Operational

nuigalway.ie

Operational

Innovation:

From Research to Practice

Professor Julian Birkinshaw

London Business School

Intertrade Ireland Innovation Programme, June 9 th 2009

Page 1


• Deep recession

• Businesspeople have lost credibility

• Questioning of Ireland’s economic model

Today’s context

What role will innovation play in the recovery?

What insights does our research have to offer

businesspeople and policymakers?

Page 2


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

Page 3


1. Not just new technologies and products

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

50

40

30

20

Percent emphasis

allocated to each

type

10

0

Products/services Operations Business model

Page 4


Which companies spend the most on R&D?

Page 5


“There is no significant

relationship between R&D

spending and financial or

corporate success”

Page 6

Booz Allen Hamilton Global Innovation 1000 survey 2006


Management model

innovation

Business model

innovation

Product or Service

innovation

Technological

innovation

Operational

innovation

Higher

Potential

for longterm

advantage

Lower

Page 7


Innovation over the lifecycle:

The classic view of the computer industry

Price

Number of

players

Sales

Technology

innovation as

source of

advantage

Consolidation

and exit

strategies

1974 2000

Product

innovation as

source of

advantage

Process

innovation as

source of

advantage

Computer Industry evolution Filson, JEBO, Page 2002 8


Business Model Innovation:

A new way of making money in

an existing industry

Page 9


Business model innovation can be seen at all

stages of the industry life cycle

Dell Direct Model

IT services & support

Apple

Mac

integrated

system

Apple iMac

experience

1974 2000

Page 10


Management Model Innovation:

A new way of working internally

that creates value in the

marketplace

Page 11


Long-run changes in competitive

position in the automobile industry

1900 1920 1940 1960 1980 2000

Page 12


The appeal of Open Innovation

2. Don’t do it all yourself

– 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?

Page 13


A framework for open innovation

Concentrated

Where is Knowledge?

Dispersed

Full control &

ownership

How is it accessed

and managed?

No controlling

entity; IP open

Distrust of

others, NIH

Why do individuals

choose to share?

Trust and

reciprocity

Page 14


Possible innovation archetypes

Traditional closed model

Concentrated

Hybrid open model

Fully open model

Dispersed

Full control &

ownership

No controlling

entity; IP open

Distrust of

others, NIH

Trust and

reciprocity

Page 15


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

Page 17


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.”

Page 18


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?

Page 20


3. Adopt a more experimental approach

• Innovation does not have to be risky and expensive

Page 21


Radical is not the same as risky

Page 22


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?

Shell Gamechanger:

A process for de-risking crazy ideas

4

3

5

6

7

1

2

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

Page 23


Innovation as a portfolio game

1000

100

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."

Page 29


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)

Page 30


The threat of divestment:

Motorola in the last downturn

NEW GLOBAL CENTRE FOR SMART CARDS

East

Ki l br i de Semi conduct o

r pl ant , 1985, 10 peopl e

Li vi ngst on mobi l e

phone pl ant , 195, 310

peopl e

CLOSED 201

CLOSED 202

Dunfermline Semicondu

ctor plant, 20

from Hyundai, £1. 3

bi l l i on

Sout h

Queensf er r y Semi co

nduct or pl ant , 1984

f r omDEC, 60 peopl e

MOTHBALLED 202

Page 31


The changing role of the country manager

20s

8910s 190s

TUAONOMOUS LEADERSHIP STRATEGIC GUIDANCE SUPORT AND DEVELOPMENT LEGAL REPRESENTATION

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

Page 32


Changing roles of the country manager

Pioneer

Defines the territory, builds initial relationships

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

Less critical

Essential but

not enough

Increasingly

important

Increasingly

critical

7-16

Source: Chris Page Bartlett 33


1

2

3

4

5

6

7

How subsidiaries develop: Idealised scenario

Strategic

Importance to

company

Enhanced

Mandate

Advanced

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: Ed Page Delany 34

Source: Delany, 1998


Carving out a role that suits your situation

3M Canada

Fuj i t su Aust r al i a

NCR Scot 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

Page 35


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

Level of

devel opment

2 peopl e

in US: Why

not ?

Gai ned key

suppor t er s

in Ger many

US desi gn

cent r e di d

desi gn

Tr ansf er r ed to Ger many

f or devel opment and

pr oduct i on

Ti me

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…

Page 37


How is attention channelled and filtered?

Through

meetings,

forums, events

Gaining the attention

of the CEO

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

Page 38


So who gets attention in a global firm?

Attention given to

a country on basis

of internal cues

(bottom-up

“attention

structures”)

High

Low

Squeaky

Wheels

success stories,

vocal managers,

problem cases

Low

Attention

Markets

Major

Markets

Honeypots

Big opportunities

or threats but little

current activity

Low

High

Attention given to a country on basis of external

cues (or top down “attention structures”)

Page 39


Operationalising attention: BOC Group

100

Number of mentions

of subsidiary

operation (log scale) 10

Germany

Italy, Spain

0

Japan

France

China

Canada

UK

Australia

South

Africa

Mexico

Singapore

India

Russia 10 100

US

Number of mentions of country (log scale)

Page 40


• Weight

– Strategic significance of local environment

– Strength of subsidiary within network

• Voice

– Initiative-taking

– Profile-building

Drivers of attention

• 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?

5.00

Level of

autonomy

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 6.00 7.00

R=-.13

Level of attention

Page 42


Sample of Australian subsidiaries:

Initiative as a way of gaining attention and autonomy

25.00

Autonomy

X

Attention

20.00

15.00

Very strong

relationship

10.00

5.00

1.00 2.00 3.00 4.00 5.00 6.00

R=.54

Initiative-taking

Page 43


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

PERCEIVED OPORTUNITIES

Hi gh

St at e of i ndust r y,

st r at egy of

par ent , l ocal

mar ket

Low

Low

VOERSTRETCH

APACBILITES

MISED OPORTUNITIES

Hi gh

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

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


Global Networker

What does the “quarterback” really do?

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


Global networker

What does the “quarterback” really do?

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.”

Page 49


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


What does an

innovative environment look like?

CONSTRAINT

CHAOS

Page 51


The elements of an entrepreneurial environment

Clear

Boundaries

Overall Direction

“Stretch Goal”

Space to

Act

Support

from Above

Page 52


Freedom… within limits

Page 53

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