Briefing_GlobalRandD_Feb12

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B AT T E N B R I E F I N GBATTEN INSTITUTE TRANSFORMING SOCIETY THROUGH ENTREPRENEURSHIP AND INNOVATION // FEB 2012

Leading Global R&D Networks: Rewards, Risks and Realities

c o n t r i b u t o r s

Malgorzata GlinskaSenior Researcher, Batten Institute

[email protected]

Sean D. CarrDirector, Intellectual Capital, Batten Institute

[email protected]

Amy Halliday Writer and Editorial Consultant, Batten Institute

[email protected]

FROM THE UNIVERSITY OF VIRGINIA’S DARDEN SCHOOL OF BUSINESS

Corporate innovation does not take place only within the vacuum of a company’s 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 partner-ships 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.

INNOVATORS' ROUNDTABLE SERIES

2 BATTEN BRIEFING INNOVATORS’ ROUNDTABLE SERIES

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 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 increas-ingly offshoring innovation-centered processes, including product design, engineer-ing and R&D (see graphic below).3

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-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. (Ac-cessed 17 February 2012.)

4 Ibid.

5 Jaruzelski, B., Dehoff, K. 2008. “Beyond Borders: The Global Innovation 2000.” Strategy + Business. (53): 1-18.

6 Ibid.

7 Ibid.

8 Ibid.

9 Ibid.

The Global Race for Talent

EVEN THOUGH HEWLETT-PACKARD COMPANY is deeply rooted in Silicon Val-

ley, its corporate research arm, HP Labo-

ratories, spends only 20% of its budget in

the United States; 80% is spread among

research centers in the United Kingdom,

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

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

OFFSHORING R&D: NOT JUST CALL CENTERS ANYMORE

PRODUCT DESIGN, ENGINEERING, R&D

INFORMATION TECHNOLOGY

ADMINISTRATIVE BACK OFFICE74%

71%

67%

CALL CENTER66%

PROCUREMENT 65%

CASE IN POINT

4

3

Global R&D’s Performance Payoff

0 50 100 150

There are many benefits to offshoring innovation, and research suggests that firms that are more aggressive in globalizing their R&D activities enjoy stronger sustained financial performance. Of the 184 top R&D spenders studied by Booz & Company, 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

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.

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

GLOBAL-DRIVEN FOOTPRINT

TOTAL STAKEHOLDER RETURN

OPERATING MARGIN

MARKET CAP

RETURN ON ASSETS

LOCAL DRIVEN = 100

9

ESSENTIAL READING

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

for the R&D ‘Lab’ of the Future.” Mariann

Jelinek, et al. 2012. Research Technology

Management. 55 (1): 16-26.

“Balancing Internal and External Knowl-

edge Acquisition: The Gains and Pains

from R&D Outsourcing.” Christoph Grimpe

and Ulrich Kaiser. 2010. Journal of Man-

agement Studies. 47 (8): 1483-1509.

“Managing the Business Risks of Open In-

novation.” 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.

“Managing Global R&D Operations—Les-

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

Involved?” Julian Birkinshaw. 2002. Long

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

c o p y r i g h t i n f o r m a t i o n

BATTEN BRIEFINGS, February, 2012. Special Edition,

published by the Batten Institute at the

Darden School of Business, 100 Darden Boulevard,

Charlottesville, VA 22903.

email: [email protected]

www.batteninstitute.org

POSTMASTER: Send address changes to Batten Brief-

ings, P.O. Box 6550, Charlottesville, VA 22906-6550.

©2012 The Darden School Foundation. All rights

reserved.


Where Do Companies Go?The United States is among the most popular destinations for corporate R&D, thanks largely to its high-quality workforce and effective enforcement of intellectual 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 destina-tions over the next few years (see map below).10

10 Tyrrell, P. 2007. “Sharing the Idea: The Emergence of Global Innovation Networks.” A report from the Economist Intelligence Unit. 1-26.

11 Church, E., et al. Eds. 2012. “Delivering Results: Growth and Value in a Volatile World.” 15th Annual Global CEO Survey. PricewaterhouseCooper. 1-39.

12 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.

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 HEIGHTENED."

Brian Duperreault, President and

CEO, Marsh & McLennan Companies

Inc.

11

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 gener-

ated from public information provided in Fortune magazine’s "Fortune Global 500" listings.

Source: Institute for the Study of Business Markets, 2008.12

CORPORATE R&D AROUND THE WORLD12

5

Where Do Companies Go?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 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 coined the term “open innovation,” says that it “can be understood as the antithesis of the traditional vertical integration approach, where internal R&D activities lead to internally developed products that are then distributed by the firm.” 14

Chesbrough was among the first to articulate that organizations not only can but should use external as well as internal ideas and paths to market.15 He contends that every organization and business unit can benefit from looking both inside and out-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, 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, respon-dents 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. 18 Chesbrough, H. 2011.

19 Huston, L., Sakkab, N. 2006. “Connect and Develop: Inside Procter & Gamble’s New Model for Innovation.” Har-vard Business Review. 84 (3): 58-66.

20 Chesbrough, H. 2011.

CASE IN POINT

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 EFFECTIVELY ON ITS OWN."

Henry Chesbrough

IN 2001, PROCTER & GAMBLE

launched an open innovation initiative

called Connect + Develop. A network of

in-house “technology entrepreneurs”

dispersed around the world serve as in-

novation scouts, scouring research labs,

suppliers, retailers and competitors for

ideas. To support this effort, P&G also

created a secure IT platform for sharing

technology briefs that defined the prob-

lems 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

Beyond Borders and Boundaries

20


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-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 in-novation initiatives.

IP PROTECTION

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

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 and entertainment industries, has a global patent team and three divisional teams for Europe, America and Asia. In-house patent attorneys from these teams visit every R&D site in the network on a regular basis. Developing a culture of IP awareness is 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-ogy officer at Thomson.23

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 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 capa-bilities, 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

21 Tyrrell, P. 2007.

22 Jefferson, G., Rawski, T. 1994. “Enterprise Reform in Chinese Industry.” Journal of Economic Perspectives. 8 (2): 47–70.


24 Ibid.

25 Li, J., Xie, Z. “Global R&D Strategies in an Emerging Economy.” European Management Review. 8 (3): 153–164.


Management Challenges of Geographically Dispersed R&D

EXTERNAL PARTNERS WITH WHICH COMPANIES COLLABORATE IN R&D PROCESSES

Respondents select all that apply.

Source: Economist Intelligence Unit survey, 2007.

UNIVERSITIES AND EDUCATIONAL ESTABLISHMENTS

CUSTOMERS

SUPPLIERS

ALLIANCE PARTNERS

JOINT VENTURE PARTNERS

COMPETITORS

OTHER

% OF RESPONDENTS SURVEYED0 10 20 30 40 50 60

3RD PARTY VENDORS VIA OUTSOURCING ARRANGEMENT

7

LOSS OF CONTROL OVER THE INNOVATION PROCESS—OVER-OUTSOURCING

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 bal-anced against the “pains” that outsourcing generates.27

Dilution of firm-specific resources. Firm-specific knowledge resources—the 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 that competitors may already have.

Deterioration of integrative capabilities. In order to assimilate and build upon external knowledge, companies need to develop capabilities that enable them to 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-ties.28

The high demands on management attention. Relationships with R&D con-tractors call for heightened management attention, a scarce resource that is critical to resource redeployment.29

How can management reduce the negative effects from over-outsourcing? First, managers should be aware that R&D outsourcing can become disadvantageous if firms rely too much on external knowledge. How much is too much? The answer varies from company to company and largely depends on the internal knowledge base of the firm. 30

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

27 Grimpe, C., Kaiser, U. 2010. “Balancing Internal and External Knowledge Acquisition: The Gains and Pains from R&D Outsourcing.” Journal of Management Stud-ies. 47 (8): 1483-1509.

28 Weigelt, C. 2009. “The Impact of Outsourcing New Technologies on Integrative Capabilities and Perfor-mance.” 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.

SIGNIFICANT RISKS TO DEVELOPING GLOBAL

INNOVATION NETWORKS

Source: Economist Intelligence Unit survey, 2007.

% OF RESPONDENTS SURVEYED60 50 40 30 20 10 0

THEFT OF INTELLECTUAL PROPERTY

LOSS OF CONTROL OVER INNOVATION PROCESS

CULTURAL DIFFERENCES

DIFFICULTY MANAGING REMOTE STAFF

DIFFICULTY SHARING KNOWLEDGE

CONCERNS OVER QUALITY CONTROL

INCENTIVES NOT SUFFICIENTLY ALIGNED

EXCESSIVE COMPLEXITY IN SUPPLY CHAIN

POSSIBILITY OF CONFLICT

OTHER

DIFFICULTY IN ENSURING COMPLIANCE


32 Jaruzelski, B., Holman, R. 2011. “Casting a Wide Net: Building the Capabilities for Open Innovation.” Ivey Business Journal. 75 (2): 43-46.

33 Ibid.

34 Ibid.

Management Challenges [ c o n t i n u e d ]

MANAGING OPEN INNOVATION

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 challeng-ing.32

In order to prevent or overcome some of the challenges of managing open innova-tion 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 devel-oping and tracking key innovation metrics.

3M has implemented a common open-

innovation model across each of its 63

operating businesses in more than 70

countries. Each business conducts its

own research while maintaining connec-

tions with all R&D operations throughout

the company. In addition, 3M collaborates

closely with customers through 30 custom-

er technology centers around the world;

here, its technical and marketing employ-

ees 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 collab-

orative, enterprising environment.”34

CASE IN POINT

Documents

Briefing_GlobalRandD_Feb12