MANAGING INNOVATION PROJECTS IN THE TRANSNATIONAL FIRM

Vittorio Chiesa'.', Masazumi Sone3, Maurizio Barbeschi'

' Mip-Politecnico di Milano

20126 Milano (Italy)

' CNR-ITIA

20131 Milano (Italy)

Nissan Research & Development, Inc.

Farmington Hills, MI 48331 (USA) Via Emanueli 15 Viale Lombardia 20/A 39001 Sunrise Drive

Abstract - It has been recognized that in worldwide companiq the opportunities for innovating and the resources needed are often in different locations. Innovation processes become transnational. Starting from a case study on Nissan cross-border product development, this work shows that, for having transnational projects to be successful, a company has to undertake organizational actions in a long term perspective. Company culture and human resource policy should help shape the organization appropriately, especially to orient it towards the sharing of re- sources, ideas and opportunities and to leverage local resources to the global benefit.

Introduction

In the last two decades, the most relevant changes in the international management context refer to the increasing global environment where interna- tionally operating companies are forced to take decisions. Different strategic models of international competi- tion have been implemented. The multinational approach, where local responsiveness strategies prevail; the centralised global approach, strongly coordinating the foreign located activities from the home country; models, aimed to combining ele- ments from both. This form of international competition has been named in various ways, such as the transnational company [l], the multifocal company [2], the heterarchical organization [3]. They view the company as a network centrally coordinated; in other words, as a flexible organiza- tion able to combine globally integrated strategies with a high level of local responsiveness when and where needed. This model emphasises the need for a strong central coordination, defined as 'the cen- tral management of resources commitments across national boundaries in the pursuit of a strategy' [2]. This approach requires that relationships between centre and subsidiaries are built on the basis of a renewed managerial mentality.

A typical example involves innovation manage- ment. In this paper we try to argue the requirements and the implications of managing innovation projects in the transnational firm. We first study the innova- tion management models that have been adopted according to the different strategic approaches to the firm international management; then, we espe- cially focus on the case of the transnational ap- proach. The empirical bases is provided by the case study of Nissan in the automobile industry.

Innovation manavement multinational companies

Innovation has always been a central element in the international management theories. Vernon [4] proposed the product life cycle model and identified the ability to innovate as the reason why a company is forced to internationalise its activities. In his theory, it has been emphasised that a product life starts with the introduction in home market of the innovating firm. This because the home market is more likely to provide the needed stimula to generate new product ideas and because the completion of the innovation requires a mutual adaptation of products and processes, that implies narrow interactions between product deve- lopers and manufacturing departments, and, on the other hand, between the innovating firm and the product end users, on the external side. Both these conditions are likely to be performed in the company home market. The success of the product in the home market can lead to introduce the product in other countries, afterwards, in the view of exploiting innovation on a larger arena than that of the home country. Then, Vernon (51 recognised that both internal (from subsidiary) and external (from host country governments) pressures led companies to compete more actively in national markets: they are forced to adopt a multidomestic approach, where each subsidiary focuses on the effective servicing of a local market and autonomously innovate to meet

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local demand. Afterwards, Porter [a] showed that the enhancement of global competition led compa- nies to global strategies where subsidiaries are drawn into playing a specialised role in develop- ments planned and organised from the centre. This concept is then stressed in the transnational model. A taxonomy of innovation management models in the coordinated network company have been of- fered by Bartlett and Ghoshal [ 11. Three are the main approaches: centre-for-global, locally-leveraged and globally-linked. A model is that of centre-for-global, where product development is carried out in central labs, located at the headquarter. The main problems are related to the management of market information and of product adaptation required when a local responsi- veness strategy is needed. The two solutions in the coordinated nenLork company can be: - the creation of an effective market injbrmation

n e w r k from the decentralised markets to home country to allow the headquarter development lab to develop the new product and to perform the adaptations required by foreign markets;

- the development of a core product in the home country and the geographical dispersion of technical activities in order to adapt the product to the local needs.

In this model, centralised resources of the company are used to create a new product and then the innovation is exploited worldwide. Technical acti- vities can be located abroad to facilitate the product adaptation to local markets.

In the other two models, technical activities are decentralised. If there is a leading market (in terms of volume or customer sensitivity), it is reasonable that development labs and plants are located in that country, in order to achieve manufacturing econo- mies of scale and be close to the most relevant customers. In this case, the country resources are used to develop a product to be exploited after- wards worldwide. It is the model defined by Bart- lett and Ghoshal as locally-leveraged. If there is not a leading market or the required technological skills and knowledge are dispersed and, more generally speaking, 'the stimulus for innovation is distant from the company's resource capability', the model to be followed is that named 'globally-linked'. k u g h the creation of linkages among the company's units, the efforts can be combined and synergies can be created that lever- age the innovation process. This approach allows to capture potential innovations and benefit from

the processes of learning worldwide. In this view, the development of a product is a process that can require different skills and can imply the use of different technologies and aapabi- lities from product to product. The coordinufed nemrk compuny is that able to leverage the distri- bution of resourm available on a global basis. Temporary teams are set up to develop new pro- ducts, gathering resources from the relevant tech- nical and market units dispersed worldwide. In other words, it has been recognised that in worldwide companies the opportunities for innova- ting and the resources needed are ofteh in different locations. Companies are required to define trans- national innovation processes, linking dispersed units of the organization 'to leverage existing resources ad capabilities, irrespective of location, to exploit any new opportunity that arises any- where in the company' [ll. Therefore, multinational companies are heavily involved in developing such coordinating and integrating capabilities. The transnational approach requires integration processes that operate across the various units. To make taols work is the result of a long term orga- nizational process. In this paper we try to argue what are the basic characteristics of the organization enabling a company to manage innovation projects on a trans- national bases. We study the case of Nissan cross- border pmduct development process.

Backmound

The history of globalization by the Japanese auto industry goes back to the early '40s when export of Japanese made automobiles was started. In the '6Os, motorization took place in the Japanese domestic market, which led to-the expansion of the Japanese automobile industry. The total number of vehicles per year, jumped dramatically to 1 million in 1970 and 2.5 million in 1975. By 1980, the number reached almost 6 million vehicles, which is close to the current figure. Although Japanese cars are exported to more than 150 countries, destina- tions for over 70% of them are in North America and Europe. Globalization of R&D activities by the Japanese auto industry started in the '60s when Engineering Liaison Offices were opened by Toyota and Nissan

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followed by the establishment of engineering func- tions by Honda, etc. to support the overseas manufacturing facilities in the early '80s. These efforts culminated into full fledged cross-border product development functions by the late '80s in conjunction with their expanding manufacturing activities. In other words, the globalization efforts by the Japanese auto industry is leading to the establishment of development, manufacturing and marketing strategies for vehicles specifically de- signed for the overseas market.

Road to Cross-Border Product DeveloDment

The Japanese auto industry moved to establish manufacturing facilities in the overseas market in the '80s. The basic rationale behind this, is based on the global strategies as multinational companies. In addition, trade friction, expensive Yen, and other political issues presented significant influ- ence. Examples of early manufacturing endeavours by the Japanese auto companies include production of the Accord by Honda in Ohio (1982) and pick- up truck by Nissan in Tennessee (1983). A number of joint venture projects, for example, Toyota and GM (1984), Mazda and Ford (1987), and Mitsu- bishi and Chrysler (1988), have started production. A manufacturing facility was established by two Japanese auto companies, Fuji Heavy Industry and Isuzu, and started operation in 1989.

As the manufacturing activities began, Japanese auto manufacturers started to establish product development functions in Europe and North America. Slightly different strategies were em- ployed by various Japanese auto manufacturers. For example, based on the distinct strategy as a multinational company, Honda is proceeding with the activities related to product development and manufacturing on its own. The case of the Accord wagon, for which production began in 1990 at its manufacturing plant in Ohio, typifies Honda's effort. The Accord wagon was basically developed by Honda's R&D function as a model specifically designed for the U.S. market, and Honda is export- ing some of the Accord wagons manufactured in the U.S. to the Japanese market. On the other hand, Nissan started its endeavour to develop a model specifically aimed at the U.S. market using the form of a joint program with Ford. Production of this joint program was started after the product development process which took over 4 years in the U.S.. In this joint program, Nissan was pri-

marily responsible for product development; whereas, Ford was responsible for manufacturing. Nissan's technical Center in Atsugi, Japan, partici- pated in this trans-national project as well. Unlike the vehicle development approaches taken by Honda or Nissan, Toyota proceeded with product development with a primary focus of enhancing localization, mainly for parts. Toyota focused on the relationship between the joint venture with GM and its own manufacturing facility in the U.S., as well as the relationship between their parts sup- pliers both in the U.S. and Japan. Generally, primary responsibilities of some of the R&D activi- ties that Japanese companies decentralised are styling or testing. Nissan Research and Develop- ment, Inc., Toyota Technical Center, USA, and Honda R&D North America, for example, are involved in the cross-border product development process.

Issues in Cross-Border Product DeveloDment: the Nissan aDDroach

The key processes in the progress of Cross-Border Product Development include the following 5 steps: 1. To produce vehicles that are already developed

in Japan (including modifying them to meet local needs);

2. To enhance localization (mainly parts); 3. To implement local vehicles development; 4. To conduct local development management; and 5. To implement decision-making from the con-

ception stage to the final stage.

Japanese auto companies are facing a number of issues in their endeavour for cross-border product development as international operating companies. In addition to issues commonly shared by compa- nies in the process of globalization, such as human resources and profitability, issues unique to the Japanese auto manufacturers exist in product development, such as designed quality development period and the relationship with parts suppliers.

Organizational approach. Issues related to the position of international R&D management repre- sent some of the long-term goals: - combining Japanese and local systems, - maintaining the identity of the company in the

local organization. One of the characteristics of Nissan's global management is the basic stance of Nissan to make

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products by the people of that country, including the management. Therefore, in view of localizing management, Nissan has promoted local people to the top management levels from a very early stage. For example, local people have been appointed president and CEO at Nissan Motor Manufacturing Corporation, since its establishment in 1980.

A relatively smaller number of Japanese staff are dispatched from Nissan's Japanese operations compared to Honda or Toyota.. There are over 18,000 employees in Nissp's U.S. operations and over 12,000 employees in its European operations. Less than 300 Japanese employees each are dispat- ched from Japan to both of the U.S. and European operations. Japanese researchers were few, but usually well known and with a high reputation at the headquar- ters. Nissan has established umbrella companies both in the U.S. and Europe in 1990, as a step to make decisions locally. The major role for these compa- nies is to coordinate activities between local opera- tions and their Japanese countetpart and to become a small scale world headquarters for makiig deci- sions locally.

Part .sqplier relationship. A unique relationship with parts suppliers exists with the Japanese auto manufacturers in their system for product deve- lopment. It is called "Black Box Engineering" or "Simultaneous Engineering' with parts suppliers", and represents a different relationship between the auto manufacturers and their parts suppliers from the traditional relationship maintained by the U.S. and European manufacturers.

In simultaneous engineering, the involvement of parts suppliers starts from an early stage of product development, by sharing not only the vehicles concept but also some p r o j k . This unique rela- tionship is possible, in most of the cases, due to the fact that a long-term business relationship between the auto manufacturer and the part supplier is established and there is a mutual trust W e e n the two parts. In other words, the key factor for the successful cross-border product development for the Japanese auto manufacturers lies in how to establish relationship with local parts suppliers and maintain the product quality and time required.

Development system. Another key factor is how to establish a development system by combiniig the Japanese and local systems. Specifically, it is

accomplished by the establishment of quality and design standards followed by the transferring of global design-related techndlogies as well as stan- d a c d i i o n of tasks related to development. The establishment of this network, which includes information associated with CAD/CAM, design information, etc., could indicate the breakthrough necessary for the cross-border product develop- ment. Japanese auto manufacturers, such as Nis- san, Toyota, and Honda, have established an R&D network between their Japanese, European and U.S. operations with designated lines of communi- cation, either by satellite or optical fibre cable.

While these steps for globalization were progress- ing, Nissan fopally started the joint minivan program with Ford in 1988. As mentioned earlier, Nissan was responsible for product development, while Ford was responsible for its manufacturing. These minivans are manufactured at the Ford assembly plant in Ohio and marketed as Mercury "Villager" through the Ford dealer network and Nissan "Quest" through the Nissan dealer network. As a trans-national project, major product deve- lopment was handled by Nissan Research & Development, Inc. in U.S.. Key components, including engine and transmissions, were deve- loped by the Nissan Technical Center in Japan, while Nissan Design International and Nissan Motor Manufacturing Corporation, both Nissan's U.S. subsidiaries, were responsible for styling and stamping, respectively. The high reputation of the few Japanese researchers working at the U.S. Nissan technical centre made easier to establish an effective cooperation between the headquarter and the subsidiary. More than 200 parts suppliers (mostly US.) were involved in this project. The presence of a large number of U.S. managers and employees facilitated the establishment of a long term oriented relationship with the network of local suppliers. Moreover, the decentralization of decisions was crucial to establish this Japanese- style type of relationship with local suppliers.

One of the difficult issues auto manufactlltets more generally multinational companies a transnational approach) face during lishment process of a local activities'(especiaI1y R&D organidon) is how to maintain the product development and product identities &lished by

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the home country. When localization progresses in an extremely short-period, as was the case for Nissan, these issues need to be faced along with current activities taking part.

In the case of Nissan, the key for success was to reestablish the product development system from the global point of view and to nurture it as a part of the culture of the multinational company. The Nissan approach enabled to open worldwide inter- faces and bring in creativity through the inter- change of different culture. It has been the result of building an international R&D management system by mixing and balancing the local and global issues in a long-term and worldwide perspective. The case of cross-border product development we studied shows that the policy adopted to manage human resources was crucial to ensure that a fruit- ful cooperation could take part among the three poles involved: the technical centre at the head- quarter, the technical centre at the subsidiary, the foreign partners. It also provided the bases for successfully facing the most important issues in product development, that are establishing a long term based relationship with part suppliers and combining local and home development systems. The human resources policy was established on the basis of achieving long term objectives goals: - establishing a localised and independent man-

agement; - maintaining the identity of the corporation in

the foreign country.

From this case we argue that, more generally, multinational companies, adopting a transnational approach to innovation, are highly involved in developing integrating capabilities, such as cross- functional teams. Creating cross-unit integrating functions is not effective if organizational changes have not been implemented throughout the firm. Transnational innovation projects are successful when the organization has been shaped appropriate- ly. Coordinating and integrating devices are not effective when the company culture is not addres- sed to a transnational approach to innovation. Such an organizational configuration is the result of a long term process. Two characteristics seem to be crucial to facilitate the transnational innovation process: to orient the organization towards the sharing of resources, ideas and opportunities (to favour a managerial attitude to embrace a world- wide perspective) and to leverage local resources to the global benefit. It requires a mutual trust between the centre and the subsidiary that can be

built on an appropriate policy on human resources.

References

[l] C. A. Bartlett and S. Ghoshal, Manashg Across Borders: The transnational Solution, Boston: Har- vard Business Press, 1989.

[2] C. K. Prahdad and Y. L. Doz, The Multinational Mission: Balancing Local Demand and Global Vi- sion, New York: The Free Press, 1987.

[3] THedlund. "The Hypermodern MNC - A Heter- archy?", Human Resource' Management, vol. 25,

[SI R. Vernon, "International Investment and Intema- tional Trade in the Product Cycle", Ouarterly Joumal of Economics, vol. 88, pp. 190-207, 1966.

[SI R. Vernon, "The Product Cycle Hypothesis in a New International Environment", Oxford Bulletin ---- of Economics and Statistics, 41, 4, pp. 255-267, 1979.

[6] M. E. Porter, "Changing Patterns of International Competition", California Management Review, vol. XXVIII, n. 2, pp. 9-40, Winter 1986.

pp. 9-35, 1986.

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