dis4003 - Universität St.Gallen
Transcrição
dis4003 - Universität St.Gallen
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 ix 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 1 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 3 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 5 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. 7 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 9 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 The role of intermediaries in cross-industry innovation processes 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 The role of intermediaries in cross-industry innovation processes 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",… The role of intermediaries in cross-industry innovation processes 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). 29 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 The role of intermediaries in cross-industry innovation processes 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 31 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 The role of intermediaries in cross-industry innovation processes 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 The role of intermediaries in cross-industry innovation processes 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 Diagnostic competence 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 Diagnostic competence 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 Diagnostic competence 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 Diagnostic competence 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. Capabilities required Diagnostic competence 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 Capabilities required Diagnostic competence Analogical step towards automotive industry already taken by customer, detail know-how in this field required by intermediary Technical know-how Observations Capabilities required Bernina// BETACO Observations Capabilities required Nespresso// GAMMACO Mammut// DELTACO Capabilities required 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 The role of intermediaries in cross-industry innovation processes 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 The role of intermediaries in cross-industry innovation processes 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. 41 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 Organizing ambidextrous corporate venturing: The case of Lonza 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 47 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 Organizing ambidextrous corporate venturing: The case of Lonza 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 49 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 Organizing ambidextrous corporate venturing: The case of Lonza 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. 51 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 Organizing ambidextrous corporate venturing: The case of Lonza 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, 53 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 Organizing ambidextrous corporate venturing: The case of Lonza 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 55 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. 56 Organizing ambidextrous corporate venturing: The case of Lonza 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, 57 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 58 Organizing ambidextrous corporate venturing: The case of Lonza 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. 59 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. 61 Collaboration and coordination in global R&D of MNC: The role of product architecture 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 63 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, 64 Collaboration and coordination in global R&D of MNC: The role of product architecture 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 65 Michael Daiber 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 Collaboration and coordination in global R&D of MNC: The role of product architecture 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. 67 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. 68 Collaboration and coordination in global R&D of MNC: The role of product architecture 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). 69 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 low: global products 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 low: global products 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 low: global products 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 Collaboration and coordination in global R&D of MNC: The role of product architecture 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. 71 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 Technological center 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 74 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 Technological center 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 75 Collaboration and coordination in global R&D of MNC: The role of product architecture 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. 76 Collaboration and coordination in global R&D of MNC: The role of product architecture 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 77 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 Collaboration and coordination in global R&D of MNC: The role of product architecture 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 79 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 Collaboration and coordination in global R&D of MNC: The role of product architecture 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 81 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. 83 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). 85 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 The effect of Chinese MNC´s internationalization on their R&D organization 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. 87 Michael Daiber 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 88 The effect of Chinese MNC´s internationalization on their R&D organization 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 90 Table 5.1: Overview of Companies analyzed in-depth during our research The effect of Chinese MNC´s internationalization on their R&D organization 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. 91 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. 92 Dispersed R&D Sites More than 50% of R&D Abroad The effect of Chinese MNC´s internationalization on their R&D organization 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 93 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. 94 Dispersed R&D Sites More than 50% of R&D Abroad The effect of Chinese MNC´s internationalization on their R&D organization Polycentric decentralized R&D R&D only in Home Country Single/Few R&D Sites Acquisition Ethnocentric centralized R&D External Orientation Geocentric centralized R&D Competition (“I”) Cooperation (“We”) Everyone for Themselves Leverage and Support Others 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 95 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 The effect of Chinese MNC´s internationalization on their R&D organization 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 More than 50% of R&D Abroad 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 R&D only in Home Country Single/Few R&D Sites Acquisition Ethnocentric centralized R&D Competition (“I”) Cooperation (“We”) Everyone for Themselves Leverage and Support Others 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. 97 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 The effect of Chinese MNC´s internationalization on their R&D organization 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". 99 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 100 The effect of Chinese MNC´s internationalization on their R&D organization 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 101 Michael Daiber 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 The effect of Chinese MNC´s internationalization on their R&D organization 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 More than 50% of R&D Abroad 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 R&D only in Home Country Single/Few R&D Sites Tapping Ethnocentric centralized R&D External Orientation Geocentric centralized R&D Competition (“I”) Cooperation (“We”) Everyone for Themselves Leverage and Support Others 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. 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Research Policy 35(1): 83-104. 136 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