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1 Measuring the Return on Investment in R&D: Voices from the Past, Visions of the Future
Pages 6-17

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From page 6...
... The first problem is how best to deploy research and development resources: in a central organization removed from the business unit, in a decentralized organization closely affiliated with the business, or through some combination of the two approaches. Over the years firms have moved from predominantly centralized research organizations to predominantly decentralized organizations and then back again, only to swing back yet.
From page 7...
... Chandler, the dean of American business history, has shown, DuPont pioneered in 1921 the organizational innovation of the multidivisional governance structure for a diversified multiproduct firm the classic M-form organization.4 Even though both structural developments and fashion have served in recent years to undermine the extent and stability of the diversified, multidivisional firm especially the vertically integrated firm the M-form remains a fundamental organizational framework in business today. RESEARCH IN THE DUPONT COMPANY Even before DuPont arrived at the M-form of organization, its executives had been pioneers in another area of business management: the formulation of a method to calculate return on investment and the development of decision rules or norms based on ROI calculations.
From page 8...
... Like Donaldson Brown and indeed like almost all DuPont executives Carpenter had attended engineering school.9 He approached problems methodically and analytically. Despite the high degree of uncertainty in such evaluations cooked books, inaccurate plant appraisals, and other drawbacks Carpenter derived a simple way to assign worth, which guided executives in carrying out one of the most successful chapters in diversification in American business history.~° Despite his youth, Carpenter replaced Donaldson Brown as treasurer of DuPont in 1919 and continued to develop analytical methods for cost analysis and asset appraisal and to refine Brown's ROI formula.
From page 9...
... His career was distinguished by one principal mode of operation: gather the best information possible both current information and historical data; assemble it into comprehensible charts, graphs, and tables; and make decisions based on reasoned analysis of the data. Only those who have spent time reviewing Pierre's business records can fully appreciate the extent to which Pierre' s brilliance was the product of rigorous information gathering and reasoned analysis of data, rather than flashes of insight or daring decision making.
From page 10...
... Second, and more important, the value of the Laboratory will eventually be much greater on this account.l4 Pierre du Pont thus made a remarkably clear statement that the returns on research investment cannot be measured solely by their direct effects a new product or a new process, an improved product or an improved process but also must be evaluated on their secondary and tertiary effects, which in many instances transcend the primary effects. In 1911, in a major reorganization of the top management of the company, which came about entirely independently of debates about research management, Hamilton Barksdale became the general manager of the company, or what in today's parlance would be the chief operating officer.
From page 11...
... Hamilton Barksdale attempted to bring greater "relevance" to the Experimental Station and to narrow its research areas and shorten its development horizon in 1911 by putting his favorite research director, Charles Reese, in charge of the Station in addition to the Eastern Laboratory. Ironically, over the next 8 years or so, Reese built a large, powerful central research organization that Barksdale would have found highly objectionable.
From page 12...
... Under Stine's leadership, both while he served as the head of the company's central research organization and after 1930 when he became the member of DuPont's Executive Committee who was in charge of the company's research portfolio, DuPont moved toward the standardization of R&D accounting across the company. It established five classifications of R&D expenditures (chemical control, improvements to existing processes and products, development of additions to established lines of product, development of new products or processes in entirely new fields, and fundamental research)
From page 13...
... Secondary effects (such as continuity of programs, improved capability for recruiting scientists and research engineers, and increased organizational capabilities) were perhaps more certain but by no means easily or accurately measured.
From page 14...
... Only later, when executives lost the ability to evaluate the merits of proposed research or to judge research opportunities or failed to develop suitable mechanisms to accurately appraise the merits of research did the company run into serious trouble when evaluating its research programs. It was at this point in the company's history that executives sought supposedly "more sophisticated means" to anticipate the expected returns on investment in R&D.
From page 15...
... The company had never borrowed money previously, and the efforts that came out of the New Venture Program eventually led to the company having to borrow money for the first time. So, it was a failure to appreciate that research is important, but other factors technical capabilities, market knowledge, marketing expertise, manufacturing expertise were critical in the success of its own stellar products, neoprene and nylon.
From page 16...
... There was another factor behind this decision. As the DuPont executives gained increased experience with their ROI measures, they realized that, although these measures led to better informed decision making, their decisions were not based solely on the ROI calculations.
From page 17...
... As early as 1902, when the Eastern Laboratory was established and the Executive Committee was created essentially to oversee DuPont, Pierre strove to obtain a better accounting for research. One of the things that led to the establishment of Donaldson Brown's ROI formulation was the work that Pierre had done on accounting, which was very different than the accounting procedures used by the railroads.


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