DOD’s S&T community—including research laboratories, test facilities, industry, and academia—conducts initial research, development, and testing of new technologies to improve military operations and ensure technological superiority over potential adversaries. Key expectations DOD places on its S&T community include the following: expand scientific knowledge and investigate technologies that may provide new warfighting capabilities, anticipate technological needs for an uncertain future, and produce relevant and feasible technologies that can transition into weapon system programs or go directly to the warfighter in the field. As a result, some investments focus on conducting research to generate scientific knowledge, exploring new technologies, demonstrating the feasibility of a technology concept, and pursuing other science and technology endeavors. We have previously reported that the challenge is finding the right balance between developing breakthrough or “disruptive” technologies—those considered to be innovative—and investing in moderate, “incremental” technology enhancements. Figure 1 below provides a notional picture of how DOD’s S&T community manages technology investment, development, and transition to a user. Following technology development, DOD’s acquisition community manages the next phase, product development, in which technologies are further advanced and system development begins. DOD has long reported the existence of a chasm between its S&T community and the acquisition community, which often precludes effective transitioning of technologies out of the S&T environment into weapon systems. In a series of reports, we found that technologies may not leave the lab because their potential has not been adequately demonstrated or recognized, acquisition programs may be unwilling to fund final stages of development, or private industry chooses to develop the technologies itself. Further, we found that the acquisition community frequently integrates technologies too early and takes on the task of maturing technologies—an activity that is the primary responsibility of the S&T community—at the start of an acquisition program. These challenges, in part, contribute to cost growth, schedule delays, and performance shortfalls that we have frequently found and reported on in DOD weapon programs. DOD funds technology and product development activities under its research, development, test, and evaluation (RDT&E) budget, which DOD groups into seven budget activity categories for its annual budget estimates. The categories follow a mostly sequential path for developing technologies from basic research to operational system development, as is shown in figure 2. The first three budget activity categories generally represent activities undertaken by DOD’s S&T enterprise to advance research and develop technology, while the remaining budget activity categories are typically associated with product development for acquisition programs. See Appendix II for a description of each budget activity. Selected leading companies that we reviewed follow six key practices that together reflect a disciplined approach to managing their R&D activities— those akin to DOD’s S&T activities. First, they define their corporate strategy by identifying desired markets. Next, they invest in technology programs to penetrate those desired markets. Effective management of these portfolios requires balancing investments between two types of R&D efforts: incremental R&D, which is tied to near-term products; and disruptive R&D, which is intended to deliver innovative technologies that can provide longer-term growth. According to company representatives, this balance is driven by the business imperative of sustaining current markets while also developing future ones. Leading companies align their goals for incremental technology development with product development, while also providing independent paths for developing disruptive technologies not tied to product development. In addition, these companies identify stakeholders outside the scientific realm and collaborate extensively with them to ensure that technologies are relevant and can be efficiently integrated into marketable products. Among the key R&D stakeholders are representatives from the business units who are responsible for identifying customer needs and getting products to market. They also scale the rigor in project oversight based on the amounts of time and money invested. Nonetheless, leading companies expect all R&D projects to include prototyping or other demonstrations to prove out the technology before it is integrated into a product for the company to sell. Figure 3 below summarizes the general management process these leading companies use to plan and execute their R&D investments. Among the eight leading companies we reviewed, each manages R&D investments that are underpinned by defined strategies, markets, and financial goals. In addition, each company sets aside a percentage of company revenues to fund R&D. The company’s strategic direction is set by the Chief Executive Officer (CEO), in coordination with the company’s top executives, including the Chief Technology Officer (CTO) or other senior R&D executives. These corporate strategies balance near-term profitability with long-term growth potential and market expansion. Companies stay competitive by dividing their collection of R&D projects, also known as their R&D portfolios, into two categories: 1. Incremental R&D: lower-risk projects to be integrated quickly into near-term products. 2. Disruptive R&D: projects that carry a higher risk of failure, but offer significant rewards for the company in the long-term. These investments may lead to non-incremental innovations that become an important piece of their portfolio. In some cases, these technologies render competing products obsolete by creating new markets or displacing existing product lines. According to representatives of leading companies, around 80 percent of R&D funding is spent on incremental development, while the balance is spent on disruptive projects. Corporate leadership determines this percentage based on tolerance for risk and the company’s financial standing. In addition to these two portfolio types, leading companies provide scientists with the flexibility to work on lower-cost exploratory projects. Such work is conducted by a few scientists or researchers and is not part of the annual process for approving projects within each portfolio. However, the work derived from these efforts could eventually become part of incremental or disruptive R&D portfolios. In determining an appropriate balance between incremental and disruptive R&D investments, company leaders consider long-term scenarios based on current trends and technologies in the market. For example, R&D leaders at Siemens reported that they conduct an annual “Innovation Review” of the company’s entire technology development portfolio for the purpose of informing top leadership’s strategic decisions. These reviews evaluate Siemens’ technological competitiveness, strategic resource allocation, and long-term corporate strategy. During this review, Siemens asks a number of questions, including the following: Are the overall resource allocations for R&D investments appropriate? Is the business unit’s technology position competitive, and will planned investments safeguard the business unit’s technological competitiveness? Is there a convincing long-term strategy for how to translate these investments into sustainable business success? Is there an adequate strategy for translating new technologies into winning offerings? Siemens executives reported that they understand that these factors directly impact their ability to grow and profit as a company, which is why the desire to remain technologically competitive drives corporate strategy decisions. Siemens also creates forecasting tools called “Pictures of the Future” that provide graphical representations of how future technologies could be used by customers 7 to 15 years in the future. Figure 4 provides an example of the elements that Siemens includes in a Picture of the Future. According to Siemens, it uses Pictures of the Future to assess societal, technological, and other trends to guide visionary concepts for potential new markets and customer needs; consider existing product lines, technologies, and customer needs; analyze the opportunities and risks for the company’s core business; identify what is required to allow the company to act upon potential future scenarios. Most importantly, company representatives stated that these pictures help develop consensus within Siemens regarding the technologies the company needs to develop to drive innovation and remain a market leader. After leading companies settle upon their corporate strategies for R&D investment, different units are charged with sponsoring—approving and funding—incremental and disruptive R&D projects. Incremental R&D projects are typically sponsored by business units, who are also responsible for product development. Disruptive R&D is often sponsored by a corporate research organization, which makes project investment decisions independently from the business units. Figure 5 shows this division of R&D that we observed in the private sector. Selected leading companies we reviewed align plans for developing new incremental technologies with plans for developing future products, which companies sometimes refer to as roadmapping. Individual business units are responsible for product sales in a company and have their own executive management teams that are charged with generating profits from their product lines. Business units sponsor incremental development projects intended to yield technologies to meet identified customer needs. Incremental R&D generally adds new capabilities to current products or next generation versions of existing products; therefore companies expect these to have lower risk of failure. Depending on the industry, business units generally do not look beyond a 5-year timeframe when making decisions about these new technologies due to the unpredictable nature of the markets in which they operate. These leading companies document planned future products in product roadmaps, while the technologies that are to be integrated into those products are documented in technology roadmaps. By aligning these plans, business units can better identify and prioritize technology development investments. To develop these plans, companies solicit ideas and information from people across the organization to determine the composition of incremental R&D portfolios. Ultimately, however, technology development decisions come down to the management’s qualitative judgements regarding the merits of individual R&D projects, as well as on quantitative metrics like potential return on investment. Once a project is approved, it may be immediately funded and executed. The process and the number of people involved in these R&D investment decisions vary depending on the company. In general, these leading companies solicit input from top leadership responsible for setting the company’s overall strategy and funding, including the CEO, CTO, and other corporate leaders; representatives from business units responsible for getting relevant products to market; and scientists and technologists who plan for future technology development and identify when technologies are ready for integration into products.