What can one country learn from another about innovation? This feature looks at innovation in various companies around the world and asks what lessons Europe can draw from their experiences.
Successful research and development depends on well educated, well trained people working to create new knowledge. Successful innovation takes more than that. It needs people and organisations to value the process of turning knowledge into money, and to take active steps to make it possible. Whether this happens is partly a function of culture: a country that values science but disdains commerce is going to have problems creating an environment in which innovation can flourish.
Korea’s progress since the early 1960s is a textbook example of what happens when an entire country decides to take innovation seriously. Korea’s story also shows what happens once an economy becomes established and its innovation slows down.
According to Dr Myung-Keun Han, director of the international co-operation division of KITECH, the Korea Institute of Industrial Technology, in 1961 Korea was earning $200m a year exporting basic raw materials such as iron ore, yarns and swine bristles. By 2004 it was exporting $254bn of high-technology products such as semiconductors, computers and synthetic resins.
Han puts this progress down to a national effort that brought together Korea’s central government, private companies and people to develop its economy. The Korean government made five consecutive five-year plans from 1965 onwards and used the chaebols, or large industrial conglomerates, to implement those plans.
Han divides Korea’s growth into two phases. In the first, from 1955 to 1979, economic growth was driven by a labour-intensive focus on light, and later heavy, industries. From the early 1980s, this gave way to technology-intensive growth. By 2003 the government was committing 4.3% of its budget, or $7.8bn, to R&D. Private industry was spending around $20bn, making total R&D spending 2.6% of GNP.
As the country became more technology-led, the government backed individual technologies and industries. It promoted the manufacture of DRAM memory chips, the development of the CDMA mobile telephony standard, and shipbuilding. Korea now has 47% of the global DRAM market, and 51% of shipbuilding. The government now focuses on promoting innovation in private companies, to diversify the country’s sources of technology. It wants companies to diversify into growth markets, and to encourage corporate entrepreneurship. It is also trying to institutionalise the use of industrial improvement strategies, such as the use of total quality management and Six Sigma programs. The government’s own efforts focus on providing the infrastructure for science and innovation. It is promoting education at various levels and creating public R&D institutes.
This has brought some stunning successes. Samsung, founded in 1969, now has annual revenues of $57.6bn. It spent its first 10 years simply imitating existing products from abroad, and its second 10 years imitating and improving on them. Since around 1990, according to Han, the company has been truly innovating, leading to its current position at number 53 on the Fortune 500. Hyundai Motor Company has followed a similar path, spending longer in its imitative phase and becoming truly innovative in the past ten years.
This progression from imitation to innovation shows how countries can back into industrialised status. Developing production technologies to make imitative products, for example, can provide the know-how to develop new products. Creating a sense of crisis in an industry can accelerate this process. Korea did this when it deregulated the provision of broadband services in 1995. This created intense competition, which the government supported by helping to create demand. Korea’s physical infrastructure, of many apartment blocks, also made installing broadband more cost effective than in more widely spread countries.
Although Korea has been very successful in rapidly industrialising its economy, it now has the same problems of innovation slowdown that face more mature industrial economies. Han calls this Korea’s Icarus paradox: the government’s strong hand, which helped develop the industrialised economy, now hampers the operation of the market. The chaebols are becoming over-dominant, stifling the growth of SMEs that could innovate more quickly. The rigid corporate cultures that allowed Korea to grow so quickly now stifle entrepreneurial activities within companies. Korea’s national monoculture and single language are becoming an obstacle to its globalisation.
In the public sector, meanwhile, national R&D institutes have focused on applied research, to the detriment of basic research. Co-operation between industry and academia is weak. Nationally, there’s too little experience of creating new businesses. And Korea’s industrial landscape lacks some vital elements, such as native parts suppliers and equipment makers, which leaves important gaps in its innovation landscape.
The remedy, says Han, is simple.
“The government has to change from being a strong leader to an effective orchestrator. We need to reform the education system, too. Industrial people complain that fresh graduates need to be retrained to adjust to the industrial environment.”
He says that the public R&D institutes need to be reformed to refocus on basic research, while the universities should be encouraged to start companies: “There’s plenty of venture capital to back that up.”
“Korea is at a crossroads. There’s a limit on the exports we can make based on imitative technology. Our birth rate is the lowest in the world and our economic growth potential has slowed dramatically, to below 4%. The solution is an innovation-led economy.”
Japan has been through this cycle itself, and has spent the past 13 years mired in a recession that it is only now beginning to climb out of.
According to Botari Hirosaki, senior vice president and executive general manager for the intellectual asset operations unit of NEC, the company was founded in 1899 and has gone through a series of major restructurings since. The most recent followed the collapse of the dotcom bubble in 2000. This prompted further recession in Japan and the dissolution of the keiretsu, or group of industrial affiliates, that NEC had been part of since the middle of the last century. NEC drew in overseas investors to provide funds instead, changing its accounting methods to match those of the US in order to give the necessary transparency.
The company has globalised its operations and changed how it manages innovation. Part of that change has been to merge the company’s intellectual asset operation with its R&D function to create an intellectual asset R&D unit, which now also includes the central research labs and the solution development labs.
NEC has changed its business model, from being vertically integrated to being horizontally organised, with open innovation processes. It has reformed its structure, selling off non-core businesses such as DRAM chips, printers and plasma display panels. It span off its semiconductor company, while retaining 70% of the shares, to reduce the capital burden on the parent company’s balance sheet. Conversely, NEC has acquired a stake in a consulting company and bought back software and system integration companies it had sold off.
“NEC is looking for a solutions business now, not just a components business,” said Hirosaki.
Roland Kircher, general manager for the technology department of Siemens KK in Tokyo, has seen the restructuring of Japanese industry at first hand. He says the economy is finally recovering, although it is held back by high oil prices, slowing exports and declining public spending. The economy is driven by consumer spending and industrial capital investment, so innovation is vital to its recovery.
The government is promoting an innovation-led recovery, routing its €26.5bn R&D spending through two main agencies in pursuit of its second five-year plan for science and technology. The plan marks a shift from science policy to innovation policy, and calls for greater collaboration among universities, public R&D institutes and industry, more university spin-offs, and reform of national universities and research institutes into independent agencies. It also wants to promote co-ordination between local industries, academia and local governments through the creation of intellectual clusters of globally competitive technology. The Japanese government has also returned to picking winners, backing R&D in specific research areas including fuel cells, IT infrastructure and communications for the home, robotics, health and welfare, environment and energy, and nanotechnology.
“From a personal point of view I can still see the old style but I can also see major changes in industry and the universities,” said Kircher. “Japan has undergone major structural changes. There are no more jobs for life and no more seniority. Japan was traditionally a very closed country and this is changing too.”
He points to the appointment of Howard Stringer as the head of Sony as an example of a seismic shift in the way Japan is now run. But the old attitudes are not dead.
“Some are reluctant to see the success of change,” he said. “They’re not sure if the recovery is stable, although it is. These 13 years of recession have changed many things. I’m not sure if a European country could bear a recession for 13 years with such a high level of unemployment.”
If changing innovation within one country or culture is difficult, changing a global innovation culture is doubly so. BOC is a global company, listed in the UK and New York, with facilities around the world. It has been developing technology in the gas industry for more than 80 years, creating new ways to produce and use gas. In the 1990s it started innovating in solutions, too, for example finding ways to inject nitrogen into ageing old fields to extend their useful lifetime.
Krish Krishnamurthy, senior director, process gas solution technology for BOC, says BOC now realises it can no longer develop all the technology it needs in-house. Efforts to create a critical mass of expertise in a central laboratory are failing, as the frontier of knowledge broadens rapidly. A lot more R&D is being done outside the US and Europe, and BOC needs to know what is going on and access that work. The question for BOC is how it can turn from an organisation that develops all its technology to one that can make a competitive job of finding, assessing and partnering with many more sources of technology.
“Technology monitoring, assessment and intelligence is becoming much more important,” said Krishnamurthy. BOC has therefore created a technology intelligence strategy that binds the gathering, organisation, assessment and reporting of technology opportunities into its wider innovation process.
This is changing the role of technologists in the company. In addition to coming up with ideas and developing them, technologists need to understand what else is going on in their specialities and how it might affect BOC. They also need to be defining which technologies to access externally, and developing and managing the relationships that enable them to do so.
“It’s more challenging and empowering for the technologists, but it could also stress them out because one has to do many more things than when we all had focused jobs,” he said. He believes that up to a quarter of the research workforce should be taking part in technology monitoring.
Even as Korea faces its Icarus paradox and Japan tries to restart its economy, America is moving its approach to innovation forward.
America starts with a strong hand. According to André Convents, section head of P&G Household Care, Connect & Develop for Procter & Gamble Eurocor, after the Second World War the US government decided to invest in R&D. It had imported a lot of people and ideas from Europe and wanted to set them to work. This drove the technology boom in the US to the point where, in the 1990s, industrial investment in R&D overtook government support and even venture capitalists were prepared to pay for it.
America has created world-famous technopoles, such as Silicon Valley in California, Route 128 in Boston, the wireless technologists in San Diego, and North Carolina’s Research Triangle Park. Even US defence spending supports industrial R&D, with organisations such as NASA and Los Alamos National Laboratory working closely with industry. Industry and government also offer substantial support for sponsored university research, to the tune of $39bn in 2003.
This is good news for Procter & Gamble (P&G), which has an almost unslakable thirst for innovation.
“P&G needs the equivalent of a new $100m business every week to meet our growth targets,” Convents said. He says it takes 1000 proposals to get one idea that is fit for developing into a business, and that it is hard to drive the discovery process in some areas of business. For example, 40% of the blockbuster drug developments have come from companies outside therapeutics: in other words, the breakthroughs were found and not made.
One response to this problem is a shift to open innovation. AG Lafley, CEO of P&G, says he wants P&G to become the best partner another company could have, in all areas of its business.
“We will acquire 50% of our technologies and products from outside P&G,” he said.
The company uses several ways to scout for ideas. It queries Innocentive, a website, to reach an audience of 80 000 chemical problem solvers. Convents says it’s like a ‘Google Answers for P&G’, and has a 40% solution rate. The company also uses NineSigma, another solution site, and Yet2.Com, a virtual technology marketplace.
“It’s more important to us to know who to get the answer from, than to know how,” said Convents. P&G is moving from a focus on R&D, to C&D – for connect and develop.
Vittorio Pataia, R&D director for Johnson & Johnson Consumer France, is another European with an insider’s view of how American companies go about their R&D.
Pataia says Johnson & Johnson (J&J) is founded on a combination of passionate people and a resilient organisation, and tries to recruit people or the quality of their leadership skills. This has surprising consequences: “J&J doesn’t hire on the basis of the openings it has. We hire the best people and then work out where to put them.”
In practice, a global recruiting team uses a biannual headcount and succession planning effort to work out which skills the business needs at its various locations.
J&J also develops its staff into research managers by putting them through what it calls a spiral process. In this, individuals are rotated through a series of two-year assignments, most of which take them into unfamiliar working environments. Someone working in formulation may move to regulatory affairs, a project manager could be moved into consumer science, a microbiologist into project management.
Pataia says around 10% of the R&D workforce is moved in this way each year, and about 40% of the workforce have been through it so far.
“It’s a great way to create the R&D managers of the future,” he said. Around 85% of the people who have been through the process move up at least two levels in the management hierarchy. “It doesn’t foster better innovation. It facilitates innovation by getting it to market faster and with less issues.”
There’s a widely held perception that Europe has a problem with innovation that needs to be fixed. It may simply be that Europe has been innovating for too long, according to Converts, a “tragedy of age” that has reduced the region’s drive to innovate. Much like Korea’s Icarus paradox, Europe may simply be doing too well at the moment to feel the need to innovate as strongly as emerging economies.
Prof Herman Vromans, executive director of the ORGANON innovation platform and head of the pharmaceuticals department at the University of Utrecht, said: “I don’t think anyone in my country would think about innovation as being about transforming knowledge into money. Especially in the Netherlands, there is a nice comfort zone.”
Jary Jensen, global R&D manager for Dow Corning, says that getting the right level of stress in an organisation is important for it perform well.
“When I used to visit people in Korea, they felt like they had their backs against the wall and they didn’t have much of a lifestyle, “ he said. “In Western lifestyles people have too much time to discuss, rather than to just do it.”
Dr Volker Hilarius, vice president for pigments R&D at Merck, said that Europe’s strong social model prevents entrepreneurship: “Big companies offer a ‘social security’ that means if you fail you don’t get killed.”
It may not simply be economic maturity. Part of the problem springs from Europe’s culture.
“Europe has too much culture – science is for science’s sake,” said Pataia of J&J.
Prof Dr Michael Droescher, innovation manager for Degussa, has analysed his company’s US operations to understand how they innovate. He says the US innovation process has a definite target and tolerates errors. It’s OK for staff to question the status quo, and to become corporate entrepreneurs. Success, which Europeans are jealous of, is an incentive in the US. And people are more flexible, positive thinking, and tolerant of failure.
“In Germany, if you make a mistake you carry it for life,” he said.
Droescher finds it easy to recruit top talent at his US locations, partly because of the broad immigration into the country. There is a large pool of ‘retired’ senior executives who are keen to take on new challenges, such as helping to manage a start-up. US students are eager to start a business, even if they only have four years of college behind them: “On average, a German chemistry PhD starts work when he is28 or 29 years old.”
Droescher compares central funding of R&D in the US and Europe. In the US there are very large federal funding opportunities, as well as venture capital and personal investments in technology. He contrasts the €40bn that Europe spends on agricultural subsidies each year, with its ambition, as yet unfulfilled, to commit €70bn over five years to the Framework 7 science program.
“In Europe we have 25 countries each doing its own R&D funding,” he said. “If we do not do more here [to sort this out] all the old economies will not thrive.”
Hirosaki said: “European people should have a can-do spirit. We have been talking about technology innovation but the market is not so simple. There has to be technical innovation, a business model, and a customer-relations model. You need to expand the technical discussion to a wide level of discussion.”
Perhaps the key to Europe’s future as an innovator is to treat the current situation as a crisis, much as Korea did with its broadband industry, in order to recreate the necessary sense of common vision and urgency to deliver real change.
“Even if Japan is experiencing turnaround, we are still fighting, still challenging,” said Hirosaki. “Stable is unstable, unstable is stable. It seems that European companies are sitting around a very stable ship while talking about making money.”
doi: eiq-2006-007-0018 |
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