Professor Julian Birkinshaw
London Business School
Intertrade Ireland Innovation Programme, June 9 th 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
50
40
30
20
10
0
Products/services Operations Business model
Percent emphasis allocated to each type
Page 4

Which companies spend the most on R&D?
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Page 6
Booz Allen Hamilton Global Innovation 1000 survey 2006

Management model innovation
Business model innovation
Higher
Product or Service for longinnovation term advantage Technological innovation
Operational innovation
Lower
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Technology innovation as source of advantage
Innovation over the lifecycle:
The classic view of the computer industry
Price
Number of players
Sales
Consolidation and exit strategies
1974
Product innovation as source of advantage
Process innovation as source of advantage
2000

Page 9

Apple
Mac integrated system
Business model innovation can be seen at all stages of the industry life cycle
Dell Direct Model IT services & support
Apple iMac experience
1974 2000
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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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Concentrated
Full control & ownership
Distrust of others, NIH
A framework for open innovation
Where is Knowledge?
Dispersed
How is it accessed and managed?
No controlling entity; IP open
Why do individuals choose to share?
Trust and reciprocity
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Traditional closed model
Concentrated
Possible innovation archetypes
Hybrid open model Fully open model
Dispersed
Full control & ownership
Distrust of others, NIH
No controlling entity; IP open
Trust and reciprocity
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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
Page 16

NVP Brightstar
Lucent New Ventures Group
80% of portfolio of 27 start-ups; price recovered with IPO of one for $470m
NVP Brightstar
BT Brightstar
“ BT cannot do this stuff. It has to be managed in an independent entity” - Harry Berry

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?
Page 19

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
Page 22

Shell Gamechanger:
A process for de-risking crazy ideas
1. Idea submission: Anyone, any time
5
6
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?
4
3
7
1
2
Outcomes: 40% of projects in E&P division came out of Gamechanger Page 23

1000
100
Innovation as a portfolio game
Often the most interesting ideas come from the most peripheral parts of the company
10
1
Ideas Experiments Ventures Businesses
Page 24

An experimental approach to product innovation
Hypothesis: Slot players do not really value perks such as free hotel rooms
Test group
$60 in chips
Control group
Standard $125 package: free room, two steak meals, $30 chips
Average net profit per customer $60
Average net profit per customer $30
Page 25

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
Page 26

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
Page 27

Strategic challenges facing foreign subsidiaries

Transient investment

Branch plant syndrome

The tyranny of distance

Changing corporate structures
Page 28

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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Increasing internal competition
Subsidiaries are increasingly competing with each other:
Competition from the external marketplace
Competition from other subsidiaries with similar activities
Internal competition from new locations
(e.g. East Europe, Far
East)
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NEW GLOBAL CENTRE FOR SMART CARDS ast
K i l br i de S emi conduct o r pl ant , 1985 , 1000 peopl e
L i vi ngst on mobi l e phone pl ant , 1995 , 3100 peopl e
CLOSED 2001
The threat of divestment:
Motorola in the last downturn
CLOSED 2002
D unfermline emicondu ctor plant, 2000 from yundai, £ .
3 bi l l i on out h
Q ueensf er r y S emi co nduct or pl ant , 1984 f r om DEC , 600 peopl e
MOTHBALLED 2002
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The changing role of the country manager s
AUTONOMOUS LEADERSHIP s
STRATEGIC GUIDANCE s
SUPPORT AND DEVELOPMENT LEGAL REPRESENTATION ncont est ed aut hor i t y over count r y oper at i on
N o aut hor i t y over count r y oper at i on
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7-16
Changing roles of the country manager
Pioneer
Defines the territory, builds initial relationships
Less 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
Essential but not enough
Increasingly important
Increasingly critical

How subsidiaries develop: Idealised scenario
Strategic
Importance to company
Advanced
Mandate
Enhanced
Mandate
Basic Mandate
Establish start-up
Carry out basic mandate
Perform basic mandate in superior way
Extend basic mandate low risk moves
Extend basic mandate.
Strategic development
Become strategic centre for company
Become strategic pivot for key activities
Source: Delany, 1998

Carving out a role that suits your situation
3M C anada
F uj i t su A ust r al i a
NCR S cot l and
Establish start-up
Carry out basic mandate
Perform basic mandate in superior way
Extend basic mandate low risk moves
Extend basic mandate.
Strategic development
Become strategic centre for company
Become strategic pivot for key activities
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Taking a small slice of the action:
The case of the New Beetle
L evel of devel opment xpl or at i on of C oncept al i dat i on and desi gn cal e up, commer ci al i sat i o n
R ol l out and i nt egr at e
2 peopl e i n US : W hy not ?
G ai ned key suppor t er s i n G er many
US desi gn cent r e di d desi gn i me r ansf er r ed t o G er many f or devel opment and pr oduct i on
Page 36

An attention perspective on subsidiary development
Demand for executive attention
Increasing demands from multiple constituencies
Internal: Growing spans of control, matrix relationships, global scope
External: Economic and political “shocks”, special interest groups etc.
Supply of executive attention
Highly constrained by number of working hours
Technology (e.g. videoconferencing) helps but only so far…
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How is attention channelled and filtered?
Gaining the attention of the CEO
Through meetings, forums, events
Through formal budgeting / planning process
Through direct reporting relationships
Through external influencers
By targeting “hot” issues for the CEO
Need to be conscious of the primary attention “channels” through which attention is filtered
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So who gets attention in a global firm?
High Squeaky
Wheels Major
Markets
Attention given to a country on basis of internal cues
(bottom-up
“attention structures”) success stories, vocal managers, problem cases
Low
Attention
Markets
Honeypots
Big opportunities or threats but little current activity
Low
Low High
Attention given to a country on basis of external cues (or top down “attention structures”)
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Operationalising attention: BOC Group
UK
Japan
100
Australia
US
China
Number of mentions of subsidiary operation (log scale) 10
France Canada
South
Africa
Germany
Italy, Spain
0
Mexico
Singapore
India
Russia
10 100
Number of mentions of country (log scale)
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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
Page 41

Can you gain attention and autonomy?
Level of autonomy
5.00
4.50
4.00
3.50
26 out of 101 subsidiary companies achieve both
3.00
2.50
2.00
1.00
2.00
3.00
4.00
5.00
Level of attention
6.00
7.00
R=-.13
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Sample of Australian subsidiaries:
Initiative as a way of gaining attention and autonomy
25.00
Autonomy
X
Attention
20.00
15.00
10.00
Very strong relationship
5.00
1.00
3.00
4.00
2.00
Initiative-taking
5.00
6.00
R=.54
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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
Page 44

Diagnosing strengths & weaknesses
MONSANTO
CANADA
Bid for $100m manufacturing investment 1985 i gh
OVERSTRETCH
PERCEIVED OPPORTUNITIES t at e of i ndust r y, st r at egy of par ent , l ocal mar ket
MISSED OPPORTUNITIES
L ow
L ow i gh
CAPABILITES xi 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
MONSANTO
CANADA
Series of small and successful bids
1990-95
PLASCO UK
No initiative
Page 45

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
Page 46

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
Page 47

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!”
Page 48

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 costcutting 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
Page 50

CONSTRAINT
What does an innovative environment look like?
CHAOS
Page 51

The elements of an entrepreneurial environment
Overall Direction
“Stretch Goal”
Clear
Boundaries
Space to
Act
Support from Above
Page 52

Freedom… within limits
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