|
Money isn’t the key to successful innovation. In fact, many companies spend far less than their competitors on R&D to achieve far better performance. To learn why that’s the case, strategy+business and Knowledge@Wharton spoke with Kevin Dehoff, a partner at Booz & Company, and Karl Ulrich, Wharton professor of operations and information management. In this second part of a three-part series, Dehoff and Ulrich discuss the competitive advantages of global innovation networks, the challenges companies face in cross-border R&D collaboration, and how models of collaboration will likely evolve.
T R A N S C R I P T :
Knowledge@Wharton: How has the ongoing globalization of innovation affected companies?
Ulrich: You have to step back and say: “What do you really mean by globalization?” Let me take one angle on that, which is that most companies I think are growing, in their global reach, in terms of the customers they serve. What that does is expose the company to a much greater diversity in its customer base than it’s accustomed to in a domestic market or in a single regional market. One of the challenges in innovation is how to be responsive to local needs, how to be responsive to diversity and needs that might vary by region. Many firms have developed mechanisms for local customization, for local product development, for local innovation that allow them to adapt to regional preferences.
For example, a food products company like Unilever will have divisions in specific regions and will often have regional variance for things like margarine or cooking oil or something like that. One of the challenges is how do you respond to that regional variability. But then the advantage of being a large company is that you can achieve scale economies. You can achieve efficiencies by serving lots of regions. And so a big challenge is, how do you take that variety that’s generated at the periphery and find a way to establish some commonality that lets you leverage some core platform of products or services and serve the world more efficiently?
It’s this process of identifying variety at the periphery, bringing it back into the core and then finding a way to deploy it efficiently, that I think is one of the real challenges that global enterprises face.
Dehoff: I completely agree. I actually think that one of the next big, competitive advantages that will come [is for] companies who are able to think about their innovation capabilities in the context of a global innovation network. I believe that there are challenges associated with that today. Those who figure how to build those networks, establish the global footprint, access global talent, capabilities and skills, and then to do all that by thinking about how to operate that network in the context of a virtual collaboration environment -- I actually believe that’s going to be one of the next big differentiators in terms of competitive advantage for companies and innovation.
strategy+business: Let’s start with that idea and focus on engineering for a moment. What are the big stumbling blocks for most companies when they offshore engineering?
Dehoff: What we’ve seen in working with companies is that over the last couple of years, offshoring and outsourcing have been a hot topic. It’s made its way from the back office into some of the more knowledge-intensive types of activities like engineering. Probably the biggest stumbling block that I’ve seen in companies that think about offshoring engineering and technical-services types of activities is that they do it in the context of cost reduction, through chasing labor arbitrage opportunities.
I think the stumbling block is that with that mentality, they potentially ignore or miss some of the real strategic advantages of thinking about establishing this idea of a global innovation network. And then, in so doing, they miss a lot of the opportunities that Karl described, some of the real strategic advantages of this in the context of access to emerging markets, or the local interaction with customers and end users. Thirdly, around the access to critical skills, capabilities, talent in the context of the global supply base, and potentially fourth, miss thinking about it in [terms of]: “Well, how is this going to take the performance levels of my innovation process and capability to the next level in terms of faster, more efficient, more throughput through the innovation pipeline?”
And so the real stumbling block is getting caught up in the near-term focus on utilizing it as a means by which we reduce costs, and missing the real opportunity to think about it strategically, and ultimately how to create competitive advantage by doing that.
Ulrich: I think that it’s also useful to think about what specific decisions the firm faces in thinking about outsourcing. One decision is clearly the boundary of the firm, that is: Are you globalizing by outsourcing to an independent supplier, in a distant location? Or, are you creating a captive group of your own employees who would be in that distant location?
But I think an even more important decision is one related to how you partition the task. Ideally I think you want to find a way to partition the task so that the distant entity can really own the whole problem. So you can provide a functional specification of what they need to achieve and not just outsource the micro-level tasks. For example, instead of outsourcing the brake caliper for design in India, you might outsource the brake system and give ownership for the whole problem of how do you stop the car, rather than just how do you design this particular part.
Dehoff: Our findings really reinforce Karl’s point. As we have focused in on engineering and technical-services types of activities, we’ve seen a continued progression to higher levels of value add, sort of up the food chain, where many companies start with the rudimentary, repetitive engineering types of activities. But we’ve seen precisely what Karl alluded to: The more sophisticated ones continue to progress up that value-added chain looking at much more complex activities, looking at entire sub-system design, ultimately being responsible for the entire product development process for a particular solution.
It’s a continued progression to more and more higher-value, more and more knowledge-intensive types of activities and capabilities that companies are increasingly looking to satisfy through the global supply base.
strategy+business: But doesn’t that run up against the problem of giving away the family jewels, so to speak? Hasn’t the argument against outsourcing whole systems been that you are also giving away your intellectual property?
Dehoff: Yes, and that’s really the right balance to strike in terms of understanding what really is the core of the core—what is the real critical product know-how, technological know-how—and understanding where to draw those boundaries. Many of the engineered-products-type companies that I’ve worked with … I mean, that fundamentally is the essence of those companies. It’s the product know-how, it’s the technological know-how. And so really understanding and having the ability to understand what that core of the core really is, and draw the appropriate boundaries is the trick to getting it.
strategy+business: Is that a moving target?
Dehoff: It can be a moving target.
Ulrich: But my experience is that firms tend to overestimate what their unique capabilities are. And, more often than not, a supplier who is out there earning its living by competing is going to be better than your captive group at a lot of these sub-systems.
Knowledge@Wharton: Aside from segmenting projects and sending over one component of, say, an engineering project to an outsourcing firm, how can globalized innovation teams collaborate across borders? Are you seeing any new models for collaboration emerging -- new technologies that enable collaboration, for instance?
Ulrich: There are lots of modes that are emerging. Let me describe one that’s kind of wacky but kind of interesting, and it is one that I’ve used recently. The service is called Rent a Coder, where if you can write a specification for a piece of software fairly clearly then, in a matter of hours, you can get bids on that project from all over the world.
I recently, with a colleague here, developed a piece of software for use in my research. It was a fairly complex piece of software and we ended up getting 200 to 300 quotes that ranged in price -- and these are shocking numbers, from $50 to $1,200 to do the software. We ultimately picked a coder from Bulgaria, named Monica, who is one of the top-rated coders at Rent a Coder and she built our software for $300.
That’s just a really remarkable phenomenon that’s enabled by the ability to share information by the Web and also frankly by things like PayPal, by the ability to make small economic transfers across the planet. That’s probably not something that we hope the federal government will be using for missile-defense-system development. But it’s a pretty interesting extreme point that’s emerged just because of some of the technology that we have.
Dehoff: I think that there are fairly sophisticated technology solutions that have emerged and will continue to emerge in terms of collaboration. A lot of the product life cycle management tools are increasingly becoming more sophisticated in terms of how they enable teams to collaborate virtually, to ensure that there’s full transparency and seamless transfer of data across the network.
I also think that there are some organizational dimensions to this. I was struck recently while spending time in Bangalore by just how [at] some of the most successful companies, you couldn’t tell the differences in terms of the organization structure between the folks working in Bangalore versus the folks working somewhere in the United States. It was really a seamless and integrated organization construct, and they effectively managed it that way. So I think there are technology solutions and there are some real organizational dimensions to the best practices here.
strategy+business: Other than the technological tools and the organizational adjustments that have to be made to collaborate across boundaries, what other approaches do you recommend for companies to take full advantage of the opportunity that emerging market countries offer?
Dehoff: I think that Karl alluded to a couple that come to mind to me. You know, first and foremost, it’s understanding what activities, what capabilities, in the context of what I talked about earlier -- how do we segment what’s appropriate in the context of core versus non-core or any other screens that we want to think about.
I think secondly, understanding where, in the context of the global supply base. There are a lot of pretty fundamental and inherent differences in terms of geographic regions around the world, specific countries. There are strengths and weaknesses and trade-offs associated with some of the inherent capabilities and some of the cultural issues within those countries themselves. That’s really the second thing.
Thirdly, its really understanding these networks in the context of the operating model that’s appropriate for a specific company, whether that’s trying to establish this through joint ventures and alliances, through captive design centers. As we’ve talked about through third-party vendors, there are multiple operating models that have both strengths and weaknesses depending on what a particular company is trying to accomplish.
A couple of other things around infrastructure, in terms of the transferability of information on one hand. That also, though, creates an issue on the other side, and that is, how do we think about protecting our intellectual property, protecting that key product know-how, that technological know-how? And then, finally, it’s really to think about, right up front, how this will in fact create competitive and strategic advantage and to design it with that kind of a thought process in mind of: “How do we want to structure this network in a way that it’s going to really create competitive advantage for us relative to where we are in the industry?”
Knowledge@Wharton: How do you see some of these models of collaboration shifting in the next five years or so, and what will drive those changes?
Ulrich: Let’s think about what categories of drivers there would be. Certainly there will be continued technological change, although my sense is that the technological changes will be mostly better, faster, and cheaper on dimensions that we already have a pretty good idea about. I also think there can be changes in the regulatory environment and in the political environment that are going to have implications. We don’t know exactly what trajectory China will end up on in terms of free enterprise, property rights, municipal control versus federal control. There are all kinds of issues in China that I think are going to have implications for the confidence with which non-Chinese will invest in China. So it’s technology, regulatory and political. What else would you add?
Dehoff: I think you are going to continue to see this progression that I talked about, to more knowledge-intensive types of activities. I think that given the historical progression of outsourcing and offshoring generally speaking, you’re going to see in the case of innovation and engineering-related activities some countries excel more at the front end, the real creative aspects of innovation, where at least in my experience a lot of it to date has been focused more on the back end of the product development process. I think that you will see a migration of opportunities that will, in some cases, get into some of the real creative aspects of innovation.
