Issue 17 summer 09

PDF Downloads This article All articles in issue 017 Create 'My eIQ' Email send via email Contact EIRMA send us a messageLinks Poul Due Jensen Foundation EIRMA annual conference 2009 Lafarge Bertrand Collomb’s Viewpoint Martin Schuurmans European Institute of Innovation and TechnologyMartin Schuurmans on EIT Shell Bangalore Technology Centre Jan-Eric SundgrenHungarian Academy of Science Anneli Pauli DG ResearchAnneli Pauli’s Viewpoint The Risk Sharing Finance Facility DSMSolvay OECD surveyEIRMA’s Focus Group study trip to India Robert Bosch Power Tools Knorr-BremseABB corporate research in Kraków Siemens corporate technology in RussiaArçelik

Europe knew it had problems even before the credit crunch struck last year. Climate change, energy security, increasing competition, and an ageing population, were just part of a challenging list of issues it faced. The fact that young people didn’t seem very interested in developing the skills and behaviours necessary to address them had industry and policymakers wondering what to do next. A financial crisis that undermined the careful almost as badly as the careless only made the situation more difficult.

But a crisis can also be an opportunity, as senior businesspeople and politicians know.

“Never waste a good crisis,” US secretary of state Hilary Clinton told a group of young people gathered at the European Parliament in March this year. “Don’t waste it when it can have a very positive impact on climate change and energy security.”

Europe is reconsidering its options now that the first tremors of the credit crunch are dying away.

Time for change

Lars Kolind, serial entrepreneur and chairman of the board of the Poul Due Jensen Foundation, told EIRMA’s annual conference in June that one of industry’s most pressing problems is that its organisation is outmoded. He said that functional management hierarchies are a relic of an industrial manufacturing era that began more than 100 years ago.

“Isn’t it an impossible thought that the best way to do things a hundred years ago is still the best way to do things now?” he asked.

Bertrand Collomb, former CEO and current honorary chairman of Lafarge, argued that the financial crisis had exposed the weaknesses of free markets and national governments in the face of global crises.

“Global issues cannot be solved by the market,” he said. “It is not the market that will decide what we do in terms of health care or climate change.” He called for global governance to tackle the world’s toughest challenges and suggested the current crisis was an opportunity to accelerate change: “The crisis is breaking ideological taboos. The world is upside down and everything is possible.”

Others think the same. Martin Schuurmans is chairman of the governing board of one such initiative, the European Institute of Innovation and Technology (EIT). He is using the crisis to promote the new Institute, which is meant to accelerate the rate at which Europe commercialises the technology it develops.

“We in Europe focus on problems much more than elsewhere,” he said. “There is a crisis and the opportunity [it presents] is that it can help us break down resistance to change.”

One further issue is bothering Europe’s top industrialists: finding the people to help innovate our way out of the crisis.

At one end of the scale, Europe’s ageing population means key talent is leaving its research labs in increasing numbers.

“The Baby Boomers are picking up their golf clubs and getting ready to retire,” said Geoff Nesbitt, technology manager of the Shell Bangalore Technology Centre. “[If we hadn’t acted], then by 2016 we would have had just one in five of our R&D staff under the age of 30.”

At the other end of the scale, Europe’s youth is showing a declining interest in the maths, science and technology skills needed for many research jobs. According to Jan-Eric Sundgren, senior vice president for public and environmental affairs and member of the group executive committee of the Volvo Group “demography is against us, with the number of 18-year-olds declining 21% between 1993 and 2022. The number of students going to university is stabilising but the number of maths, science and technology graduates is down 11% between 1998 and 2006.”

According to Norbert Kroó, vice president at the Hungarian Academy of Science, this is leading to a shift in the balance of power between individuals and institutions, as the battle for talent intensifies.

The paradox

Kroó sums up Europe’s situation in five paradoxes, as follows. The first is the knowledge paradox - science is increasingly important but young people’s interest in it is decreasing. The second is the time paradox - the time to acquire knowledge is increasing but the time until that knowledge is obsolete is decreasing. The third is the innovation paradox - Europe has good-quality research, and yet faces declining competitiveness. The fourth is the competitiveness paradox – the role of R&D in sustaining competitiveness is increasing but the attention that government pays to it is decreasing. Finally, there’s the governance paradox - governments’ share of R&D funding is decreasing, but the money they do spend is increasingly important to sustaining R&D in Europe.

Kroó argues that Europe needs to reduce the impact of the five paradoxes, and can use the crisis to drive through change. The public sector should focus on strengthening the basis of Europe’s competitiveness, but leave competition to industry. He says that Europe must draw on its traditions, such as the Enlightenment, to help it succeed. “Nations that don’t respect their traditions don’t deserve to thrive in the future.”

Short-term responses are likely to be more pragmatic, according to Anneli Pauli, the deputy director-general of DG Research at the European Commission. She says that even the most committed companies are likely to reduce their investment in research and innovation, at least for this year.

But she argues that continuing to invest in R&D and innovation, as countries such as South Korea and Finland did during previous crises, could turn the current crisis into an opportunity that will help Europe prepare for the upturn.

“This won’t happen by itself - we need continuous investment in the EU, the member states, associated states and the private sector. We’re trying to lead by example,” she added, for example by developing the Risk Sharing Finance Facility.

Europe faces resistance to change. Collomb sees it in the way that European countries have been slower to take advantage of information and communications technologies than the US. Pauli sees it in efforts to reform European universities through the Bologna process: “In Finland there’s a new law to be passed to modernise the universities, and I was told that there was a demonstration in the streets. The university people were saying ‘Make love, not innovation’.”

And 65% of those present at the conference agreed that innovation is hampered by resistance to change, with a further 32% partially agreeing, according to polling carried out during the sessions.

Globalisation

If Europeans are unwilling to change, and unwilling to learn the skills to create change through innovation, then some European companies are looking beyond their home country borders to find the skills and new markets they need to grow.

According to an OECD survey on trends in European R&D investment, the surveyed companies carry out more than 20% of their R&D outside the EU. But despite the hype about R&D in the developing world, the largest share of foreign R&D investment, at almost 10% of total spend, goes to the US and Canada. China and India receive just 2.7% and 3.5%, respectively, of the polled companies’ R&D investment.

Many of the lessons of globalising R&D are now well understood. Go where the talent is. Go to make your global company a local citizen in key emerging markets. Ensure that offshore facilities are treated as full members of your global R&D network. Respect the local culture. And don’t expect offshore R&D to be particularly cheap.

China

Jacques Joosten, director of corporate technology at DSM, has worked on globalising his R&D organisation for more than a decade. For him, “proximity is a key success factor for R&D.”

After a false start in the 1990s, DSM began a serious effort to establish an offshore R&D centre in China in 2006, driven by a sense of urgency about technology and business developments in China.

“In 2006 the State Council of China launched an innovation plan for the next 15 years,” he said. The plan calls for the country to increase its R&D spending by 21% a year for the next five years.

“One thing you can be sure of is that they will just move on and do that,” he said.

Joosten has coupled an R&D workforce in China with local marketing and sales and technology intelligence, so their activities are co-ordinated.

“You need to build the trust of local people and make the resources available, supporting ambitious growth through innovation and new business development scouting,” he said. He also pointed out the advantages of China’s large population.

“We have an approach we call PSD, for people, selection and diversity,” he said. “Not everyone in the company yet appreciates that involving 0.01% of 1.3 billion people is better than involving 1% of 16 million.”

And then there’s the scope of the opportunity. DSM has set a €1.5bn sales target for China in 2010 “but if we had started sooner this could have been double”.

There’s opportunity and challenge in China, according to polling at the conference. Of those polled, 68% agreed that cost should not be a prime driver for work with China, and 19% partly agreed. In another poll, 34% agreed that China will outperform Europe as a leading region in science and technology in 30 years, 44% partly agreed and 32% disagreed.

India

India is also becoming a popular location for R&D. According to Balkumar Marthi, expertise group director of biosciences at Unilever Research and Development Laboratory in the Netherlands, India is a modern country that is still grounded in tradition. Its population offers a diversity of thought and language, a highly motivated workforce with a good work ethic, and plenty of the kind of entrepreneurial spirit that means you can find a teashop almost anywhere you go.

“These are all national characteristics that are now re-emerging,” he said.

“The message is to weave yourself into the fabric of your community and that’s where you will find success,” he said, pointing out that the Hindustan Unilever sales-force can reach more people in the villages of India than the government.

On the other hand, Marthi said that India’s infrastructure is still poor, and that there are still informal attitudes and a lack of respect for processes that Western R&D managers find it difficult to come to terms with.

Léopold Demiddeleer, future business director in the central management and technology group of Solvay, led EIRMA’s recent Focus Group study trip to India alongside Dietmar Theis, formerly of Siemens. He offered a ‘before and after’ comparison of the group’s view of the country.

“Before the trip we thought that the reason to go to India was the cost, the market, corporate image, and the talent, in that order. After we had been, we thought that the most important issues were the local and global market, the talent, the image and finally cost.”

The group drew a number of lessons from its trip. Adaptability is important, as is creating strong links to local organisations in order to tap into the local talent, know-how and markets, as well as gaining some legitimacy. It’s important to match the technical competence of the parent company with the subsidiary, and try to foster some cultural commonality between the two. It also helps if your local managers have experienced both Western and local cultures, perhaps by being a returning expat.

Nesbitt at Shell helped create the Bangalore centre, in part to take advantage of India’s ‘demographic dividend’, a boom in its population that has created an increasing number of high-school students educated to go to university.

“Cost was also a factor,” he said. “We thought we might make a 40% saving but now it is more like 25% less to employ somebody in India than in the US or the Netherlands.”

He adds that the reality is that the demographic dividend is yet to be realised. Academic standards and student numbers are high but the opportunities for graduates to gain relevant experience are limited. He finds that the habit of research is still developing, and that report-writing skills need work. And there is a tension between individual and group work, because students who make it into and through university have done so by fierce individual competition.

He also finds that because people are moving so fast they’re happy to do 80% of a job, perhaps solving a problem in theory, and leave the last 20%, putting it into practice, undone.

“It is one of the hallmarks of a culture that is struggling to catch up with itself.”

Nesbitt says that multinationals can be slowed down by their inability to take part in ‘miracle minutes’, when informal payments help shortcut bureaucracies. “As an international company with international ethical standards we can’t participate in this kind of behaviour and it can take some effort to make people understand that.”

He points out that globalisation cuts both ways in large organisations: even as the offshore group is coming to terms with the company’s practices, the company has to work hard to absorb their presence.

“We needed an extremely dynamic management-of-change programme to ensure that change was expected. The dynamics of your culture will change radically when you add in almost 30% of your staff from India.”

Central Europe

If India and China seem too far, plenty of technology and talent is available in central and eastern Europe, in places such as Hungary, Poland, Russia and Turkey.

Gyulas Gondos, head of the development department at Robert Bosch Power Tools in Hungary, says that the best location for R&D is close to manufacturing to enable a good interaction between the two.

His company started its development facility in Hungary using mainly foreign managers, but has quickly replaced them with Hungarians. “Local managers can understand the culture and better motivate the workers.”

But there are weak points to Hungary’s R&D offering, according to Gondos, especially the lack of competence in English and German, and an education system that is biased to the theoretical rather than the practical.

László Palkovics, director of advanced engineering processes at Knorr-Bremse, also in Hungary, says the country offers a combination of universities, attitudes, costs, co-operation opportunities, and talent that make it attractive.

“Cultural issues are not a barrier either,” he added. “We have to accept the local culture but we don’t have to overemphasise these things. There are national and corporate cultures and we should never give up our corporate culture for a local culture.”

The R&D lab has taken steps to become embedded in the local research community so the R&D unit is now as important to Knorr-Bremse’s business as those in Germany, Italy or the US. One drawback with working in Hungary, though, is the lack of R&D capabilities among local suppliers: Palkovics has found his staff having to make up drawings of very simple parts such as O rings for suppliers.

According to Marek Florkowski, director of ABB corporate research in Kraków, Poland offers good education and a competitive price to quality ratio.

“But for globally competitive companies lower cost is of minor importance,” he said. “We have highly motivated people with good retention, a huge student pool, plenty of flexibility, easy travel and respect for IP.”

Kraków alone has 15 universities, 140 research science technology organisations and 20,000 science staff, serving 140,000 students.

One of the reasons that ABB set up a centre in Poland was because it still offered skills that were declining elsewhere: “There is a generation gap in skills such as electrical engineering, mechanical engineering and transformer design, but we can still find these people in Poland.”

Florkowski’s advice to managers of offshore R&D group is “to bring tangible results. They should build demonstrators, not just solve equations or create recipes.”

He has also helped ensure his lab became the global lead in the ABB R&D network on a number of issues such as group standards and simulation support, to make it important to the whole group.

Martin Gitsels, vice president of Siemens Limited Russia and head of Siemens corporate technology in Russia, says his group has a strong impact on the company’s global business.

“Low cost is not the driving force for research and advanced development here,” he said. “You want to leverage the intellectual force of the country and be close to the market and the customer.”

Gitsels says trustworthiness is higher in Russia than you sometimes read in the newspapers, but that it is still a challenging place: “Russia is a jungle but there are treasures in that jungle. You need to balance the tedious search for excellent research groups in dead institutes.”

Cemil Inan, R&D director at appliances maker Arçelik in Turkey, says half the population there is less than 29. The country is second in the world in terms of increasing its R&D spending between 2002 and 2007. Engineering is still popular, having a social status second only to being a doctor. Under a new R&D law, there are tax breaks for all R&D expenditure for companies that set up an R&D centre with more than 50 researchers. And up to 80% of a researcher’s income can be tax-exempt, or up to 90% for people with PhDs.

“In this economic crisis we are walking with our heads up because we have good support,” he said.

Most R&D managers at the conference were not discouraged by cultural issues: 43% agreed that any cultural issues could be overcome with proper management, 30% partially agreed and 26% disagreed.

Finding another way

Of course culture isn’t only a national issue: companies and even entire groups of economic actors can have common cultures that may or may not remain appropriate.

Kolind closed the conference by arguing that most companies, and the R&D groups that serve them, are based on an organisational model created 50 or even 100 years ago.

“Companies maintain mental models for decades after they have become irrelevant. The board is prepared to refine these irrelevant mental models seemingly forever.

“Until 10 years ago what was the mental model of an airline industry? It was that their products were exclusive, expensive and ‘high service’. Then there was a change with the launch of Southwest Airlines in the US. Airlines tried to adapt their irrelevant mental models, instead of realising that the foundation of that model, although still successful, had gone away.

“The model of running large companies is that the criteria for success is a return on an investment, and that it is organised in a hierarchy which always has a functional component. The idea of a functional hierarchy was invented by Ford and GM in the 1960s.

“These organisations also have a separation of owners and workers, so that conflict is built in.

“There is a dominating mental model for running an international corporation and the logic for doing it that way no longer exists.”

Kolind argues that the same is true for R&D organisations, which are built in the image of their parent organisations.

“The goal of an innovation organisation is to provide new products for long-term profit. So what’s the success measure? The measure of output that many people are now using is the percentage of sales coming from products introduced a particular number of years ago. This means that the shorter the product life, the better. So effectively this is a measure of how quickly a product goes out of business.

“R&D organisations are run as functional hierarchies and the culture in an R&D department is an adapted version of corporate culture managed using plans, budgets, reports and a focus on deviations.

“You are a reflection of a corporate mental model that is outdated. But the fact is that if the mental model gets out of touch with today’s world you will go out of business.

“It is possible to create a new mental model for business where the criterion for success shifts from profit to passion or purpose. Every business must have a purpose above profit.”

For Grundfos, a water pump maker in which the Poul Due Jensen Foundation holds a majority stake, the purpose was to provide water for the world. For a hearing aid company that he ran, the purpose was to enable customers to live the life they wanted with the hearing they had.

“If you have a higher purpose then you can turn relationships with customers into partnerships.”

Kolind says he has designed organisations without hierarchies that use various self-organisation mechanisms instead. The first is a mechanism to ensure that everything gets done, using a project-based approach. The second is a professional structure that ensures the quality of the work. The third is a ‘people’ mechanism that ensures everyone works at maximum effectiveness.

“These three mechanisms can be built into one organisation, provided there is a meaning on top and the conventional leadership structure is replaced with a value-based leadership.”

Kolind says it is then important to try to establish a link between values and behaviour, norms and expectations. “The whole key is to establish consistency.”

“So imagine if the purpose of R&D was to create value for society,” he said. “”Then the success criterion becomes the degree to which what you do adds value to society.

“Imagine if an organisation was a big, networked collaborative team. Imagine if that organisation was designed as a self-managed entity. Imagine if the culture of R&D was designed and optimised as a framework for a knowledge factory with a purpose. Imagine your innovation was open to the world, for example through crowdsourcing, and imagine if your employees were partners. And imagine operating your business in an unlimited context, without a budget or a plan but with a mechanism to ensure you are providing value to a purpose.

“Question your mental model. Ask yourself - what are we doing today? When did we start doing that? What was the logic that made us choose to do that? Check that the logic is relevant today and if not, that should lead to change.

“”You may think you’re in innovation but you’re actually in the management of innovation. The question is - how much innovation have you contributed to the field of innovation management?”

Kolind clearly believes that he has found a better way to run modern organisations than to use approaches formulated during the Industrial Revolution. He has another motivation as well.

“If we compete on the same playing field as Asia and central and Eastern Europe there is no way we can maintain our current salaries and living standards,” he said. “So we need to find out how to do things differently.”

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