or materials. The PCTU functions as an advanced research laboratory for a number of more application oriented units in the subsidiaries.
Geocentric Transfer Technology Units (GTTU)
The transfer technology unit is extremely important if the geocentric organization is going to function successfully. Transfer technology units can be located anywhere and have the responsibility for surveying best practices or new innovations throughout the company and implementing them or cross fertilizing wherever applicable. The GTTU can be either a formal organization or an informal function of all R&D units.
Geocentric Indigenous Technology Units (GITU)
Although indigenous technology units could exist in a geocentric corporation, it is contra the fundamental goal of that type of organization. In a properly functioning geocentric R&D unit, no new product would be developed in a subsidiary without striving to incorporate the needs of the global market. It could occur that a market segment were defined in a local market that was not evident in any other market and that this segment was deemed important enough to justify a specific product being developed. In this case the development might be executed in the local development organization or in some other subsidiary where a special competence was maintained, thus the concept represented by the GITU is not truly applicable.
Geocentric Global Technology Units (GGTU)
Global technology units capitalize on the open communication between subsidiaries around the world to maximize global scales in R&D, manufacturing, and marketing. Although global technology units can function well even in ethnocentric organizations the geocentric corporation’s ability to leverage a global base of technical know-how and human resources gives a clear competitive advantage.
Geocentric Corporate Technology Units (GCTU)
In a geocentric organization, corporate technology can be located in a single unit anywhere in the world or it may be comprised of several different units carrying the responsibility for different areas of technology. The corporate technology function may also be divided between a number of R&D units with specific product responsibility (i.e. global technology units) which manage a segment of the corporate technology function based on their unique competencies. For example a global technology unit that is primarily focused on developing a product that requires special heat resistant plastics may also be responsible for the corporate technology unit for all heat resistant plastics for the entire company.
It should be noted that this Perlmutter/Ronstadt matrix would require more in depth analysis in order to confirm its viability as an evaluation tool. In this brief analysis some general conclusions can be drawn.
The first and maybe most obvious conclusion is that ethnocentric R&D organisations are not functional on a global scale. This does not mean that a company with ethnocentric R&D is not a global competitor. A company may be a global leader in their industry, however this would imply an industry in which the product is a relatively unimportant element of the marketing mix. This could be true of such products as Coca Cola or Chanel perfume. Another alternative is that the company has created a temporary monopoly for example with patents as in the case Astra and Losec.
As regards polycentric and geocentric organisations it could be concluded that both are equally functional for global R&D but the choice of organisation styles depends greatly on the nature of the industry.
Polycentric organisations are particularly applicable to industries in which there are large variations in the needs of the market. The food industry is a good example where companies like Unilever and Nestlé must develop products that meet the local tastes of consumers around the world.
The key to the polycentric R&D organisation is the indigenous technology unit which carries the responsibility for creating products that secure the company’s success in the local market. The transfer technology units work to avoid simultaneous development of products in different markets and to cross-fertilize best practices or to transfer new knowledge from the corporate technology units.
The corporate technology units fill a secondary, but important role to the indigenous technology units. The corporate technology unit is not under the pressures of supplying the market with new products and can therfore fill the role of technology consultants looking ahead, evaluating and developing fundamental technology that will be fed to the more operative R&D units locally.
A geocentric organization is advantageous for industries in which market needs can be defined or segmented globally with little or no variations from country to country. In fast pace industries with short product lifecycles, a geocentric organisation for R&D gives the benefit of developing a large number of competitive products for immediate global introduction. The geocentric R&D organisation is a child of modern times, completely dependent on high speed telecommunication, jet travel and computers.
The driver in this type of organisation is the global technology unit. These units must be well coordinated to avoid overlapping, however, properly managed the geocentric global technology units operate as one R&D department with a number of complimentary projects being executed simultaneously. Although inconvenienced by geographical distance, the project teams are in constant communication. The corporate technology units in a geocentric organisation are crucial and although they can be located anywhere in the world they should be clearly separated from the global technology units. This will ensure that the corporate technology units are focused on long term technology development which will secure the future of the corporation.