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Innovation: From Research to Practice

Professor Julian Birkinshaw

London Business School

Intertrade Ireland Innovation Programme, June 9th 2009

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Today’s context

Deep recession

Businesspeople have lost credibility

Questioning of Ireland’s economic model

What role will innovation play in the recovery?

What insights does our research have to offer

businesspeople and policymakers?

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PART 1

Three approaches to innovating in a downturn

1. Innovation is not just new technologies and new

products

2. Don’t try to do it all yourself

3. Adopt a more experimental approach

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1. Not just new technologies and products

IBM’s Global CEO study 2006: Expanding the Innovation Horizon

0

10

20

30

40

50

Products/services Operations Business model

Percent emphasisallocated to eachtype

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Which companies spend the most on R&D?

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“There is no significant

relationship between R&D

spending and financial or

corporate success”

Booz Allen Hamilton Global Innovation 1000 survey 2006

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Management modelinnovation

Business model innovation

Product or Service innovation

Technological innovation

Operationalinnovation

Higher

Lower

Potential

for long-

term

advantage

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Innovation over the lifecycle:

The classic view of the computer industry

Computer Industry evolution Filson, JEBO, 2002

1974 2000

Number of

playersPriceSales

Technology

innovation as

source of

advantage

Product

innovation as

source of

advantage

Process

innovation as

source of

advantage

Consolidation

and exit

strategies

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Business Model Innovation:

A new way of making money in an existing industry

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Business model innovation can be seen at all

stages of the industry life cycle

1974 2000

Dell Direct Model

Apple

Mac

integrated

system

Apple iMac

experience

IT services & support

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Management Model Innovation:

A new way of working internally that creates value in the

marketplace

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Long-run changes in competitive

position in the automobile industry

1900 1920 1940 1960 1980 2000

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2. Don’t do it all yourself

The appeal of Open Innovation

– Innocentive: Network of >160,000 available to solve

technology challenges

– Topcoder: Network of >170,000 software developers

around the world

When is an “open” model optimal?

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A framework for open innovation

Concentrated Dispersed

Full control &

ownershipNo controlling

entity; IP open

Distrust of

others, NIH

Trust and

reciprocity

Where is Knowledge?

How is it accessed

and managed?

Why do individuals

choose to share?

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Possible innovation archetypes

Concentrated Dispersed

Full control &

ownershipNo controlling

entity; IP open

Distrust of

others, NIH

Trust and

reciprocity

Traditional closed model Fully open model Hybrid open model

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Some (well-known) examples

P&G Connect & Develop

Benefits:

– 35% of innovation accessed externally in 2004

– R&D productivity up by 60%

– Enormous media coverage

Possible risks:

– Loss of control

– Loss of competitive differentiation

– Takes time to deliver results

– Opportunity cost of investment in open innovation

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NVP Brightstar

Lucent New Ventures Group

BT Brightstar

NVP Brightstar80% of portfolio of 27 start-ups;

price recovered with IPO of one

for $470m

“BT cannot do this stuff. It has to be managed in an independent entity” - Harry Berry

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IBM InnovationJam

Jam = online collaborative brainstorm event

ValuesJam 2003– 10,000 postings over 72-hour period

InnovationJam, August 2006– Employees, friends, clients debated 4 major themes (e.g. “going places”)– 30,000 postings in round one, 5,000 in round two – Ten major initiatives launched by IBM, November 2006

Online data not owned by IBM– We are betting there is enough expertise in IBM that we can apply these

insights for commercial ends ahead of our competitors. We are living in an era of open innovation, and we are betting with initiatives like InnovationJam that we can stay ahead of the tsunami of commoditization in our industry. But it is inherent in this approach that you don’t know where open innovation will take you.”

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Key points from examples

“Hybrid” open innovation models still unproven in practice

– Some parts of system sit uneasily with others

Open innovation is a “leap of faith”

Can you really create new ideas by tapping into the

wisdom of the crowd?

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Challenges in pursuing open innovation

Message for companies: no half measures– Sharing ideas is a two-way street

– New attitudes needed towards control/ownership

– Open innovation means less control, more use of partners who can

do it better than you can

Message for academics: a phenomenon in need of theory– When is open innovation damaging? What are is limits?

– What are the most appropriate theoretical underpinnings?

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3. Adopt a more experimental approach

Innovation does not have to be risky and expensive

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Radical is not the same as risky

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Shell Gamechanger:

A process for de-risking crazy ideas

Outcomes: 40% of projects in E&P division came out of Gamechanger

1

3

4

5

6

7

2

1. Idea submission: Anyone, any time

2. Peer review: Within a week

3. Test & Mature: Testing hypotheses

4. Expert review

5. Is there a compelling value proposition?

6. Technical feasibility

7. What is the business logic?

Which part of Shell will

take it on?

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Innovation as a portfolio game

Ideas Experiments Ventures Businesses

1000

100

10

1

Often the most

interesting ideas come

from the most peripheral

parts of the company

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An experimental approach to product innovation

Control group

Standard $125

package: free

room, two steak

meals, $30 chips

Test group

$60 in chipsHypothesis: Slot

players do not

really value perks

such as free hotel

rooms

Average net

profit per

customer $60

Average net

profit per

customer $30

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Key points about experimentation

How can you maximise the ratio of learning to investment?

How can you ensure you cast the net widely enough?

How can we make the concept of an “experiment” more

acceptable?

– Pilot and Prototype are safer words

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PART 2:

Innovation in the foreign-owned sector

What does research tell us about how foreign subsidiaries

evolve? And what is the role of innovation in this process?

General lessons for creating an environment that facilitates

innovation

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Transient investment

Branch plant syndrome

The tyranny of distance

Changing corporate structures

Strategic challenges facing foreign subsidiaries

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The heart of the problem:

Low visibility in head office

"Nobody wakes up in head office thinking about what

they can do in Ireland today”

"As a subsidiary, we don't just wait our turn to be

handed manufacturing opportunities. If we waited,

our turn would never come."

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Subsidiaries are increasingly competing with each

other:

Competition from

other subsidiaries

with similar

activities

Competition from the

external marketplace

Internal competition

from new locations

(e.g. East Europe, Far

East)

Increasing internal competition

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The threat of divestment:

Motorola in the last downturn

East

Ki l br i de Semi conduct o

r pl ant , 1985, 1000 peopl e

Sout h

Queensf er r y Semi co

nduct or pl ant , 1984

f r om DEC, 600 peopl e

Li vi ngst on mobi l e

phone pl ant , 1995, 3100

peopl e

Dunfermline Semicondu

ctor plant, 2000

from Hyundai, £ 1. 3

bi l l i on

CLOSED 2001

CLOSED 2002

MOTHBALLED 2002

NEW GLOBAL CENTRE FOR SMART CARDS

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The changing role of the country manager

Uncont est ed aut hor i t y

over count r y

oper at i on

No aut hor i t y

over count r y

oper at i on

AUTONOMOUS LEADERSHIP STRATEGIC GUIDANCE SUPPORT AND DEVELOPMENT LEGAL REPRESENTATION

1980s 1990s

2000s

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Changing roles of the country manager

Pioneer

Defines the territory, builds initial relationships

7-16

Less critical

Essential but

not enough

Increasingly

important

Increasingly

critical

Trader

Builds profitable operations, develops local resources,

contributes to overall strategy

Intelligence-gather

Analyses local environment, develops innovative ideas

for input to overall strategy

Quarterback

Confers with HQ coaches to advocate the field view;

motivates team; networks; maintains drive

Source: Chris Bartlett

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How subsidiaries develop: Idealised scenario

Strategic

Importance to

company

Establish

start-up

Carry out

basic

mandate

Perform

basic

mandate in

superior

way

Extend

basic

mandate -

low risk

moves

Extend

basic

mandate.

Strategic

develop-

ment

Become

strategic

centre for

company

Become

strategic

pivot for

key

activities

Basic Mandate

Enhanced

Mandate

Advanced

Mandate

Source: Delany, 1998

1

2

3

4

5

6

7

Source: Ed Delany

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Carving out a role that suits your situation

Establish

start-up

Carry out

basic

mandate

Perform

basic

mandate in

superior

way

Extend

basic

mandate -

low risk

moves

Extend

basic

mandate.

Strategic

develop-

ment

Become

strategic

centre for

company

Become

strategic

pivot for

key

activities

3M Canada

Fuj i t su Aust r al i a

NCR Scot l and

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Taking a small slice of the action:

The case of the New Beetle

Expl or at i on

of Concept

Val i dat i on and

desi gn

Scal e up,

commer ci al i sat i o

n

Rol l out and

i nt egr at e

2 peopl e

i n US: Why

not ?

Gai ned key

suppor t er s

i n Ger many

US desi gn

cent r e di d

desi gn

Tr ansf er r ed t o Ger many

f or devel opment and

pr oduct i on

Level of

devel opment

Ti me

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An attention perspective on subsidiary

development

Demand for

executive

attention

Supply of

executive

attention

Highly constrained by

number of working hours

Technology (e.g.

videoconferencing) helps

but only so far…

Increasing demands from

multiple constituencies

Internal: Growing spans of

control, matrix relationships,

global scope

External: Economic and

political “shocks”, special

interest groups etc.

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How is attention channelled and filtered?

Need to be conscious of the primary attention “channels”

through which attention is filtered

Through

meetings,

forums, events

Through direct

reporting

relationships

Gaining the attention

of the CEO

By targeting “hot”

issues for the CEO

Through formal

budgeting /

planning process

Through external

influencers

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So who gets attention in a global firm?

Squeaky

Wheels

success stories,

vocal managers,

problem cases

Honeypots

Big opportunities

or threats but little

current activity

Attention given to a country on basis of external

cues (or top down “attention structures”)

Attention given to

a country on basis

of internal cues

(bottom-up

“attention

structures”)

Low

Attention

Markets

Major

Markets

High

Low

Low High

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Operationalising attention: BOC Group

10 100

JapanUK

Canada

US

South

Africa

AustraliaChina

France

Italy, Spain India

MexicoGermany

Russia0

Number of mentions of country (log scale)

Number of mentions

of subsidiary

operation (log scale) 10

100

Singapore

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Drivers of attention

Weight

– Strategic significance of local environment

– Strength of subsidiary within network

Voice

– Initiative-taking

– Profile-building

Voice-based activities more critical when subsidiary is further away, and more effective when subsidiary has strong competence

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Can you gain attention and autonomy?

1.00 2.00 3.00 4.00 5.00 6.00 7.00

2.00

2.50

3.00

3.50

4.00

4.50

5.00

R=-.13

Level of

autonomy

Level of attention

26 out of 101

subsidiary

companies

achieve both

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Sample of Australian subsidiaries: Initiative as a way of gaining attention and autonomy

Autonomy

X

Attention

Initiative-taking

1.00 2.00 3.00 4.00 5.00 6.00

5.00

10.00

15.00

20.00

25.00

R=.54

Very strong

relationship

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Basic advice to subsidiary managers

Perform basic mandate to high level

– “you can do what you like once you are a high

performer”

Take initiative, build profile

– Do not accept status quo, always look out for new

opportunities

Be very clear on your own strengths and weaknesses

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Diagnosing strengths & weaknesses

PERCEIVED OPPORTUNITIES

St at e of i ndust r y,

st r at egy of

par ent , l ocal

mar ket

CAPABILITES

Exi st i ng act i vi t i es, t r ack r ecor d, cr edi bi l i t y

of t op t eam

Low

Low

Hi gh

Hi gh

OVERSTRETCH

MISSED OPPORTUNITIES

MONSANTO

CANADA

Bid for $100m

manufacturing

investment 1985

PLASCO UK

No initiative

MONSANTO

CANADA

Series of small and

successful bids

1990-95

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Developing an action plan

Tactics for approaching HQ

– Identifying key degrees of freedom, possible openings

– Identifying key influencers, sponsors etc.

Match ambition with capabilities

Build peninsulas not islands

– Make sure what you are doing matters to HQ

Sharpen your “Quarterback” skills

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What does the “quarterback” really do?

Global Networker– Raising the profile of the business elsewhere in the

company

– “Oiling the wheels” of major projects

– Placing executives in senior corporate positions

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What does the “quarterback” really do?

Global Networker

Entrepreneur and Catalyst for change– “Most country managers are builders: they are

aggressive and career-seeking types. So they cannot

hide for long, even if it would be in their interests to do

so!”

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What does the “quarterback” really do?

Global networker

Entrepreneur and catalyst for change

Advocate and Defender of the country operation– My loyalty is to the region first, and the company second. What I

fight for is: How much of a particular programme (such as a cost-cutting drive) am I going to pick up for my region? Remember, you earn the right to self sufficiency by flying in formation when you have to.”

– “You are stupid if you don’t keep some things up your sleeve. You have to manage expectations, which involves not telling the whole story until you are ready. So I act as a buffer.”

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POSTSCRIPT:

Building a culture that sustains innovation

Conditions for innovation to happen:

– Openness to new ideas from outside

– Novel, surprising connections

– Slack – time and resources

– Tolerance of failure

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What does an

innovative environment look like?

CONSTRAINT CHAOS

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The elements of an entrepreneurial environment

Overall Direction

“Stretch Goal”

Space to

Act

Clear

Boundaries

Support

from Above

Page 53

Freedom… within limits