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 / Winter 2012 / Issue 69(originally published by Booz & Company)


Overcoming the Global Innovation Trade-Off

How to maintain creative complexity without the limitations of co-location.

For their global innovation strategies, many companies have long relied on their ability to assemble people with key capabilities and critical knowledge. They typically do this through co-location: bringing together designers, engineers, technologists, and other creative thinkers in a few innovation centers at home and in lead markets. The new products and services they create are then disseminated to markets across the world.

But as the range of knowledge needed for global innovation becomes wider and more varied, co-location is no longer sufficient. Leading innovators are increasingly seeking competitive advantage by combining knowledge and capabilities from many different places. Consider Essilor International SA, the world’s largest manufacturer of ophthalmic corrective lenses. It engineers its lenses in Germany, makes blanks from high-transparency polymers in the U.S., and adds micron-thin coatings in Japan. Essilor taps into the best capabilities around the world to create, develop, and manufacture leading-edge products.

Very few companies, however, have succeeded in internationalizing their innovation strategies enough to draw on the globally dispersed, complex knowledge needed for today’s products and services. Instead, they use their international networks only to arbitrage routine tasks, and fail to exploit opportunities for global innovation. Our research suggests that the reason for this failure is the commonly accepted trade-off between complexity and dispersion. The challenge is to overcome this trade-off: to build a worldwide R&D team that can master the complexities of robust innovation. (See Exhibit.)

Many managers recognize that the knowledge best suited to dispersed global innovation is explicit, codified, and modular. An example is provided by the Internet-based software development and analytics company TopCoder Inc. Because of the highly codified nature of the knowledge it deals with, this company can break all its clients’ software development projects into relatively simple pieces. Then, through a process of open innovation and bidding for modules, TopCoder taps into a global community of software developers to deliver projects for a range of clients.

Even when knowledge isn’t explicit, some firms can achieve dispersed innovation by putting it into more simplified, explicit forms. The India-based services firm Infosys Technologies Ltd. structured and codified much of its system integration and facility management knowledge. This allowed the company to develop a global delivery model serving a client base around the world.

Unfortunately, in most industries, the knowledge that is critical for innovation is collective, tacit (not easily codified), and locally rooted (not easily managed across long distances). Simplifying it doesn’t always work. Making tacit knowledge more explicit tends to diminish its richness, timeliness, and uniqueness, thereby seriously eroding or even destroying its value. Thus, many companies turn to a different approach: They co-locate more of their researchers at one single knowledge source so these people can collaborate more intensively.

For example, the perfume industry is very slow to change; brand share remains relatively constant over decades. For 20 years, Japanese cosmetics group Shiseido Company unsuccessfully tried to build a global perfume business with marketing staff and designers in France and product development in Japan. Shiseido initially failed to recognize that most of the complex knowledge needed to develop, manufacture, market, and package perfumes was rooted in France, the world’s leading perfumery market and competence cluster. Eventually, Shiseido realized that it had to connect its staff more closely with the critical knowledge it was lacking; it co-located its entire perfume business in France. This move paid off. It allowed Shiseido to develop such successful global perfume brands as Jean Paul Gaultier, Issey Miyake, and Zen.

But both simplification and co-location fall short of the ideal: innovation of products and services that involves the free exchange of tacit knowledge among people dispersed around the globe. As long as firms are bound by the complexity– dispersion trade-off, the opportunities to create value and competitive advantage from global innovation will be limited.

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