foreword by cesare mainardi,
ceo, booz & company
Man agin g
Global
Inn ovation
fr amewor ks
for
in teg r ating
capabi liti es
ar ou nd
the wor ld
Yves L. Doz Keeley Wilson
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h a r v a r d b uCopying
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r e v isi eanw infringement
p r e s s of copyright.
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MANAGING
GLOBAL
INNOVATION
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MANAGING
GLOBAL
INNOVATION
FRAMEWORKS
for
I N T E G R AT I NG
C A PA B I L I T I E S
AROUND
the WORLD
Y V ES L . DOZ K E E L E Y W IL S ON
H A R VA R D B U S I N E S S R E V I E W P R E S S
Boston, Massachusetts
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Copyright 2012 Harvard Business School Publishing Corporation
All rights reserved
No part of this publication may be reproduced, stored in or introduced into
a retrieval system, or transmitted, in any form, or by any means (electronic,
mechanical, photocopying, recording, or otherwise), without the prior permission
of the publisher. Requests for permission should be directed to
permissions@hbsp.harvard.edu, or mailed to Permissions, Harvard Business
School Publishing, 60 Harvard Way, Boston, Massachusetts 02163.
Library of Congress Cataloging-in-Publication Data
Doz, Yves L.
Managing global innovation : frameworks for integrating capabilities around the
world / Yves L. Doz, Keeley Wilson.
p. cm.
ISBN 978-1-4221-2589-2 (alk. paper)
1. Technological innovations–Management. 2. Diffusion of innovations–
Management. 3. International business enterprises–Management. I. Wilson,
Keeley. II. Title.
HD45.D679 2012
658.4'063–dc23
2012012904
Find more digital content or join the discussion on www.hbr.org.
The web addresses referenced and linked in this book were live and
correct at the time of the book’s publication but may be subject to change.
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CONTENTS
Forewordxi
Preface xv
Acknowledgmentsxxi
Part I
Managing Global Innovation
The Challenge
1. The Innovation Challenge
3
Part II
Optimizing the Innovation Footprint
2. The Optimized Footprint
25
3. How a Site Creates Value and Why the
Size of the Network Matters
55
Part III
Optimizing Communication and Receptivity
Integrating the Network
4. The Barriers to Integration
5. Improving Receptivity and Communication
93
107
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CONTENTS
Part IV
Optimizing Collaboration
Succeeding Globally
6. Organizing for Global Innovation Projects
139
7. Collaborative Innovation
171
8. Globally Integrated Innovation
201
Appendix 1:
The Nature of Innovation Is Changing
211
Appendix 2:
Knowledge Is Increasingly Dispersed
219
Notes227
Index233
About the Authors
249
vi
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TABLE OF SIDEBARS
Chapter 1
Tata Communications: A Globally Integrated Model10
Chapter 2
HP Labs India: Experiencing via Immersion
in a New Context38
Snecma: Foraying via Learning Expeditions42
Nokia: Attracting Leading-Edge Research50
Chapter 3
John F. Welch Technology Center:
From Substitution to Complementarity in India62
Novartis Institute for Tropical Diseases:
Learning from a New Location72
Fuji Xerox: From Market Access Joint Venture to
Key Innovation Hub79
Chapter 5
Xerox: From a Culture of Secrecy to Open Knowledge
Sharing and Reuse108
Synopsys: Connecting Dispersed Teams116
vi i
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TA B L E O F S I D E B A R S
Siemens: DFSS, a Tool to Impose a Common Language
120
GSK Affymax: An Approach for Integrating
Complex Knowledge129
Chapter 6
Apcantes: A Troubled Global Project
142
ATV-71: A Successful Dispersed Project
154
Sapphire: Strong Project Management Delivering Success162
Chapter 7
IBM’s Collaboratories
178
Boeing: From Dreamliner to Nightmare Project183
PixTech: From Great Potential to Downfall
188
Intel: Building the WiMAX Innovation Ecosystem
194
vi ii
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In Memoriam
To Gunnar, Sumantra, and C. K.
They paved our way.
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FOREWORD
This book explains how to conceive, build, and hone a global
innovation capability that is enduring, practical, and rooted in
the realities of both global competition and a company’s particular approach to its market. Yves Doz and Keeley Wilson
have brought their considerable expertise to bear on a subject
of fundamental strategic importance, both rich in promise and
perilous in its potential for misinterpretation and misapplication. Innovation has become such an all-encompassing concept
and powerful driver of modern business strategy that company
leaders lose focus when asked to define innovation and how they
intend to achieve it. Globalization only adds to the challenge.
Along come Doz and Wilson with a blueprint for organizing,
building, and managing a global innovation capability, from
design through execution. And they offer seasoned counsel on
how to tailor this blueprint to the parameters of a particular
industry and the priorities of a given company.
Just as we do at Booz & Company, the authors start with
focus. It is our shared belief that companies create long-term
competitive advantage by recognizing, developing, and continuously improving a limited set of interrelated winning capabilities. Assets and market positions are transient. In contrast,
core capabilities are sustainable and defensible in the long
term. In the new world context of open market access and dispersed knowledge, managing global innovation will become an
integral component in many companies’ systems for growing
xi
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F O R E W O R D
winning capabilities. To continuously create and capture value,
companies must not only know how to design and develop a
valuable and flexible innovation footprint, but also learn to integrate worldwide knowledge and experience through effective
processes and systems driven by strong leadership.
The notion that Doz and Wilson are onto something is not
news to us—Booz & Company has worked with both authors
for almost a decade, developing insights on innovation and
how it has taken shape around the world, market by market. In
2004 we undertook a study of global innovation networks with
INSEAD that provided a preview of some of the trends explored
in this book, and we have continued to participate in their work
on innovation regimes and global innovation in specific industries, such as telecom and pharmaceuticals.
Looking back just a few years, it is remarkable how rapidly our
early findings have taken hold and become key issues for companies around the world, both in developed and developing economies. Our early study focused on companies from developed
economies that were expanding their innovation footprints into
China and India. In fact, that is where most of their incremental R&D investment was going. Now, we’re observing a turn in
the tide, as companies in China and India are investing their
R&D and innovation currency in the United States, Europe, and
even Japan. India’s Tata Motors acquired not only brand equity,
but also technology and a European automotive R&D footprint
by acquiring Jaguar and Land Rover. China’s SANY Group has
opened R&D centers in Germany and the United States. Huawei
Technologies has an extensive global R&D footprint and a $4.5
billion global R&D budget.
All of these companies now face the challenge of managing innovation on a truly global basis—identifying, accessing,
xii
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FO R EWO R D
stimulating, and integrating the best ideas and capabilities from
around the world into innovations that will serve world markets
while at the same time pioneering new ways of collaborating
both inside and outside company walls. It’s a daunting challenge, and few companies have found a winning formula.
Senior leaders need practical suggestions to find the proper
architecture for implementing global innovation networks and
meeting the day-to-day challenges of crossing borders in the
development of ideas into products and services. This book is
for corporate leaders but also for frontline innovators, and not
only in developed economies, but also in China, India, Brazil,
Indonesia, and other developing economies now spreading their
wings on the global stage. It combines an understanding of the
fundamental drivers of success in managing global innovation
with practical strategies for building a productive and enduring
innovation capability. It describes a long journey that requires
a set of guiding concepts and principles, as well as an architecture of systems and processes. Doz and Wilson provide both in
this expert road map for building the capability to manage global
innovation.
—Cesare Mainardi
Chief Executive Officer
Booz & Company
xi i i
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PREFACE
In an essay arguing for a shift toward a more globally distributed
and integrated approach to innovation, Sam Palmisano, the
highly regarded chairman (and recently retired CEO) of IBM,
cautioned, “As the twin imperatives of [global] integration and
innovation render the old MNCs’ networks of national hubs
inefficient and even redundant, it is becoming increasingly clear
that the twentieth-century corporate model is no longer optimal for innovation.”1 Similarly, at GE, Jeff Immelt has put the
globalization of innovation at the center of his strategic agenda.
During Henning Kagermann’s tenure as CEO of SAP, when
asked by one of the authors what he considered his company’s
most difficult strategic challenges, he answered, “To build a
global innovation network.” Along with many other managers,
these executives have all recognized that over the past decade,
there has been a growing need for radical change in the way their
firms innovate.
As with any radical and systemic change, embracing global
innovation will be difficult. It requires new structures, processes, tools, capabilities, and perhaps most important, new
mind-sets. Our goal in writing this book, which is the result of
more than a decade of research, is to give executives and managers from companies—both large and small, established and
new—a guide to achieving that change and repositioning their
companies to compete in the era of global innovation.
xv
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P R E F A CE
To explain the origins of this book requires us to go back to
2001, when Yves Doz and two colleagues at INSEAD, Jose Santos
and Peter Williamson, published From Global to Metanational.2
This was a manifesto for highly dispersed innovation, based on a
few pioneering firms that were tapping the world for new knowledge. Although From Global to Metanational described what this
new form of innovation looked like, it didn’t explain how firms
could build the structures, mechanisms, and processes needed
to undertake dispersed innovation.
The magnitude of the challenge facing firms in building and
managing a global innovation capability began to emerge in
the fall of 2002 at a forum we organized at INSEAD for senior
executives from leading global companies. By the end of the
three-day event, we were left in no doubt of the genuine need
for a deeper understanding of how firms could become global
innovators.
Over subsequent years, our quest to understand how companies can build an effective innovation network and manage
global innovation led us to conduct field research at forty-seven
companies around the world, including Citibank, HP, Hitachi,
IBM, Infosys, Intel, LG Electronics, Novartis, Philips, Samsung,
Schneider Electric, Siemens, Toshiba, Vodafone, and Xerox.
In 2004, with our field research ongoing, we teamed up with
Booz & Company (then Booz Allen Hamilton) in a joint research
agenda to gain a better understanding of global innovation footprints. We jointly conducted in-depth field research into innovation footprints in a number of sectors, but the centerpiece of
our collaboration was a survey, “Innovation: Is Global the Way
Forward?” This survey was completed by 186 companies from
19 countries and 17 different sectors, with an annual innovation
spend of more than U.S.$78 billion.3 Throughout our research
and theory-building process, we have been able to hold various
x vi
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P R EFAC E
symposia bringing together executives from global companies
as sounding boards and intellectual sparring partners.
In the past few years, the relevance and urgency of successfully implementing global innovation has intensified and the
need for a book addressing the “how” aspect has become urgent.
This book draws together the findings, observations, and managerial lessons arising from our research. Our hope is that it provides stimulating ideas as well as practical guidance for senior
executives to strategically approach the configuration and
deployment of innovation activities. For managers working in
innovation-related functions, we have provided the frameworks
and tools to support the coordination of global innovation and
to maximize the benefits and minimize the costs of managing a
global innovation network. Although we researched dispersed
service, business model, and product innovations, we found the
same lessons holding true for all. For illustrative purposes in the
book we have mainly used the latter, simply because the innovation is more tangible and therefore clearer for descriptive purposes.
The book is divided into four parts based on the core “managing global innovation” (MGI) framework. In part I, chapter 1,
“The Innovation Challenge,” we introduce the fundamental
conundrum that innovating with complex knowledge is best
suited to a colocated environment (the traditional model of
innovation), but the complex knowledge needed for innovation
is increasingly dispersed, so global innovation needs to tap into
this diversity. We put forward the MGI framework as the solution by providing a model for globally integrated innovation. In
the final part of the chapter, we look at the evolution of innovation footprints over the past three decades and reveal that,
with key capabilities remaining at home, poor network integration mechanisms and processes, and adherence to short-term
xvi i
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P R E F A CE
cost-saving strategies, most companies are failing to build
effective and efficient innovation networks.
Part II focuses on the frameworks a company needs to optimize its innovation footprints. Agility and flexibility are key,
given increasing knowledge dispersion, shorter cycle times,
and the need for greater efficiency. An innovation network of
traditional bricks-and-mortar sites is not only expensive to
run, but is never going to deliver adequate agility and flexibility. In c hapter 2, “The Optimized Footprint,” we suggest a new
approach to building a global innovation network, where a company uses bricks-and-mortar sites for accessing and absorbing
complex, systemic knowledge. If the knowledge at a location
is either codified or embedded, we describe alternative, more
flexible ways of accessing that knowledge from a distance or via
learning expeditions.
An optimized footprint still needs bricks-and-mortar sites,
though fewer. In chapter 3, “How a Site Creates Value and
Why the Size of the Network Matters,” we introduce a dynamic
framework for organizing bricks-and-mortar sites for value creation and assessing the usefulness of new locations for increasing productivity, contributing differentiated knowledge, or
seeking new opportunities for radical innovation. The optimal
size of a bricks-and-mortar network alters, depending on a
range of factors specific to individual companies. In the second
part of the chapter, we explain how strategic choices, capability
constraints, legacy, and corporate culture all play a role in determining the optimal size of a physical network for creating value.
In part III, we move from focusing on the configuration of innovation footprints to the integration of sites. A
well-configured, flexible, and agile innovation network that
provides access to critical knowledge and competencies both
x vii i
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P R EFAC E
internally and externally still fails to create and deliver value if
that knowledge isn’t shared and reused. In chapter 4, “The Barriers to Integration,” we outline the four main impediments
companies face when transferring and integrating knowledge: a
lack of connection mechanisms to share codified knowledge and
connect knowledge holders within a network; communication
barriers between different parts of the firm; an inherent difficulty in moving complex, rooted knowledge; and organizational
cultures that fail to promote reciprocity. Chapter 5, “Improving
Receptivity and Communication,” identifies some of the tools
and processes that the firm can put in place to overcome each
barrier and leverage dispersed knowledge in innovations that
will build competitive advantage.
The final part of the book, “Optimizing Collaboration: Succeeding Globally,” examines why and how companies need to
mobilize their dispersed innovation networks around global
projects and extend their reach and capabilities through collaboration with external partners. When the knowledge needed
for innovation is dispersed, it’s impossible for product, service,
or solution development to remain colocated. Yet many firms
have experienced difficulties managing innovation projects dispersed across multiple sites. Chapter 6, “Organizing for Global
Innovation Projects,” provides insight into why. We then present a framework to guide organizations through the entire global
project process, setting out new structures, mechanisms, tools,
and approaches to adopt in order to build this critical capability.
Sometimes it’s not a local presence that a company needs
to access new knowledge, but a local partner. In chapter 7,
“Collaborative Innovation,” we describe how the nature of collaboration with partners changes over the course of an innovation project, from open approaches in the early stages when
xi x
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P R E F A CE
the opportunity is evaluated to building an ecosystem for the
diffusion of the innovation. For each phase of the collaborative innovation, we outline the key considerations in selecting
partners and m
anaging the process. In chapter 8, we propose an
action plan based on the three dimensions of change.
The familiar model of innovation that has proved so resilient for so long is woefully inadequate for the current reality in
which the critical knowledge for innovation is increasingly dispersed across a wide geographic canvas; firms must respond to
the rapid growth of new global competitors; and the deepening
financial and economic crisis in the West calls for effective and
efficient innovation in all sectors. Unless firms change the way
they innovate and embrace the structures, processes, mechanisms, and mind-sets for a globally integrated approach, they
will face i rreversible decline.
xx
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ACKNOWLEDGMENTS
This book would not have been possible without the contributions of a great many people. Two in particular stand out: S
teven
Veldhoen made a significant contribution to the research on
innovation footprints and has been a valuable intellectual sparring partner and friend over the past decade; Peter Williamson played a vital role in the early stages helping us shape and
sharpen some of our arguments. The research work of colleagues
past and present, including Kaz Asakawa, Chris Bartlett, Robert
Burgelman, John Cantwell, Sumantra Ghoshal, Gary Hamel,
Gunnar Hedlund, Arnoud de Meyer, and C. K. Prahalad, played
an important role in directing our research and informing our
arguments. Many people at INSEAD made valuable contributions; in particular, Jose Santos and Mary Yoko Brannen had
important research insights. We owe thanks to Anil Gaba, Ilian
Mihov, and the R&D department at INSEAD for their continued support, to Ian Edwards for helping us fund the work, and to
Jeanne Larson and Muriel Larvaron. Without the support, both
financial and intellectual, of Booz & Company, much of our field
research would not have been possible. To this end, we thank
Neil McArthur, Georg List, Thomas Goldbrunner, Kate Gulden
Pinkerton, and Georg Altman.
We owe a huge debt of gratitude to the many managers around
the world who showed generosity and patience in sharing their
xxi
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ACKN
OWLEDGMENTS
experiences and insights with us. Although there are far too
many to list, we thank each and every one of you. P
articular
thanks are due to Mark Bennett, Gita Gopal, Paul Herrling, Dick
Lampman, Alain Marbach, and Jean-Pascal Tricoire for l eading
us into new territory. We are eternally grateful to Andrea
Cuomo, not only for his infectious intellectual curiosity, but for
introducing us to many interesting companies.
We thank the anonymous reviewers for their feedback and
suggestions in relation to an earlier draft and also Charlotte
Butler for her suggestions for improving the final manuscript.
Last, but certainly not least, our heartfelt thanks go to our editor Melinda Merino, who worked closely with us to improve the
clarity and flow of our arguments and who played the dual roles
of critic and enthusiastic supporter so well.
Although so many people have contributed to this book, any
errors, misinterpretations, and shortcomings remain our own.
x x ii
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[ PART I ]
MANAGING GLOBAL
INNOVATION
The Challenge
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[ CHAPTER ONE ]
The Innovation Challenge
E
very so often, businesses face a seismic shift in the way
they operate. One of those shifts is currently underway in
how and where firms innovate. Take a product many peo-
ple use every day, eyeglasses. People with bad eyesight once had
to wear glasses with heavy, thick lenses. Not anymore, thanks
to the ability of lens makers like Essilor to access and integrate
innovations from around the world.
One of us, who has poor eyesight, recently bought a new pair
of glasses in France. After choosing a frame and giving his prescription to a local optician, he was told to return at the end of
the week to collect the new glasses. Little did he know the journey his lenses would take: the prescription was first sent to a
local division of lens maker Essilor for screening to establish the
complexity of the lenses. This was then engineered in Germany
3
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M anaging G lobal I nnovation
by the Carl Zeiss Company (a partner of Essilor), which then
sent specifications to PPG in the United States (another Essilor
partner) to make the blanks from high-transparency polymer
materials. From there, the blanks traveled across the Pacific
to a Nikon plant in Japan ( yet another partner), which put
twenty-three coatings, each a few microns thin, on the blanks,
including antiglare filters, photochromatic adjustments (so that
the lenses darken in sunlight), and an antiscratch finish. The
lenses then traveled back to France to be fitted and aligned to
the frame, ready to be collected at the end of the week.
Essilor is one of the world’s foremost corrective lens producers, a position it achieved by bringing together from around
the world the leading innovators in their respective capability
domains: PPG is a world leader in developing and making
high-transparency light polymers; Nikon, with its long-standing
leadership in high-quality camera lenses, excels at polishing and
coating lenses; and Carl Zeiss is renowned for specifying the
optical properties of corrective lenses. By integrating its partners’ unique competencies in a global product-creation and
manufacturing process, Essilor has built a strong innovationbased advantage.
Although our example’s logic may seem obvious, it is a far
cry from the way companies traditionally carry out innovation (for a detailed description of how the nature of innovation
has changed, see appendix 1). Even before the recession beginning in 2008 forced many companies to reassess the effectiveness and durability of their innovation strategies, the need for
changes to compete successfully in a rapidly altering world had
become increasingly apparent. Whereas, in the past, it was sufficient for firms to innovate in their home market and disseminate those innovations across other markets, now innovations
need to draw on dispersed and differentiated competencies,
4
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Th e I nnovation C h allenge
capabilities, markets, and customer insights from around
the world. As with sales and manufacturing, innovation must
become global.
The need for this change had become increasingly o
bvious
during the decade leading up to 2012, yet few companies seem
to have embraced it. The results of our joint survey with Booz &
Company of 186 companies from 19 countries and 17 different
sectors highlighted that, although the European companies
were the most dispersed group, only 20 percent of their foreign innovation sites were outside the region. Less than half of
the U.S. firms’ innovation sites were outside the United States,
while the companies from Northeast Asia had slightly more
than half their innovation sites located in other parts of the
world. Only 12 percent of sites in India and China were involved
in value-creating innovation, while less than a third of foreignbased innovation sites as a whole made a contribution to core
innovation activities. Few companies undertook global innovation projects involving multiple sites in their networks. This
chapter focuses on explaining why firms are finding it so difficult
to make the transition from local to global innovation.
Why Companies Can’t Innovate Globally
Firms that have previously been successful innovators by creating one or two major innovation hubs in their home country and
lead market aren’t necessarily able to transpose that success to
a globally integrated innovation regime. They have based their
approach on an inherent logic of knowledge complexity and dispersion trade-off that assumes the only way to access and utilize
complex knowledge for innovation is through colocation, and
conversely, that a more dispersed approach to innovation is only
5
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M anaging G lobal I nnovation
suitable for and capable of accessing and integrating explicit
knowledge.
The significant limitations of this conventional wisdom
are potentially worrying for any company with an ambition to
innovate globally: complex knowledge is critical for c reating
competitive advantage because it is context-dependent and
can only be understood by familiarity with its context, making
it difficult for competitors to replicate. A good way of thinking about the nature of complex knowledge in a more tangible
way is to look at how chefs train. Most aspiring chefs need to
acquire a deep understanding of the world’s great cuisines, the
philosophies that underpin them, and the techniques required
to recreate them. Chefs can’t achieve this by reading a range of
cookbooks, because all the context and nuance critical to understanding a cuisine is lost in the codified lists of instructions.
Instead, chefs undertake years of apprenticeships in leading restaurants around the world. Only by experiencing the environment and local conditions in which great dishes are devised and
created can chefs truly master various cuisines and later transpose elements of them into their own creations.
Explicit knowledge, on the other hand, travels easily. In the
seventeenth century, scientists all over Europe were able to disseminate new knowledge by publishing their research and observations. Now, explicit knowledge for innovation is typified by
software development and testing in which teams in Asia, Europe,
and North America work on the same project twenty-four hours a
day. Figure 1-1 captures this knowledge complexity and dispersion
trade-off, illustrating why colocated innovation is more feasible
than a dispersed global approach when complex knowledge is
involved. The problem and challenge is that innovations increasingly rely on inputs of multiple, dispersed, complex knowledge
ranging from location-specific skills to local customer insights.
6
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Th e I nnovation C h allenge
Figure 1-1
The knowledge complexity and dispersion trade-off
Complex
knowledge
A
Knowledge
complexity
B
Explicit
knowledge
Colocation
Innovation
footprint
Dispersion
In the figure, the x axis represents the footprint of sites
involved in innovation, from colocated innovation at a few
sites on the left, to a greater number of globally dispersed sites
on the right. Meanwhile, the y axis represents the nature of
the knowledge required for innovation, from explicit, codified knowledge to context-dependent, complex knowledge.
Currently, most companies are limited to innovation opportunities along the concave curve: because complex knowledge is
locally rooted, companies dependent on this for innovation are
forced into colocation, around the point marked A on the curve.
Over the past decade, many companies that have traditionally relied on a strong home-base innovation capability have
faced pressure to access knowledge that is more dispersed,
which has led them to simplify that knowledge. Take Infosys as
7
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M anaging G lobal I nnovation
an example. In the 1990s, as Infosys attempted to serve global
customers with the advanced services and system integration
and facility management skills it had developed, it implemented
a global delivery model. In essence, it structured, codified, and
standardized its knowledge so it could incorporate more sites
into serving clients and facilitate the global integration of its
activities. In other words, it moved from point A to point B on
the curve.
But what if, instead of having to choose a position along the
curve with all its limitations, it were possible to transcend
the knowledge complexity and dispersion trade-off, or change
the curve from concave to convex? What would it take to be able
to access and integrate highly dispersed complex knowledge to
deliver global innovations?
Building a global innovation capability that relies on complex
knowledge will be difficult, though not impossible. As figure 1-2
depicts, flipping the curve to transcend the knowledge complexity and dispersion trade-off calls for new understanding,
strategies, processes, and tools across three critical vectors: the
innovation footprint, communication and receptivity, and collaboration.
To change the shape of the curve and overcome the complex
knowledge and dispersion trade-off, the first step is to optimize
the innovation footprint. This means being selective in both the
choice and number of locations in which a company performs
innovation. An optimal footprint is as compact as possible while
still providing access to all the sources of knowledge needed to
contribute to an innovation. Part II of this book introduces the
frameworks, tools, and processes that enable companies to build
an optimal footprint.
The next step is to improve communication and r eceptivity.
Few companies have the tools, processes, and mechanisms to
8
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Th e I nnovation C h allenge
F i g u r e 1 - 2
Managing global innovation
rt
Pa
Complex
knowledge
rt
Pa
rt
Pa
co Op
lla tim
bo iz
ra e
tio
n
IV
co O
an mm pti
m
d
re uni ize
ce ca
pt tio
iv n
ity
III
th Op
e tim
fo
ot ize
pr
in
t
II
Knowledge
complexity
Explicit
knowledge
Colocated
Knowledge
dispersion
Dispersed
support the internal knowledge sharing and integration e ssential
for a dispersed innovation network. Company cultures tend to
lean toward original creation and knowledge hoarding, while few
human resources policies encourage and reward the international experience paramount to global innovation. This deficit of
integration capabilities paints a worrisome picture in which innovation networks comprise a group of autonomous or semiautonomous centers with neither the incentives nor ability to function as
an integrated whole. In part III, we address the m
anagement and
organization challenges companies need to overcome to improve
communication and cooperation between dispersed sites.
Finally, effective global innovation depends on companies
that collaborate both internally and externally. Unfortunately,
collaboration falls outside most companies’ comfort zones.
9
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M anaging G lobal I nnovation
In part IV, we introduce the frameworks and processes essential
for successful global innovation projects and collaborative innovation with external players.
In the preface, we mentioned Sam Palmisano’s observation
that a new corporate model is needed to optimize innovation.
Some companies are already beginning to transcend the
knowledge complexity and dispersion curve. They are b
uilding
a new type of globally integrated firm that looks very different from the usual organizational models. For example, Tata
Communications’ footprint is designed to access the best
knowledge around the world (see sidebar 1-1). It has a dispersed
top team, reflecting the need to be close to critical sources of
knowledge. It is able to leverage this knowledge by having organizational structures, processes, and a culture that support and
reward communication and collaboration.
SI D EB A R 1 - 1
T AT A CO M M UN ICA TI O N S : A G L O B A L L Y
IN T E G RATE D MO D E L
Tata Communications is a young, rapidly growing company. It is
already the world’s largest telecom wholesale carrier (selling capacity
to other telecom firms). It has one of the largest submarine cable
networks in the world, a Tier 1 Internet Protocol (IP) network, and
an expanding enterprise business (providing solutions and services
directly to large customers). Yet, in 2002, as the monopoly provider
for India’s overseas telecom services, it was operating in only one
market.1 By 2011, it had registered offices in 31 countries with 7,545
employees and 73 percent of its revenue generated outside India.
10
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Th e I nnovation C h allenge
This rapid growth from local to global began in earnest in 2005
with the strategic acquisition of the submarine cable firm Tyco
Global Network. The same year, Tata Communications acquired
the Canadian voice carrier, Teleglobe. These acquisitions provided
valuable capabilities and knowledge as well as a springboard for
subsequent expansion.
From the outset, Tata Communications’ proposition was
intrinsically international, and although the company had originated
in India, it didn’t need to remain headquartered there. What made
sense was to disperse the entire organization around the world so it
could access widespread competencies and be close to important
sources of market knowledge. Of the executive team, CEO Vinod
Kumar, is based in Singapore; the head of voice, in Montreal; the
head of data, in London; the head of strategy, in Mumbai; and the
head of product and services development, in New Jersey.
This level of dispersion requires a strong emphasis on
communication, collaboration, and feedback mechanisms. The
company has invested in a raft of information and communication
technologies (ICTs) to support everyday collaboration and
communication
between
geographically
dispersed
teams,
including Telepresence, internal social media platforms, and forums
that supplement face-to-face meetings.
The firm sees unity as critical for a globally dispersed organization
and central to its own culture. Every day, the collective culture is
reinforced across the company by cross-location accountability.
So, for example, a team in the United States may be responsible
for deliverables in India or a team leader in India might take charge
of a project in the United Kingdom. At a managerial level, the firm
achieves unity through the constant need for collaboration and
shores it up with regular face-to-face meetings. For example, the
(continued)
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M anaging G lobal I nnovation
forty most senior managers meet three times a year, while the top
one hundred get together at least once a year.
Tata Communications recognizes that not everyone is suited
to working in a globally integrated organization. According to
Kumar, “to be globally innovative, you have to let go of control and
this doesn’t come easily to most managers.” Laurie Bowen, head
of global data and mobility solutions, concurs: “Working in a
highly dispersed organization can be chaotic. You have to let go
of formality, be flexible, and focus on the overarching initiative.”
Consequently, the company pays a lot of attention to hiring
people who will thrive in this environment. Most managers at Tata
Communications have cosmopolitan backgrounds with deep
international experience from having lived and worked outside their
home countries and a genuine openness to new ideas and cultures.
In comparison to traditional organizational forms, a globally
integrated organization presents much more complexity and
places a greater onus of responsibility on every individual to adapt.
Working in dispersed teams is demanding due to time and cultural
differences, but Tata Communications has found that employees
can find it an empowering and exciting environment. From a
business perspective, dispersion gives Tata Communications
significant advantages: it’s able to innovate quickly by tapping its
own expertise around the world; through proximity, it can build
durable relationships with global partners and suppliers; and it is
able to keep its finger on the pulse in a rapidly changing industry.
In some ways, Tata Communications, along with other
emerging market global players, had a significant advantage over
its old-world competitors. It didn’t have a huge legacy structure
12
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Th e I nnovation C h allenge
and processes to overturn and overcome but was able to build a
globally integrated model from the ground up. The journey for
companies without that advantage will be much more difficult
but no less urgent.
Moving the Innovation Frontier
Since 1975, after years of merger and acquisition (M&A) a ctivity,
there has been significant growth in both the number of sites
where companies pursue innovation activities and the dispersion of these sites across a diverse range of economic and
cultural environments. But most companies with dispersed
innovation footprints have failed to capitalize globally on local
innovations. At the other end of the spectrum, executives in
companies that have remained steadfastly focused on the home
base have hesitated to internationalize innovation for various
reasons: the risks of intellectual property infringement, a strategically critical issue, are high; recruiting, retaining, and integrating good staff in unfamiliar locations is difficult; and choices
about where to open new innovation units have become mired
in indecision.
As outlined in table 1-1, globalization and the opening of new
consumer markets; increasing technological complexity and
convergence; demographic changes; greater external pressures
and, in particular, environmental concerns; and offshore
outposts and outsourcing are together driving a trend toward
greater knowledge dispersion (for a more detailed analysis of
each of these factors, see appendix 2). As this trend is more likely
to intensify than abate, how well placed are companies today to
meet these challenges? To answer this question, we will look
13
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M anaging G lobal I nnovation
T A B L E 1 - 1
Radical shifts forcing greater knowledge dispersion
The world then
The world now
•• Traditional consumer markets in
developed economies
•• Large new consumer markets
opening in emerging economies
•• Specialization within industries
based on discrete knowledge
elements
•• Increasing knowledge convergence
across industries
•• Locus of brainpower in U.S., Japan,
and Western Europe
•• External pressures limited to
low-impact local regulations and
standards in some industries
•• Innovation taking place in the home
market and kept largely in-house or
with trusted local suppliers
•• Locus of brainpower shifting to
emerging economies, in particular
India and China
•• Growing external pressures with
a focus on climate change and
environmental concerns, resulting in
varied local regulations
•• Greater movement of parts of the
innovation value chain to offshore
outposts and outsourcing
at the results of the survey we conducted in conjunction with
Booz Allen Hamilton (now Booz & Company), examining what
current innovation footprints look like and what has driven
their past and current configurations, the organizational structures and processes that support dispersed innovation, and the
challenges these present.2 We will then highlight what companies need to do to bridge the gap between today’s reality and the
requirements of knowledge diversification and dispersion.
The results of our survey revealed that the innovation footprints of most companies are becoming more global and that this
trend had been in progress for three decades, during which the
share of foreign sites increased from 45 percent to 66 percent
of all innovation sites. Although using different methodology,
other surveys were conducted around the same time, and subsequently all concurred with our headline findings that innovation footprints are expanding.3 The headlines were interesting,
but the detail revealed that the dispersion phenomenon is much
more nuanced.
14
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Th e I nnovation C h allenge
Some Sectors Are More Dispersed Than Others
To a great extent, a company’s innovation footprint has been a
function of the sector it is in. Industries that have historically
experienced high levels of M&A activity or those whose products have been subject to strong local variation demands tend
to have more dispersed footprints. So, for example, given that
in the past there were extremely high levels of local variation
in cars and trucks (catering to different safety standards, consumption concerns, price points, and local branding), the automotive industry understandably ranked as the most dispersed
sector in our survey. The chemicals sector, which has had very
high levels of M&A activity over the past twenty years, was also
highly dispersed. As was the electronics industry, although we
can trace the roots of its dispersion to the need to combine product innovation from the West with process innovation in Japan.
It’s worth noting that in all of these sectors, the knowledge
base is codified, and because this type of knowledge, captured
in mathematics and the scientific lexicon, travels well, globally
dispersed innovation becomes easier. In contrast, we found that
sectors, such as consumer goods, pharmaceuticals, and health
care, that greatly rely on complex knowledge had less dispersed
innovation footprints.
Where a Company Is Born Makes a Difference
With some exceptions, there are distinct regional differences
in the dispersion of company innovation footprints. We found
that Western European companies had the highest levels of
dispersion, although other European countries dominated
with regard to their innovation footprints, with 80 percent of
foreign sites located within Europe. Meanwhile, during the
15
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M anaging G lobal I nnovation
past decade the share of U.S. companies’ innovation sites based
in the United States fell by seven percentage points, although
more than half of innovation sites were still based there. At
the same time, the locations of U.S. companies’ investments in
overseas innovation are changing. India and China combined
are on the brink of overtaking Western Europe as favored
innovation destinations for U.S. firms. Japanese companies
fall somewhere in between their Western European and U.S.
counterparts.
New Innovation Investments Aren’t Where They Used to Be
In the 1980s, manufacturing migrated eastward and changed
the competitive landscape for many Western companies. Today,
the lure of India and China as locations for innovation is having much the same effect. From around 2000, the proportion
of foreign-owned innovation sites in Western Europe and the
United States declined as the number of sites in India and China
grew dramatically. According to Booz & Company, between
2004 and 2007, the world’s top–one thousand R&D spenders
increased their total number of innovation sites by 6 percent
and global R&D staff grew by 22 percent. But 83 percent of these
new sites and 91 percent of increased head count were in India
and China.4
These findings correspond with the predictions of future
growth from our own survey. When we asked about planned
future growth, we found strong evidence supporting a continued migration of innovation toward India and China, both in
terms of new sites and head count. Perhaps more striking was
the response to our question asking where companies would
choose to open or scale up existing sites to achieve an “optimally configured” innovation footprint. The results, consistent
16
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Th e I nnovation C h allenge
across sectors, company size, and home country, revealed that
22 percent of all sites would be in China, with 19 percent in India.
Changing Drivers of Innovation Footprint Expansion
Is this shift toward India and China the result of well-thoughtout strategic decisions with value creation in mind, or is it, in
the words of nineteenth-century journalist Charles Mackay, the
result of “extraordinary popular delusions and the madness of
crowds,” the modern-day equivalent of the South Sea bubble or
Tulip mania?5
Over time, the drivers of dispersion have shifted, echoing
advances and changes in other parts of the value chain as much as
reactions to the external environment. What has remained constant is that the most significant drivers at any time reflect a shift
in the underlying knowledge base. As figure 1-3 illustrates, where
F i g u r e 1 - 3
The changing drivers of footprint dispersion
Then
Now
Low-cost skills
9%
Legacy
29%
Legacy
17%
Skills and
capabilities
16%
Proximity to
production
18%
Close to
headquarters
14%
Market
customer
10%
Low-cost skills
2%
Skills and
capabilities
16%
Proximity to
production
17%
Subsidies
incentives
13%
Close to
headquarters
10%
Market and
customer
insight
19%
Legacy
11%
Skills and
capabilities
22%
Proximity to
production
13%
Close to
headquarters
7%
Market and
customer
insight
19%
Subsidies
incentives
14%
Subsidies
incentives
9%
The first period is up to 1979, the second from 1980 to 1995,
and the final from 1996 to 2005.
17
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once the largest proportion of innovation footprints were “ legacy”
sites, a more focused approach on postmerger integration and
rationalization has meant that the number of legacy sites in footprints has fallen. It was once very important for innovation sites
to be colocated with manufacturing, but the digitalization and
automation of production, together with reliable and low-cost
logistics, have caused a decline in this once symbiotic relationship. Over the past decade, as products and services have become
more complex and knowledge increasingly dispersed, the need
to access new skills and capabilities has grown in importance to
become the biggest driver of innovation globalization. Similarly,
the emergence of new markets in Asia, Eastern Europe, and South
America has resulted in the growth of innovation sites established
to gain insights into new markets and customer groups.
Given that in recent years the number of innovation sites
in India and China has increased dramatically, it’s perhaps not
surprising to see that the fastest growing driver of innovationfootprint expansion over the past decade has been the access
to low-cost skills. But companies following a purely arbitrage
logic have already begun to find the benefits short-lived, thanks
to a combination of lower than expected levels of efficiency and
rapidly rising wages. In 2005, a well-qualified engineer in India
earned around half of someone doing a similar job in the U.S. By
2008, remuneration for the same job in India had increased to
65 percent of the U.S. equivalent and this trend is expected to
continue increasing rapidly, reaching parity shortly after 2020.
The smart companies in our survey recognize that the gains
from chasing lower costs are short-lived and instead differentiate developing markets based on other attributes they can
contribute. Companies saw that innovation sites in China offer
significant opportunities to access large numbers of demanding
customers. India, on the other hand, attracts investment not just
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because of its large population of people with tertiary education,
but because of the high quality of its scientists and engineers.
Far from being a newcomer to basic research, India has created
a homegrown aerospace industry and world-class IT sector, and
developed the complex technologies required to be a nuclear
power. IBM, HP, and GE, among others, follow this dual logic in
India, with low-cost operations running alongside innovation
centers that focus on leading-edge research.
To summarize, over the past few decades, the internationalization of innovation has both increased and changed in nature.
Footprints are now more widely dispersed than previously, and
based on the insights gained from our survey, we think that this
trend toward greater dispersion will continue. At the same time,
the drivers of innovation internationalization are gradually
changing in response to the increasing dispersion of knowledge
brought about by the radical shifts we outlined in table 1-1. But
while footprints are certainly becoming more dispersed, is innovation becoming more global?
Footprint Dispersion: The Costs Are Accruing,
the Benefits Are Not
Powerful global forces are rendering the technological and consumer knowledge needed for innovation more diverse and dispersed. On the face of it, companies would seem to be reacting
well to this challenge, with ever larger innovation footprints
expanding into emerging markets. But appearances can be
deceptive. In fact, while a handful of firms have established new
innovation centers for accessing knowledge to feed into a global
innovation process, for the majority, arbitrage is still the core
logic for investing in emerging markets.
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The Arbitrage Argument Is Flawed
Despite India and China being home to 14 percent of all R&D
sites in our survey, only a small proportion of these (12 percent)
were involved in real value-creating innovation. The majority
focused on low-end development support tasks, such as testing
and verification, together with the adaptation of existing products and services (created in the West) to meet local market
requirements.
This is a zero-sum game. Managers need to ask themselves
how long this strategy will be realistically sustainable. First,
these new consumer markets are growing rapidly and will
require unique products and services designed to meet local
customer needs, not just last year’s castoffs that companies
have adapted to suit lower price points. Second, wages are rising rapidly in innovation hubs like Shanghai, Bangalore, and
Hyderabad, rendering any cost advantage short-lived. Third,
companies will experience a dearth of qualified staff in developed markets, so it is inevitable that over time many more creative innovation activities will have to shift to where the brains
are. It would surely make sense to begin building and integrating
these capabilities now rather than wait until the tipping point
has been reached.
Finally, the well-qualified and talented employees that companies need for innovating in new markets are drawn not only
by good salaries, but, more critically, by the possibilities of
stimulating, challenging work and decent career prospects. Just
as their counterparts anywhere else in the world, in terms of
Maslow’s hierarchy of needs, employees in emerging economies
need to attain higher levels of esteem and s elf-actualization to
be fulfilled and satisfied in their work.6 Innovation centers that
focus only on repetitive, low-end work will find it impossible to
20
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Th e I nnovation C h allenge
retain and recruit the high-caliber staff needed for innovation.
These people will choose to work for multinationals that enable
them to make a valuable contribution, or for local entrepreneurial companies that will almost certainly be global competitors in the near future. In the critical battle for talent, which
demographic changes will make more intense (detailed in
appendix 2), those companies that have condemned their foreign innovation sites to low-end work will find it difficult, if not
impossible to compete.
Just because the arbitrage logic that seems to be driving
much current investment in India and China is flawed, it doesn’t
follow that there are no compelling reasons for setting up innovation centers in these and other emerging-economy locations.
Both countries offer huge potential for companies to adopt
cost-innovation strategies.7 These strategies can encompass the
leveraging of unique consumer requirements to develop new
products with global appeal. They can mean adopting frugal
innovation by finding innovative ways to develop products and
services for lower costs without compromising functionality. Or
they could involve innovating to build local mass markets. India
and China’s determined homegrown companies are currently
stealing a lead by following a combination of these strategies.
Instead of thinking in terms of arbitrage gains, Western companies need to play the same game and think of India and China as
long-term, but big opportunities.
Key Capabilities Remain at Home
For every company that has embraced the real opportunities
that a more dispersed innovation footprint offers, there are
many more that are failing to exploit the potential of their networks and derive any sustainable benefits. While c ompanies
21
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M anaging G lobal I nnovation
have increasingly dispersed innovation footprints, by c ontrast,
most are focusing their innovation activities on the home
base. Our survey revealed a strong tendency for companies to
keep their innovative capabilities in their home market. Only
32 percent of foreign-based innovation sites contributed to core
R&D activities. So, although footprints have been expanding,
true innovation capabilities and activities have remained stubbornly close to home. Put more plainly, many companies are
taking on the costs of an expanded innovation network, with
burgeoning communication budgets and high management
coordination costs, without building the sustainable competitive advantage that comes from an effective global innovation
network.
Given the increasing dispersion of knowledge required for
innovation, companies that have dispersed R&D networks but
are limiting their innovation activities to their home markets are
missing significant potential to create competitive advantage by
accessing and utilizing valuable knowledge for innovation from
their foreign sites. Of course, the reason that many companies
keep innovation close to home is that their foreign sites genuinely have little to contribute. If this really is the case, and companies have innovation sites in the wrong places, then they need
to reassess their innovation footprints so they are aligned with
the knowledge needed for innovation.
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[ PART II ]
OPTIMIZING
THE INNOVATION
FOOTPRINT
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[ CHAPTER TWO ]
The Optimized Footprint
M
ost innovation footprints comprise a series of bricksand-mortar sites. These physical sites undoubtedly play
a vital role: they provide a colocated environment in
which companies can develop complex ideas and concepts. They
provide grounding in a local environment where companies can
build and manage relationships with external players. And they
provide the continuity that enables companies to amass and
leverage deep expertise. Always at the heart of how companies
“do” innovation, bricks-and-mortar sites have remained the
default option when companies are expanding or restructuring
their innovation footprints. But how close to an optimized footprint is this default option?
Far too many companies have discovered over the past three
decades that building or acquiring physical innovation sites
around the world has stymied rather than promoted innovation.
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The networks are expensive to operate, difficult to c oordinate,
and rife with duplicated effort. The sites tend to compete rather
than collaborate with each other. They are inefficient and largely
ineffective.
Agility and flexibility are becoming ever more paramount for
creating competitive advantage. As cycle times contract, there is
mounting pressure to cut costs across the board and efficiency
is key. At the same time, the knowledge needed for innovation
in any given sector is increasingly dispersed across different
consumer markets, industries, and emerging hot spots, and the
rate of this knowledge diffusion is growing rather than dissipating. Against this backdrop, building new centers to tap dispersed
knowledge challenges the dual mantras of speed and efficiency.
This approach is not only costly, but will result in a significant
lead time between the inception of the new site and its contribution to the innovation pipeline. The purely bricks–and-mortar
approach is no longer a sustainable strategy for building a global
innovation footprint. It slows companies down, limits the opportunities they can pursue, and places them in a reactive competitive position.
The solution to optimizing the innovation footprint is to
build in agility and flexibility—to create something that is sensitive and adjustable to current and changing innovation needs.
Achieving this type of footprint doesn’t mean abandoning
physical sites altogether. On the contrary, it means recognizing when they are the most suitable approach for accessing new
knowledge for innovation and when alternative and complementary approaches are more effective. Whether a company is
expanding its footprint or restructuring its current footprint,
it needs to decide where to locate physical sites versus alternative approaches based on the type of knowledge it seeks. When
the knowledge is complex and deeply rooted in the local c ontext,
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then a physical site is probably the best option. But when the
knowledge needed is more easily defined and transferable or
explicit and codified, there are more effective and efficient alternative means to access that knowledge than sinking cash, time,
and commitment into bricks and mortar.
In this chapter, we examine the pitfalls of an innovation footprint that relies wholly on physical sites and the causes of inertia
that prevent companies from restructuring around a more agile
model. We then describe each of the constituent approaches
required for an agile footprint and the circumstances, based on
the nature of the knowledge being targeted, in which each is best
deployed. The first approach is a bricks-and-mortar presence
that we call experiencing, in which companies access complex
knowledge by being immersed in a particular location. The second, foraying, enables companies to mount learning expeditions
to access embedded knowledge without building a costly, longterm presence. In the final approach, attracting, companies
become magnets for explicit knowledge. The key to agility and
success is having a balanced footprint and knowing when it’s
appropriate to experience, foray, or attract.
The Limitations of a Bricks-and-Mortar Innovation Model
Think of an innovation center in New Jersey, Shanghai, Basel,
or anywhere. What probably comes to mind is a building filled
with people conceptualizing, designing, developing, and testing
products or new services. Close by, business development and
marketing people contribute to the innovation pipeline by finding new market and business opportunities, seeking to understand latent customer requirements, and identifying embryonic
trends. From the mature pharmaceutical to newer software
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industries, this conventional approach to innovation prevails.
It presents a real impediment to flexible, fast-moving, and agile
innovation.
Physical innovation footprints carry high quantifiable costs:
sites can be expensive to run and maintain, communication budgets are high, and management coordination costs significant.
But it’s the hidden costs that really damage a company’s innovation capability. By their very nature, these sites are immovable, which limits a company’s scope for accessing knowledge to
the places where its innovation sites are already located. So as
new sources of knowledge emerge—with customer groups, new
technologies, or centers of competence—companies reliant on a
purely physical footprint can never be at the vanguard. But just
think of the opportunities and flexibility available for companies that have broken free of this conventional approach.
Rolls-Royce, maker of integrated aircraft and marine engines,
is a good example of a company that recognizes the limitations
of an expensive, cumbersome global innovation network. The
growing need for specialization and modularity in its leadingedge products prompted Rolls-Royce to radically restructure
its footprint and regain leadership in advanced power systems.
It replaced its physical corporate R&D sites by flexibly partnering with twenty-nine university labs around the world. It
reviews the relationships regularly against output and changing
knowledge requirements. This model provides Rolls-Royce with
the flexibility to continually find and access the most relevant
knowledge in the world for the development of its products.
Unlike many companies, it isn’t burdened with outdated innovation centers.
The argument against a purely bricks-and-mortar model is
even more compelling with regard to opening new sites. With
the growing dispersion and diversification of knowledge, most
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companies recognize that they need to expand their innovation
footprint to access new customers and markets, capabilities,
partners, and external experts. But it takes time to recruit and
train staff and then integrate the site into an existing network.
In some locations, particularly emerging hot spots, recruiting
staff can be a particular challenge. For example, in places like
Shanghai and Bangalore, there is huge competition for skilled,
high-quality employees. When HP Labs opened its R&D center
in Bangalore (see sidebar 2-1 later in the chapter), it took five
months just to find the right local director who had the requisite experience in multinationals, contacts with local institutions, and scientific credentials to head the lab. Additionally,
in some locations, there aren’t enough qualified people to meet
the demand. A McKinsey study of engineering talent in China
found that despite large numbers of engineering students graduating from China’s universities each year, only a tiny fraction
were seen as good hires by Western companies and only 10 percent had the necessary social and communication skills to work
effectively in a multinational corporation.1 This recruitment
problem is exacerbated in some places by difficulty in retaining
good staff, annual attrition rates in double figures, and salary
inflation not far behind.
Even after a company recruits and trains staff for a new innovation center, it still has to integrate a new site into an existing
innovation network before the center can contribute. According
to Dave Guidette, who set up new innovation centers in Mexico,
India, and China for Schneider Electric, getting the growth rate of
new sites right presents a challenging balancing act: “The new site
needs to learn about products and processes and initially has to
focus on low-end work whilst they build up competencies. At the
same time, the best hires have to be motivated and committed.
Developing codependency between the new and existing sites is
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key to the growth and success of new R&D centers. You have to
create a ‘need’ for these sites and this doesn’t happen overnight.”
At the crux of the argument against an overreliance on bricksand-mortar sites is the fact that locations seen as critical for
innovation in a given industry today can quickly become superseded by another location tomorrow. Companies will be left
with a network of legacy sites that no longer meet their innovation requirements, are expensive to run, and yet are difficult
to wind down. So why are companies so wedded to their physical innovation networks? And why do they find it so difficult to
restructure these activities? We believe they have fallen victim
to what we call footprint inertia.
Footprint Inertia: Why Bricks-and-Mortar
Innovation Networks Are Difficult to Restructure
We can easily attribute the failures of companies with ineffective global innovation networks to a lack of management attention, focus, or innovation strategy. But this view would be too
simplistic, ignoring some of the unique characteristics of innovation and R&D centers that lead to footprint inertia or, in other
words, the seeming inability or unwillingness to rationalize and
restructure innovation footprints:
• Social networks and relationships. Much of the
knowledge used in innovation is tacit and built up over
time within and between small networks of people who
have worked together on various projects and programs.
While databases can capture and store codified knowledge
relating to products, services, or solutions, valuable
knowledge about why one solution was chosen over
another, for example, or why a component was designed
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in a particular way is held by individuals and networks.
Culling or reorganizing an innovation footprint can
destroy or seriously disrupt these valuable networks,
which act as the knowledge kernel for many innovation
projects.
• Retaining star performers. Successful innovation
requires a critical mass of talented scientists, engineers,
technologists, strategists, or marketers, but every
company has a number of star performers within its ranks
who, by virtue of experience and/or sheer talent, make
exceptional contributions. For example, when one of
Intel’s lead scientists, Dov Frohman, decided to emigrate
to Israel in 1975, rather than lose him, Intel opened a small
R&D center in Haifa so he could continue making a
valuable contribution. This center eventually became a
fifteen-hundred-person research facility. Many companies
are reluctant to close innovation sites that are home to
some of their star performers for fear they will be
unwilling to relocate.
• Intellectual property. Whether via copyrights or patents,
protecting core intellectual property (IP) is vital for the
competitiveness of innovative companies. Many
companies are reluctant to restructure their innovation
footprints because it would entail closing sites in
established markets where IP protection is strong in favor
of new sites in rapidly emerging economies with weak IP
laws and the very real potential that critical knowledge
will leak to local competitors.
• Hostage to home base. Many companies have a sense
(often real as well as perceived) of national responsibility
or corporate citizenship to their home country. The news
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that a national champion plans to downsize or close local
innovation centers often results in a national outcry not
only at the immediate job losses but also at the resulting
effect on local suppliers and subcontractors. For e xample,
many global IT companies have been vilified in their
national media for establishing large new R&D sites in
India. Even though this hasn’t resulted in direct job cuts
at home, they have been accused of denying locals work in
favor of cheap labor in the subcontinent.
Creating an optimized footprint will inevitably lead to the
closure or downsizing of existing sites. Companies need to be
aware of the causal factors or combination of factors to overcome this barrier. Once they understand the impediments to
restructuring, companies can put strategies and mechanisms
in place that will enable them to retain the positive aspects
of their legacy network within their new agile footprint,
while reducing the downside of a wholly bricks-and-mortar
model.
Prior to restructuring an innovation footprint, a company
should draw up a map of crucial knowledge networks. Most
companies will already know the critical relationships within
the innovation community, but a simple question like, “Who
do you talk to when you encounter a problem?” quickly highlights networks of knowledge gatekeepers in any organization.
These are the people and networks that the company needs
to keep. But knowing who the gatekeepers are doesn’t necessarily entail maintaining large physical sites. Rather, the
company can formalize the gatekeepers’ roles by giving them
interesting, stimulating, and global work within the new agile
network, either relocating to or liaising with sites charged with
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experiencing work, or taking on responsibilities within foraying
or attracting activities. Similarly, closing a site doesn’t necessarily mean the loss of star performers. A company can motivate
people to relocate by offering more resources, greater latitude to
publish work early, or the challenge of experimenting with new
concepts in new locations.
Concerns over possible IP infringements and weak legal
systems in many emerging markets will lessen over time as
more countries join the World Trade Organization and the
growth and development of homegrown companies in these
markets lead to stronger IP laws and enforcement. Even so,
many companies have found that the benefits (including
new consumer markets, access to innovative suppliers, and
talented and skilled staff) of placing innovation centers in
countries that currently have weak IP laws far outweigh the
potential problems.
Finally, a company may find it difficult to avoid being a hostage to a home base. Cutting jobs at home always leads to bad
publicity, and more so when the jobs in question are at the core
of the knowledge economy on which so many developed countries now base their economies. A public relations campaign
arguing that the tax revenue from a company that is flourishing
because of its strong innovation output based on an agile and
flexible footprint is preferable to lower taxes from a company
that is struggling to survive may soften the blow. But local politicians and media are unlikely to readily accept this. Instead,
on this facet of inertia, companies will have to accept that
the alternative is worse: doing nothing could spell long-term
demise because the days of innovating primarily from a home
base and shipping the results to markets across the world are
truly over.
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Achieving a Flexible Innovation Footprint
With regard to innovation, perhaps the most knowledge-based
activity in the value chain, there has ironically been no discernible
knowledge-based approach to organizing footprints. Companies
have treated all knowledge requirements as more or less equal,
perpetuating the bricks-and-mortar mind-set. But, as figure 2-1
illustrates, the characteristics and accessibility of knowledge
vary greatly, from complex, highly context-dependent, tacit
knowledge to explicit, codified knowledge. In addition, the halflife of any knowledge needed for innovation rapidly diminishes,
while the number of knowledge sources needed increases.
An agile innovation footprint is configured to exploit the differences in knowledge types and ensure against shifting knowledge
requirements. It enables a company to vary the mode of access
based on the nature of the knowledge it is seeking (see figure 2-2).
At the top of the scale is complex, locally rooted knowledge.
FIGURE 2-1
A simple typology of knowledge
Increasing knowledge complexity
Knowledge type
Characteristics
Complex
Highly context-dependent, systemic,
exists in behavior and norms, can
only learn by doing
Embedded
Context-related, observable, loosely
definable, accessible by seeing
through different eyes
Explicit
Codified, definable, transferable via
common language or processes
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This knowledge is held in norms, behavior, or cultural a ssumptions;
the only way to access it is through shared experience—being there
and learning through doing. To access this type of knowledge
requires a bricks-and-mortar approach—experiencing. Moving
down the scale, knowledge that is embedded in user behavior or
technologies can be accessed without the need for a full-time, longterm presence via foraying. Finally when knowledge is explicit and
can be codified and is likely to make a small contribution to the
final innovation, the mode of attracting, which doesn’t require any
presence in the originating location, can be employed.
• Experiencing. When the knowledge is complex and
systemic, and is impossible to attribute to a specific owner
(either an individual or entity), a company needs to
access it via a long-term presence on the ground in the
form of an innovation center.
• Foraying. When the knowledge sought is technological
but embedded in a local context, user behavior or some
facet of how the technology was originally created often
has to be understood. The knowledge needs to be accessed
in situ, but this doesn’t necessarily require a dedicated
innovation center. Instead, small teams can embark on
foraying exercises to see and understand the knowledge
in its original context before translating it for use more
widely across the organization.
• Attracting. When the knowledge needed is explicit,
codified, and modular, for example in programming code,
blueprints, and computer-aided designs, a company in a
virtual environment can attract it. The knowledge needs
to be able to move from its location of origin to the
attractor company via ICTs without losing any of its
integrity or meaning.
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FIGURE 2-2
An optimized innovation footprint
Type of knowledge
Complex
Full
immersion
(bricks and mortar)
Experiencing
Foraying
Embedded
Attracting
Explicit
Distance
Mode of access
Experiencing: Immersion in the Local Environment
The limitations of physical innovation networks we have
described shouldn’t preclude the continuation or establishment
of bricks-and-mortar sites in the future. The only caveat is that
these sites are used to access the systemic, diffuse complex knowledge held in norms, social interactions, and culture. Only under
these circumstances is an actual, physical site a viable option.
Complex knowledge is locally rooted and deeply embedded. It
is difficult to define and will invariably be very different from a
company’s existing knowledge base. To access complex knowledge requires learning by doing, seeing, and being there. It means
growing local roots and cultivating local relationships, which can
only be done by immersion in the local context or experiencing.
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For most companies, the business rationale behind the need
to access complex, locally rooted knowledge is to achieve growth
by entering new businesses and or new markets.2 For example,
when the Japanese cosmetics group Shiseido decided to enter
the global perfumery business, it chose France, the world’s leading market in this segment, as a base. As we describe in chapter 5,
trying to understand the subtle nuances of design, packaging, and marketing in perfumery from Japan was impossible.
However, learning by doing, seeing, and being in France helped
Shiseido develop the Issey Miyake and Jean Paul Gaultier
brands, among others, that have had lasting success.
In recent years, a new phenomenon is the growing importance of low-cost, high-value innovation in markets where
necessity is the mother of invention.3 To participate in this
growing field and innovate at the bottom of the pyramid, companies need to access complex knowledge that requires them to
undertake innovation activities in situ.4 Building on Tata’s lead
in developing a low-cost, fuel-efficient car for India’s vast and
growing middle class (currently estimated at over 100 million
households), many auto manufacturers, including Suzuki and
Hyundai, set up innovation hubs in India to enable them to
compete in what the industry widely acknowledges will be one
of the few future growth areas. Only by being on the ground and
understanding consumer requirements and preferences, road
conditions, maintenance, and servicing constraints can manufacturers come up with a radically different vehicle at a price
point for those at the bottom of the pyramid.
Similarly, HP recognized that, although a potentially huge
market, India was underserved, and by the time the economy had developed sufficiently for HP to sell its global product range (albeit pared-down versions to achieve attractive
price points), local competitors would have emerged to make
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market entry difficult. To develop products and services that
would be attractive in an Indian market, it needed to open a
bricks-and-mortar innovation center (see sidebar 2-1). HP realized that it had to have a deep understanding of how people lived
and worked in India and the challenges the government, the
administration, and businesses faced.
SI D EB A R 2 - 1
HP L ABS IN DIA: E X PE R I E N C I N G V I A I MM E R S I O N
IN A N E W C O N TE X T
In the 1990s, HP Labs began to recognize the strategic imperative
in examining what kind of ICTs it would need to create a market in
developing countries. It saw that most of HP’s future growth would
be in these markets and realized that most MNCs in developing
countries focused on serving the tiny proportion of rich people at
the top of the pyramid. But the greatest and most underexploited
opportunities lay with the group in the middle of the pyramid.
HP already had an interest in developing economies with its
emerging market solutions (EMS) group. Its role was to adapt
existing HP technologies to make them affordable and usable in
poor countries. But this approach didn’t address the real opportunity
of understanding the unmet and unarticulated technology needs in
developing economies. The type of research that would tap into
these needs had to be on the ground, immersed in the local context.
In 2000, HP Labs set up a new lab in Bangalore India (HPLI)
with a dual mandate to develop new solutions and products for the
underserved populations of developing economies and also “learn
how to learn” in new, very different markets.
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Building a management team to establish the lab with the right
attributes, vision, experience, and connections to HP’s businesses,
head office, and local networks of contacts was paramount. Gita
Gopal, who had been involved in the project from its inception, took
on the role of the lab’s associate director. But rather than being
based in India, she remained in Palo Alto to provide a voice for the
lab back at the center. The lab also hired an HP veteran to be based
in India and to forge relationships with HP’s global businesses.
The local director’s role for the first few years while the lab
established local connections and partnerships would be quite
different from its later incarnation once the lab was up and running. So,
initially, HPLI needed to hire a prominent local to give the lab credibility
and provide an external network of contacts. It asked an executive
search agency to find candidates who met some challenging criteria:
they had to be eminent scientists in their own right, have business
experience, and understand how an MNC operates. The search
process took almost five months resulting in the hiring of Srinivasan
Ramani. He had a long and distinguished career that included serving
on the United Nations’ high-level panel of advisers in ICTs.
The lab’s approach to conducting research differed radically
from the traditional approach that began by identifying technical
challenges. HPLI’s mandate was to understand the end-user
problems that needed to be solved and to identify the potential of the
market. The softer sciences, such as ethnography, anthropology, and
sociology, would play a prominent role in driving the research effort.
Although HPLI focuses on creating technologies for markets that
don’t yet appear on the radar of the business divisions, it falls to the
businesses to take those concept technologies to market, since
HPLI has neither the skill nor the charter to manufacture and sell
its innovations. It’s therefore vital for HPLI to identify and adopt
(continued )
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business sponsors for the projects it pursues. For example, HPLI
designed a “script mail device” to allow people to send and receive
handwritten e-mails via the telephone without the need for an
expensive PC or other script-based input devices. HP’s relevant
business unit was able to target this device to institutional buyers.
Similarly, when HPLI developed the “shopkeepers’ assistant,” a
small, simple device that could track inventory, once the relevant
HP business unit was brought into the project, it realized that trying
to sell a single device to every shopkeeper would be unprofitable,
if not impossible. But targeting large suppliers to India’s 5.5 million
independent retail outlets (and thus allowing them to track inventory
in the stores they supplied) would be much more feasible.
HPLI is now a well-established research center in HP’s network,
with its own network of research collaborations around the world. Its
research projects focus on the needs of users and consumers in the
developing world, but many of its developments have a wider impact,
such as simplifying Web access and using technology in education.
Any company can set up experiencing sites, but these will be
successful only if the company makes and maintains the requisite resource and management commitments. To gain value from
experiencing, the company should only make the commitment
when the source of the knowledge and the nature of the knowledge it is seeking has some or all the following characteristics:
• Diffuse ownership. No individual or identifiable group
possesses all of the knowledge sought. For example, when
Novartis opened a research center in Singapore to focus on
tropical diseases (discussed in chapter 3), the k
nowledge
it needed was highly diffuse. Physicians who treated
patients suffering from the diseases, NGOs h
eadquartered
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in Singapore that knew about delivering health services
in neighboring poor countries, and Singapore’s own local
scientific communities that had worked in these areas for
decades held the critical knowledge. To learn from all of
these different sources and then continuously c ombine
this new, complementary knowledge with its core
drug-development knowledge called for Novartis to use an
experiencing approach.
• Complex. The knowledge is tacit, deeply rooted in the
local context in a combination of norms, behavior, actions,
mental models, or beliefs. It is not easily articulated and is
very difficult to transfer to other locations. For example,
the knowledge that enabled HP to develop innovative new
products for emerging markets was complex: it wasn’t
possible by merely reading reports to understand the
implications and ramifications of living and working
in a country with an underdeveloped and unreliable
infrastructure. Staff at HP had to learn by experiencing
firsthand the impact and constraints on people’s everyday
lives and actions. Only then were they equipped to
recognize opportunities to develop solutions.
• Difficult to define. Before embarking on experiencing, a
company will find that the structure of the knowledge is
unknown or fuzzy. A greater understanding of what can be
learned will be revealed only through the process of
learning. For example, HP Labs went to India to learn
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