Briefing_GlobalRandD_Feb12

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BATTEN INSTITUTE

BRIEFING

TRANSFORMING SOCIETY THROUGH ENTREPRENEURSHIP AND INNOVATION // FEB 2012

Leading Global R&D Networks: Rewards, Risks and Realities INNOVATORS' ROUNDTABLE SERIES FROM THE UNIVERSITY OF VIRGINIA’S DARDEN SCHOOL OF BUSINESS

Corporate innovation does not take place only within the vacuum of a company’s contributors

Malgorzata Glinska Senior Researcher, Batten Institute glinskam@darden.virginia.edu

Sean D. Carr Director, Intellectual Capital, Batten Institute carrs@darden.virginia.edu

Amy Halliday Writer and Editorial Consultant, Batten Institute hallidaya@aol.com

R&D unit. New products and services emerge from widely distributed R&D net-

works, which may exist within the firm or across firm boundaries by means of partnerships with external engineers, scientists and managers. Whether it’s through offshor-

ing—locating proprietary R&D activities in other countries—or through arm’s-length

relationships with an array of customers, suppliers, governments, universities and other research organizations, leading today’s corporate R&D means being able to manage across a vast network of innovation activities.

Despite its many benefits, the growing internationalization and externalization of

R&D poses significant challenges, including the protection of intellectual property, the dilution of firm-specific resources, the deterioration of integrative capabilities, and the ever-present problem of too many demands on managers’ limited time and attention.

This briefing will describe the current state of globally networked corporate R&D,

explore the risks involved in having diffuse and disparate R&D centers, and introduce a few recommendations for addressing these critical challenges.

The Global Race for Talent According to a 2011 survey by PricewaterhouseCoopers, one-third of global CEOs said their firms were unable to innovate effectively because of severe talent con-

straints.1 To alleviate this talent crunch, many multinationals have looked beyond

CASE IN POINT EVEN THOUGH HEWLETT-PACKARD COMPANY is deeply rooted in Silicon Valley, its corporate research arm, HP Laboratories, spends only 20% of its budget in the United States; 80% is spread among research centers in the United Kingdom,

the confines of their own research labs to tap every available pool of expertise.

This has led to a fierce global race for scientific, engineering and technology talent; multiple studies confirm that one of the main drivers of R&D offshoring is access

to qualified people. Companies can’t find enough high-end analytical minds even in

Silicon Valley.2 In one study, the buyers of offshoring services said they were increasingly offshoring innovation-centered processes, including product design, engineering and R&D (see graphic below).3

Israel, India, Russia, China and Japan.5 “Wherever the best researchers are, we need to tap into those brightest minds. And the best researchers happen to be located in regions that have very strong universities that are producing top-quality PhDs,” said Prith Banerjee, director of HP Labs and senior VP for research.6

OFFSHORING R&D: NOT JUST CALL CENTERS ANYMORE

4

RESPONSES CITING 'ACCESS TO QUALIFIED PERSONNEL' AS 'IMPORTANT' OR 'VERY IMPORTANT'

74%

67%

71%

66%

PRODUCT DESIGN, ENGINEERING, R&D 1

Church, E., et al. Eds. 2012. “Delivering Results: Growth

and Value in a Volatile World.” 15th Annual Global CEO Survey. PricewaterhouseCooper. 1-39.

2

Dutta, S. 2011. “The Global Innovation Index 1000: Ac-

INFORMATION TECHNOLOGY

celerating Growth and Development.” INSEAD. 1-358.

3

Couto, V., et al. 2008. “Offshoring the Brains as Well as the

Brawn.” Booz & Company and Duke University Offshoring Research Network. http://www.booz.com/media/uploads/ Offshoring_the_Brains_as_Well_as_the_Brawn.pdf. (Accessed 17 February 2012.)

4

Ibid.

5

Jaruzelski, B., Dehoff, K. 2008. “Beyond Borders: The

Global Innovation 2000.” Strategy + Business. (53): 1-18.

2

ADMINISTRATIVE BACK OFFICE

6

Ibid.

7

Ibid.

8

Ibid.

9

Ibid.

BATTEN BRIEFING INNOVATORS’ ROUNDTABLE SERIES

65%

PROCUREMENT

CALL CENTER

Global R&D’s Performance Payoff There are many benefits to offshoring innovation, and research suggests that firms

ESSENTIAL READING

financial performance. Of the 184 top R&D spenders studied by Booz & Company,

“21st Century R&D: New Rules and Roles

that are more aggressive in globalizing their R&D activities enjoy stronger sustained those that deployed more than 60% of their R&D outside the countries in which

they are headquartered had greater success in responding to local market needs and performed better in terms of operating margin, total shareholder return, market

capitalization growth and return on assets (see chart below).7 It is, therefore, not

surprising that 91% of the world’s 1,000 largest R&D spenders conduct innovation activities outside the countries in which they are headquartered. 8

for the R&D ‘Lab’ of the Future.” Mariann Jelinek, et al. 2012. Research Technology Management. 55 (1): 16-26.

“Balancing Internal and External Knowledge Acquisition: The Gains and Pains from R&D Outsourcing.” Christoph Grimpe and Ulrich Kaiser. 2010. Journal of Management Studies. 47 (8): 1483-1509.

“Managing the Business Risks of Open Innovation.” Oliver Alexy and Markus Reitzig.

2012. McKinsey Quarterly. (1):17-21.

“Managing Global Innovation: Uncovering the Secrets of Future Competitiveness.”

Roman Boutellier, et al. 2008. Berlin: Springer-Verlag.

GLOBAL-DRIVEN FOOTPRINT

9

“Managing Global R&D Operations—Les-

COMPANIES THAT DEPLOY 60% OR MORE OF THEIR R&D OUTSIDE THEIR HOME COUNTRIES TEND TO OUTPERFORM THEIR LESS-GLOBAL PEERS

sons from the Trenches.” Surajit Kar, et al.

2009. Research Technology Management.

52 (2): 14-21.

“Managing Internal R&D Networks in Global Firms: What Sort of Knowledge Is

LOCAL DRIVEN = 100

Involved?” Julian Birkinshaw. 2002. Long TOTAL STAKEHOLDER RETURN

Range Planning. 35 (3): 245-267.

OPERATING MARGIN MARKET CAP RETURN ON ASSETS

co p y r i g h t i n fo r m at i o n

0

50

100

150

BATTEN BRIEFINGS, February, 2012. Special Edition, published by the Batten Institute at the Darden School of Business, 100 Darden Boulevard,

note : 100 is a normalized figure. The average performance of companies in each instance = 100.

The bars show relative performance in each area by companies with a global-driven footprint.

Charlottesville, VA 22903. email: batten@darden.virginia.edu www.batteninstitute.org POSTMASTER: Send address changes to Batten Briefings, P.O. Box 6550, Charlottesville, VA 22906-6550. ©2012 The Darden School Foundation. All rights reserved.

3

Where Do Companies Go? The United States is among the most popular destinations for corporate R&D,

THERE’S NOW AN EQUAL CHANCE, AND MAYBE A GREATER CHANCE, THAT INNOVATIVE IDEAS WILL COME OUT OF THE DEVELOPING WORLD, WHERE THE ACTION IS, WHERE THE NEED TO DELIVER MORE FOR LESS IS EVEN MORE 11 HEIGHTENED."

thanks largely to its high-quality workforce and effective enforcement of intellectual

Brian Duperreault, President and

Intelligence Unit. 1-26.

CEO, Marsh & McLennan Companies

11

Inc.

Survey. PricewaterhouseCooper. 1-39.

property (IP) rights. India offers the best combination of cost and quality, while

countries in the Asia-Pacific region are poised to become the most popular destinations over the next few years (see map below).10

10

12

Tyrrell, P. 2007. “Sharing the Idea: The Emergence of Global Innovation Networks.” A report from the Economist Church, E., et al. Eds. 2012. “Delivering Results: Growth and Value in a Volatile World.” 15th Annual Global CEO Tellis, G.J., et al. 2008. Competing for the Future: Patterns in the Global Location of R&D Centers by the World’s

Largest Firms. ISBM Report 06-2008. 1-13.

CORPORATE R&D AROUND THE WORLD

12

Current data on the offshoring of R&D by multinational corporations is relatively scarce. Researchers at the Institute for the Study of Business Markets at the Pennsylvania State University observed that few multinationals disclose the location of their R&D centers. Moreover, much R&D offshoring activity has occurred in the past few years, whereas most existing research is based on information collected prior to this period. The data presented here was generated from public information provided in Fortune magazine’s "Fortune Global 500" listings.

Source: Institute for the Study of Business Markets, 2008.12

4

BATTEN BRIEFING INNOVATORS’ ROUNDTABLE SERIES

Beyond Borders and Boundaries Not only are firms establishing research centers outside their own geographic bor-

ders, but also they are finding new ideas beyond their corporate boundaries. In the

CASE IN POINT

spirit of “open innovation,” companies are opening their internal R&D processes to external parties.

13

Henry Chesbrough, a professor at U.C. Berkeley’s Haas Business School who

IN 2001, PROCTER & GAMBLE launched an open innovation initiative

coined the term “open innovation,” says that it “can be understood as the antithesis

called Connect + Develop. A network of

to internally developed products that are then distributed by the firm.”

dispersed around the world serve as in-

of the traditional vertical integration approach, where internal R&D activities lead 14

in-house “technology entrepreneurs” novation scouts, scouring research labs,

Chesbrough was among the first to articulate that organizations not only can but

suppliers, retailers and competitors for

every organization and business unit can benefit from looking both inside and out-

created a secure IT platform for sharing

should use external as well as internal ideas and paths to market. He contends that 15

side for innovative ideas and for assistance in developing and commercializing them to maximize returns from new product development.16

Open innovation originally referred to an inbound and an outbound process: on the one hand, companies would commercialize external ideas, and on the other,

they would spin off or license internal ideas.17 Chesbrough suggests that companies should look for ideas and technologies that fit their business models. The internal ideas that don’t fit should be allowed to go outside, where others can bring them into their innovation processes.18

Companies such as Procter & Gamble, Unilever, General Mills, Hewlett-Packard,

ideas. To support this effort, P&G also technology briefs that defined the problems the company was trying to solve.

Since the inception of this program, P&G says it has increased R&D output by about 60%, and it has exceeded its goal of acquiring 50% of its innovations outside the company. Externally sourced innovations include Swiffer Dusters, Mr. Clean Magic Eraser, Olay Regenerist, Tide Total Care and the Oral B Pulsonic Toothbrush.19

Kraft, Philips and L’Oreal have all successfully implemented open-innovation ap-

proaches, generating great ideas in partnerships with universities or picking them up by paying careful attention to consumers, high-tech entrepreneurs and others.

Asked which type of external partners assisted with innovation processes, respondents to a 2007 Economist survey ranked universities the highest (cited by 60%), followed by customers (50%) and suppliers (47%). (See chart on page 6.)

13

Lichtenthaler, U. 2011. “Open Innovation: Past Research, Current Debates, and Future Directions.” Academy of

Management Perspectives. 25 (1): 75-93.

14

Chesbrough, H. 2011. “Everything You Need to Know about Open Innovation.” http://www.forbes.com/sites/hen-

rychesbrough/2011/03/21/everything-you-need-to-know-about-open-innovation/ (Accessed 20 February 2012.)

15

Chesbrough, H. 2003. Open Innovation: The New Imperative for Creating and Profiting from Technology. Boston:

Harvard Business School Press.

16

Grönlund, J., et al. 2010. “Open Innovation and the Stage-Gate Process.” California Management Review. 52 (3):

106-131.

17

Lichtenthaler, U. 2011.

19

Huston, L., Sakkab, N. 2006. “Connect and Develop: Inside Procter & Gamble’s New Model for Innovation.” Har-

18

Chesbrough, H. 2011.

OPEN INNOVATION… IS A MORE DISTRIBUTED, MORE PARTICIPATORY, MORE DECENTRALIZED APPROACH TO INNOVATION, BASED ON THE OBSERVED FACT THAT USEFUL KNOWLEDGE TODAY IS WIDELY DISTRIBUTED, AND NO COMPANY, NO MATTER HOW CAPABLE OR HOW BIG, COULD INNOVATE 20 EFFECTIVELY ON ITS OWN." Henry Chesbrough

vard Business Review. 84 (3): 58-66.

20

Chesbrough, H. 2011.

5

Management Challenges of Geographically Dispersed R&D The dispersion of R&D to multiple countries and external organizations and

partners carries significant risk. A survey of senior executives from a wide range of industries conducted by the Economist Intelligence Unit revealed that the big-

EXTERNAL PARTNERS WITH WHICH COMPANIES COLLABORATE IN R&D PROCESSES

gest concerns for respondents as they considered embracing the global innovation network model were intellectual property theft and a “loss of control over the in-

novation process.” Sixty percent cite the former as being a concern, and 44% cite the

latter.21 In addition, as open innovation is becoming a key characteristic of the global innovation network, many executives struggle to effectively manage their open innovation initiatives.

UNIVERSITIES AND EDUCATIONAL ESTABLISHMENTS

IP PROTECTION

CUSTOMERS

As they develop new technological competencies, multinationals investing in global

R&D facilities face the possibility of losing control over intellectual property rights.

In most emerging economies, IP rights are often either underdeveloped or underen-

SUPPLIERS

forced.22 Without sufficient legal protection, patents are vulnerable to piracy.

ALLIANCE PARTNERS

However, there are measures companies can take to protect their IP. For example, Thomson, a French provider of services, technologies and equipment to the media

JOINT VENTURE PARTNERS

and entertainment industries, has a global patent team and three divisional teams for 3RD PARTY VENDORS VIA OUTSOURCING ARRANGEMENT

R&D site in the network on a regular basis. Developing a culture of IP awareness is

COMPETITORS

key. Thomson has policies and processes to protect innovation wherever it may arise.

“It’s part of the DNA of the company,” said Jean-Charles Hourcade, chief technol-

OTHER

0

10

Europe, America and Asia. In-house patent attorneys from these teams visit every

ogy officer at Thomson.23

20

30

40

50

60

% OF RESPONDENTS SURVEYED Respondents select all that apply.

Source: Economist Intelligence Unit survey, 2007.

Hourcade’s top priority in coordinating R&D is to ensure that Thomson does not “outsource mission-critical activities that have a strong IP-generation potential.”

This means that no fundamental research is outsourced except as part of Thomson’s agreements with universities.24

When locating R&D in a region with weak IP protection, multinational companies tend to invest in wholly owned R&D centers and reduce their cooperation with

other organizations.25 Olivier Baujard, CTO of Alcatel-Lucent, the global provider 21

Tyrrell, P. 2007.

22

Jefferson, G., Rawski, T. 1994. “Enterprise Reform in

Chinese Industry.” Journal of Economic Perspectives. 8 (2): 47–70.

23

Tyrrell, P. 2007.

24

Ibid.

25

Li, J., Xie, Z. “Global R&D Strategies in an Emerging

Economy.” European Management Review. 8 (3): 153–164.

26

6

Tyrrell, P. 2007.

BATTEN BRIEFING INNOVATORS’ ROUNDTABLE SERIES

of voice, data and video communication solutions, said, “In countries where we

expect to have a long-lasting business interest, and where there are real R&D capabilities, cost savings and flexibility, we would rather set up our own operations than sub-contract. This has a double benefit: to develop locally the efficient control and

protection of our intellectual property, and to prove to the local country that we are serious about developing their R&D skills.”26

LOSS OF CONTROL OVER THE INNOVATION PROCESS—OVER-OUTSOURCING

SIGNIFICANT RISKS TO DEVELOPING GLOBAL INNOVATION NETWORKS

In some cases, knowledge acquisition from outsourced R&D activities can threaten

an organization’s own internal innovation performance. Thus, experts caution against over-outsourcing: they argue that the gains from R&D outsourcing need to be balanced against the “pains” that outsourcing generates.27

Dilution of firm-specific resources. Firm-specific knowledge resources—the

THEFT OF INTELLECTUAL PROPERTY

ones that may not be easily traded, redeployed outside the firm or imitated by

competitors—are diluted if companies rely heavily on generic external knowledge

LOSS OF CONTROL OVER INNOVATION PROCESS

that competitors may already have.

CULTURAL DIFFERENCES

Deterioration of integrative capabilities. In order to assimilate and build upon external knowledge, companies need to develop capabilities that enable them to

DIFFICULTY MANAGING REMOTE STAFF

tailor external knowledge resources to firm-specific needs and to redeploy them within the firm. R&D outsourcing poses a threat to those integrative capabili-

DIFFICULTY SHARING KNOWLEDGE

ties.28

DIFFICULTY IN ENSURING COMPLIANCE

The high demands on management attention. Relationships with R&D con-

tractors call for heightened management attention, a scarce resource that is critical

CONCERNS OVER QUALITY CONTROL

to resource redeployment.29

EXCESSIVE COMPLEXITY IN SUPPLY CHAIN

How can management reduce the negative effects from over-outsourcing? First,

managers should be aware that R&D outsourcing can become disadvantageous if

INCENTIVES NOT SUFFICIENTLY ALIGNED

varies from company to company and largely depends on the internal knowledge

POSSIBILITY OF CONFLICT

firms rely too much on external knowledge. How much is too much? The answer base of the firm. 30

OTHER

Research has shown that joint R&D projects with a variety of external partners can be used to complement R&D outsourcing and that such collaboration leads to a

higher diversity of the accessed knowledge. Companies should therefore comple-

60

50

40

30

20

10

0

% OF RESPONDENTS SURVEYED

ment R&D outsourcing with collaborative R&D.31

Source: Economist Intelligence Unit survey, 2007.

27

Grimpe, C., Kaiser, U. 2010. “Balancing Internal and

External Knowledge Acquisition: The Gains and Pains from R&D Outsourcing.” Journal of Management Studies. 47 (8): 1483-1509.

28

Weigelt, C. 2009. “The Impact of Outsourcing New

Technologies on Integrative Capabilities and Performance.” Strategic Management Journal. 30 (6): 595–616.

29

Ocasio, W. 1997. “Towards an Attention-Based View of

the Firm.” Strategic Management Journal. 18: 187–206.

30

Grimpe, C., Kaiser, U. 2010.

31

Ibid.

7

Management Challenges [ c o n t i n u e d ] MANAGING OPEN INNOVATION CASE IN POINT 3M has implemented a common openinnovation model across each of its 63 operating businesses in more than 70 countries. Each business conducts its own research while maintaining connections with all R&D operations throughout the company. In addition, 3M collaborates closely with customers through 30 customer technology centers around the world; here, its technical and marketing employees meet directly with customers, exposing them to the full range of 3M technology platforms.

However, what really drives 3M’s success is its culture, which the company actively supports. “[This] creates a community of collaboration and ensures that everybody has some skin in the innovation game,” said Fred Palensky, 3M’s chief technology officer. “And because our senior leaders have grown up in this culture, they continue to nurture and protect this highly collaborative, enterprising environment.”34

Experts caution that companies should not view open innovation as a panacea for all innovation ills. Generating ideas is relatively easy, but it’s not enough. What com-

panies need are processes to find, capture, and commercialize those ideas. Creating

a culture where such processes are promoted and protected is particularly challenging.32

In order to prevent or overcome some of the challenges of managing open innovation in a global R&D network, the following approaches have been suggested:33

Ensure top-level support. In order to ensure the successful adoption of open

innovation across the organization, the support of a senior-level executive who

presides over an innovation office is critical. The office should have a mandate to seek ideas and opportunities and establish two kinds of teams: some responsible for managing relationships with external partners and others, chosen from dif-

ferent business units, charged with developing cross-functional open-innovation processes.

Address the “not-invented here” syndrome. Companies that make open in-

novation work create a culture that encourages true collaboration among business units and functions and has no tolerance for the “not-invented-here” syndrome.

Employees in those companies understand the importance of focusing on what consumers need and at the same time embracing externally generated ideas.

Provide processes & tools. Discipline is an essential ingredient in the successful adoption of open innovation, and so is frequent communication. Moving away

from ad hoc processes to clearly defined open innovation practices, systems and roles is critical. New, consistent processes should be backed up with flexible IT

tools to track new ideas, select the best ones and manage the development stage.

Measure and reward. For firms to innovate effectively, they must be able to ef-

ficiently capture new ideas. Creating mutually beneficial partnerships is critical to

successfully developing ideas generated outside the organization. Internal budgets for divisions and functions should be tied in part to their innovation efforts, as

should individual incentives. For this to work, companies need a process for developing and tracking key innovation metrics.

32

Jaruzelski, B., Holman, R. 2011. “Casting a Wide Net:

Building the Capabilities for Open Innovation.” Ivey Business Journal. 75 (2): 43-46.

8

33

Ibid.

34

Ibid.

BATTEN BRIEFING INNOVATORS’ ROUNDTABLE SERIES