dis4003 - Universität St.Gallen

Transcrição

Breaking Boundaries for Global Innovation
DISSERTATION
of the University of St. Gallen,
School of Management,
Economics, Law, Social Sciences
and International Affairs
to obtain the title of
Doctor of Philosophy in Management
submitted by
Michael Louis Joachim Daiber
from
Germany and France
Approved on the application of
Prof. Dr. Oliver Gassmann
and
Prof. Dr. Sabine Seufert
Dissertation no. 4003
Difo-Druck GmbH, Bamberg 2012
The University of St.Gallen, School of Management, Economics, Law, Social
Sciences and International Affairs hereby consents to the printing of the present
dissertation, without hereby expressing any opinion on the views herein
expressed.
St. Gallen, May 11, 2012
The President:
Prof. Dr. Thomas Bieger
Acknowledgements
This dissertation is the result of my research at the Institute of Technology
Management at the University of St.Gallen. Although being an individual
exercise it would not have been possible to write it without the support of others.
It is my pleasure to thank those persons who have actively accompanied and
supported me in this exciting phase of my life.
First of all, I would like to thank my supervisor Oliver Gassmann, who made it
possible to write this thesis in an environment where high expectations meet
great opportunities. His input challenged me more than once and often made me
think one step further. Also, I would like to thank Sabine Seufert for having
supported me as my co-supervisor.
Furthermore, I am very grateful to all the co-authors contributing to the single
articles, especially Marco Zeschky and Bastian Widenmayer. Discussions with
Marco triggered a process of critical reflection and significantly contributed to
improving the scientific rigor and relevance of the articles in this thesis. I also
would like to thank Ursula Elsässer-Gaehwiler for her support in administrative
tasks.
Being a mainly qualitative study the completion of this work would not have
been possible without the support of numerous executives that were ready to
cooperate through interviews and participating in my survey.
I will always keep in good memory my time as a research assistant and doctoral
student at the Institute of Technology Management. My friends and the entire
team at the Chair of Innovation Management as well as my friends at other
chairs and institutes contributed to a good working atmosphere and made life in
this little city more than enjoyable.
As I have written parts of the dissertation as a visiting scholar at Tongji
University in Shanghai, special thanks go to the Swiss National Science
Foundation for having funded my extremely instructive research stay, unique
experiences with inspiring people and a great year in an exciting city. I am
thankful to Zheng Han and to Max von Zedtwitz for having supported me before
v
and during my stay in Shanghai, as well as to my colleagues at the Sino-German
Chair of Postgraduate studies at Tongji University and all my friends in
Shanghai.
The greatest gratitude goes to my parents Anny and Hans-Joachim Daiber as
well as to my sister Ariane that allowed me to have a wonderful youth as well as
to receive an excellent education. I am deeply grateful for their unlimited
support.
Shanghai, December 2011
Michael Daiber
Contents
Figures
xi
Tables
xi
Abbreviations
xiii
Abstract
xv
Kurzdarstellung
xvii
1.
Introduction
1
1.1
Organizing a company for innovation and R&D
5
1.2
The organizational boundaries of innovation:
State of literature
8
1.2.1
Open innovation
9
1.2.2
Global R&D
12
1.3
Thesis outline and research design
14
1.3.1
Research concept
14
1.3.2
Research methodology
16
1.3.3
Thesis outline
16
2.
The role of intermediaries in cross-industry
innovation processes
21
2.1
Introduction
23
2.2
Cross-industry innovation
24
2.3
Intermediaries in innovation
26
2.4
Research methodology
27
2.5
Survey results
30
vii
Michael Daiber
2.6
In-depth cases studies
32
2.7
Analysis and discussion
36
2.8
Conclusions
40
3.
Organizing ambidextrous corporate venturing:
The case of Lonza
43
3.1
Introduction
45
3.2
Literature review
47
3.2.1
Challenges of managing short and breakthrough
innovation
47
3.2.2
Roles and organization of corporate venturing
48
3.3
Methods
49
3.3.1
Research design and case selection
49
3.3.2
Data collection
50
3.4
Lonza: pursuing incremental and breakthrough
innovation
50
3.4.1
Lonza's innovation organization
51
3.4.2
LIFT: hybrid corporate venturing
52
3.5
Discussion
55
3.5.1
Leveraging existing competencies
55
3.5.2
Collaborations in technology exploration
57
3.5.3
Top management control
57
3.6
Conclusion
58
4.
Collaboration and coordination in global R&D of
multinational companies:
The role of product architecture
61
Introduction
63
4.1
viii
Table of Contents
4.2
Literature
64
4.2.1
The interplay between product architecture and
organization
64
4.2.2
Strategic goals and organization of R&D sites in MNCs
65
4.2.3
Collaboration and coordination in global R&D
66
4.3
Methodology
68
4.3.1
Case sampling
68
4.3.2
Data collection and analysis
69
4.4
Towards a typology
69
4.5
Findings
76
4.6
Discussion and conclusion
80
5.
The effect of Chinese MNCs' internationalization
on their R&D organization
83
5.1
Introduction
85
5.2
Literature
87
5.2.1
Models and overview on R&D Internationalization
87
5.2.2
Cultural background: Chinese management
88
5.2.3
The internationalization of Chinese MNCs
88
5.3
Methodology
89
5.3.1
Sampling and analysis
91
5.3.2
Research framework
92
5.4
Results: Developments in Chinese R&D
internationalization
93
5.4.1
Catch-up through acquisitions
93
5.4.2
Recentralization of control for greater leverage
95
5.4.3
How Chinese MNCs internationalize step by step
98
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Michael Daiber
5.5
5.6
x
Discussion: Why does Chinese internationalization
differ from existing concepts
100
Conclusions
102
Appendix
105
References
107
Curriculum Vitae
137
Figures
Figure 1.1:
Breaking the traditional boundaries of the firm
4
Figure 1.2:
Positioning the different articles within
open innovation and global R&D
20
Expectations towards intermediaries in
cross-industry innovation
31
Figure 3.1:
Innovation organization at Lonza
52
Figure 4.1:
Coordination structures in global R&D
79
Figure 5.1:
Overview of Chinese owned R&D sites abroad
86
Figure 5.2:
Organization forms of global R&D
93
Figure 5.3:
Internationalization through acquisition
95
Figure 5.4:
Post acquisition consolidation
97
Figure 5.5:
Internationalization of R&D in Chinese MNCs
104
Figure 2.1:
xi
Tables
Table 1.1:
Literature describing different actors in
open innovation
11
Table 1.2:
Literature on global R&D
13
Table 1.3:
Type of boundary expansion and contingency
factors in the articles of this thesis
19
Table 2.1:
Structure for content analysis
28
Table 2.2:
In-depth case studies
32
Table 2.3:
Cross-case analysis in three cross-industry
innovation phases
37
Table 4.1:
Case study overview
70
Table 4.2:
Overview about collaboration and definition
of product architecture in case study companies
75
Overview of companies analyzed in-depth
during our research
90
Collaborative research projects performed
at the Institute of Technology Management
105
Table 5.1:
Table 6.1:
xii
Abbreviations
AT&T
formerly American Telephone and Telegraph Company
BMW
Bavarian Motor Works (German: Bayrische Motoren Werke)
CAD
Computer Aided Design
CDMA
Code Division Multiple Access
CEO
Chief Executive Officer
cf.
compare (Latin confer)
CTO
Chief Technology Officer
CV
Corporate Venturing
ed.
edition
Ed.
Editor
Eds.
Editors
e.g.
for example, for instance (Latin: exempli gratia)
et al.
and others (Latin: et alii/alia)
etc.
and so on, and so forth (Latin: et cetera)
excl.
excluding
FDI
Foreign Direct Investment
IBM
International Business Machines
ICT
Information and Communication Technologies
i.e.
that is, in other words (Latin: id est)
incl.
including
IP
Intellectual Property
IT
Information Technology
ITC
Innovation and Technology Committee
LIFT
Lonza Innovation for Future Technology
xiii
Michael Daiber
M&A
Mergers and Acquisitions
MNC
Multinational Company
MNE
Multinational Enterprise
No.
Number
NPD
New Product Development
OECD
Organization for Economic Co-operation and Development
OEM
Original Equipment Manufacturer
P&G
Procter and Gamble
PC
Personal Computer
PLM
Product Lifecycle Management
pp.
pages
R&D
Research and Development
SCI
Science Citation Index
SIT
Strategic Innovation Team
TCL
The Creative Life; (Chinese: 今日中国雄狮 , jīnrì Zhōngguó
xióngshī, Today China Lion)
TRIZ
Theory of Inventive Problem Solving (Russian: теория
решения изобретательских задач, teoriya resheniya
izobretatelskikh zadatch)
UK
United Kingdom
USA
United States of America
US$
United States Dollar
Vol.
Volume
ZTE
formerly
Zhongxing
Telecommunication
Equipment
Corporation (Chinese: 中兴通讯股份有限公司 , Zhōngxìng
tōngxùn gǔfèn yǒuxiàn gōngsī)
xiv
Abstract
The organization of businesses which conduct research and development has
changed dramatically over the last 20 years. More and more companies work
with outside contractors, many of whom are located abroad. Globalization and
the rise of emerging markets like China and India facilitate this shift.
This thesis is split in five parts, the introduction reviews organizational theory
and literature about the concepts of open innovation and global research and
development.
The thesis further includes four articles which describe how companies apply a
global and open innovation paradigm to their corporate organization:
The first article describes how companies make use of intermediaries to source
innovative concepts based in different industries. It describes different
approaches chosen by different types of intermediaries.
The second article considers the Swiss life science company Lonza and how it
makes use of corporate venture capital to globally source exploratory
innovation. It focuses on management efforts to balance exploratory and
exploitative innovation by using open innovation and corporate venture capital.
The third article investigates collaborative relationship in global research and
developments. It examines how multiple research and development sites with
unique strategic roles coordinate and collaborate and the role product
architecture thereby plays.
The fourth article surveys how the internationalization of Chinese companies
impacts their research and development organizations. It compares and contrasts
Chinese and Western approaches to incorporating internationalized research and
development into corporate organizational schemes.
xv
Kurzdarstellung
Während der letzten 20 Jahre haben die traditionellen organisationalen und
geographischen Grenzen des Unternehmens, für Forschung und Entwicklung
(F&E) sowie für sonstige Innovationsaktivitäten an Bedeutung verloren. Immer
mehr Unternehmen kooperieren in diesen Bereichen mit externen Akteuren und
führen eigene F&E- Aktivitäten im Ausland durch. Dieser Trend wird durch die
fortschreitende Globalisierung und den Aufstieg von Schwellenländern wie
China und Indien weiter verstärkt
Diese Dissertation untersucht dieses Themengebiet und ist wie folgt aufgebaut:
Nach einem Einführungskapitel über Themen wie 'Open Innovation' und
'Globalisierung von F&E' und einer Beschreibung der theoretischen Grundlagen
der Organisationstheorie wird in vier Artikeln untersucht, wie Unternehmen ihre
Organisation auf das neue, offene und globale Innovationsparadigma ausrichten.
Der erste Artikel beschreibt, wie Unternehmen Intermediäre einsetzen, um
innovative Konzepte aus anderen Branchen übernehmen zu können. Es wird
beschreiben, welche Ansätze verschiedene Intermediäre dazu wählen.
Der zweite Beitrag befasst sich mit dem Schweizer Biotechnologieunternehmen
Lonza, und dessen Einsatz von Corporate-Venture-Capital (CVC) um über die
Unternehmensgrenzen hinweg global explorative Innovation zu ermöglichen.
Der Artikel beschreibt wie das Top Management mit Hilfe von CVC eine
Balance von explorativer und exploitativer Innovation bewerkstelligt.
Der dritte Artikel untersucht die Zusammenarbeit zwischen verschiedenen
globalen F&E Standorten von multinationalen Konzernen. Vor allem die Rolle
der Produktarchitektur für die Koordination und Zusammenarbeit der Standorte
wird näher hierbei hervorgehoben.
Der vierte Artikel gibt einen Überblick über die Internationalisierung
chinesischer Unternehmen und deren Auswirkung auf die Organisation ihrer
F&E. Dieser Artikel beschreibt die Internationalisierungsansätze chinesischer
Unternehmen, und deckt Unterschiede zur F&E-Internationalisierung westlicher
Unternehmen auf.
xvii
1. Introduction
During the last twenty years the world of corporate research and development
changed in ways that many would have never predicted:
 Procter & Gamble, once nicknamed the 'Kremlin on the Ohio' because of the
secretiveness of their corporate culture, launched an external innovation
initiative. It was called 'Connect and Develop' and its stated goal was to
source outside innovation.
 General Electric opened research and development laboratories in Munich,
Germany, Bangalore, India and Shanghai, China. Another lab is planned for
Rio de Janeiro, Brazil.
 The emerging markets of India and China, respectively, produced the
conglomerate Tata and the company Geely. These two firms, which were
unheard of in the board rooms of Western industrialized economies ten years
ago, today own old European car brands like Jaguar, Land Rover and Volvo.
A few decades ago the world of corporate research and development and
innovation was rather simple. Nearly all innovative multinational companies
were headquartered in the triad regions of Western Europe, North America and
Japan. Innovative companies performed most of their research and development
internally in their home countries. From there, they served their global markets.
Global research and development (R&D) took place in centralized corporate
laboratories like AT&T's Bell Labs of New Jersey, Toyota's central research and
development labs of Nagoya, Japan, and General Electric's research laboratories
in Niskayuna, in upstate New York. Within these 'cathedrals of R&D' worked
highly skilled employees who developed products behind closed doors.
But today, as a result of technological developments and changes in society and
politics, that old world of innovation and research and development is no more.
Today, markets and competition are global. Information and communication
technologies (ICT) facilitate international communication, affordable
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Michael Daiber
collaboration, and universal access to information. People and organizations
work and cooperate globally better. New players around the world participate in
innovation. These players also serve a global customer base.
As a result of global markets and competition, companies face new challenges in
research and development. To deliver optimal solutions for customers in
different markets around the world they must increase their cost efficiency. To
compete in the global marketplace of innovation they need to meet more diverse
needs and preferences.
Traditional boundaries have lost their importance. Consequently, the way that
research and development and innovation are performed has changed.
Innovation today happens in a globalized context and in cooperation between
different actors within and outside the company.
Research achievements, traditionally, used to be realized inside a single firm's
research laboratories. But nowadays companies focus more on leveraging
external research achievements (Chesbrough, Vanhaverbeke et al. 2006).
One of the best known examples for this paradigm shift is Procter & Gamble
(P&G). In 1999 P&G launched a new strategy to increase growth through
innovation. P&G changed their once internally-focused research and
development culture into a culture that connected people with external
technological experts in a more efficient way. Gordon Brunner, Chief
Technology Officer of P&G, argued that R&D should become 'C&D', 'Connect
and Develop', by integrating externals into the innovation process (Dodgson,
Gann et al. 2006).
Another important trend is that companies increasingly perform research and
development activities outside their home country. After a long period of
absence from public attention, the globalization of research and development
activities is on the increase (Boutellier, Gassmann et al. 2008).
In 2008 the top 80 corporate research and development spenders in the United
States spent an estimated US$ 80 billion of their US$ 146 billion R&D funds
overseas. The top 50 European companies spent US$ 51.4 billion of their
US$ 117 billion total outside the continent. The top 43 Japanese firms exported
2
Introduction
US$ 40.4 billion of their total US$ 71.6 billion to other countries (Jaruzelski and
Dehoff 2008).
In the five years between 2001 and 2006 research and development expenditures
of foreign affiliates increased in all countries, according to a 2009 report of the
Paris-based Organization for Economic Cooperation and Development on main
science and technology indicators (OECD 2009). Even companies like Hitachi,
once considered so home-country focused that they performed their research and
development activities almost exclusively in Japan until about one decade ago,
(Gassmann and von Zedtwitz 1999) built R&D sites in Europe North America
and India (Hitachi 2011).
As of ten years ago the trends towards opening up and globalizing research and
development were already visible. Companies from the old triad regions which
dominated the world had begun to subcontract research and development outside
of their classical corporate centers. In countries like China, globally relevant
research and development activities were, however, still being performed by
companies from developed countries or at least for them.
Since China and India's rise globally relevant research and development
activities have increasingly been performed by companies which originated in
emerging markets even outside their respective home country. This
internationalization of R&D from emerging markets happened via Greenfield
investments and acquisitions (Child and Rodrigues 2005). Lately, it has gained
momentum when companies like Tata, Geely and Lenovo, acquired renowned
and innovative Western companies such as Jaguar, Volvo cars, and IBM's
computer hardware business. The trends toward open and global innovation
reinforce each other. Globalization creates a global innovation landscape with
scientific and technological capabilities distributed internationally between and
among more and more actors.
This thesis will investigate, from an organizational and a geographic
perspective, the opening up and the globalization of research and development,
cf. Gassmann (2006).
While research and development within its traditional boundaries represents the
classical model of ethnocentric research and development (Gassmann and von
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Michael Daiber
Zedtwitz 1999), the geocentric research and development model describes how
knowledge is exploited internationally to generate innovation. The discussion on
open innovation describes the external sourcing of knowledge for innovation.
The organizational models of an 'R&D hub structure' and an 'integrated R&D
network' (Gassmann and von Zedtwitz 1999) describe how knowledge is
differently sourced within and outside the traditional boundaries of the firm, and
how it is used outside of these boundaries (Figure 1.1).
external
Open Innovation
Knowledge
sourcing
internal
Traditional
boundaries
of the firm
Ethnocentric
R&D
central
Integrated R&D
Networks
R&D hub model
Geocentric R&D
Knowledge
exploitation
decentral
Figure 1.1: Breaking the traditional boundaries of the firm
This thesis is a compilation of four articles, all of which deal with the topic of
how large companies tackle changes in the corporate research and development
environment, based on their different strategic objectives and boundary
conditions.
These articles will provide insights into how innovation can be enabled and
realized within today's open and globalized innovation paradigm and how
companies from both industrialized countries and emerging markets tackle the
challenges of the new globalized innovation world in an effective and efficient
way.
4
Introduction
1.1 Organizing a company for innovation and R&D
Behind the phenomena of expanding organizational boundaries in research and
development and innovation is a broader question: how should a company
optimally set up and manage and lead an organization? This section aims at
creating a theoretical base for the main research fields of open innovation and
global research and development. It provides an overview of the underlying and
more general questions on how to best organize a company, especially for
innovation.
The question of optimal organization is customarily discussed from a political
and military perspective. Ancient philosophers have addressed these topics as
have contemporary economists. In the 18th century research on organization
was strongly believed to have been influenced by the works of Adam Smith
(1776) who advocated the division of labor within organizations. Smith said that
a nation which specializes in a certain commodity would have an absolute
advantage. Modern research on organizations and their management are based
on the works of Weber (1922), who coined the term 'bureaucracy' and Taylor
(1911), who was best known for his theory of 'scientific management'. Both men
defended the rational and mechanistic description of an 'optimal organization'.
Innovation and research and development, however, are complex topics:
The importance of innovation for economic change and wealth (Schumpeter
1939; Solow 1957) as well as the importance for the differentiation of a firm
(Drucker 1955) were acknowledged in the first half of the 20th century
beginning and from and during the 1950s. To generate novel products efficiently
companies have to make a sequence of important resource allocation decisions
(Goldhar 1980). Companies not only have to search for innovation in the right
fields but also have to do this in an economically viable and efficient way
(Drucker 1973).
Although innovation is a highly cross-functional activity (Denison, Hart et al.
1996; Song, Montoya Weiss et al. 1997), most of the literature on innovation
management focuses on research and development as a corporate function.
Research and development activities, especially sustainable innovation efforts
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Michael Daiber
are expensive and have uncertain outcomes and unexpected future returns
(David, Hitt et al. 2001).
Organizing a company for optimal innovation output became one of the greatest
challenges in the corporate world. It was also a topic of interest for scholars in
Management. Innovation's high levels of uncertainty and complexity made the
idea of one single optimal organization form unviable (Burns and Stalker 1962).
The optimal organization depends on different internal and external factors
(Galbraith 1973) and changes with them. Because of their uncertainty and
complexity a contingency theory has been advocated by multiple scholars
(Duncan 1976; Mc Donough and Leifer 1983; Dewar and Dutton 1986).
The literature that analyzes different contingency factors regarding the
organization of innovation is infinite. This thesis focuses on three types
contingency factors that are known to influence the way companies are
organized for research and development.
 The degree of novelty of an innovation:
The majority of innovations can be described as incremental and continuous
improvements of products and processes. Only a few innovations represent
substantial milestones (Kleinschmidt and Cooper 1991). Therefore,
innovations with high degrees of novelty, and innovations with small degrees
of novelty are treated separately in literature (von Hippel 1976; Chandy and
Tellis 1998; Leifer, McDermott et al. 2000).
Different terms such as radical, breakthrough, discontinuous, or disruptive
innovation are thereby used to describe innovation with high level of novelty.
A further, slightly different aspect is the scope of realization:
Exploratory innovation tends to bring results in the long-term, while the
outcomes of exploitative innovation are expected quickly. These terms imply
that innovation can either happen in small steps and be predictable, or happen
in bigger steps and have a higher degree of originality (Masticelli 2000).
Within the single articles the terms 'exploratory innovation' (Jansen, van den
Bosch et al. 2006), 'radical innovation' (Chandy and Tellis 1998) and
'breakthrough innovation' (Masticelli 2000) are used depending on whether
the focus within the article is on transformations of markets and technologies
6
Introduction
(radical, breakthrough innovation) or on organizational topics (exploratory
innovation).
Sourcing innovations with a high or low level of novelty require different
approaches. A major challenge is to balance both exploratory and
exploitative innovation, especially within established companies.
 Industry and product specificities:
Innovation is a broad topic, but even within an industry there are differences
in how an innovation is achieved. Among different industries companies
spend different shares of their sales on research and development (OECD
2005). Product or process types will also drive differences in how innovation
activities are performed (Utterback 1994). This thesis focuses on product and
process innovations. Research into business model innovation (Johnson,
Christensen et al. 2008) is separate, although some insights from this thesis
might also be valid for business model innovation.
Product modularity (Ulrich 1995), especially how innovation tasks can be
divided within the interfaces of the product, will be closely examined.
Organizational modularity is closely interlinked with the topics of open
innovation and international research and development (Sanchez and
Mahoney 1996).
 The cultural, political and geographic background:
As advocated by institutional theory (Meyer and Rowan 1977; di Maggio and
Powell 1983), a company's geographic, social and political background and
its national culture (Hofstede 1980) significantly influences the way
companies organize and perform the functions of research and development.
Literature on national differences in management and organization describe
European, American, and East Asian approaches (Grandstrand 1999; Su
2005). Due to the growing importance of emerging markets (Gassmann and
Han 2004; von Zedtwitz 2004) and their companies (Xie and Wu 2003) for
research and development, articles that examine the influence of cultural,
politics and geography influence this thesis.
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Michael Daiber
The state of the art in knowledge about these contingency factors will be
described more deeply in the single articles. Specific attention is paid to the
declining importance of political boundaries relative to the rise of global
research and development and open innovation.
1.2 The organizational boundaries of innovation:
State of literature
Scholars of business economics and management for years have studied the
question of which tasks are best performed within in-country, in-company,
and/or by outside actors or non-nationals. Scholars crafting and testing the
theory of transaction cost economics (Coase 1937; Williamson 1981)
investigated both the choice of internal vs. external task completion as well as
company internationalization.
According to this theoretical point of view a company faced with the choice of
performing a task within the company or buying it externally would opt for a
variant with lower internal or external transaction costs.
Scholars advocating a resource-based view of the firm (Wernerfelt 1984; Barney
1991) emphasize the role to which valuable, rare, inimitable, non-substitutable,
resources within a firm that determine whether a firm can obtain a competitive
advantage by performing a certain activity or refrain from doing so.
The trend to perform more tasks outside the traditional boundaries of the
company, be it through more cooperation with external actors or through an
increased internationalization of research of development, indicates an increase
in the attractiveness of external actors in research and development from a cost
or resource/competence perspective.
The phenomenon of traversing company boundaries in innovation is described
in two literature streams: Literature on open innovation (Chesbrough 2003;
Gassmann 2006) describes the increasing reliance by companies on external
actors like customers, suppliers, research institutes, intermediaries or partner
companies to realize and commercialize innovation. Literature on global
innovation (Gassmann and von Zedtwitz 1999; Boutellier, Gassmann et al.
2008) describes why and how firms go beyond geographical boundaries to seek
8
Introduction
out research and development on a global scale. Since both topics are tightly
linked to each other (OECD 2008) the two literature streams are united by
Gassmann et al. (2010), which applies research into globalization of innovation
as a spatial perspective of open innovation. Both topics will, however, be
reviewed separately from each other in this chapter.
1.2.1 Open innovation
Procter & Gamble's outsourcing of innovation, as mentioned above, is far from
the exception in today's industrial world. Within the last twenty years the
propensity to cooperate in research and development projects has increased
dramatically. During that period, many companies started to rely on contract
research and external development for innovation (Rigby and Zook 2002;
Chesbrough 2003).
Open innovation is not restricted to an inward flow of technological knowledge.
Companies are increasingly commercializing their technology in order to profit
from know-how transfers and licenses. Roche Pharmaceuticals licensed its
patents from an abandoned research and development project to a spin-off
company, Actelion (Reepmeyer, Gassmann et al. 2011). IBM realized US$ 1.5
billion by commercializing intellectual property (IP) in 2005 (Gassmann 2006)
in a similar way as Dow Chemical did in the 1990s (Davis and Harrison 2001).
Although differences exist to the extent to which companies engage in inbound
and outbound open innovation (Laursen and Salter 2006; Keupp and Gassmann
2009), the open innovation model is more prevalent in some industries than in
others. The overall trend is toward more open innovation processes and that is
visible in all industries (OECD 2008).
Although the term 'open innovation' is not even ten years old, the necessity to
recognize and assimilate external knowledge for innovation purposes has been
well recognized in literature before (Cohen and Levinthal 1990). Cooperation
with external actors in research and development projects increased during the
1970s, 1980s and 1990s and has already been described back then. Firms started
to incorporate customers (von Hippel 1976; 1988), suppliers (Clark 1989),
research institutes (Meyer-Krahmer 1998), and intermediaries (Bessant and
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Michael Daiber
Rush 1995) into the innovation process and to cooperate with other companies
for innovation (Hagedoorn 1993).
In his seminal book, Chesbrough then analyzed this trend and coined the term
'open innovation' in 2003. Based on this book literature on open innovation
came up, including not only external technology sourcing and cooperative
innovation (the outside-in and coupled processes described in Gassmann and
Enkel's (2004; 2009) taxonomy) but also external technology commercialization
(Gassmann 2006; Lichtenthaler and Ernst 2007) which is the so-called insideout process according to their taxonomy.
Chesbrough (2003) identifies three different categories of companies in the open
innovation model:
 Organizations that fund innovation: This category includes investors
(venture capitalists, incubators) and innovation benefactors (mostly public
funding agencies focusing on early stages of research discovery).
 Organizations that generate innovation: This category includes innovation
explorers (discovery research institutions, this task was formerly often
performed by company internal R&D labs), innovation merchants
(companies generating and commercializing intellectual property),
innovation architects (companies creating a systems and standards to allow
others to participate in innovative activities), and innovation missionaries
(people and organizations that advance technologies to serve a cause, without
seeking financial profit from their work, e.g. open source software
programmers).
 Organizations that bring innovation to the market: This last category
includes innovation marketers (groups that commercially link technological
solutions. Those solution may either be their own or solutions which emerge
from third parties.) and so-called innovation one-stop centers (those which
resell the ideas of others).
The three types of organizations and their contributions to innovation are
described in different research streams. Table 1.1 provides an overview of
relevant literature that has contributed to different research streams.
10
Introduction
Table 1.1: Literature describing different actors in open innovation
Type of organization
Literature streams
Organizations that fund
(Corporate) venture
capital, incubators
innovation
References
(Skyes and Block 1989; Skyes 1990; Block and
Mac Millan 1993; Dushnitsky and Lenox 2005;
Ernst, Witt et al. 2005; Becker and Gassmann
2006; Dushintsky and Shaver (2008)
University-industry
(Cohen, Nelson et al. 2002; Laursen and Salter
links
2004)
(Brockhoff 1992; Hagedoorn 1993; Hagedoorn,
R&D co-operations
Organizations or
individuals that generate
Standardization
Link et al. 2000; Tether 2002; Miotti and
Sachwald 2003; Gassmann and Reepmeyer
2005)
(Tassey 2000; Bekkers, Duysters et al. 2002;
Blind and Thumm 2004; Leiponen 2008;
Rysman and Simcoe 2008)
(Lakhani 2003; von Hippel and von Krogh 2003;
innovation
Open source
Bagozzi and Dholakia 2006; Dahlander and
software
development
Wallin 2006; Henkel 2006; von Krogh and von
Hippel 2006; West and Gallagher 2006;
Dahlander and Magnusson 2008)
(von Hippel 1976; Thomke and von Hippel 2002;
User innovation
Organizations that bring
innovation to the market
Intermediaries
von Hippel 2002; Franke and Shah 2003;
Franke and Piller 2004; von Hippel 2005;
Hienert 2006; Piller and Walcher 2006)
(Bessant and Rush 1995; Hargadon and Sutton
1997; Howells 2006; Verona and Prandelli 2006;
Sieg, Wallin et al. 2010)
Other literature analyzes how companies best make use of the new open
innovation paradigm. This literature mainly describes how open innovation has
become part of the corporate method of innovation (Chesbrough and Crowther
2006) and how companies actively adopted processes and structures including
open innovation (Dodgson, Gann et al. 2006; Rohrbeck, Hölzle et al. 2009).
Within this literature there is still room for new insights especially regarding
different contingency factors that might influence an optimal use of open
innovation.
11
Michael Daiber
1.2.2 Global R&D
For a long time research and development was defined as part of the national
treasure. Although some foreign research and development labs already existed
for years, the internationalization of research and development activities was not
present in management literature until the end of the 1970s (Gassmann 2003).
At the end of the 1970s, the first articles on global R&D described research and
development laboratories outside the home country. This literature also
identified factors that explained that phenomenon (Terpstra 1977; Ronstadt
1978).
Present day literature on the internationalization of the firm, e.g. the Upsala
model (Johanson and Vahlne 1977) is not sufficient to exhaustively explain the
peculiarities of internationalization. The topics of global research and
development and global innovation were thoroughly examined in literature
around the year 2000.
Present day knowledge addresses the topic of global research and development
from different aspects. Companies are reported to have internationalized their
research and development for market and technology related reasons (von
Zedtwitz and Gassmann 2002) and to have created foreign research and
development sites with different levels of autonomy. Companies have also been
reported to have had different objectives and roles within the company's
organization (Kuemmerle 1997; Nobel and Birkinshaw 1998). Information and
communication technologies have facilitated cooperation and communication
and enabled the emergence of new forms of international collaboration,
including global virtual teams (Gassmann and von Zedtwitz 2003; Song,
Berends et al. 2007).
12
Introduction
Table 1.2: Literature on global R&D
Topics
Subtopics
References
Motivations for global
R&D
(de Meyer and Mizushima 1989;
Håkanson and Nobel 1993; Gassmann
and von Zedtwitz 2002; Le Bas and Sierra
2002)
Knowledge and
competences
(Kuemmerle 1997; Birkinshaw 2002)
Communication
(Howells 1995; Boutellier, Gassmann et
al. 1998; Nobel and Birkinshaw 1998;
Moenaert, Caeldries et al. 2000; Song,
Berends et al. 2007)
Project management
(de Meyer 1993; Graber 1996; Barczak,
Mc Donough et al. 2006)
Organizational
structure
(Gassmann and von Zedtwitz 1998;
Gerybadze and Reger 1999; von Zedtwitz
and Gassmann 2002; Filippaios,
Papanastassiou et al. 2009)
Human resource
management
(Chiesa 1996; Gassmann and von
Zedtwitz 2003; Criscuolo 2005; Wright,
Snell et al. 2005; Tarique 2008)
Strategy
Process
Organization
Current literature highlights the motivations and challenges that those who
engage in global research and development experience. It also reviews the
process aspects like communication and project management as well as
organizational aspects (structure and human resource management). An
overview of relevant literature is provided in table 1.2.
Since the first wave of important publications in the area of global innovation
important changes occurred in the world of corporate research and development.
Companies from the triad regions increasingly performed research and
development activities in emerging markets like China and India.
Prior to that nations in the triad regions (USA, Japan, Europe) received most
foreign research and development investments (Patel and Pavitt 2000). Today
83% of new research and development labs are built in China and India
(Jaruzelski and Dehoff 2008). China’s scientific output has increased
significantly in the last decades (Cyranoski 2004). In the eleven years between
13
Michael Daiber
1993 and 2004 the number of publications by Chinese authors in SCI-ranked
journals increased from 1.69% to 6.52% (Zhou and Leydesdorff 2006).
Western companies in China have increased their engagement in research and
development activities in order to access local knowledge (von Zedtwitz, Ikeda
et al. 2007; Schwaag-Serger 2009). This includes not only knowledge about
local markets, but also technological knowledge, which represents one of the
main drivers of research and development internationalization (von Zedtwitz
and Gassmann 2002). Recent literature describes cases of Western companies
developing new products in China and selling them throughout the world. This
phenomenon has been called 'reverse innovation' (Immelt, Govindarajan et al.
2009) or frugal innovation (Zeschky, Widenmayer et al. 2011).
The internationalization of companies from emerging markets like China and
India is another trend that came up during the last years. Some authors already
described this trend, e.g. Luo and Tung (2007). and von Zedtwitz (2005), but the
literature still provides few insights on this topic.
1.3 Thesis outline and research design
Although the topics of open innovation and global research and development
have been addressed in literature that examines management over the past years,
several white spots remain. In particular, the research should address the
question: what would be the best way for companies to organize their research
and development given today's globalized and open economy?
1.3.1 Research concept
Based upon the premise that the mission of research in business is to advance
knowledge relevant to the practice of corresponding professions (Simon 1967),
the objective of this thesis is to advance both science and practice. As research
in management often fails to adopt its findings to managers' practice (Rousseau
2006), a research concept has been chosen in order to overcome this difficulty.
A significant factor which contributes to the gap between theory and practice is
understood to be a knowledge production problem (Gibbons, Limoges et al.
14
Introduction
1994). This has lead to the requirement that management research ought best be
performed in close proximity and interaction with management practice. Also,
that management research should offer solutions to practical and relevant
problems.
In order to cope with these requirements as well as to ensure validity, impact
and coherence, van de Ven's (2006; 2007) model of 'engaged scholarship' has
been adopted for the research contributing to this thesis.
Using the diamond model, research can be broken down into four study
activities, each of which can be performed in any sequence. As the research
topics treated in all papers of this thesis emerge from projects in close
collaboration with practitioners, the following sequence of tasks is applied:
problem formulation, theory building, research design, problem solving.
The research questions and topics formulated within this thesis are diagnosed
and grounded in 'reality' within collaborative research projects. The research
problems treated in this thesis emerged from research projects. Those projects
were performed in collaboration with companies from a variety of European
countries. The thesis also stemmed from a one-year research project in China.
An overview of the projects and corporate partners can be found in the
appendix. This approach guarantees a topical relevance for practitioners.
According to van de Ven's approach a problem should be analyzed and
described using a theoretical model via an abstraction process. Depending on the
question, a research design ought to be constructed so that the problem is
defined using a theoretical base. Based on the results of the enquiry,
management implications would thus be drawn for the observed practical
problems. The theoretical findings would then be interpreted and communicated
to companies within their problem setting. This method guarantees a certain
practical impact for the research performed within this thesis (Aram and
Salipante 2003).
In order to refine the results and increase their internal and external validity, the
research concept within this thesis consisted of following the above steps at least
two times. First results were presented to our corporate research partners. This
15
Michael Daiber
allowed the problem to be reformulated so that it more precisely adapted to
theoretical models.
1.3.2 Research methodology
In accordance with this research concept, the main focus of this thesis is based
on exploratory research which provided a clear focus on theory building from
case studies (Eisenhardt 1989). Whereas one article (chapter three) relies
exclusively on a single case study, all other articles are based on multiple case
studies. In one article (chapter two) the qualitative case studies are supported by
descriptive statistics. The result of this is that the entire paper has a semiquantitative approach rather than a pure qualitative approach. Further details on
the research methodology will be described in the corresponding chapters.
1.3.3 Thesis outline
Based on empirical research, this thesis aims at providing a deeper
understanding of how open innovation and global R&D, as spatial dimension of
open innovation (Gassmann 2006), change the way innovation is performed, and
how companies make ideal use of it based on their boundary conditions.
The different articles integrated into this thesis make recommendations on how
managers should organize their research and development activities in order to
take advantage of the expanded boundaries of the company for explorative and
breakthrough innovation. This chapter provides an insight into the structure of
the thesis and describes the approach taken toward the research.
This thesis consists of four separate articles that examine the organization of
innovation in an open innovation and a globalized context:
Paper A (chapter two), written together with Oliver Gassmann and Ellen Enkel
focuses on how innovation can be efficiently realized by reapplying concepts
from different industries using intermediaries, or so called 'cross-industry
innovation'. In a survey with 107 respondents we asked for companies'
expectations towards intermediaries in different phases of cross-industry
innovation process including the abstraction of existing needs, the analogy to
solutions in different industries and their adaptation to ones industrial context.
16
Introduction
Based on in-depth case studies with companies having performed 'crossindustry' innovation projects including intermediaries we analyzed how these
fulfill their expectations. Based on the intermediaries approaches different
archetypes of intermediaries are identified according to the way they contribute
to innovation through analogies from different industries.
Paper B (chapter three), written together with Marco Zeschky and Oliver
Gassmann, focuses on how to steer the balance between exploratory or
breakthrough innovation activities and incremental exploitative activities within
the same firm, using corporate venture capital in an open innovation context.
Based on the single case study about the Swiss biotechnology company Lonza
we analyze how 'hybrid corporate venturing' using company internal and
external resources is employed to guarantee a balance between exploratory and
exploitative innovation. Technology relatedness and top management control
mechanisms turn out to be decisive in the endeavor to steer and control this
balance.
Paper C (chapter four) written together with Bastian Widenmayer, Marco
Zeschky and Oliver Gassmann investigates on the globalization of research and
development. This article focuses on the question of how headquarters and
subsidiaries collaborate in a global research and development network and the
role played by product architecture. Product architecture is found to play an
important role in cases where a subsidiary has either autonomy for certain
market-related decisions or where a subsidiary is dominant for a certain
technology within the entire company. In these cases smart product architecture
helps facilitate collaboration between headquarters and subsidiaries. In cases
where subsidiaries only execute predefined tasks, i.e. an 'extended workbench'
setting, product architecture plays a less important role for collaboration. In
cases where subsidiaries have the freedom to define products for their own
markets and the freedom to make technological decisions autonomously, the
role of product architecture in collaboration is also less dominant, since product
architecture can also be defined locally.
Paper D (chapter five) written in collaboration with Maximilian von Zedtwitz
and Marco Zeschky investigates the internationalization of Chinese multinational companies and the effect of that internationalization on their global
17
Michael Daiber
research and development organizations. Based on a sample of the 80 biggest
Chinese research and development spenders and in-depth studies with six
Chinese multi-national corporations that internationalized their research and
development we found trends that contradict existing theories about the
globalization of the firm and existing concepts of global research and
development organization. Acquisition of foreign companies plays a more
important role for the internationalization of research and development among
Chinese companies than it did and does for Western and Japanese companies.
Further, there is a visible re-centralization trend among Chinese companies that
acquired foreign research and development sites but which later consolidated
most of their research and development activities in China.
Based on existing theory we analyzed cost and cultural reasons for this type of
internationalization process.
While paper A analyzes the interface between breakthrough innovation and open
innovation with innovation projects as a unit of analysis, paper B describes this
interaction from a company's perspective. Papers A and B highlight open
innovation as a means to realize innovative breakthroughs but do not explicitly
address issues of global research and development. Papers C and D emphasize
global research and development and investigate it from the perspective of a
developed country as well as from the perspective of an emerging market. Table
1.3 provides an overview of boundary conditions and contingency factors in the
different articles. Figure 1.2 provides an overview of where the articles are
positioned in the area of open innovation and global R&D. It also describes how
the questions are approached from a methodological point of view.
18
Introduction
Table 1.3: Type of boundary expansion and contingency factors in the articles of this
thesis
Paper A
Paper B
Paper C
Paper D
Expansion of
boundaries
company and
industry
boundaries
company
boundaries
geographic
boundaries
geographic
boundaries
Type of
innovation
not specified
exploratory
innovation
local adaptation
vs. autonomous
product
development
not specified
Geographic
context
developed
countries
developed
countries
developed
countries and
emerging
markets
emerging
markets
19
20
Knowledge
exploitation
Qualitative: multiple case study
Semi-quantitative: survey + multiple case studies
central
Qualitative: single case study
decentral
Product architecture and
organization of global R&D
in multinational companies
Paper C
The effect of Chinese MNCs'
internationalization on their
R&D organization
Paper D
Achieving ambidexterity
through corporate venturing:
the case of Lonza
Paper B
Traditional boundaries
of the firm
The role of
Intermediaries in
cross-industry
innovation
Figure 1.2: Positioning the different articles within open innovation and global R&D
internal
Knowledge
sourcing
external
Paper A
Michael Daiber
2. The role of intermediaries in
cross- industry innovation processes
Co-authored by Oliver Gassmann and Ellen Enkel
In this article we investigate the role intermediaries play in the cross-industry
innovation process. Intermediaries are external institutions that support
companies in their innovative activities. They are frequently used to bridge gaps
between different industries. Our research focuses on the question of which
capabilities an intermediary should have in order to achieve success in
initiating a cross-industry innovation. Our empirical base consists of a survey of
107 European manufacturing companies and an analysis of six collaborative
cross-industry innovation projects. The company survey is used to identify the
capabilities an intermediary should have during each of the three phases of the
innovation process. The cross-industry projects, each of which involves a Swiss
or a German industrial company and an intermediary, provide us with
analyzable data. We conclude our study by identifying three types of
intermediary: the innovation broadener, the innovation leverager, and the
innovation multiplier.
21
The role of intermediaries in cross-industry innovation processes
2.1 Introduction
A solution to one's problem can usually be found in someone else's toolbox. The
challenge is finding it. In this article we identify how intermediaries contribute
to finding innovative solutions in different fields. We also identify the skills and
expertise that an effective intermediary should have.
In the year 2000, Nike introduced a basketball shoe with small hollow columns
in its mid-soles. According to Nike, which branded the shoe "Nike Shox" the
columns of the athletic shoe absorbed the shock of a strike when the heel of a
wearer struck a surface and had the ability to "spring back" to add more power
to a runner's stride.
The thermoplastic urethane material used for the Nike Shox was originally
developed as an automotive application. Polymer specialists at the Huntsman
Corporation, a global chemical company, helped transfer the material's
application from an automotive application to a sports shoe. Huntsman acted as
intermediary to make the transfer possible.
Supported by Huntsman's polymer experts, Nike had to search, adapt, and adopt
a principle from a different industry to realize an innovative breakthrough. In
accordance with Enkel and Gassmann (2010) we define this approach as crossindustry innovation. We define the approach a company takes to realize this
kind of innovation as a cross-industry innovation process.
Cross-industry innovations are not new: Schumpeter (1934) argues that most
innovation is a recombination of existing ideas, concepts, principles and
technologies. Jaffe (1986) demonstrates through patent data that technological
spillovers from one industry to another are frequent. However, only a few firms
actively use these knowledge spillovers.
Reusing knowledge from different fields mitigates innovation costs (Langlois
1999). The question of how to best use previously created knowledge for
innovation purposes is explored in various contributions (Zander and Kogut
1995; Majchrzak, Cooper et al. 2004; Haefliger, von Krogh et al. 2008) In the
above mentioned example involving Nike and Huntsman, analogical thinking
23
Michael Daiber
enabled the transfer of a concept from one industry to another (Dahl and Moreau
2002). Even though a concept and a solution already existed elsewhere, a broad
set of capabilities was needed by the intermediary to identify a matching
solution and to adapt that solution to a new product or process.
Different terms are used in literature to describe the intermediary who performs
this function. In accordance with Howells (2006) we define the term
intermediary to be an all-inclusive term that includes a company that delivers an
innovative service to a customer in a variety of industries. The main value
proposition of an intermediary is to bridge the gap between internal and external
know-how (Burt 1992; Quinn 1999; Quinn 2000).
Besides acquiring complementary know-how, a company also aims to reduce
the time to market and the time to know-how. By doing so, it increases its
efficiency in product development and the efficiency of its external service
providers (Chiesa, Manzini et al. 2004).
Intermediaries, like technical service providers, consultants and university
institutes, do not focus on one industry. Their know-how and expertise is not
restricted by industry boundaries. As a result their expertise tends to be broader.
Additionally, these individuals and institutions hire people with diverse industry
backgrounds to constantly broaden their knowledge base. Intermediaries often
realize innovation by adapting existing ideas, principles and concepts to other
industrial ambits (Hargadon and Sutton 1997). The aim of this paper is to show
which capabilities are required by an intermediary when the job of that
intermediary is to transfer existing solutions from one industry to another by
using analogies.
2.2 Cross-industry innovation
Innovative products are, in most cases, not based on technological principles or
solutions that are new to the world (Schumpeter 1934). The use of an analogy
(as a key element of innovation) in applying one application from one industry
to a different application in another industry is discussed in several studies
(Keane 1987; Reeves and Weisberg 1994; Dahl and Moreau 2002). Analogical
24
reasoning is also seen as beneficial to corporate success (Gavetti, Levinthal et al.
2005).
Most literature on analogies focuses on describing the phenomenon from a
theoretical or psychological perspective, e.g. Keane (1987). Analogical thinking
is defined as the process of transferring information from a familiar setting to a
new setting by using creative tasks (Gentner, Rattermann et al. 1993). This
process includes recalling the structural similarities that are most valuable for
problem solving. Various creative and problem solving methods like Altshuller's
theory of inventive problem solving, with its Russian acronym TRIZ (Altshuller
1996), or synectics (Gordon 1969) rely on analogical thinking to generate
innovative ideas.
Studies of the cross-industry innovation phenomenon focus on analogical
thinking as a source of highly novel innovations (Holoyak and Thagard 1995)
with limited risks of uncertainty (de Bono 1990). The methods and tools needed
to transfer analogical solutions include the ability to adapt a process and a
competency in technology and innovation management. Herstatt and
Kalogerakis (2005) discuss possible cross-industry innovation process steps
from an analogical perspective. Gassmann and Zeschky (2008) demonstrate that
analogical thinking across industry boundaries can be used for product
innovation at the organizational level. Within this article we focus on outside-in
cross-industry innovation (Enkel and Gassmann 2010) and the search by
companies for solutions in industries that differ from their own.
Absorptive capacity is defined as "the ability to recognize the value of new,
external knowledge, assimilate it, and apply it to commercial ends" (Cohen and
Levinthal 1990). Thus, successful cross-industry innovation requires a company
to be able to exhibit an absorptive capacity from different ambits. In order to
take advantage of spillovers from different industries, a company has to acquire,
assimilate, transform, and exploit external knowledge (Zahra and George 2002).
Here, intermediaries play an important role as knowledge broker.
25
Michael Daiber
2.3 Intermediaries in innovation
The advantages and disadvantages of outsourcing knowledge-based services and
innovation activities have been discussed in various scientific contributions
(Chatterji 1996; Quinn 1999; Kessler, Bierly et al. 2000; Quinn 2000; Love and
Roper 2002). Chiesa et al. (2004) identified accessing specialist talent, sharing
risks, increasing speed, increasing technological innovation, reducing, sharing,
minimizing cost and rapid access to proven technology as the main drivers for
sourcing innovation activities externally.
However, the phenomenon of outsourcing innovation (Howells, Gagliardi et al.
2008) and knowledge-intensive technical services (Tether and Hipp 2002) has
become more important in recent years, a trend amplified by open innovation,
which has gained relevance among practitioners and academics (see
Chesbrough, 2003, but also the special issues in R&D Management in 2006,
2009, and 2010). According to Tether and Tajar (2008) with more open
approaches to innovation, deeper commitments to innovation, and greater social
capital, companies rely more on external specialist knowledge providers.
From a social capital point of view, specialist knowledge providers and
intermediaries in innovation fill structural holes between different groups and
can build a bridge for knowledge (Burt 1992). Due to their position as between
different markets such organizations are highly qualified to realize crossindustry innovation. Up to now a broad body of knowledge has described the
activities of intermediaries in innovation. Howells (2006) provides an overview
of the literature on this topic.
Research on knowledge management (Nonaka and Takeuchi 1995) has drawn
more attention to the topic of intermediaries in innovation. Long term
knowledge re-use and transfer have been analyzed in knowledge-intensive firms
that specialize in innovation (Alvesson 1993). Different papers apply a process
view on the tasks intermediaries perform (Hargadon and Sutton 2000; Semadeni
2000). In all these articles the contribution of intermediaries in the innovation
process is the management and re-use of existing knowledge and ideas.
An intermediary needs different capabilities to be able to transfer knowledge to
a customer (Bessant and Rush 1995), and specific skills (Dunford 2000) that
26
include diagnostic capacities which are often neglected when analyzing the
transfer of knowledge.
The technology transfer from intermediaries or consultants is a time-based
process involving several stages and multiple actors playing different roles
(Bessant and Rush 1995). These roles include: (1) direct knowledge transfer, (2)
experience sharing, (3) network providing and (4) a diagnostic role, which
comprises of helping companies articulate and define their innovation needs.
The extent to which an intermediary plays different roles differs from case to
case. What is missing is the analysis of how these intermediaries enable an
innovation through a cross-industry innovation process and which skills are
expected by their customers.
2.4 Research Methodology
In order to address this research question we chose a three-phase research
strategy:
a) In order to identify how innovation projects, including intermediaries, were
structured, we performed interviews with representatives of four Germany and
Switzerland-based intermediaries. Two were from large and established
companies founded more than 20 years ago, and two were from small start-up
companies founded two to five years ago. In a case study approach we analyzed
five to ten of the firm's customer projects in order to identify the major phases of
cooperation and the knowledge transferred from intermediary to customer.
b) Based on the results we described a simplified innovation process for cross
industry-innovation with three main steps: abstraction, analogy, and adaption.
We designed a survey in which the respondents could describe their past
experience and future expectations regarding intermediaries in the innovation
process.
We tested this survey with ten manufacturing companies selected at random. We
adapted the survey based on the feedback from the companies, and added
examples to explain the kind of capabilities and demands we wanted to assess.
We then sent the online survey to 400 of the companies' past and potential
27
Michael Daiber
customers. In order to eliminate current project partners and remove duplicates
we culled a database provided to us by the intermediaries.
The 400 companies included manufacturing concerns in German-speaking
Europe (Switzerland, Germany, Austria, and Liechtenstein). We followed up the
initial distribution with two electronic reminders. We obtained 107 valid
answers from chief technical officers, chief executive officers, research and
development managers and innovation managers, a response rate of
approximately 25%. The response rate of past customers was higher (80%) than
the response rate of potential future customers (20%).
The final survey consisted of graphically-supported open questions and
examples of customer-intermediary relationships were used to illustrate the
questions. The phases of the innovation process were denoted by arrows and
contained knowledge activities. The questions addressed the companies'
expectations towards intermediaries in past projects as well as for future projects
during the different phases of the innovation process (abstraction, analogy, and
Table 2.1: Structure for content analysis
Category
Sub Category
Diagnostic competence
Knowledge
"analyze the company", "external view",
"identify internal competences", "analyze
requirements", …
Methods
"method",
"tools"
methods
explicitly
mentioned, e.g. patent analysis, creativity
techniques,…
Technology
"technological support", technology explicitly
mentioned,…
Network competences
Experience
28
Exemplary Statements
"network",
"identify partners",
knowledge providers",…
"identify
Intellectual
"patent situation", "technical risks", …
property
management, risk
management
Coaching
"integrate technology in
"teaching",
"coaching
developers",…
our company",
of
internal
Implementation
"product development"; "industrialization",…
adaption). The questions also sought to quantify company willingness to
cooperate with externals in different sub-processes of innovation, research and
development. They also queried the main barriers for collaboration with
externals. The main result consisted of a table containing qualitative answers
regarding the skills and capabilities customers expected from intermediaries
within innovation projects.
To analyze the answers, we used a content analysis framework. We deductively
developed a system of categories for both customer expectations and
intermediary roles, based on Bessant and Rush's (1995) categorization, and,
inductively, based on the pre-test's and the survey's results, cf. table 2.1. The
inductive component reflects the explorative nature of the study.
c) As access to knowledge from different sectors was described as a main
objective to include externals into the innovation process and different sets of
capabilities were expected from intermediaries we decided to conduct case
studies to deepen our knowledge on how intermediaries contribute to the
innovation process (Eisenhardt 1989). We identified the cases from both the first
interviews with intermediaries and the survey results and addressed only
customers that clearly described that analogies from other industries had
contributed to innovation in a past project. We contacted 20 companies to obtain
a richer data base and to increase external validity. Six of them agreed to a
detailed analysis of their projects. We performed interviews with representatives
of both the industrial companies and the respective intermediary. The interviews
(3-5 per project with a duration of 45 to 90 minutes each) were tape recorded
and transcribed. The interviews targeted the customers' expectations in the
different phases of the project as well as the different activities and capabilities
the intermediary used to identify and adapt cross-industry knowledge.
Additionally, we analyzed both internal documents of the companies and the
intermediary including presentations, specification lists, product descriptions,
early and late stage prototype descriptions, documentation of the different
approaches to adapt analogous solutions, etc. as well as minutes from their
mutual meetings. This contributed to an increase in the construct validity
through multiple sources of evidence (Patton 1987; Yin 2003).
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Michael Daiber
By analyzing the six case studies we were able to link different capabilities of
intermediaries to different approaches they took to cross-industry innovation.
We linked these different approaches to capabilities required in cross-industry
innovation projects. Three archetypes of intermediaries emerged from the case
studies. We discussed these archetypes and validated them together with the four
intermediaries we interviewed at the beginning of the project.
2.5 Survey results
Company executives were asked about their past experiences with and future
expectations of intermediaries in innovation. Respondents represented a variety
of industries. Those in the machinery tools, medical devices and plant
construction industries generated the greatest number of responses, 15- 20 %
each.
Within the survey approximately 80% of the companies said they relied on
external intermediaries for product development. In other innovation related
business processes such as technology management (40%) idea management
(30%), portfolio management (approximately 15%) companies relied less on
external intermediaries. In general, companies demonstrated experience
collaborating with intermediaries for innovation purposes.
In cross-industry innovation, companies said they relied "less" on external help
for identifying their requirements and adapting them to their concept. They
relied "more" on external help during the analogy phase. Twelve respondents
explicitly stated they would not integrate externals for the first phases of the
innovation process (abstraction), e.g. "This has to be realized internally", "We
know best about our requirements". Seven refused to integrate intermediaries
when adapting solutions to their own industry. One respondent refused to
integrate externals in the analogy phase.
During the abstraction phase of cross-industry innovation most customers expect
an external diagnostic view of a company's technological competences and
problems. Respondents demonstrated this opinion in statements like "identify
problems and potentials in the area of sensors", "We need support in
requirement engineering, a broader and (a) more general view outside our
30
company's horizons" as well as "identify all requirements and transfer them into
a standardized form". Respondents said they felt that an effective intermediary
should be able to apply method knowledge in order to identify the company's
competences in a more abstract way.
In the analogy phase, potential customers said they most expected an
intermediary to have know-how, specifically technical know-how. Customers
also wanted an intermediary to have access to a network (sic): "identify potential
partners" and, to a lesser extent, to access the intermediary's methodological
competencies. More than one respondent who self-identified as a potential
customer said he desired any prospective intermediary to be able to "perform a
morphological patents research".
When adopting solutions from other industrial ambits, customers mainly rely on
external service providers to share their experience in product development and
industrialization and, thus, to reduce risks. The intermediary is expected to
integrate the new technology into the customer's company through product
development support and coaching, or even by implementing the solution
himself. Respondents said they also wanted an intermediary to have experience
with legal or intellectual property rights issues so that the intermediary could
minimize their legal exposure.
Diagnostic Competence
Method Know-how
Technical Know-how
Abstraction
Technical Know-how
Networking
Analogy
Method Know-how
Implementation/ Product Development
Coaching
Intellectual Property/ Legal Know-how
Adaption
0
20
40
60
80
Number of Respondents
Figure 2.1: Expectations towards intermediaries in cross-industry innovation
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Michael Daiber
2.6 In-depth cases studies
Based on the different expectations companies have towards intermediaries in
cross-industry innovation projects we wanted to understand which type of
capabilities companies require to meet their expectations and how these
capabilities are used and combined by intermediaries in cross-industry
innovation projects. But based on the survey results we could not derive valid
statements as to how these expectations match with the capabilities required by
the intermediaries (especially how intermediaries combine these capabilities and
apply them in cross-industry innovation projects). We thus analyzed six projects
in depth involving different intermediaries. Table 2.2 provides an overview of
the companies involved and the industries from which the technological
spillovers were realized.
Table 2.2: In-depth Case Studies
Case
Company
Origin of technology
Destination of technology
1
Geberit
Power plants
Civil construction
2
Bernina
IT hardware
Home appliances
3
Nespresso
Laboratory equipment
Home appliances
4
Mammut
Food packaging
Outdoor clothing
5
BMW
IT hardware
Automotive
6
Ulrich Alber
Automotive
Medical technology
Case 1: Geberit
Geberit, a globally-known producer of sanitary equipment, was facing high
costs. To facilitate its planning and to reduce costs, it assigned ALPHACO, a
Switzerland-based technology consultancy, the task of designing an IT-based
planning tool. In its first phase, ALPHACO rewrote Gerberit's technical
requirements. They reconfigured Gerberit's original expectations to be more
abstract so that the requirements were based on technical principles.
In redesigning Gerberit's requirements ALPHACO engineers discovered there
were analogies to a earlier project they had executed for Alstom, a power plant
producer: power station tube designs planning was similar to building water
32
supply tube design. ALPHACO investigated how they could reutilize the
planning tool they designed for the previous project. Although Geberit and
Alstom operated in completely different industries, the reapplication of existing
knowledge created negligible conflicts.
ALPHACO adapted its planning tool to the dimensions and requirements of
Geberit's building technologies and sanitary equipment. This required a certain
planning effort, but reutilization of existing concepts enabled both ALPHACO
and Geberit to save time and money in the development of an adequate planning
tool.
Case 2: Bernina
Sewing machine producer Bernina had a problem: the speed of material
displacement was different from the speed of the sewing foot. The result was
inconsistent stitch lengths and spaces. When trying to synchronize material
displacement speed and the speed of the sewing foot Bernina had to overcome
the difficulty of how to gauge the displacement of the sewing foot with high
precision. As gauging was not within Bernina's competence, the company hired
BETACO, a technical consultancy based in Switzerland, to be their external
expert.
When BETACO engineers described Bernina's requirements in technical terms
they realized their challenge was structurally similar to a computer hardware
problem. Based on technical knowledge acquired in previous projects, they
solved the problem with a sensor that was based on the same technology as an
optical computer mouse. Through their technical expertise and experience in
similar projects, BETACO contributed to the adaptation of the mouse sensor
chip so that it recognizes even dark fabrics.
Case 3: Nespresso
With its successful capsule system Nespresso has, in recent years, become one
of the most renowned brands of home coffee makers. This occurred as espressobased coffee drinks such as cappuccino and latte macchiato gain in global
popularity. Espresso-based coffee drinks required milk froth. Commercial coffee
machines were equipped to froth milk but home espresso machines required a
separate device. Existing milk frothers, however, were often difficult to clean as
33
Michael Daiber
parts of the device were hidden behind a spiral coil. To provide its customers
with a milk frother that was easy to use and easy to clean Nespresso cooperated
with GAMMACO.
Nespresso's requirements were analyzed by GAMMACO engineers.
GAMMACO reformulated the requirements in a more abstract way in technical
terms, based on physical principles. Though they questioned the existing
concepts for milk frothing, GAMMACO decided to stick to the principle of a
stirrer performing a rotational movement. The mechanics of the stirring motion,
however, was realized in a different way. Based on his previous professional and
academic experience a GAMMACO employee found an analogous solution in
the area of laboratory devices.
To mix liquids, magnetic stirrers are used in chemical labs. The stirrer is driven
through a rotating magnet outside the vase. The rotational movement and torque
is transmitted without physical contact based on magnetic principles. The stirrer
can easily be removed and does not need a sophisticatedly shaped - and thus
difficult to rinse - connection.
To adapt this principle to milk frothing, the technical feasibility and avoidance
of technical risks was of great importance. GAMMACO used Computational
Fluid Dynamics software to simulate the temperature profile and fluid velocity
over time. The challenge was to solidify the milk froth in a relatively short
amount of time so as to avoid milk scotches that can occur when milk is heating
and frothing. GAMMACO developed and built the first prototypes and
supported the producer at the start of the production process. The Nespresso
Aeroccino has since been successfully introduced into the market. Crossindustry innovation reduced the time required for development.
Case 4: Mammut
Mammut, a Swiss producer of mountaineering equipment and outdoor clothing,
was looking for new concepts. They wanted a substitute for principles used to
close outdoor jackets. As internally no real breakthrough solution was found
Mammut decided to cooperate with DELTACO, a virtual innovation platform
based in Switzerland. DELTACO provided Mammut with an Internet platform
and a community of independent innovators with different professional and
34
personal backgrounds. In cooperation with experts from DELTACO, Mammut
engineers formulated the following question for the community: "Which
technical solution can substitute a zip fastener." The best ideas were to receive a
monetary prize of 4000 Swiss Francs. Over a period of four weeks nearly 100
ideas were collected.
The best solution was submitted by an engineering student in Germany who
proposed adapting the closing mechanism of freezer bags. This submitter was
invited to participate in the concept phase with Mammut. A group of external
experts around the submitter outlined a 90 page concept with a patent expert and
tested the new type of fastener against humidity. As the results of the team were
promising, Mammut decided to build a prototype which is now being subjected
to acceptance tests with potential customers.
Case 5: BMW
When, in 2001, the car producer BMW was designing a novel control system,
the iDrive, for its new 7 series, they discovered a new use for an old technology
from a completely different industrial ambit. Four years earlier while searching
for new technological opportunities, BMW's technology scouts cooperated with
the American knowledge broker EPSICO to look for a new kind of manmachine interface to improve design and ergonomics inside the car.
EPSICO identified the requirements BMW had for controlling secondary
vehicle systems. These included reducing complexity and reducing the number
of elements. EPSICO found analogous requirements in the computer games
industry. EPSICO hence created a link between BMW and Immersion a hightechnology company specialized in haptical interfaces for computer game
controlling.
BMW and Immersion adapted the concept without EPSICO's support. In a later
step BMW contacted different automotive suppliers like the Japanese company
ALPS for industrialization and series production for the iDrive. ALPS was
chosen for its joystick technology and SHARP for its screen technology.
Meanwhile, Harman/Becker was tapped to develop the computing unit for the
iDrive.
35
Michael Daiber
Case 6 Ulrich Alber
Ulrich Alber GmbH is a German producer of mobility aids for seniors and
people with walking disabilities. During its search for a new concept for electric
wheelchairs Ulrich Alber wanted to design a wheelchair that could traverse
difficult ground like dirt tracks, curbs or cobbled pavement with the highest
levels of comfort, design and security. The wheelchair they wanted to build
would also be transportable in a medium-sized car. Knowing that the
competencies needed to perform these requirements were extant within the
automotive industry Ulrich Alber asked ZETACO, an engineering provider
closely linked to a well reputed car manufacturer, to design the wheelchair's
chassis.
ZETACO engineers studied how to adapt chassis technologies from car
industries to wheelchairs. At the start of the product development phase one
employee of the service provider worked full time at Ulrich Alber's facilities. He
contributed his and ZETACO's specific knowledge in chassis technologies to the
development and tool manufacturing of the final product. To reach the above
mentioned expectations, Ulrich Alber and ZETACO designed a wheelchair with
independent wheel suspension and hydraulic dampers and various other
elements known from the automotive industry.
While adapting the functional principles for car chassis to the needs of
wheelchair, ZETACO relied on its deep knowledge and experience as well as on
specialized resources like nonlinear finite element modeling software. This new
wheelchair concept successfully entered the market and won the German 'Red
Dot' design award in the category 'Best of the Best'. It was one of 33 products
from 1678 that participated in this competition.
2.7 Analysis and discussion
As can be seen in all the above cases, innovation through a structured crossindustry innovation process can realize innovative solutions or new products
based on analogies. Interviewees agreed that through finding analogies to the
36
Table 2.3: Cross-case analysis in three cross-industry innovation phases
Geberit //
ALPHACO
Abstraction
Analogy
Adaptation
Analysis of customer's needs,
reference to underlying
technical needs
combined with basic
technical know-how
Technical knowledge from
previous projects
Feasibility analysis and Implementation
Technical know-how
Experience and resources in product
development
Recognition of customer's
needs and reformulation of
specifications in more general
terms
Technical knowledge from
previous projects
Feasibility analysis and implementation and
teaching new technological approach to the
company
Technical know-how
Experience and resources in product
development , Coaching in new technology
Observations
Reformulation of specifications
in more general terms
Feasibility analysis , simulation, testing and
implementation
Capabilities required
Technical know-how based on
divergent academic background
of intermediate's employees
Technical know-how
Observations
Formulation of specifications
and of the question for the
'crowdsourcing' challenge in
cooperation with the customer
Analogy found within the
community through
'crowdsourcing' method
Concept and prototype is created in direct
cooperation between idea submitter and
Mammut, intermediary serves as a platform
Network and Method
-
Observations
Reformulation of technological
requirements
Further development tasks performed in
cooperation with technology provider.
Identification of external experts
with analogous requirements and
technological competences
Network
Observations
Identification of customer
requirements
Cooperation with customers in technology
development, product development and
industrialization
Analogical step towards
automotive industry already taken
by customer, detail know-how in
this field required by intermediary
Technical know-how
Observations
Bernina//
BETACO
Observations
Nespresso//
GAMMACO
Mammut//
DELTACO
BMW//
EPSICO
Ulrich
Alber//
ZETACO
Experience in product development
-
Technical know-how, Experience/resources
in prod. dev and industrialization
37
Collaboration and coordination in global R&D of MNC: The role of product architecture
Case
Michael Daiber
challenges faced by other industries innovative solutions can be realized more
quickly than expected. The intermediaries' contribution within the different
phases of cross-industry innovation is illustrated in table 2.3.
The evidence from these case studies generally confirms to the survey results
regarding the capabilities expected in the different phases of cross-industry
innovation. All cases of the above sample confirm the importance of diagnostic
capacities in the abstraction phase. The expertise in intellectual property or legal
matters required by potential customers is not visible within the cases. Such
challenges necessitate the skills of different service firms commonly utilized by
firms confronted with intellectual property questions.
From the case studies three groups of intermediaries can be identified, each of
which makes use of their specific set of capabilities in different ways. The first
group of intermediaries, the Innovation multipliers (i.e. ZETACO) are
characterized by multiplying their technological specialization into different
technological ambits. The second group, the Innovation leveragers (i.e.
ALPHACO, BETACO, and GAMMACO) contribute to cross-industry projects
by applying methodological, technical and leverage knowledge from previous
projects. The third group, the Innovation broadeners (i.e. DELTACO, EPSICO),
mainly combine methodological capabilities and networking skills to identify an
optimal target.
(1) Innovation multipliers usually have strong technology skills and are often
backed by technological research and development performed in-house. Their
main activities lie within this technological specialization. Their cross-industry
innovation activities consist of transferring innovative approaches from their
area of specialization into other ambits. The main customers of Porsche
Engineering, for example, are in the automotive sector. Porsche's technical
expertise is in areas related to the automotive industry like drive train, chassis,
engines, styling, and production. They act as an innovation multiplier when
transferring technological solutions to industries like marine technology,
agricultural machines or medical devices. Applied research organizations like
the Fraunhofer Institute or IBM Research, which have customers in different
industries, can be categorized as innovation multipliers as well. Similar concepts
of knowledge transfer can be found in literature describing host organizations
38
responsible for transferring technology, e.g. in Shohet and Prevezer (1996). This
literature however does not describe the transfer of technology across industry
boundaries.
Innovation multipliers rely on their technological know-how and experience in
all three phases of the cross-industry innovation process. Their contribution to
the adaption phase is the strongest of all the three groups. As they are normally
active in a completely different industrial ambit, innovation multipliers need
collaboration from their customers during the abstraction and analogy phase.
Analogical thinking is already required by their customers to approach them as
potential partner.
(2) Innovation leveragers usually have areas of technological specialization.
They build up competences in different ambits through project work and by
hiring employees with diverse technological skills. They also rely on strong
methodological skills to find and transfer solutions from one industrial ambit to
another. Zühlke Engineering, a Swiss technical service provider has acquired
technological expertise in various fields including software solutions, digital
engineering, and plastics technology. The acquired knowhow and experience is
leveraged to projects in different industrial ambits ranging from the automotive
industry to life science, telecommunication, insurance and trade. Other technical
consulting companies like Helbling or Altran can also be classified as
Innovation leveragers. With their broad expertise in different fields, they
function as knowledge brokers as Hargadon and Sutton (1997) describe them by
recombining their repository of knowledge to arrive at new solutions.
Besides their strong diagnostic skills, Innovation leveragers rely on the
technological background and experience of their employees. Analogies are
found by the Innovation leverager within the range of experiences from
previous projects and personal affiliations. Due to their experience in product
development, testing, and coaching, an Innovation leverager can play a similar
role as an Innovation multiplier in adapting the innovative concept to the new
industry.
(3) Innovation broadeners normally lack strong internal technology skills but
rely on their method knowledge and their network to realize a cross-industry
innovation. The class of this group of intermediaries includes virtual knowledge
39
Michael Daiber
brokers and method-based innovation consultants (Verona and Prandelli 2006).
As described by Sieg et al. (2010) InnoCentive, the leading virtual open
innovation platform, provides an Internet-based method of realizing innovations
where innovators are not employees but part of InnoCentive's network and
community. The Israeli innovation consultancy SIT, for example, performs its
own research in creativity methods and employs people with a large variety of
backgrounds. SIT relies on their clients' industry-specific or technical
knowledge. Relying on a broad network of experts, the Innovation broadener
can realize analogies from distant industrial ambits. They are therefore the best
in overcoming a local search bias (Rosenkopf and Almeida 2003).
Innovation broadeners have their strengths in the abstraction and analogy phase
during which they apply their methodological know how while relying on a
network of external technology experts. Innovation broadeners often have no
technical specialization and hence cannot contribute to the adaption phase to the
same extent as the two other groups.
2.8 Conclusions
Our paper expands the existing literature body on intermediaries in innovation in
the following way: Technology spillovers from one industry to the other, a topic
that has mainly been analyzed from an economic perspective (Jaffe 1986), has
been investigated on a company level. The roles played by intermediaries in
different phases of innovations through analogies are described in-depth.
Furthermore, three different types of intermediaries can be defined in a crossindustry innovation context.
These three types of intermediaries have different approaches to realizing
breakthroughs through analogies. They also have different capabilities and
different strengths that enable them to realize cross-industry innovation:
Whereas an Innovation broadener is able to realize an innovative idea from a
very distant context, the role of Innovation broadener in the adaption or
implementation phase remains minor. An Innovation leverager can realize
innovation by applying an analogy within its field of corporate experience or
within its employee's personal background. The Innovation leverager also has
40
certain implementation capacities. The Innovation multiplier acts within a
narrower technological field of expertise but can lead innovation projects further
into the adaption phase.
The Innovation broadener and the Innovation leverager contribute significantly
during the analogy phase because they have a broad network or a broad
technological know-how. The Innovation multiplier relies on its customers to
identify analogies from another industrial ambit. Its notoriety is often limited to
another area of expertise.
From an absorptive capacity (Cohen and Levinthal 1990) point of view the
Innovation broadener facilitates knowledge acquisition and adaption (Zahra and
George 2002) even from distant industrial ambits. The Innovation multiplier has
its strength in supporting companies in transformation of knowledge into an
industrial ambit. The Innovation leverager contributes to three phases of
innovation (knowledge acquisition, knowledge adoption, knowledge
transformation).
Depending on which phase a company wants support, the different types of
intermediaries are the best option to realize a breakthrough innovation based on
existing principles from different industries.
After identifying the different approaches of intermediaries who transfer
knowledge and technological principles from one industry into the other we
have determined that further research is needed on the phenomenon of crossindustry innovation as well as on the role intermediaries play.
We analyzed six case studies in which innovations were achieved by use of
analogies from a variety of industries. Intermediaries searched for solutions in
industrial ambits and found them. But a longitudinal analysis of projects that
were started with the intention of finding solutions through analogies would
permit a researcher to analyze failed 'cross-industry innovation projects'. This
might help reveal the shortcomings of cross-industry innovation.
Moreover, larger empirical samples need to be made to investigate this topic and
to validate the three archetypes. One possible approach would be to screen
patents to which intermediaries have contributed for references to the state of the
art in other industries.
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Michael Daiber
Open innovation is an ongoing debate, but insights into the specific potential of
cross-industry innovation at the company level continue to be limited. Our work
tried to contribute to a better understanding of the phenomenon and concept of
the intermediary in cross-industry innovation. However, a better theory of the
determinants, enablers and barriers of intermediaries in cross-industry
innovation as well as in open innovation processes in a larger sense is needed.
The need for a researchable theory on open innovation as a whole new
innovation model is obvious, see also Enkel, Gassmann et al. (2009) and
Gassmann, Enkel et al (2010). The bridges from one phase to the other are not
well understood: What is needed? When to change? What roles do
intermediaries play in these discontinuous episodes of phase changing? Most
probably the existing stage-gate approaches (Cooper 1986) or probe and learn
processes (Lynn, Morone et al. 1996) are not sophisticated enough to explain the
new division of labor in the knowledge creating and transforming processes. A
new innovation process model is needed in which the external knowledge
intermediary plays a greater role than today.
For the technical services new challenges of the globalized and open innovation
process are always arising. On one hand, the opening up of innovation provides
many opportunities. On the other hand it faces highly educated customers who
are opening up their own processes. External knowledge and experience is no
longer an exclusive key asset of an intermediary. As competition increases the
need for clear differentiation strategies will become more and more obvious.
As the rate of exportation and importation of knowledge based services
increases, the impact of cultural differences on the role intermediaries play in
cross-industry innovation should be investigated within in a global context. The
acceptance of an intermediary by a customer, especially by the research and
development team of a customer, is context-specific. In a country with a strong
outsourcing culture and a high division of labor the highly externally-leveraged
process of knowledge creation might find better acceptance. Overall, research
and development stays no longer a national treasure at home as Patel and Pavitt
(1991) stated. Research on opening up innovation processes and the new roles of
intermediaries within open innovation have just begun, so there are many
questions for researchers to answer.
42
3. Organizing ambidextrous corporate
venturing:
The case of Lonza.
Co-authored by Marco Zeschky and Oliver Gassmann
Corporate venturing (CV) is a widely applied instrument to spur breakthrough
innovation and to create new business opportunities in the firm. While the
different types and roles of CVs, their organizational relationship to the parent
company, and their specific challenges and advantages have been well
documented in literature, there is little empirical insight in how corporate
venturing must be organized in order for the entire firm to become
ambidextrous, i.e. to achieve a balance between the development of incremental
and breakthrough innovation. In this paper, we analyze how the CV initiative of
Lonza, a Swiss life science company, is organized to achieve a balance between
both types of innovation activities. Based on the insights, we find that projects
conducted under the CV umbrella must have a technological relatedness to the
existing technological competencies of the established organization in order to
successfully develop breakthrough innovation. The findings have implications
for management practice and for existing research on organizational
ambidexterity.
43
.
Organizing ambidextrous corporate venturing: The case of Lonza
3.1 Introduction
Corporate venturing is a widely applied instrument in large firms to spur
breakthrough innovation and to create new business opportunities in the firm.
Large, mature firms often use CV as an instrument to break away from the
organizational constraints inhibiting the development of breakthrough
innovation (Ford, Garnsey et al. 2010). CV involves entrepreneurial efforts in
which established business organizations invest in or create new businesses that
are characterized by high uncertainty regarding their outcome (Block and
MacMillan 1995; Sharma and Chrisman 1999). Examples of firms which have
successfully employed CV to create new businesses include Philips' 'Future
Technology Incubator', Nokia's venture organization, Siemens' 'Technology
Accelerator', or Lucent's 'New Ventures' (Becker and Gassmann 2006). In the
case of Lucent, the CV's goal was to leverage non-core technologies which did
not fit with the firm's strategic goals to external parties. The advantages most
often associated with CV are their ability to act independently of day-to-day
business requirements, to pursue risky tasks, and to operate on a budget
specifically designed for these tasks.
While CV has primarily been associated with the creation of new businesses to
increase profitability and spur growth it has more recently also been recognized
as a vehicle through which indirect benefits such as the creation of new
capabilities can be achieved (Fang, Lee et al. 2009; Keil, McGrath et al. 2009).
For example, the investigation of how and where an emerging technology can be
beneficially used and the subsequent development of a new business increases
the know-how base of the firm and enhances organizational learning. Put
differently, the development of new capabilities is important for the firm as it
enables it to adapt to changing external environments and to adjust corporate
strategies (Burgelman 1991; March 1991; Levinthal 1997). However, while
developing new capabilities is inherently valuable, a one-sided focus on
breakthrough innovation and on developing new technological capabilities
exclusively is also detrimental for the firm in the long run. Rather, firms must
also foster their day-to-day innovation activities and thereby maintain a healthy
balance between their short-term and breakthrough innovation activities (Rivkin
45
Michael Daiber
and Siggelkow 2003; Auh and Menguc 2005). Research found that exploration,
i.e. the creation of new businesses and breakthrough innovation, and
exploitation, i.e. the development of short-term innovation such as incremental
product improvements, in a combined fashion not only warrants the
breakthrough survival of the firm but even leads to higher firm performance
(March 1991; Tushman and O'Reilly III 1996; Gibson and Birkinshaw 2004).
Therefore, firms are challenged to find a sound balance between their
exploitative innovation activities of the established organization and their
exploratory innovation activities of the CV unit.
Despite the potential of CVs for enabling and pursuing breakthrough innovation
and thereby creating new technological capabilities, there is – to the best of our
knowledge – no empirical insight in how exactly the CV's organizational
implementation and operational procedures influence the way how the firm as a
whole is able to pursue both short- and breakthrough innovation in a balanced
way (Hill and Birkinshaw 2008; Burgers, Jansen et al. 2009). This article aims
to address this shortcoming by illustrating how the life science company Lonza
successfully engages in CV to create both types of innovation. The case
describes Lonza's CV initiative named LIFT (Lonza Innovation for Future
Technologies) from its inception in 2007 to the present day and provides rich
insights in its organization and the way how exploratory and exploitative
innovations are balanced. The article is structured as follows. In the next section,
we review the literature on tensions between exploration and exploitation and
the role that CV plays in overcoming these tensions. Then, after outlining the
methodological approach to the study, we illustrate the case of Lonza and how
its CV unit in accord with the established organization operates to maintain a
balance between both innovation activities. We then discuss the circumstances
and conditions under which Lonza's approach is effective and successful. We
conclude with implications for existing literature and managerial implications.
46
3.2 Literature review
3.2.1 Challenges of managing short and breakthrough innovation
The simultaneous pursuit of short- (incremental) and long- (breakthrough) term
innovation is a persisting challenge for many large firms. A tension exists
because in contrast to short-term innovations such as product improvements or
design changes, the outcome of breakthrough innovations is often highly
uncertain (March 1991; Rosenkopf and Nerkar 2001; Benner and Tushman
2003; Gupta, Smith et al. 2006). Organizational learning literature argues that
the exploration of new technologies and markets is a vital precondition for the
development of breakthrough innovation. In contrast, the exploitation of existing
competencies typically leads to the development of incremental innovation.
March (1991) defined exploration to include "things captured by terms such as
search, variation, risk taking, experimentation, play, flexibility, discovery,
innovation", while he defined exploitation to include things like "refinement,
choice, production, efficiency, selection, implementation, execution". Similarly,
it has been argued that exploitative innovations involve "improvements in
existing components and architectures which build on the existing technological
trajectory" while exploratory innovations involve "a shift to a different
technological trajectory" (Benner and Tushman 2002). Typically, incremental
innovations ensure short-term profit while breakthrough innovations secure the
long-term survival of the firm.
Firms usually prefer the pursuit of incremental innovation activities whose
outcome is readily predictable, resulting in a crowding out of breakthrough
innovation activities. This is particularly true in the case where exploitative
activities such as everyday engineering and development compete for the same
(scarce) resources as the exploratory unit which focuses on new technology and
business development. Competition for the same resources entails the
assumption that exploration and exploitation form a continuum rather than being
orthogonal to each other (Gupta, Smith et al. 2006). In the orthogonal case
(Baum, Li et al. 2000; Rothaermel 2001), exploratory and exploitative activities
are sponsored by different budgets which facilitates the proper and simultaneous
pursuit of both activities. In any case, it is widely accepted that the balanced
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Michael Daiber
pursuit of short- and breakthrough innovations leads to increased competitive
advantage (Rivkin and Siggelkow 2003; Gupta, Smith et al. 2006). To enable a
simultaneous pursuit, literature has proposed structural separation in terms of
separate processes (Benner and Tushman 2002), loosely coordinated yet
organizationally separated subunits (Duncan 1976; O'Reilly III and Tushman
2004), and new ventures that concentrate on exploring new technologies while
the parent firm continues meeting existing customer demands (Wadhwa and
Kotha 2006). Therefore, corporate venturing represents a promising vehicle
through which new technologies can be explored and breakthrough innovations
be generated. Still, even if CV structures are in place, the firm as a whole must
ensure that resources are not invested at the expense of either one of the
activities but it must ensure a sound balance between the breakthrough activities
of the CV program and the day-to-day innovation activities of the established
R&D organization.
3.2.2 Roles and organization of corporate venturing
The corporate venturing literature proposes that CV can have different strategic
roles and organizational forms. A major distinction refers to the locus of where
CV is effectively pursued. External CV refers to activities that result in the
creation of an autonomous unit which resides outside of the firm, while internal
CV activities result in organizational units which reside inside the firm
(Ginsberg and Hay 1994; Sharma and Chrisman 1999). A common trait of all
types of CV is that it is organized in an autonomous fashion where the CV unit
operates independently and physically separated of the rest of the organization.
The goal of this approach is to stimulate an environment conducive to the
development of breakthrough innovation and new businesses while suppressing
the often urgent demands of everyday business. Despite this, the CV unit is
typically controlled by the parent firm which is responsible for investing in new
business opportunities and for safeguarding the breakthrough competitiveness of
the entire firm (Block and MacMillan 1995; Hill and Birkinshaw 2008). This
also includes budget constraints which are imposed on the CV unit by the parent
firm. According to where the business opportunity emerges and what strategic
role the CV unit plays in pursuing this opportunity, CV units can furthermore be
48
categorized as being internal explorers, external explorers, internal exploiters, or
external exploiters (Hill and Birkinshaw 2008).
CV units which act as internal explorers adopt new opportunities which emerge
inside the firm and grow them so they become real business opportunities over
time. As such, they often serve as incubators for early technology developments
or for exploring new business opportunities (Becker and Gassmann 2006).
Internal exploiters use spare internal resources which the firm is unable to use
otherwise and exploit their potential by leveraging them externally (Campbell,
Birkinshaw et al. 2003). A recent trend where internal exploitation can be
observed is the external commercialization of non-core patents to generate
additional revenues (Lichtenthaler 2005). CV units which act as external
explorers try to profit from opportunities which arise outside of the firm and
which may exceed internal competencies. Often, such units invest in small
businesses or entrepreneurs who are expected to grow the opportunity which
ultimately is of strategic benefit for the firm (Hill and Birkinshaw 2008).
External exploiters, finally, are CV units whose purpose is to invest in external
companies with the primary goal of gaining financial returns (Chesbrough
2002). Rather than nurturing the external company and to acquire new
capabilities, the focus is to leverage internal assets such as industry know-how
or brand name to capture opportunities which would not be possible without
them.
3.3 Methods
3.3.1 Research design and case selection
Extant management literature offers little empirical evidence pertaining to how
CV units are organized in order to achieve a balance between short- and
breakthrough innovation. Due to this and due to the limited understanding of the
interaction between the strategies of the CV unit and the established business
organization we employ a qualitative research design consisting of case study
research. Case study research allows the investigator to obtain deep insights in
the environment in which the phenomenon is occurring and enables her to
discover causal relationships between attributes which could not be detected by
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Michael Daiber
quantitative surveys (Yin 2003; Siggelkow 2007). The in-depth insights then
allow the researcher to build testable propositions (Eisenhardt 1989). The Lonza
case offers high learning potential as Lonza's ability to balance short- and
breakthrough innovation is largely based on mechanisms other than those known
from extant research.
3.3.2 Data collection
We conducted our research throughout the entire implementation process of
Lonza's CV unit which allowed us to analyze the evolution of the organizational
implementation in a longitudinal way. The data was gathered mainly through
semi-structured interviews in the period between 2007 and 2011. These were
complemented by internal documents and participation in internal meetings in
which we kept a purely passive presence. In total we performed 43 interviews
(lasting from 20 to 90 minutes) with employees across all sectors and
hierarchical positions ranging from scientists to the CEO. All interviewees were
directly or indirectly involved in either exploration or exploitation activities, or
both (see appendix 1 for an overview of the performed interviews). All
interviews were tape recorded, transcribed and controlled for correctness by two
researchers except for the internal meetings for which we wrote summaries
immediately after the meeting. The high amount of data from multiple sources
of evidence ensured high construct validity (Jick 1979; Yin 2003).
3.4 Lonza: pursuing incremental and breakthrough
innovation
Lonza Ltd. is one of the world's leading (bio-)chemical agents suppliers to the
pharmaceutical, healthcare and life-science industries. Its core business are cell
therapy services as a part of the custom manufacturing processes and the
development and improvement of chemical engineering processes in close
cooperation with its large customers from its main industries. Having a broad
range of technologies, Lonza uses its expertise in chemical synthesis and
biotechnology to enable the production of intermediates for use as
pharmaceuticals, biotherapies, nutraceuticals, cosmetics, and animal health
50
products. Today, Lonza is one of the world's leading manufacturers of
monoclonal antibodies which are important for the diagnosis and treatment of
diseases such as cancer. In 2010, Lonza generated global sales of approximately
2.8 billion US$ with its 8.300 employees in the three sectors Life Science
Ingredients, Bioscience, and Custom Manufacturing.
3.4.1 Lonza's innovation organization
Lonza's firm-wide innovation activities are supervised by the 'innovation and
technology committee' (ITC) which consists of board members and members of
the management committee. Their tasks include monitoring potential technology
breakthroughs in the area of industrial and pharmaceutical biotechnology which
would impact the large-scale manufacturing of (bio-)chemical agents,
supporting ongoing innovation projects, and establishing relationships with
academia and other research institutions. The committee also provides a firmwide internal forum for the enhancement and exchange of scientific ideas,
research and development for technologies, applications and processes. The
strategic innovation team (SIT) serves as a mediator between the ITC and the
divisional innovation activities and is responsible for the execution and
management of Lonza's breakthrough innovation activities.
Historically, Lonza's innovation efforts were largely driven by customer
requirements and therefore focused on incremental innovation projects with a
time horizon of two to five years. Incremental innovations were developed in the
research and development units of the three sectors and thus represented a core
activity of the sectors. Despite the success of this business model in the past,
Lonza was in recent years increasingly pressured by aggravating price and cost
demands of its customers which led to a slow but steady decline in margins in
the custom manufacturing business. In the end of 2007, Lonza therefore decided
to launch a new initiative named LIFT (Lonza Innovation for Future
Technologies) to break out of this dependency and to pursue breakthrough
innovation especially in the biotechnology area.
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Michael Daiber
3.4.2 LIFT: hybrid corporate venturing
Organizational implementation
LIFT is an initiative and unit whose mission is to explore new (bio-)chemical
agents to create new business opportunities with a value of about 500 million
US$ in addition to the existing business in a time span of 12 to 15 years. For
example, in 2008, the expansion of Lonza's biocatalytic platform was started as
a LIFT project to access entirely new reactions previously unknown to Lonza.
All activities which are conducted under the LIFT umbrella run parallel to the
innovation activities of the three sectors. The annual LIFT budget ranges
between ten to twenty million US$ and is sponsored by the corporate center to
enable the pursuit of uncertain innovation projects and ultimately to develop
breakthrough innovation. The CEO has the power to decide if additional funds
are provided to LIFT to account for unforeseen opportunities. The SIT,
consisting of the head of global innovation, the heads of R&D of the three
sectors, and four senior research scientists, is responsible for the execution and
management of all LIFT activities (see figure 3.1). In this regard, the SIT is
responsible for assessing the potential of breakthrough ideas, championing
ongoing innovation projects, managing the LIFT innovation portfolio, and
managing the communication flow of breakthrough innovation projects between
Lonza and external partners.
Innovation & Technology Committee
Members: members of board and management committee
Innovation Strategy
+ Innovation Fields
Strategic Innovation Team
Members: Divisional R&D heads, board member
Innovation Program
Sector
Life Science Ingredients
R&D
Ideas
Sector
Bioscience
R&D
Ideas
LIFT
R&D
Ideas
Ideas
Know-How
Sector
Custom Manufacturing
External innovation
partners
Figure 3.1: Innovation organization at Lonza.
52
The SIT meets every three months to review ongoing LIFT activities and to
review their breakthrough innovation project portfolio. The composition and
organizational implementation of the SIT allows Lonza to have a comprehensive
overview of all innovation activities and a close exchange between the R&D
heads of the sectors and the LIFT team which is responsible for breakthrough
innovation projects.
Exploring within 'focus areas'
The innovation and technology committee has defined five corporate 'focus
areas' which are presumed to yield the biggest growth potential for Lonza in the
future, and which serve as an overarching orientation for all of Lonza's
innovation activities. These areas, i.e. clean water, intelligent materials,
functional food, building blocks, and therapy & bioavailability were derived
based on the analysis of megatrends from technology, markets and society such
as the convergence of biotechnology and pharmaceuticals, nutritional issues
based on the growing world population, or the diminishing acceptance of new
technologies within developed countries' societies. As stated by an executive
board member, the purpose of the focus areas is "to link the actual idea
generation to the company's corporate strategy and make it possible to focus
creative resources to a certain area". While the focus areas are only broadly
defined, Lonza through its three sectors has significant technological
competencies in these areas, ensuring that future innovations are not completely
detached from the existing competence base. Within the single areas, the SIT
has defined still more specific 'hot spots' which represent novel and uncertain
biochemical technologies and which are therefore explicitly explored at LIFT.
Generally, ideas originating in a sector which are promising but involve a high
degree of uncertainty and which exceed currently existing competencies and
resources of the sector are transferred to LIFT where they can be further
investigated. To be accepted as an official LIFT project, the idea is initially
evaluated by the LIFT team regarding at least six specific, qualitative criteria:
the degree of newness to the world, the existence of similar solutions, the
existence of patents in the area, the kind of biochemical agents which could be
manufactured with this new technology, the market growth potential of this new
technology for Lonza, and the extent to which the topic, e.g. a specific reaction,
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Michael Daiber
has already been treated in scientific literature. Based on the answers to these
questions, the core team builds a preliminary assessment of the potential of the
idea. The results of this assessment are subsequently transformed into two
dimensions, i.e. 'overall technological innovativeness' and 'market potential' and
then evaluated on a Likert scale. Breakthrough ideas which pass the initial
assessment become 'LIFT candidates' for which a limited budget is granted to
clarify further aspects. When the information basis is sufficiently well
developed, the candidate becomes an official LIFT project with additional
budget and is subsequently monitored in the Lonza overall innovation project
portfolio. The LIFT core team regularly revises the status of all breakthrough
innovation projects and prepares decision on what projects may have to be
sorted out and thereby keeps the portfolio up to date.
Leveraging external resources
Due to the high uncertainty inherent for LIFT projects and due to the limited
annual resources, LIFT pursues three different strategies to develop new
technological competencies and breakthrough innovation in the focus areas:
40% of all breakthrough projects are explored by external partners from public
or private research institutions, 40% by LIFT in collaboration with external
partners, and 20% solely at LIFT. Purely external exploration assignments entail
that LIFT is providing financial support while the partner explores the potential
of a new biochemical reaction based on its competencies and resources. In
projects which are jointly done with external partners LIFT largely supervises
the direction and progress of the project to which all partners contribute with
their individual expertise and resources. For example, in the area of cell therapy,
LIFT started a joint project with other local and international research institutes
to explore new technologies for the large-scale production of human stem cells
for the regeneration of tissue in, e.g., red blood cells, the skeleton, the nervous
system, or the heart. In this collaboration, LIFT contributes with its know-how
on growing cell cultures, the volume reduction of the cell concentration and
washing of the cells to reduce storage requirements, and the cryopreservation of
the cells. Furthermore, it provides facilities such as bioreactors while the other
partners contribute with their area-specific knowledge on stem cells and their
treatment according to the development stage such as primary cell acquisition or
54
storage and inventory of the cells. Finally, in purely internal LIFT projects
technology exploration is mainly supervised by the LIFT core team which,
based on the amount and content of the exploration activities, recruits additional
researchers from Lonza's sectors or external institutions to do the research on the
new technology. These types of projects are mostly done when the Lonzainternal know-how is sufficiently well developed and when the project is very
close to the core business of one sector.
3.5 Discussion
The case shows how Lonza as a firm pursues both incremental and breakthrough
innovation. While the development of incremental innovation activities in the
core business is pursued in the R&D of the sectors, breakthrough innovation
activities exceeding the current competence base of the sectors are pursued in
the LIFT unit and in cooperation between LIFT and external partners. Although
the development of incremental and breakthrough innovation is structurally
separated as proposed by literature (Tushman and O'Reilly III 1996; O'Reilly III
and Tushman 2004), Lonza seems to be able to connect both types through its
definition of corporate focus areas to leverage existing divisional competencies,
through using firm-external resources and competencies, and through a top
management team which oversees all ongoing innovation activities. In the
following, we discuss how these mechanisms enable Lonza to balance, which is,
simultaneously pursue short and breakthrough innovation in more detail.
3.5.1 Leveraging existing competencies
As described in the case, Lonza has defined firm-wide focus areas in which all
innovation activities, i.e. incremental and breakthrough innovation activities, are
conducted. The definition of these fields, which can be termed more broadly as
innovation fields, has an effect on how new ideas in the sectors or at LIFT are
developed and on why these ideas have a higher chance of being pursued than if
they were originating outside of the innovation fields. First, each individual is
asked to envision how, for example, a new biochemical reaction would solve a
future problem within one of the innovation fields. For example, the discovery
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Michael Daiber
of a new reaction to enable the large-scale production of new stem cells such as
antibodies for the treatment of cancer or heart diseases would link to the 'therapy
& bioavailability' innovation field and obviously be of very high relevance to
patients and current diagnosis and treatment procedures. Second, linking
innovation fields to existing businesses ensures that even breakthrough
innovation projects relate to an area where Lonza has at least some preexisting
technological competencies. In this sense, innovation fields serve as a coarse
exploration framework and increase the likelihood that the exploration of new
business potential will eventually have a payoff. In fact, the relatedness of
existing and new technological competencies has been argued to effectively
minimize the risk of exploring new technologies due to the structural
relationship between existing and new technological requirements (Dahl and
Moreau 2002; Herstatt and Kalogerakis 2005).
The technological relatedness between LIFT projects which originate from the
sectors furthermore seem to directly influence how Lonza as a whole is able to
pursue both incremental and breakthrough innovation projects. The stem cell
example suggests that, despite the high novelty of the idea to Lonza, the idea
ultimately became a LIFT project because it involved technological know-how
that was already to some degree present in the Bioscience and Custom
Manufacturing sectors. The fact that the stem cell project involved existing
competencies and was of immediate interest to several sectors also alleviated the
LIFT assessment process for new project ideas. Due to the high relevance for the
sectors and some preexisting competencies, the LIFT core team assessed the
stem cell project as less uncertain because existing competencies could
effectively be stretched, implying that Lonza would not have to start from
scratch to develop new competencies in this area. Through the technological
relatedness between existing and new businesses, Lonza perceives its
exploration projects as less risky, and they may be better able to maintain a
sound balance between incremental and breakthrough innovation projects by
using existing competencies as a stepping stone to explore new technologies.
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3.5.2 Collaborations in technology exploration
The case illustrates that about 80% of the operational exploration activities is
conducted entirely by or in collaboration with external parties. This approach
allows Lonza to enable exploration activities with a limited amount of resources;
in fact, only five full-time employees assess and oversee all exploration
activities. Exploration activities which are shared across several partners
therefore also allow all parties to share the risk involved in these activities.
Entirely outsourced exploration activities or those which are jointly conducted
resemble exploration alliances for which prior research has shown that enabling
and maintaining a balance between incremental and breakthrough innovation is
possible (Lavie and Rosenkopf 2006). The Lonza case shows that, on the one
hand, LIFT outsources breakthrough innovation activities which exceed existing
technological competencies in a specific area but which seem to be promising
future business areas. For example, in the LIFT stem cell project, external
partners investigate how primary cells could be isolated and stored which is not
a core business of Lonza. On the other hand, it collaborates with external parties
in areas where they have own competencies to expedite the exploration process.
This flexible approach of different resource intensity with respect to exploration
allows Lonza to pursue both kinds of activities with limited resources.
Furthermore, the flexible scalability of this approach allows Lonza to achieve
even a balance between incremental innovation and breakthrough exploration.
3.5.3 Top management control
All innovation activities at Lonza are supervised by the innovation and
technology committee and the strategic innovation team. Although the activities
of the division and LIFT are separated both physically and financially, the set-up
of the ITC and the SIT allows Lonza to maintain control over all ongoing
innovation projects. Not only has Lonza created an institution which oversees all
innovation projects, but due to the technological relatedness often found in LIFT
projects, there is close interaction between the heads of the sectoral R&D and
the LIFT core team. In addition, the strategic innovation team is able to
influence decisions about the question if exploratory ideas are pursued in LIFT,
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Michael Daiber
if they are conducted internally or in collaboration with externals, and how these
activities will enhance existing competencies. In the case of the stem cell
project, the entire process chain starting with the tissue acquisition, the primary
cell isolation, growing cell cultures and harvesting, washing, and storing the new
cells was just too complex and resource intensive. Therefore, it was determined
that the idea of large-scale stem cell manufacturing should be further pursued at
LIFT. In addition, it was clear that the sectoral R&D would not explore how, for
example, large-scale manufactured cells would be stored and inventoried since
they neither had the resources nor the competencies. After the idea proposal had
passed the assessment process, LIFT started to explore how cell cultures could
be grown while external partners explored other parts which were crucial to the
large-scale manufacturing of the new stem cells. The way this entire project
evolved in Lonza was likely due to the close interaction of the responsible
people at the upper management level who agreed that the idea was promising
but exceeded the division's competencies.
3.6 Conclusion
The case of Lonza shows that the ability to balance incremental and
breakthrough innovation between a corporate venture unit and an established
R&D organization depends on several mechanisms: leveraging existing
technological competencies intelligently, collaborating with external parties, and
a top management team which is has a comprehensive overview of all ongoing
innovation activities and is able to link existing business with future demands.
Our findings confirm existing research by revealing how CV units can use
external collaborations to maintain a balance between exploration and
exploitation (Rothaermel and Deeds 2004; Lavie and Rosenkopf 2006).
Furthermore, our findings on the SIT as a mediator and facilitator of innovation
projects between LIFT and the divisional R&D are in line with literature on
structural ambidexterity which posits that top management plays a crucial role in
integrating incremental and breakthrough innovation activities (Tushman and
O'Reilly III 1996; O'Reilly III and Tushman 2004; Smith and Tushman 2005).
However, our findings extend existing literature on ambidexterity by showing
that existing technological competencies in the divisions should be used as a
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springboard for the CV unit to explore new technologies. While a separation of
exploration and exploitation activities are beneficial, a continuous integration of
both by means of competence leveraging is a promising mechanism through
which exploration and exploitation can be jointly pursued and ambidexterity
ultimately be achieved. In particular, the firm needs to maintain a link between
both activities at the same time. Technological relatedness, achieved by the
establishment of corporate focus areas (i.e. innovation fields) in which
particularly breakthrough innovation projects are sought, may be a promising
strategy to bridge the gap caused by structural separation. The findings also
imply that the ability to pursue and even balance incremental and breakthrough
innovation projects is not only assessed by 'objective' ex post such as different
technological trajectories (Christensen 1997; Rosenkopf and Nerkar 2001) but
also by individual perception of what is a breakthrough innovation in the
existing business.
This research is based on longitudinal observations and consists of only one
single case study. To get a deeper insight on efficient ways to balance
exploratory and exploitative innovation further analysis is needed at the firm
level to validate these results through larger samples which link these data to the
companies' breakthrough innovation success. In a larger sense, there are still
enough white spots for research in understanding the mechanisms companies
use for balancing exploratory and exploitative innovation over time. Especially
the concept of technological relatedness to stretch existing competencies to new
domains and the effects of open innovation activities in the context of
ambidexterity are promising future research avenues. Furthermore, despite the
longitudinal approach and a four-year observation of LIFT as a CV unit, we
cannot show a causal link of Lonza's approach to their overall success of
balancing incremental and breakthrough innovation. In fact, since LIFT projects
are per definition designed to yield a payoff only in ten to fifteen years, it is
hardly possible to provide objective evidence on the success of balancing
exploration and exploitation activities. However, based on the statements of the
vast majority of our interview partners, people are convinced that they have
found the right balance particularly considering the long-term innovation cycles
typical for the biochemical and pharmaceutical industries.
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4. Collaboration and coordination in
global R&D of multinational
companies: The role of product
architecture
Co-authored by Bastian Widenmayer, Marco Zeschky and Oliver Gassmann
Multinational companies (MNCs) increasingly internationalize their R&D. This
leads to an increased need to collaborate and to coordinate R&D activities
between different sites around the world. Especially in the last fifteen years,
relying on smart (modular) product architectures has been described as one
possibility to build up organizations in an efficient way. The question how
product architecture can contribute to efficient collaboration and coordination
in global R&D of MNCs as well as the question how product architecture and
global R&D organization influence each other are still lacking insight. We
approach these questions through nine case studies focusing on single
subsidiaries and their strategic role and autonomy within the company. The case
studies describe four types of R&D subsidiaries (extended workbench, local
adaptors, center of competence and system innovators), depending on their
strategic roles. Based on this typology we identify different levels of influence
between product architecture and the companies' global R&D organization.
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4.1 Introduction
Throughout the last 15 years, companies started more and more to
internationalize their R&D through building up or acquiring R&D sites abroad.
In an increasingly globalized R&D landscape companies face the question on
how to best organize their R&D activities between their subsidiaries. At the
same time products become more and more complex and have to match with the
expectations of different markets throughout the world.
During the last ten to fifteen years, literature analyzed international R&D of
multinational companies from different perspectives including strategic drivers,
strategic goals (de Meyer and Mizushima 1989; Kuemmerle 1997; Boutellier,
Gassmann et al. 2008), and organization structures (Gassmann and von Zedtwitz
1998; Chiesa 2000; Asakawa 2001). Further, scholars discussed topics of how
different R&D sites within a MNC collaborate (Boutellier, Gassmann et al.
1998; Eppinger and Chitkara 2006) and coordinate their activities (Chiesa 2000;
Adenfeldt and Lagerström 2006).
Meanwhile, the discussion on product architecture and product platforms
(Henderson and Clark 1990; Ulrich 1995) has been strongly influencing
literature on new product development (NPD) and R&D. The question whether
and how companies' organizations influence their products or companies'
products influence their organizations has been intensely discussed in literature
during the last years (Sanchez and Mahoney 1996; Schilling and Steensma
2001; Hoetker 2006). Product architecture is hereby seen as one of the main
drivers that allow different parts of the organization as well as different
organizations to collaborate in product development.
Although the internationalization of R&D is one of the biggest organizational
issues in management of R&D, there are very few insights about the effect of
product architecture on a company's international R&D organization. Especially
the question on how product architecture influences the way collaboration
happens in multinationals' global R&D is under-researched. The research
question therefore is to identify how product architecture and global R&D
organization of multinational companies influence each other. In the next
paragraph we will therefore provide an overview of the literature about the
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Michael Daiber
relationship of product architecture and organization before summing up
relevant literature about the motivations and organization structures and
collaboration activities in global R&D. After describing our research
methodology we describe nine case studies about single subsidiaries, how they
collaborate with other sites within the company, and the role product
architecture thereby plays.
4.2 Literature
4.2.1 The interplay between product architecture and organization
The question how to best split tasks in product innovation has been discussed for
a long time (von Hippel 1990). Researchers in management soon described the
importance of product architecture in managerial decision making, especially
regarding R&D (Henderson and Clark 1990; Ulrich 1995). Product modularity
as a strategy to design a complex product or process effectively is based on
product architecture, interfaces and standards (Baldwin and Clark 1997).
Designing a modular product requires a high effort (Ulrich 1995; Persson and
Ahlström 2006), especially in building up architectural knowledge "to be
embedded in the structure and information processing procedures of established
organizations" (Henderson and Clark 1990). On the other side, it brings a broad
range of advantages (e.g. through higher flexibility, bigger product variety, the
possibility of quicker product upgrades, greater speed to market and lower
product, distribution and service costs through economies of scale). An
overview of these advantages is presented by Mikkola (2003). Modular products
allow for higher variety through recombination, but in order to reach modularity
challenges lie in arranging functional elements of a product, mapping them to
physical components and defining their interfaces (Persson and Ahlström 2006).
In their widely cited article, Sanchez and Mahoney (1996) stated that not only
organizations design products but also products can design an organization,
which means that organizations can be built up to fit the product architecture. A
modular organization allows for recombination of its units for different
businesses, cf. Helfat and Eisenhardt (2004). Langlois (2002) stated that "nonmodular products lead to or are best produced by non-modular organizations,
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whereas modular products call for modular organization". Especially for
heterogeneous inputs and demands, modular organizations are seen to be more
efficient than non-modular ones (Schilling and Steensma 2001).
Scholars also started investigating the effects of product architecture on the
organization of the entire company: From an organizational perspective,
modular product design is recognized to facilitate collaborative innovation and
outsourcing (Sinha and van de Ven 2005). Literature investigating product
architecture in a global R&D perspective however is still scarce.
4.2.2 Strategic goals and organization of R&D sites in MNCs
As having different geographically separated sites with different roles, global
R&D organizations in MNCs can be described as one type of modular
organization:
Literature on management of R&D describes different strategic motivations and
objectives of global R&D. (de Meyer 1993; Håkanson and Nobel 1993; Florida
1997; Pearce 1999; von Zedtwitz and Gassmann 2002). Motivations thereby
vary from accessing local markets to profiting from local technology expertise,
tapping into local talent pool, cost arbitrage reasons, and others.
Based on these motivations, companies have built up their global R&D
organizations accordingly. Literature analyzing how multinationals organize
their R&D activities on a global scale has become abundant (Medcof 1997;
Gassmann and von Zedtwitz 1998; Chiesa 2000). An important part of these
contributions investigates these topics with the MNC as unit of analysis.
Other articles focus on the single R&D subsidiary and describe their role or
strategic setting within a company's multinational R&D network (Kuemmerle
1997; Birkinshaw and Hood 1998). While Kuemmerle differentiates between
home-base augmenting and home-base exploiting R&D, Roth and Morrison
(1992) as well as Birkinshaw and Hood (1998) analyzed different types of
subsidiaries regarding their level of autonomy within a MNC. Autonomy can
thereby be defined as the ability of a sub-unit to take decisions for themselves on
issues which are reserved to a higher level in comparable organizations (Brooke
1984). Depending on this variable they defined the terms 'role' and 'strategy' of a
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subsidiary within an MNC. As autonomy is not an end in itself but a means to a
larger goal (Persaud 2005) that lies in the strategic motivation, different types of
subsidiaries will differentiate depending on their level of autonomy they have to
fulfill their strategic role.
Based on their objectives within the company's subsidiary network, various
authors classified R&D subsidiaries according to different criteria including
autonomy: In their seminal work Bartlett and Ghoshal (1989) defined four
organizational models for international innovation projects within a MNC. In the
'central for global' view of Global R&D, significant research and development
activities are centralized in one hub and tightly controlled. In a 'local for local'
setting development for different markets takes place autonomously in local
subsidiaries. In the 'locally linked' setting, subsidiaries innovate locally but try to
leverage the innovations throughout the company. In a 'globally linked'
organization products and services are developed through collaboration between
R&D subsidiaries in different countries. In a similar approach Chiesa (2000)
defines two different structures of R&D networks, the 'specialization based
structure', where one lab has the full responsibility to develop a product on a
global mandate and the 'integration based structure', where innovation is the
result of joint work of different units around the globe.
4.2.3 Collaboration and coordination in global R&D
A global R&D organization leads to product development projects and tasks that
have to be performed at different locations. In accordance with Archibugi et al.
(1999) and Bergek et al. (2010) collaboration can thereby be defined as an
activity where two or more partners make substantial contributions of resources
and know-how to agreed aims. While collaborations in global R&D can also
include company-external partners, we focus our research on collaboration with
and between fully owned R&D sites rather than on collaboration with external
entities (Chiesa and Manzini 1998). Successful coordination can be seen as the
alignment of actions that are interdependent but performed from different
entities, cf. Thompson (1967), Gulati, Lawrence et al. (2005) and Srikanth and
Puranam (2011). Main questions are thereby which tasks are performed locally
66
in subsidiaries, which tasks are performed at headquarters? How can redundant
work be avoided?
Literature describes that different types of organizations bring significantly
different coordination efforts (Chiesa 2000). With higher levels of integration
between R&D subsidiaries of an MNC, the need to coordinate tasks within
collaborations rises. The collaboration among different sites of a multinational
company brings effort and costs which are mainly due to codifying and
transferring knowledge to the recipient (Teece 1981; Kogut and Zander 1993).
During the last years, literature describing collaboration between headquarters
and subsidiaries increasingly focused on reverse flows of innovation from
subsidiaries to the headquarters as a topic of investigation (Frost 2001;
Håkanson and Nobel 2001; Yamin and Otto 2004; Ambos, Ambos et al. 2006).
There has been an important scientific debate on how collaboration between
different R&D sites can happen efficiently (Noriah and Ghoshal 1997; Persaud
2005; Barczak, Mc Donough et al. 2006). After investigating the outsourcing
and offshoring of business processes, Srikanth and Puranam (2011) define three
different strategies to manage collaboration and coordination (information and
communication technologies, tacit coordination mechanisms) and to reduce the
need for coordination (modularization of product architecture). In research
about global R&D a lot of articles have been published about the use of ICT to
facilitate communication and coordination, e.g. in a 'global virtual teams' context
(Jarvenpaa and Leidner 1999; Mc Donough, Kahn et al. 2001; Gassmann and
von Zedtwitz 2003). The other coordination strategies (modularization and tacit
coordination mechanisms) have not been discussed as intensely in a global R&D
context. Especially the topic of modularization of the product architecture is
mostly neglected in current literature on global R&D: A few authors (Muffato
1999; Meyer and Mugge 2001) suggest a relationship between the product
structure and how R&D tasks can be coordinated in R&D without describing
how it affects coordination effort in different strategic settings of R&D.
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Michael Daiber
4.3 Methodology
As there are few insights about how product architecture influences the way
R&D sites collaborate within MNCs, we chose an exploratory approach using
qualitative case studies (Eisenhardt 1989). As they allow for deeper insights in
how and why companies and managers choose a certain approach, case studies
help discovering causal relationships between different topics, which cannot be
obtained through purely quantitative surveys (Yin 2003; Siggelkow 2007).
Through case study research we are thus able to get deeper insights into the role
of R&D subsidiaries as well as into the way product architecture is defined and
the underlying reasons.
4.3.1 Case sampling
In order to investigate the relationship between the type of R&D organization
and product architecture, we searched for European and North American
companies operating R&D sites outside their home countries with different
strategic intent. To achieve comparability within the sample, we focused on
companies acting in medium high-tech and high-tech industries according to the
OECD definition (OECD 2005), including machine tooling, medical devices,
and IT hardware. These industries share similar notions of (physical) product
architecture. We deliberately did not focus on other R&D intensive industries
including pharmaceuticals, as their innovation process and global R&D
strategies differ from the industries in our sample (von Zedtwitz, Gassmann et
al. 2004), and their notion of product architecture does not correspond with what
we know from previous literature on this topic, cf. Ulrich (1995). We analyzed a
group of nine companies and looked for different types of subsidiaries and thus
categorized them depending on their role within the company. We emphasized
on the level of autonomy regarding decisions for their markets, and on their
autonomy regarding technological decisions on a corporate level. Our
categorization reflects some aspects of Bartlett and Ghoshal's (1989) and
Chiesa's (2000) taxonomy but puts more emphasis on the strategic autonomy of
a subsidiary.
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4.3.2 Data collection and analysis
To get initial insights on the structure of their R&D organization we first
conducted interviews with representatives of the R&D headquarters including
CTOs, heads of R&D, technology managers and innovation managers. They
explained us the overall structure of their R&D organization and described the
role of the different sites. Based on these insights, we could categorize the
subsidiaries according to the above described scheme.
In a second step, we analyzed the collaboration between the respective R&D site
and the headquarters. We asked both the headquarters' representatives as well as
R&D managers within the subsidiaries about mutual collaboration as well as
how R&D tasks and responsibilities are defined within the company. We further
asked them to describe the products they are developing, their product
architecture, and who is involved in defining this architecture. These interviews
were performed face-to-face or via telephone and video conference and lasted
from 60 minutes to 90 minutes and were based on a semi-structured interview
guideline. They were tape recorded in order to facilitate further analysis. During
these interviews we asked them to describe collaboration in product
development projects. We focused our questions on the interaction between the
subsidiaries and headquarters before and during the actual product development.
4.4 Towards a typology
As our objective is to investigate the mutual effects of product architecture and
different strategic and organizational settings in which MNCs global R&D
organizations collaborate, we decided to define different categories based on the
role or strategy of a single subsidiary within the company's network of R&D
sites and their autonomy regarding market and technology decisions ( table 4.1).
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Michael Daiber
Table 4.1: Case study overview
Company
Headquarter
Industry
Autonomy
regarding market
decisions
Autonomy regarding
technology decisions
machine
construction
low: global products,
no market
responsibility
low: executing tasks
predefined at headquarters,
trend to some subsystem
responsibility
medical
devices
low: global products
low: executing predefined
tasks
high: site leading for
electrocardiography R&D
Subsidiary
Company A
Germany
Russia
Company B
Indian subsidiary
Germany
Company B
US subsidiary
Germany
USA
medical
devices
Company C
France
construction
relatively high: the
relatively low: no
China
equipment
site is allowed to
adapt products within
a strategic 'range of
activities'
development tasks in areas
linked to the company's
technological core
competences
USA
medical
devices
high: site leading for imaging
R&D
China
medical
devices
high: develops own
products for different
markets
relatively high: own product
development relies however
on technologies developed
at other sites
Switzerland
IT hardware
high: develops
products for its
markets
low: has to rely on central
R&D for technology
development
Germany
medical
high: site leading for patient
USA
devices
Switzerland
measuring
technologies
Company D
India
Switzerland
Company E
Company F
USA
China
Company G
Company H
China
monitoring R&D
high: develops own
products for different
markets
relatively high: own product
development relies however
on technologies developed
at other sites
Four exemplary cases, representing the four possible combinations of autonomy
are hereby described.
Low market autonomy, low technological autonomy (extended workbench):
Company A - a leading manufacturer of banknote processing machines - has
set up a R&D site with about 45 employees in Russia to extend the capacities of
the headquarters' R&D in Munich. R&D activities in its Russian subsidiary
70
include most of the specialization areas resided at the headquarters (i.e.
hardware, software and sensors); development activities in Russia are however
closely managed by the headquarters. The Russian subsidiary supports the
headquarters' projects without performing important R&D tasks autonomously.
Tasks are distributed to this kind of site by the headquarters or other subsidiaries
based on short-term opportunities. Extended workbench subsidiaries are seen as
'low-cost extensions'. They get assigned mostly small, strategically less
important and less complex work packages in order to optimize resource
utilization and to benefit from cost arbitrage. Their tasks are easy to define, but
require continuous interaction between the headquarters and the extended
workbench.
High market autonomy, low technological autonomy (local adaptor):
Company C - a producer of earth moving machines - has set up a product
engineering unit at its manufacturing site in northern China. The role of this site
within the company's R&D network is to adapt the company's products to the
local demand (Chinese market and products for other emerging markets
produced in China). The development tasks performed in China include small
design changes to the standard products from established markets as well as the
integration of locally sourced components into given products.
These R&D subsidiaries perform adaptations for regional markets. They have
the autonomy to adapt some components to local needs, while others are defined
centrally. Which parts can be adapted locally mostly depends on the product
strategy and local boundary conditions.
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Michael Daiber
Low market autonomy, high technological autonomy (specialized center of
competence):
Company B’s development site in Illinois, USA is specialized in the
development of electrocardiography devices and develops sub-components for
the company’s diagnostic devices. In these domains the US has a leading
position within the company. Together with the headquarters, Germany,
Company B’s US site decides on the architecture and interfaces of products that
include components from both sites.
This kind of R&D subsidiaries has a leading position in certain technological
areas. Within these areas the center of competence can decide on their activities
rather autonomously. R&D in different centers of competence contributes to the
company's products. This type of sites has a special standing within the
company's network. Centers of competence are often located close to important
research clusters (the New England states for example are highly renowned for
their knowledge in medical technology) and have often entered into the
company through mergers and acquisitions. These centers of competence
contribute each within their technological areas of specialization to
technological innovation for the entire company's products.
High market autonomy, high technology autonomy (global system
innovator):
Company E’s Chinese R&D site in Shanghai was empowered to develop
ultrasound devices for the Chinese market (provincial hospitals) autonomously
from the headquarters R&D. Local engineers could rely on technologies
available within the company, but build their product independently from
existing platforms. Today products developed by the Chinese site are marketed
as a 'budget' product line in different countries including the USA. Global
responsibility for these products lies in China.
Having the freedom to develop products, these R&D subsidiaries serve their
market(s) rather independently from the headquarters. They use and adapt
technologies of the company to fulfill their markets’ needs.
72
Case
Subsidiary
Subsidiary’s
raison d’être
Task definition and collaboration
Product architecture
Definition of
architecture
Role of
corporate ICT
Company A
Extended workbench
Central project office at headquarters assigns work
One global product
Not involved:
Support in daily
Russia
in software, hardware
and sensor
development
packages within projects. Company A’s Russian site
strives to perform project subtasks more and more
autonomously. Single tasks outsourced to Russia, clear
definition of boundaries reduces effort in collaboration
Centrally in
headquarters
collaboration, frequent
use of communication
tools
(videoconferencing)
Company B
India
Extended workbench
for headquarters and
site in USA
Work packages assigned from headquarters or R&D site
in USA
Not involved:
Dominated by
headquarters and
Regular use of
communication tools
Global product, only
slight adaptations
US site
Company B
USA
Technological center
of competence in
Areas of expertise of the US site and headquarters in
Germany clearly defined beforehand. According to these
electrocardiography
settings, the US site develops sub components in full
responsibility. Results contribute to final product based on
predefined interfaces
Company C
China
Local adaptor for
regional and
developing markets
Central R&D defines strategic boundaries for subsidiary
autonomy. These strategic boundaries have implications
on the product architecture, where some parts are within
the Chinese site's 'range of activities' others not.
Company D
Switzerland
of competence in
imaging technologies
With defined interfaces R&D projects take place rather
autonomously within subsidiary. Development tasks are
shared along areas of expertise, they contribute to final
product along predefined boundaries
Global product, only
slight adaptations
In discussions
between the US site
Communication tools
used for collaboration,
and headquarters
however dominated
by headquarters
meetings, system
integration meetings
Regional products,
based on centrally
defined architecture
Not involved:
Centrally in
headquarters
Operationalization of
the 'range of activities'
in subsidiaries through
regulation on data
access
One global product
In virtually
organized
worldwide system
engineering teams
Frequent use of ICT to
discuss the product
definition between
sites
Michael Daiber
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74
Table 4.2: Overview about collaboration and definition of product architecture in case study companies
Subsidiary’s
raison d’être
Task distribution and collaboration
Product architecture
Definition of
architecture
Role of
corporate ICT
Company E
China
System innovators for
"budget" product lines
The Chinese subsidiary can use existing technologies to
develop own products autonomously. Chinese R&D
employees can integrate existing components but is free
to define architecture according to its local needs.
Regional product, using
existing components
but with own product
architecture
Architecture for
local products
defined locally in
China
Used for
communication in
transferring solutions
and aligning strategies
with other sites
Company F
Adaptors for the
The Chinese site has the autonomy to develop products
Local product, adapted
Not involved:
Exchange of
China
Chinese market
based on the global platforms and technologies within the
company. Adaptations for the Chinese market on
component level, based on product architecture of
existing high-end products.
from central
architecture
Defined centrally
through
technological
research and
development of new
global product lines
technological and
market information
Company G
USA
of competence in
patient monitoring
Tasks distributed to different sites along predefined
interfaces within the product. Technological areas
specialization help defining the product architecture
One global product,
only slight adaptations
Architecture is
defined by cross
functional teams
together with
headquarters in,
Germany
Globally used project
management tools
Company H
China
Systems innovators
for 'budget' product
line
Technology development solely take place in
headquarters in, Switzerland. Product development
happens autonomously in China. Subsidiary can use
existing technologies define and develop a product
integrating existing and new technological components
Local product, defined
locally, however using
global components
In China in
collaboration with
headquarters
Communication
technology used to
exchange
technological
solutions and
information
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Case
Subsidiary
Michael Daiber
4.5 Findings
In order to identify how these different types of subsidiaries handle cooperation
and coordination with the headquarters and which role product architecture
thereby plays, we investigated on the task distribution between headquarters and
the different subsidiaries as well as on the definition of product architecture.
Table 4.2 provides an overview on how the nine subsidiaries described in our
case studies approach this topic. According to our interviews and also based on
extant literature (Srikanth and Puranam 2011), emphasizing the role of tools to
manage collaboration in global R&D, ICT turned out to play a central role.
Thus, we provide an overview of the role of ICT in these companies' globally
distributed R&D. During the interviews we found that task distribution, the
extent and way of sharing technological information, and the use of ICT in
collaboration and coordination varied depending on the subsidiary's role within
the company. Concerning coordination between different sites, we could
identify important differences in the process on how the product architecture is
defined within these companies.
In an 'extended workbench' setting with low autonomy, the tasks at subsidiary
level have to be managed closely by the headquarters. As tasks are defined in a
rather opportunistic way the product architecture is not the driving force behind
the repartition of tasks between different sites, although it might facilitate it.
Tasks are distributed according to the product architecture; the product
architecture is however defined centrally without considering the capabilities on
different sites. After setting up a R&D site in Russia, Company A's Banknote
Processing Organization started its operations there as an 'extended workbench'.
Collaboration in software R&D turned out to be less problematic than hardware
R&D, mainly due to the fact that intermediary results can be shared through
electronic means, and do not involve work on physical prototypes. In sensors
and hardware R&D transferring tasks that were defined along the product
architecture turned out to require less coordination efforts during the actual
collaboration than others.
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In a 'local adaptor' setting, R&D subsidiaries perform adaptations for regional
markets. These sites often emerge from existing manufacturing plants to
perform adaptation of products for the local market. Main drivers behind the
decisions, which tasks are performed at the headquarters and which tasks can be
performed autonomously at the subsidiary are based in the product strategy,
market specificities and local conditions, e.g. regarding IP appropriability. In
this setting, the product architecture is defined and coordinated centrally and
platform management defines the 'range of activities' of R&D subsidiaries.
Company C centrally defines which parts of its excavators can be locally
adapted at their subsidiaries in China, Russia and Brazil, and for which parts
detailed technical information is kept at the headquarters for earth-moving
technologies in France, according to their strategic importance and risks
regarding IP. IT tools, i.e. Product Lifecycle Management (PLM) solutions,
support these strategic decisions on an operational level. Access to product data
like Computer Aided Design (CAD) files, technical simulations or spare part
pricing structure is granted, restricted or denied to different R&D sites based on
different attributes of the respective part: its position in the product structure, the
age of the component and technological complexity.
In a 'center of competence' setting, R&D subsidiaries are in the lead for a certain
technological area of specialization. Company D's R&D lab in Switzerland has
been acquired from a leading industrial electronics company in 1991 as medical
devices began to rely more and more on visualization technologies. As products
often contain technology from different centers of competence and technological
knowledge is located in different R&D sites, previous coordination and
management of interfaces is necessary to develop products with components that
'fit together'. Within its products in the area of oncology systems Copmany D
e.g. combines components that have been developed at different sites with their
own 'areas of specialization', California (R&D for linear accelerators,
microwave physics), Finland (R&D for treatment planning software) and
Switzerland (R&D for image acquisition software). Intelligent product
architectures, and thus efforts in managing this architecture, facilitate the
integration of the different technologies into products. The product architecture
is globally uniform and defined in close coordination of all contributing sites, so
that interfaces within the product can fit to the distribution of competences
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Michael Daiber
between the single sites. The process of coordinating tasks and defining
interfaces is decentralized. This reveals to be more complicated. Varian uses a
permanent 'worldwide systems engineering team' that is distributed on the global
sites and coordinates activities in order to assure a proper alignment and
integration of all components. An important part of this task happens through
virtual cooperation between the sites using modern ICT. While in the other sites
that fall into this category (Copmany B and G’s American subsidiaries) the
definition of the product architecture and its interfaces mostly takes place at the
headquarters, it still requires important participation from the different 'centers
of competence' within the company.
In a 'global system innovator' setting, subsidiaries develop, use and adapt
technologies of the company to best fulfill their markets’ needs. In contrast to
the 'local adaptor' setting, development tasks are not limited to adaptations of
existing or even outdated product lines. The example of Copmany E's 'reverse
innovation' fits into this setting. The product architecture and the product itself
are developed in a subsidiary. They are however often based on technologies
that are in use in other products within the firm and should ideally be made
available to other markets. Copmany E's Chinese subsidiary develops and
manages its own product portfolio for the value segment. They also sell their
products to Western markets (e.g. USA) with an own sales organization. In
order to still profit from economies of scale and scope within the whole
company, a special challenge lies in coordinating development activities that are
performed rather independently. Subsidiaries have to find, and thus, actively
search for existing technological solutions within the company's network of
R&D sites and, at the same time, contribute their solutions to other subsidiaries
that might face similar difficulties. Collaboration between different R&D sites
takes place in a more ad-hoc setting, especially when technological skills or
solutions from other sites are required. ICT-based collaboration tools facilitate
coordination. In this setting, the smart architecture of a product defined at one
site can facilitate the reuse of technological solutions within the company;
further reuse of existing components influences the product architecture. In
general however, the product architecture is defined rather independently at a
subsidiary level.
78
High
Center of competence
System innovator
Regular global meetings, central
coordination possible
Decentral integration
Extended workbench
Local adaptors
Low
Level of technological autonomy at subsidiary
As can be seen, central coordination and the management of product architecture
play a different role depending on the role of the subsidiary and the global R&D
setting of a MNC. In figure 4.1 we describe how the definition of product
architecture works for different types of subsidiaries and which importance
product architecture plays in defining the tasks performed at different sites
within the company.
Central
Central, hierarchic
Low
High
Level of market autonomy at subsidiary
Figure 4.1: Coordination structures in global R&D
The distributed R&D activities imply a coordination effort, both centrally in the
headquarters as well as decentrally within the subsidiaries. While defining a
product architecture requires an effort at the beginning of a collaboration
project, the communication and collaboration between remote sites during an
ongoing project work brings important efforts, cf. Olson et al. (2002) and Allen
(1977), which can be reduced through smart product architecture.
In a very standardized setting like 'local adaptors' with low subsidiary autonomy,
product architecture is defined centrally which reduces the coordination effort in
ongoing project work. With a higher subsidiary autonomy the coordination
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Michael Daiber
effort rises both in the headquarters and in the subsidiaries. In the 'center of
competence' setting where subsidiaries have high autonomy regarding
technological matters but serve the same markets together with other sites,
coordination between the different sites is essential to define platforms and
interfaces, which requires important efforts. The actual product development
tasks, then, happen in the different centers of competence, with less need for
coordination within project work. While low autonomy of a subsidiary (e.g. in
an extended workbench mode) does not require important resources to plan the
collaboration in advance, the coordination effort during the daily project work
rises much more. Defining the tasks performed at the subsidiary along the
product architecture might help reduce this effort. The 'system innovator' R&D
setting on the other side plays a special role: The need for central coordination to
define product architectures stays low as products can be developed
independently at subsidiaries without having to stick to close to existing
modules. The need for decentral coordination however is even more important
as subsidiaries have to collaborate in order to identify existing technological
solutions within the company’s network.
4.6 Discussion and conclusion
Our results confirm previous studies that the degree of subsidiary autonomy
regarding technological matters, affects the coordination effort between
subsidiaries of an MNC (Adenfeldt and Lagerström 2006). We further found
deeper insights about the role of ICT within the companies' R&D networks.
Besides facilitating everyday communication, collaboration, coordination, and
knowledge dissemination in R&D, a topic widely discussed in different
contributions (Boutellier, Gassmann et al. 1998; Monaert, Caeldries et al. 2000;
Song, Berends et al. 2007), ICT has also a supporting role in reducing the need
for collaboration and communication within MNC's R&D: As can be seen with
Copmany C, companies performing adaptation tasks in local subsidiaries can
use IT tools to operationalize the interfaces and 'ranges of activity' they defined
within the product architecture, based on their strategic goals and local boundary
conditions.
80
Our study allowed showing the reciprocal effects of global R&D strategy and
global R&D organization on one side and the product architecture on the other
side. In strategic settings with very little R&D subsidiary autonomy, and in
settings with high autonomy regarding both market decisions and the technical
solution, global R&D organization structure and product architecture are less
interconnected. In settings where R&D subsidiaries have certain autonomy
regarding decisions for their markets but low technological autonomy and in
settings where R&D subsidiaries have high strategic autonomy regarding their
products but contribute to one global product, the need for coordination is higher
and product architecture plays an important role. In those cases where R&D
subsidiaries are set up to adapt products to local needs, product architecture
drives the global R&D organization, local subsidiaries are built up to execute
their role (e.g. localizing certain components). In those cases where different
specialized sites contribute to one product, the whole R&D organization defines
the product architecture, different sites contribute to defining and developing the
product, its components and their interfaces, the tasks needed for modularization
(Persson and Ahlström 2006).
This result provides a deeper link between the strategic role of R&D subsidiaries
(mainly described in international management literature), collaboration
between efforts remote R&D sites (often described in NPD literature) and
product architecture (also discussed in NPD literature). While up to now the
topics of platform management and product architecture have mainly been
treated from a manufacturing (Ulrich and Pearson 1998) or general product
development (Ulrich 1995; Mikkola and Gassmann 2003) perspective, this
article focuses on the effects of product architecture and platform management
on global R&D, beyond pure localization that have been already mentioned in
literature aspects (Muffato 1999; Meyer and Mugge 2001). It reveals that the
product architecture heavily depends on the subsidiaries' strategic role within the
company.
This article also contributes to managerial practice by describing the importance
of product architecture when it comes to organizing R&D in multinational
companies in an efficient way. Especially when setting up an international R&D
organization, insights from this article help to understand when the roles of
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Michael Daiber
different subsidiaries within the organization have to be designed along the
product architecture. This gives more in-depth evidence for Sanchez' and
Mahoney's (1996) suggestion that not only organizations design products but
products can also design organizations and provides details to how modular
products and modular organizations fit together (Langlois 2002).
This study, however, is based on a limited number of case studies, about
companies based in Europe and North America and representing a limited
number of industries. A study involving a larger sample of companies including
other industries like pharmaceuticals, chemical industry or consumer goods
might be useful to confirm these results. Further quantitative results measuring
collaboration and coordination costs (working time, collaboration costs, travel
expenses, logistics costs) might help companies finding an optimal setting for
the collaboration between different R&D sites. Another point to investigate on is
how product architecture affects other topics of interest in the discussion about
the globalization of R&D: How can results from research about the product
architecture best be integrated into existing global product development
processes? Which effects do different product architectures have on staffing of
foreign R&D subsidiaries? When are expatriate managers the best choice, when
local ones? Further, longitudinal studies about R&D subsidiaries could help
describe evolution paths of different types of foreign R&D subsidiaries.
82
5. The effect of Chinese MNCs'
internationalization on their R&D
organization
Co-authored by Maximilian von Zedtwitz and Marco Zeschky
For the last years, the global presence of Chinese companies is constantly
growing as did their investments in research and development (R&D). Chinese
companies build up and acquire more and more R&D sites abroad. Based on
the analysis of the 80 biggest Chinese R&D spenders and in-depth case studies
with six Chinese multinationals we describe how Chinese companies
internationalize their R&D and how this affects their organization structure. We
thereby identify different peculiarities of Chinese R&D internationalization.
Chinese tend to internationalize their R&D quickly and carefully at the same
time. Acquisitions thereby play a more important role than for the
internationalization of Western companies. After acquiring foreign R&D sites
Chinese companies often consolidate and recentralize their R&D organization.
We find underlying reasons for the careful Chinese R&D internationalization in
cost considerations as well as rooted in the local culture. We further compare
the internationalization of Chinese companies with extant internationalization
theories, mainly based on insights from Western countries and Japan.
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The effect of Chinese MNC´s internationalization on their R&D organization
5.1 Introduction
During recent years, the location of research and development (R&D) has
shifted from being almost exclusively based in the triad countries (North
America, Europe, Japan) towards emerging markets, especially China. This
trend is not only due to Western companies sourcing R&D activities in China
but also to autochthonous companies innovating for local and global markets.
Chinese companies do not only innovate locally anymore, they target more and
more at international markets, want to improve their technological base and
hence internationalize their R&D activities.
The internationalization of the firm is a well described phenomenon in the
international business and management literature (Johanson and Vahlne 1977;
Dunning 1980). Similarly, there has been extensive research on R&D as the last
function of the value chain to be internationalized (e.g. de Meyer 1993;
Gassmann and von Zedtwitz 1999; Patel and Vega 1999; Pearce 1999; Asakawa
2001; von Zedtwitz, Gassmann et al. 2004). In absence of multinational
companies from emerging markets, past research has mainly investigated how
Western multinational companies (MNCs) internationalize. In the wake of the
economic rise of emerging markets, however, a new cohort of MNCs have
emerged from countries like China and India (Xie and Wu 2003), the number of
Chinese companies among the 500 biggest companies in the world has more
than tripled in the last ten years, while the amount of foreign direct investment
(FDI) outflow from China has been multiplied by more than 10 during this time
(di Minin and Zhang 2010). With 68.1 billion US$ in 2010 China is now the
fifth country worldwide in terms of outward FDI (Xinhua 2010). This FDI also
includes investment in foreign R&D sites. Based on our database comprising
115 foreign R&D sites of 37 Chinese companies (cf. figure 5.1), we can observe
that China's companies are present with own R&D sites on all continents,
including the classical global R&D locations (American East & West coast,
western and Northern Europe, Japan) but also in other emerging markets (India,
Eastern Europe, South East Asia).
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Michael Daiber
v
Figure 5.1: Overview of Chinese owned R&D sites abroad
(source: GLORAD Database 2011)
As emerging economies usually have a quite different institutional environment
compared to developed countries (Yiu, Lau et al. 2007; Cuervo-Cazurra and
Genc 2008), they provide different starting points for the internationalization of
local firms. The question therefore arises if current theories about the
internationalization of the firm still hold true when considering MNCs from
emerging countries such as China. By analyzing Chinese companies we would
like to answer the following questions: How are Chinese MNC with foreign
R&D subsidiaries organized? How do their organizations evolve? What are
differences towards internationalization of Western MNC's R&D? How can
these differences be explained?
In this article, we aim to enhance extant literature about the international
organization of global R&D by analyzing how MNCs from China
internationalize their R&D function. Using semi-quantitative and qualitative
research methods, we investigate developments paths and the structure of their
international R&D organization. After reviewing literature on the globalization
of R&D and literature describing the internationalization of Chinese companies,
we will draw a general picture on the R&D internationalization within Chinese
companies, based on data from companies within the 80 biggest Chinese R&D
86
spenders, derive different patterns of internationalization, and exemplify these
patterns through in-depth case studies.
5.2 Literature
5.2.1 Models and Overview on R&D Internationalization
R&D is one of the last corporate functions to be internationalized within a MNC
(Boutellier, Gassmann et al. 2008). The internationalization of other corporate
functions as sales or logistics has been explained with trade theories (Ohlin
1967) and through transaction costs (Dunning 1980). The Uppsala model of
internationalization (Johanson and Vahlne 1977) proposed a sequential process
of internationalization, starting with exportation and leading to different types of
FDI. For international R&D, however, other explanations were needed.
Research about international R&D organizations of MNCs came up within the
last 25 years. Up to now different topics have been investigated:
The main reasons for internationalizing R&D can be found in the access to
foreign markets and technology (von Zedtwitz and Gassmann 2002), including
the access to scientific and technical experts (Florida 1997). Based on these
motivations, MNCs have different types of foreign R&D sites within their
organization. Bartlett and Ghoshal (1989) derived a first classification of R&D
subsidiaries through analyzing how subsidiaries interact with other parts of the
organization. Other classifications followed, based on the level of strategic
autonomy of a subsidiary (Birkinshaw and Hood 1998), on the question to
which degrees it contributes to the knowledge resources within the company or
uses them (Kuemmerle 1997), and on its level of specialization within the MNC
(Chiesa 2000). Scholars also analyzed global R&D from a company perspective
rather than a subsidiary perspective, e.g. Chiesa (1996) or Gassmann and von
Zedtwitz (1999). The companies' R&D organizations are thereby compared,
depending on their level of centralization/internationalization as well as on the
level of collaboration between their R&D sites.
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5.2.2 Cultural background: Chinese management
According to the institutional theory, the institutional, i.e. social, cultural and
political environment can strongly influence the ways of organization, often
more than market influences them (Meyer and Rowan 1977; di Maggio and
Powell 1983). Based on this insight, scholars started researching the differences
between western and Chinese or more generally oriental management styles (Su
2005). Mainly based on different national cultures (Hofstede 1980; Tang and
Koveos 2008) Chinese companies have different management and practices than
those common in the western world (Buckley, Clegg et al. 2006). Especially the
stronger collectivistic cultural component and the stronger power distance,
respectively more paternalistic leadership behavior have effects on how Chinese
companies tackle challenges closely linked to innovation like R&D (Zhang and
Begley 2011).
Cultural, political and historical reasons are used to describe the peculiarities of
Chinese management: Scholars wrote about the important role of hierarchies
rooted in Confucian values (Yeh and Xu 2010), the higher importance of
'guanxi', networks of personal trust, compared to formal reporting lines (Xin and
Pearce 1996; Chen and Chen 2004; Chua, Morris et al. 2009) and about the
paternalistic role of the state (Jin and von Zedtwitz 2008), even perceived in
public companies.
5.2.3
The internationalization of Chinese MNCs
As for companies from developed countries, general motivations for the
internationalization of companies from emerging markets are based on
technological and market drivers. Von Zedtwitz (2005) describes two trends in
R&D internationalization of firms from emerging markets: expansional
international R&D, mostly into other developing countries and catch-up
internationalization, into industrial countries, mostly performed to acquire
technological skills.
The internationalization of Chinese companies is a rather recent phenomenon,
especially in an R&D environment. It has largely been triggered and pushed by
the 'going-out policy' (zouchuqu zhanlüe), set up around the year 2000 to
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encourage outward FDI from Chinese companies (Shi 2002). Chinese
companies can hence be seen as late developers (Dore 1990) on the global
market. This brings them certain disadvantages compared to Western companies
(Cho, Kim et al. 1998; Luo and Tung 2007), but also enables them to learn from
more advanced technological standards and management practices abroad. The
late-comer status allowed them to 'springboard' (Luo and Tung 2007) or 'leapfrog' in their development towards multinationals (Warner, Ng Sek et al. 2004).
Companies from emerging markets thereby often take "aggressive, risk taking
measures by proactively acquiring or buying critical assets from mature
multinational enterprises (MNEs) to compensate for their competitive weakness"
(Luo and Tung 2007). Although an important part of acquisition made by
Chinese companies serves to access natural resources, especially in mining, the
access to technology is also seen as a main driver (Wang and Boateng 2007; Rui
and Yip 2008). Chinese multinationals have improved by learning from foreign
companies. Child and Rodrigues (2005) identify three different 'routes' being
taken by Chinese firms toward internationalization (1) the partnership route
through original equipment manufacturing (OEM) or joint venturing, e.g. taken
by Galanz; (2) the acquisition route; e.g. taken by TCL (3) and the organic
expansion route, e.g. Haier. Up to now, however, there is no evidence on how
Chinese companies' R&D organizations evolve after internationalization, and
few insights about why Chinese companies chose a certain evolution path.
5.3 Methodology
The internationalization of R&D is still a recent phenomenon among Chinese
companies, as one of the first companies Huawei built up research and
development labs in Russia, India and Sweden around the year 2000, the same
year as external FDI has started to be actively pushed by the government.
Further the number of Chinese companies performing R&D activities abroad is
still limited. We therefore chose a semi-quantitative and qualitative research
approach.
89
Company
Industry
R&D/
sales
ratio
Foreign
sales
R&D
employees
R&D
employees
abroad
R&D sites
in China
R&D sites
abroad
Geely
Automotive
6%
8% excl.
Volvo
2381 Geely
Geely 0%
Linhai, Shanghai,
Ningbo, Hangzhou,
77% incl.
Volvo
3800 Volvo
Volvo ~10%
(incl. site in
Shanghai)
Shanghai (Volvo)
Gothenburg, Barcelona,
Camarillo (US), (all Volvo)
Acquisition/
Greenfield
investment
Acquisition
Goodbaby
Children's
products
4%
78%
330
7-8%
Kunshan
Utrecht (NL), Boston, Hong
Kong, Tokyo
Greenfield
investments
Huawei
Telecom
infrastructure
10%
74%
51'000
~ 5%
Shenzhen,
Hangzhou, Nanjing,
Wuhan, Beijing,
Xi'an, Chengdu
Stockholm, Baringstoke
(UK), Moscow, Berlin,
Munich, Milan, Amsterdam,
Madrid, Israel, Bangkok,
South Africa, Lagos (NI),
Bangalore, Ottawa, Silicon
Valley, Dallas
Greenfield
investments
Lenovo
ICT hardware
1.4%
57%
1800
(in 2005)
now more
47%
(in 2005)
now less
Beijing, Shenzhen,
Shanghai, Xiamen,
Chengdu
Raleigh (USA), Yamato
(JP)
Acquisition
TCL
Communications
Telecom
hardware,
electronics
4%
94%
2'000
5-10%
Huizhuo, Shanghai,
Shenzhen, Ningbo,
Chengdu
Paris, Milan, Mexico, Irvine,
Silicon Valley
Acquisition
ZTE
Telecom
infrastructure
and hardware
10%
50%
20'000
1-2%
Nanjing, Shenzhen,
Beijing, Shanghai,
Xi'an, Tianjin,
Chongqing,
Chengdu, Sanya
New Jersey, San Diego,
Dallas, Austin, Stockholm,
Bangalore, Islamabad,
Korea, Santiago de Chile
Greenfield
investment
Michael Daiber
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Table 5.1: Overview of Companies analyzed in-depth during our research
5.3.1 Sampling and analysis
(1) To get a general overview about how Chinese companies internationalize
their R&D and how frequent are different internationalization paths, we
identified the companies with international R&D among the 80 Chinese
companies (and holdings) with the biggest R&D spending (China Internet
Information Center 2011). In order to focus on companies that have a similar
definition of R&D we thereby refined our research on companies active in
medium hi-tech and hi-tech industries (OECD 2005). This helped us to
exclude companies where R&D is not a main driver for R&D
internationalization like mining or natural resources. Among the 32
companies in our industries all except two already had experience with
foreign collaboration in R&D; about half of them owned foreign R&D sites.
(2) In order to get deeper insights on motivations and R&D internationalization
strategies of Chinese companies and the reasons why they opted for a certain
internationalization path, cf. Child and Rodrigues (2005), we decided to
conduct in-depth case studies (Eisenhardt 1989) with Chinese companies that
already own foreign R&D sites. According to taxonomy shared by diverse
authors' (Barkema and Vermeulen 1998; Slangen and Hennart 2008), we
chose to analyze three companies that have internationalized their R&D
autonomously by Greenfield investments in new sites and three companies
that internationalized their R&D through acquisitions. This reflects the equal
prevalence of both types of internationalization within our larger sample. An
overview of our companies is presented in table 5.1.
In order to obtain information about their internationalization paths and
underlying motivations, we performed multiple face-to-face interviews with
their R&D managers including representatives of the headquarters (CTOs,
Senior Vice President R&D) as well as domestic and foreign R&D centers
(head of R&D center).
These results were validated through the interviews and the analysis of
secondary documents from Chinese companies engaging in international
R&D, either being part of the first sample or other notable examples of
internationally active Chinese companies.
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Michael Daiber
5.3.2 Research framework
In order to guarantee comparability and external validity within our research we
refer to Gassmann and von Zedtwitz' (1999) framework used to describe the
internationalization of R&D organizations. This model is based on 5 archetypes
of R&D organizations within MNCs: (1) The ethnocentric R&D, where R&D is
essentially performed in the home country; (2) the geocentric centralized R&D,
where R&D sites are located in the home country, however, collaborate
internationally; (3) the polycentric decentralized R&D, where R&D sites in
different countries act without strong coordination, (4) the R&D hub model, with
foreign R&D labs tightly led by the headquarters; and (5) the integrated R&D
network, where relatively autonomous subsidiaries in different countries
collaborate for R&D. Gassmann and von Zedtwitz further identified paths along
which companies evolve from one organizational model to the other (cf. figure
5.2). Their model has been derived from observations among Western and
Japanese companies and implies a step by step internationalization of R&D by
companies tapping and building up a hub and spoke model with small R&D
satellites situated abroad. In their framework these foreign sites later build up
competences and grow towards more autonomy, being part of an integrated
R&D model.
Based on these frameworks we especially want to show differences between the
internationalization modes of Western companies' R&D and Chinese companies'
R&D.
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Dispersed R&D Sites
More than 50% of R&D Abroad
Polycentric
decentralized
R&D
Synergy
R&D
Hub
R&D only in Home Country
Single/Few R&D Sites
Competences
Costs
Tapping
Tapping
Ethnocentric
centralized
R&D
Integrated
R&D Network
External
Orientation
Geocentric
centralized
R&D
Competition (“I”)
Cooperation (“We”)
Everyone for Themselves
Leverage and Support Others
Figure 5.2: Organization forms of global R&D (Gassmann and von Zedtwitz, 1999)
5.4 Results: Developments in Chinese R&D
internationalization
When looking at the R&D internationalization of the 32 companies within our
larger sample, sixteen of them own foreign R&D sites. In eight of these sixteen
cases the foreign site was built up through Greenfield investments, in eight other
cases through merger and acquisition (M&A) activities. Through the in-depth
analysis of the six companies within our case study sample, one can observe
trends that differentiate them from the classical approach described in existing
literature mainly based on insights from Western and Japanese companies.
These trends will be described in the following subchapters:
5.4.1 Catch-up through acquisitions
An important part of the Chinese companies, eight of the sixteen companies in
the larger sample that actually own foreign R&D sites, got their first foreign
R&D site through an acquisition of foreign companies or their subunits (figure
5.3). The acquisition of foreign companies, leads to a new international R&D
organization structure: By acquiring IBM's PC hardware business, Lenovo
turned to have an international R&D organization. While some companies
already collaborated with foreign organizations in R&D before the acquisition
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Michael Daiber
others like Geely started from a completely ethnocentric context with all R&D
activities performed in their domestic R&D center.
For those Chinese companies that acquired foreign companies before having
internationalized their R&D themselves, acquisitions were a quick means to
access foreign markets and to acquire technological knowledge. Companies that
were mainly China focused turned into multinationals 'overnight'. Lenovo e.g.
was the best-selling computer brand in China from 1996 on, but was not present
in industrialized western countries. IBM as acquisition target was present all
around the world and allowed to expand Lenovo's presence from a handful of
countries in Asia to over 163 countries around the world. In 2010 Geely sold
only 20'555 of its totally 415'286 cars abroad mainly to other emerging markets
like Russia, Turkey and different Latin American countries. TCL was already
number 8 on the global mobile phone market before acquiring Alcatel's mobile
phone business, its markets were, however, less international than today.
Although not always the main reason for the acquisition, the access to foreign
technology always played an important role. As stated by a TCL executive:
"When acquiring Alcatel mobile phones, TCL mainly targeted at expanding its
markets to Europe and Latin America. However, from a technological
perspective, we could rely on Alcatel's intellectual property to enter the 2G
telephony market". Geely's acquisition of Volvo was mainly motivated by the
possibility of entering the premium cars segment. The access to technologies
and technological expertise was though seen as another reason for Geely next to
the access to new markets. As Frank Zhao, product development director at
Geely said, an important part of the deal for Geely is to gain "rights to use 'a
large amount of Volvo's intellectual property, including access to its fuel-saving
environmental and safety technology".
The Chinese companies thereby chose well established western companies with
relatively high reputation while these were in a bad financial situation. Volvo's
acquisition was planned during the economic crisis when the sales for premium
cars dropped and Ford wanted to get rid of their daughter company. The
situation was similar for Lenovo buying IBM's loss-making PC hardware branch
and TCL's acquisition of Alcatel's mobile phone business.
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Dispersed R&D Sites
Polycentric
decentralized
R&D
Acquisition
Ethnocentric
centralized
R&D
External
Orientation
Geocentric
centralized
R&D
Figure 5.3: Internationalization through acquisition
5.4.2 Recentralization of control for greater leverage
For all three companies of our sample internationalizing their R&D through
acquisitions, we observed the integration after the acquisition represents an
important challenge. Two different ways can be observed: While in some cases
the acquired R&D organization is kept separated other companies try to
consolidate the R&D organizations of the acquiring and the acquired company
(figure 5.4).
In Geely/Volvo's case both R&D organizations are kept rather separate from
each other. As stated by different high level Geely executives: "Geely and Volvo
are not like father and son but rather like two brothers. Both companies have
their own activities and help each other if needed". Even compared to its past as
a part of Ford, Volvo has more strategic freedom to develop cars independently.
Although Volvo is building up an R&D center in Jiading, close to Shanghai,
both R&D organizations are kept separately also in China. Plans for Volvo are
to establish China as its second home market and their presence with an R&D
site in Shanghai should help growing in the Chinese market. As chairman Li
Shufu said "Geely would not seek to impose its own corporate culture on Volvo
but rather find ways to let the Swedish company exploit its strengths". On a
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Michael Daiber
medium term view, the two R&D organizations might work together on certain
projects, e.g. to help lower R&D costs. Geely's product development director
can imagine providing low-cost engineering support for Volvo with Chinese
engineers. For the foreseeable future however, the organizations are and will be
deliberately kept separate from each other. Geely and Volvo representatives
state the following reasons for this separation:
(1) Branding: The two companies' brands are too different from each other, as
is their reputation within the automotive. While Volvo is positioned as a
European premium car, Geely is perceived as a Chinese budget brand and
only sold in China and other developing markets. Common R&D
activities between both companies might affect Volvo's brand image.
(2) Different vision for the acquired company: The Geely holding plans to
actively increase the market share of Volvo cars in the Chinese market,
with a completely different positioning than Geely's existing brands.
(3) Technological Level: Especially as both companies start from a
technologically highly different level, consolidating both R&D
organizations appears to cause too many difficulties and to bear too much
risk for the high technological level known from Volvo.
Different Chinese holdings that acquired medium-sized European companies in
the area of machine tooling or automotive supply also kept the operations
separate from each other in a similar way, examples the acquired companies like
Waldrich Coburg (machine tooling) or Duerrkopp Adler (textile machines) still
operating rather independently under Chinese ownership.
Other companies tend to integrate R&D operations after the acquisition: After
taking over Alcatel's mobile phone business, TCL sought to concentrate the
actual product development activities in China: With the exception of Alcatel's
Chinese R&D lab in Shanghai where now an important part of TCL's product
development activities are located, the old (non-Chinese) Alcatel R&D sites lost
their former relevance for product development. Although a few technological
experts remain in Paris, most have been encouraged to work for TCL in
Shanghai. TCL's foreign R&D sites serve as market adaptation centers (Mexico,
Paris), dedicated centers to investigate in certain technologies (Silicon Valley)
96
or for product design (Milan). Activities that could be performed in China at
lower cost were transferred to China whenever possible. Worldwide R&D
activities are steered from China; Chinese returnees with professional and
technical experience abroad thereby play an important role to coordinate
activities.
Dispersed R&D Sites
Although not as extreme, a similar trend can be observed with Lenovo: Through
the acquisition of IBM's PC business the company nearly doubled their R&D
staff from 900 to 1700 employees. Former IBM sites in Raleigh (USA) and
Yamato (Japan) entered the company. The post merger phase was an intense and
time consuming process for both organizations as highly different company
cultures had to be integrated. According to a company executive, within the two
first years the merger was performed organizationally, however, only after 5
years the different parts of the organization really worked together.
Polycentric
decentralized
R&D
Consolidation
R&D
Hub
Acquisition
Ethnocentric
centralized
R&D
Figure 5.4: Post acquisition consolidation
Today Lenovo's R&D organization is expanding mainly in China, a new site is
being built up in Chengdu, and the site in Beijing is expanded. In Lenovo's case
however, substantial R&D is still performed at the former IBM sites. Lenovo's
R&D is still international: Lenovo's board members are partly Chinese partly
foreigners. Lenovo's CTO is based in Beijing and his leadership team consists of
senior managers from different sites in China, USA and Japan. They currently
supervise 15 R&D key projects going on in different sites, sometimes also
across sites.
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Michael Daiber
5.4.3 How Chinese MNCs internationalize step by step
Besides the cases of Chinese acquisitions that got a lot of attention among the
Western public, a considerable number of Chinese companies are
internationalizing their R&D through building up own sites abroad. In our larger
sample eight of the sixteen companies that own foreign R&D sites acted
accordingly. Huawei and ZTE for example, the two major Chinese players in the
telecommunication industry, have an important number of R&D sites abroad,
but also smaller companies internationalize their R&D without using mergers or
acquisitions. Goodbaby, the Kunshan based producer of children products like
baby strollers, has built up R&D sites in Europe, the USA and Japan during the
last years. Although ZTE, Huawei and Goodbaby have more foreign R&D sites
than R&D sites in China, the proportion of R&D employees abroad remains
relatively small for all three (cf. table 5.1).
The companies' foreign sites R&D have been built up for various reasons and
have different roles within the organization. These roles include acquiring
knowledge about certain technologies (e.g. Huawei and ZTE's sites in Sweden,
Germany or the USA), investigating about markets and customers and adapting
products to their needs (Goodbaby's foreign R&D sites, ZTE's sites in India and
Pakistan).
Further R&D sites have been set up where expertise in a certain technology is
expected. So Huawei's R&D site in Milan, specialized in microwave
technologies, has been built up where Nokia Siemens networks shut down their
facilities and experts in this field were available on the labor market. Huawei
also built up R&D sites close to existing facilities of technological leaders, the
R&D site for mobile cell towers has been built up in Munich, close to the
facilities of Kathrein and Rohde und Schwarz, leading companies in the domain
of antennas and radio communication. Other sites from companies like Huawei
and ZTE are situated in clusters traditionally renowned for their technological
expertise in these areas like Silicon Valley, Israel or the Stockholm area. When
asked for the location choice for their site near Stockholm, a ZTE executive
described hiring key people, especially experts in CDMA Technology as a main
motivation.
98
None of the companies internationalizing their R&D through Greenfield
investments has more than 10% of R&D employees abroad, especially the actual
product development tasks are mainly performed at the home base in China.
Foreign R&D sites only have to perform one dedicated task e.g. adaptation to a
certain market, technology listening post activities. Furthermore, R&D activities
and budgets are centrally coordinated in headquarters. Within ZTE, for example,
the divisions' Senior Vice Presidents, located in China (Nanjing, Shenzhen, or
Shanghai), lead their marketing team that decides which R&D projects to
launch. The R&D budget (approx 10% of ZTE's turnover) is defined by the CEO
and distributed on the different divisions. R&D Projects are negotiated within
this division and defined there. ZTE China (respectively the divisions) decides
what happens in R&D worldwide, foreign R&D centers can only decide on very
small projects autonomously. When it comes to company culture, the Chinese
heritage stays dominant for Chinese companies that internationalized step by
step: Even after the internationalization Huawei stays a Chinese company with a
high degree of centralization. Chinese stays the most important language within
the company. The key positions at Huawei's R&D labs were held by Chinese
nationals for a long time, Chinese employees are present in many foreign sites.
Although being embedded in a matrix organization, the foreign R&D sites report
to both central R&D in Shenzhen as well as to the respective national/regional
organization, as stated by employees of a German R&D site "the decision power
clearly lies at the central R&D in Shenzhen".
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Michael Daiber
5.5 Discussion: Why does Chinese internationalization
differ from existing concepts
Internationalization of Chinese companies took place within very short time at a
high speed. Whereas fifteen years ago Chinese multinationals did not exist, their
number has considerably increased during the last years. This holds also true for
the number of Chinese owned R&D sites abroad. The speed of
internationalization is due to the fact that Chinese companies are latecomers and
to the way Chinese policy makers dealt with this situation (Dore 1990; Luo and
Tung 2007). Based on the 'going-out policy' (Shi 2002; Buckley, Clegg et al.
2007) the internationalization of R&D can be seen as a top down political and
strategic decision, especially for those companies internationalizing through
M&A. Chinese companies often internationalized in so called 'windows of
opportunities' (Lee, Lim et al. 2005), i.e. Chinese companies often acquire
companies for relatively 'cheap' prices when they are in financial difficulties
(e.g. Geely's acquisition of Volvo cars) or set up R&D labs where Western
competitors closed their operations and skilled personnel is available (e.g.
Huawei's R&D lab at a former site of Nokia Siemens Networks in Milan).
In general, Chinese companies stick to a tight central coordination (R&D hub)
and do not opt for further decentralization (i.e. towards an 'integrated network')
They do not build up competences abroad, but rather use these sites to acquire
competences or expertise and transfer them to the headquarters or central R&D
in China. Acquired foreign sites are either consolidated (e.g. TCL) or kept
separate (e.g. Geely/Volvo), seeking synergies by building up foreign sites as a
rather autonomous node in an integrated network does not happen.
When Chinese companies build up foreign R&D sites from scratch they follow
certain rules: Some sites are located in the companies' most important foreign
markets and in areas where employees with technological expertise are easy to
find: Goodbaby's site in Utrecht in the Netherlands is located close to design
companies Goodbaby collaborates with. Huawei's R&D site in Madrid i.e. is
situated close to Telefonica's headquarters, an important phone carrier in Europe
and Latin America. Another similar motivation to locate sites is the proximity to
officials and national governments: ZTE built up R&D sites in India and
Pakistan to be present in these important markets to get a 'local citizen' image. In
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this case the main necessity was not to adapt products to the local markets, the
R&D offices were built up to facilitate technological communications with the
carriers and governments, and to provide a certain local citizen image to ZTE.
For all companies except Geely/Volvo, that keep their R&D operations separate,
the foreign R&D sites only account for a small minority of these companies'
R&D employees. The internationalization of R&D in Chinese companies can be
qualified as quick and careful at the same time. Chinese companies build up or
keep foreign R&D sites only where it is absolutely necessary for market or
technology reasons, motivations already highlighted by von Zedtwitz and
Gassmann (2002). Chinese companies that mainly target the domestic market
and are not research intensive, e.g. most Chinese (generic) pharmaceutical
companies, do not internationalize at all. Generally speaking the
internationalization level of R&D and the autonomy of foreign R&D labs stay
rather low. The following reasons explain this Chinese approach:
Missing necessity of internationalizing further: China nowadays has an
important pool of qualified employees. Chinese returnees that have lived,
studied, and worked abroad come back to China and contribute to domestic
R&D (Filatotchev, Liu et al. 2011). They contribute significantly to innovation
by transferring technical and managerial knowledge from Europe and the USA
although being active in China. Further, also Chinese universities are catching
up (Zhou and Leydesdorff 2006) and 'produce' highly skilled talents being able
to develop products for the world.
Cost structure: Chinese companies' foreign direct investment (FDI) to build up
R&D often go into countries with higher labor cost, especially when their
motivation is accessing technological skills. Cost arbitrage reasons which are
not dominant but also discussed when it comes to the internationalization of
R&D (Gassmann and von Zedtwitz 2002) are turned into disadvantages when
describing the internationalization from a Chinese perspective. Further,
coordination efforts and costs increase tremendously for R&D activities
performed at multiple sites (Allen 1977; Olson, Teasley et al. 2002). As China
has, for long time, been isolated from external cultural influences, foreign
language proficiency is still relatively low among Chinese employees. This
language barrier often makes Chinese the dominant language for company
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internal communication. Coordinating tasks between headquarters and foreign
subsidiaries hence becomes a more difficult and expensive.
Cultural reasons: Chinese companies often tend to a rather centralistic culture.
Huawei's foreign R&D centers are staffed with local and international experts as
well as an important number of Chinese expatriates to control local operations.
Although opening up towards western management practices, e.g. through the
influence of returnees, Chinese companies stay rooted in the Chinese leadership
style. As hierarchies play an important role in Chinese management (Yeh and
Xu 2010), the headquarters stay the place where decisions are taken, which does
not allow for high levels of autonomy at the subsidiaries. Further, Chinese
companies, as the entire Chinese society, are dominated by 'guanxi' (Xin and
Pearce 1996; Chua, Morris et al. 2009). Chinese CEO's tend to install their
protégés, often with family link, mostly Chinese nationals, to direct foreign
operations. These personal linkages towards the headquarters favor a tight
coordination between headquarters and subsidiaries and tight control rather than
high levels of autonomy.
Chinese companies that internationalize their R&D only do so if the opportunity
costs of not internationalizing their R&D outweigh the high costs of a foreign
site. These opportunity costs are mostly located in the missing access to foreign
markets or missing technological level to compete in domestic markets.
5.6 Conclusions
This article provides a dynamic description of the internationalization of R&D
in Chinese firms. This phenomenon differs from existing theories on
internationalization of the company (Johanson and Vahlne 1977) as
internationalization does not always happen in a slow and steady process but
often rather quickly. Compared to the internationalization of R&D in Western or
Japanese MNC described by Gassmann and von Zedtwitz (1999) the following
main peculiarities can be observed:
(1) Many Chinese companies internationalize their organization through
acquisitions (Child and Rodrigues 2005; Luo and Tung 2007), a
phenomenon that has not been described by in the above mentioned
102
model. After an acquisition the R&D labs of the Chinese acquirer and the
foreign target are first part of the same company/holding structure without
cooperating, which describes that those companies move from an
ethnocentric or geocentric R&D model (depending on their previous
experience with foreign collaboration partners) to a polycentrically
decentralized R&D.
(2) After an acquisition some Chinese companies remain in the
polycentrically decentralized R&D model keeping both R&D
organizations apart (e.g. Geely/Volvo), others tend to consolidate both
R&D organizations (e.g. TCL, Lenovo) through centralizing decision
making rather than building up R&D networks with different specialized
sites. This trend to centralizing decision making within a polycentric
decentralized R&D setting has not yet been described in literature about
R&D organization.
(3) Foreign subsidiaries with a high level of strategic autonomy and
collaboration within the network could not be observed. Although
validating our observations with the biggest Chinese R&D spenders and
other most internationalized Chinese companies, we could not identify
Chinese companies building up an integrated R&D network. Chinese
companies that internationalized their R&D through Greenfield
investment developed their R&D organization from ethnocentric or
geocentric centralized R&D to an R&D hub model, depending on their
previous experience with international R&D collaboration. The
subsidiaries thereby have to fulfill a role (Nobel and Birkinshaw 1998)
defined in the headquarters without having the autonomy for far reaching
strategic decisions.
Figure 5.5 describes on our observations at Chinese companies based on the
model of Gassmann and von Zedtwitz (1999).
Our research can be considered as an early step towards understanding a young
phenomenon. By analyzing the biggest companies we only looked at the tip of
the iceberg concerning R&D from Chinese companies. At the current state of
Chinese R&D internationalization, quantitative analyses could allow to
103
Michael Daiber
Dispersed R&D Sites
investigate on an important part of all Chinese companies that internationalized
their R&D, and produce highly valid results.
Polycentric
decentralized
R&D
Consolidation
Acquisition
R&D
Hub
Tapping
Tapping
Ethnocentric
centralized
R&D
External
Orientation
Geocentric
centralized
R&D
Figure 5.5: Internationalization of R&D in Chinese MNCs
We proposed a Chinese mode for the internationalization of R&D comparable
with other nation specific modes, e.g. for Japan (Grandstrand 1999). Up to now,
this Chinese mode of internationalizing R&D helps Chinese companies to
reduce the technological distance towards their competitors in established
markets and to adapt their products to be sold in other emerging markets.
Technologically, however, Chinese companies stay in a follower position: Their
technological development is mainly based imitating and applying existing basic
technologies to develop new products within China. Given the big reservoir of
science of technology graduates (Zhou and Leydesdorff 2006), the question
emerges whether Chinese companies with this type of organization design will
manage to turn into technology leaders. The evolution of the Chinese patent
system, especially the appropriability of intellectual property rights (Teece 1987;
Yang 2008) will thereby play a significant role.
104
Appendix
Appendix 1 Research Projects
Table 6.1: Collaborative research projects performed at the Institute of Technology
Management
Project
Duration
Companies involved
KTI CrossNovation
01.2007 - 12.2008
Zühlke Engineering, BMW, Alcan, Lonza, Ciba,
Schindler, ZF Friedrichshafen, Reichle & de
Massari, Sevex, SIG allCap, W.L. Gore&
Associates
Lonza LIFT
02.2008 - 09.2008
Lonza
KTI Crowdsourcing
10.2008 - 02.2010
Atizo, INCH
Case Studies with Bühler, EWB, Youtility,
Wander, ABB, and others
Managing Open
Innovation
03.2009 - 11.2009
MAN Turbo, Dr. Oetker Nahrungsmittel KG, SMS
Siemag, MTU Friedrichshafen, Philip Morris
International, OSRAM GmbH
KTI Managing Global
Innovation
01.2010 - 12.2011
Henkel, Nestlé, Liebherr, Giesecke & Devrient,
Siemens Medical, Airbus, Varian Medical,
Reichle & de Massari, Dräger Medical, Zühlke
Engineering
SNF Project:
Internationalization of
Innovation in China
12.2010 - 11-2011
Geely, Goodbaby, Huawei, Lenovo, TCL, Wuxi
Apptec, ZTE
105
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Curriculum Vitae
Personal Details
Michael Louis Joachim Daiber, MSc ETH,
born February 16th 1983 in Stuttgart (Germany)
Educational Background:
2008 - 2012
University of St.Gallen, Switzerland
Research associate and doctoral candidate at
the Institute of Technology Management
2010 - 2011
Tongji University Shanghai, P.R. of China
Visiting Researcher at the Sino-German Chair of
Postgraduate Studies
2005 - 2007
ETH Zurich, Switzerland
Master of Science in Mechanical Engineering
2005 -2006
Universitat Politècnica de Catalunya,
Barcelona, Spain
Visiting Student in Industrial Engineering
2002 - 2005
ETH Zurich, Switzerland
Bachelor of Science in Mechanical Engineering
2001
Eberhard-Ludwigs-Gymnasium, Stuttgart, Germany
Abitur (German high-school diploma)
137

dis4003 - Universität St.Gallen

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