12/28/2012 02:18 am ET Updated Feb 26, 2013

About Leadership: Materiality and R&D

I was once in a meeting with John Browne, quite a few years ago when he was the managing director responsible for technology in the corporation, listening to a review of a series of projects underway in our U.S. research center. I had heard these projects reviewed before, several times, but it was John's first exposure to them.

The presenter had gone through a fairly long description of a project on a particular corner of electronic ceramics, when John asked just how big might the market be, or how big might we expect this business to ultimately grow in revenue.

"Well, our medium term goal is $25 million, but we expect it ultimately to grow to $100 million." John was clearly not sure he heard correctly -- is that revenue or profit? No, that would be the sales, but we expect to get a good margin.

I think that is the last we heard of that project, and several others.

In a company with sales of $200 billion, derived from a few products, it is not sensible for management to be spending time reviewing research projects that might (and we know there is always a lot of optimism) grow to $25 million. Nor is it rational for the leaders of the technology program to run such projects.

But they do, and it is a disease of R&D, especially corporate block-funded R&D, to engage in exploring ideas that lack materiality. I became a non-executive director in a company with $400 million in sales, in two main businesses, and found management and the board spending time on projects off the main business line where the five year plan after commercialization was to grow sales to $5 million. Problems of materiality are very scalable, and this disease can flourish in companies of all sizes.

Of course, as with everything else in business, there is an exception, and it is a major one. The exception is companies that are big, but have hundreds of thousands of products. The big example of this is 3M, but GE is also in this mold. In this case you run projects to develop products that might be $25 million in sales in a multi-billion dollar corporation, because the corporation has literally tens of hundreds of thousands of such products.

And finally, the trap. Corporations often look at products in a company like 3M, and their R&D process, and think, oh, look how successful that process is in bringing forth innovation; we should copy what they do. But the process is usually a total mismatch because there are few 3Ms, and many companies that need to grow a few core businesses. This is best done by being innovative in and around those core businesses, and by finding ways to do the core business more efficiently and effectively. A completely different kind of R&D program, in other words, but one that can pay real dividends that is material.

About Leadership:
About Leadership is a series of 52 columns on corporate leadership -- essential skills, leading teams, managing your career, the strategic and business practices to make a company and its leader distinctive from competitors. These columns will be of interest to people leading small and medium sized companies today, many of whom have not had much formal training in management skills and techniques; for the many people in big companies who aspire to senior management; and for anyone who thinks: Give me a hint, how can I do this better?