The Well-Designed Global R&D Network

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05/15/2006

© 2006 Booz & Company Inc. All rights reserved.

The Well-Designed
Global R&D Network
A new study by Booz Allen Hamilton and INSEAD finds that organizations
benefit when they configure their innovation networks for cost and manage
them for value.
1

by Thomas Goldbrunner, Yves Doz, Keeley Wilson, and Steven Veldhoen

C
onsider the two faces of the ate. Company A has considered nations in 2005. The survey results,
global innovation move- closing some sites, but has resisted and our own experience, suggest
ment. Company A, having doing so because it fears losing capa- one central truth: Organizations
grown through acquisition, pro- bilities and insights, and roiling benefit when they configure their
duces multiple brands for multiple local markets. Meanwhile, incre- innovation networks for cost and
markets and operates a worldwide mental budget cuts have chipped manage them for value. (For an in-
network of research and product away at engineer and supplier depth look at the survey results, see
development centers. Each of its morale. Having built its network to www.strategy-business.com/media/
R&D sites was initially responsible maximize the value associated with file/global_innovation.pdf.)
for its own brands and local market, market access, it is now forced to The survey respondents, who
but with globalization these distinc- manage the network for cost. together account for nearly 20 per-
tions have lost their importance. Most global innovation net- cent of global corporate R&D
Company B, on the other works look like Company A’s — expenditures, or $76 billion, clearly
hand, was built largely through and suffer the same problems. understand the problems that arise in
internal growth and has two global Company B’s R&D structure is overseeing a bloated, competitively
brands. It operates one primary clearly more productive, but it is not disadvantaged innovation network.
R&D center supported by a hand- necessarily ideal either. Its network They named what they view as the
ful of special-purpose sites around might be too compact, limiting primary R&D challenges: assessing
the world. This comparatively access to knowledge that could max- the value of new knowledge, encour-
sparse network has helped imize performance. Thus, to identi- aging cross-site and cross-functional
Company B win wide admiration fy principles and practices for collaboration, managing the com-
for the efficiency of its engineering. creating a truly well-designed inno- plexity of global projects, and opti-
Because expanding the number vation network, Booz Allen mizing innovation footprints. They
of nodes in a network exponentially Hamilton and INSEAD, the inter- also emphasized that having a well-
increases its complexity, it is not sur- national business school, surveyed managed R&D network is becoming
prising that Company A’s R&D R&D leaders in 186 companies particularly advantageous as compa-
structure is more expensive to oper- from 17 industry sectors in 19 nies expand R&D beyond their
 RESILIENCEreport
home turf. Between 1975 and 2005, easily identifiable. A diverse class of Thomas Goldbrunner
([email protected]) is a
the survey found, the share of R&D multinational corporations, includ- principal with Booz Allen Hamilton in
sites located outside the markets of ing LG, Adidas, Novartis, and Munich who specializes in helping clients
their corporate headquarters has Toyota, have all taken advantage of improve their innovation management
and product development capabilities,
risen from 45 percent to 66 percent. globalization. Korean giant LG was primarily in the automotive and high-tech
That share is likely to increase, with able to move part of its software and industries.
77 percent of the R&D sites planned project engineering to India, whereas
Yves Doz
over the next three years slated for apparel manufacturer Adidas created ([email protected]) is the Timken
China or India. a key consumer and fashion product Professor of Global Technology and
Innovation at INSEAD in Fontainebleau,
Several factors have contributed development center in Japan. France. He is the coauthor, with José
to the dispersion of corporate R&D A global footprint also enables Santos and Peter Williamson, of From
sites. Rising costs in the West, rapid companies to better tailor their Global to Metanational: How Companies
Win in the Knowledge Economy (Harvard
growth of markets in developing products for local markets. There Business School Press, 2001).
nations, advanced information tech- are countless examples: Novartis 2
nology, a scarcity of engineers and moved its research on tropical dis- Keeley Wilson
([email protected]) is a research
scientists, and the opening of mar- eases to Singapore, while high-tech fellow at the international business
kets in China and India have each giants like Areva have more than school INSEAD. She is coauthor, with
Yves Doz and Peter Williamson, of
encouraged companies to globalize 1,000 engineers working in China Managing Global Innovation (Palgrave,
their R&D efforts. Our survey sug- and India to develop products for forthcoming 2007).
gests that future R&D sites in the local markets. And even Toyota,
Steven Veldhoen
Western Europe, the United States, long the pinnacle of centralized ([email protected]) is a vice
and Japan will be selected primarily learning and development based president with Booz Allen Hamilton in
because they offer value such as solely in Nagoya, Japan, is now Tokyo. He concentrates on innovation
strategy, global innovation networks, and
proximity to technology or research starting to establish engineering improvements in innovation effectiveness
clusters, to markets or customers, or centers in Thailand and Brussels. for industrial manufacturers. He co-leads
Booz Allen’s Japanese operations and
to qualified workers commensurate In the face of such obvious need jointly leads the INSEAD–Booz Allen
with their higher cost. Locations in to disperse innovation networks research on global innovation.
the developing world will be chosen despite the risks, how can compa-
primarily to gain access to local nies ensure that they configure their
markets, to decrease costs, and, par- new networks for cost? First, they
ticularly in India and Eastern can accept that there are only two
Europe, to tap into a pool of highly valid reasons to add a node: 1) to
qualified workers. cost-effectively access critical knowl-
But choosing the right location edge that could not otherwise be
isn’t an easy task for R&D leaders. tapped, and 2) to locate capabilities
Because it’s critical that leaders be where they can deliver results better,
able to justify the high cost of faster, and cheaper than anywhere
knowledge access in a developed else in the network. Compared with
market location and of operational traditional innovation networks,
efficiency in a developing market these leaner, more consciously
location, the process must be man- designed networks can achieve 37
aged strategically. Without fully percent faster time-to-market and
understanding the calculated bene- lower costs by 24 percent, according
fits of a potential site, R&D execu- to estimates based on the aggregate
tives are likely to incur an unjustified experience of survey participants.
increase in structural costs. This statistic suggests that when
When the process is managed possible, companies should be fru-
properly, however, the benefits are gal while expanding and as objective
RESILIENCEreport

as possible when assessing their less of the location. On the organi- most respondents viewed accessing
innovation networks. If knowledge zational side, globally aligned new knowledge as central to innova-
or capabilities can be found in a less processes, roles, and structures are tion success, few had deployed
costly manner, they should be. Just seen as important; also viewed as incentives to support it. Not surpris-
as inefficiencies are not tolerated in vital are cross-location steering com- ingly, then, low-value-added sites,
manufacturing supply chains, they mittees to manage pipelines and such as those that do nothing but
should also be stripped out of inno- portfolios, and information systems local-market customization, often
vation networks. that enable 24/7 flows of knowl- struggle to retain talented staff. (This
In addition, there is a morale edge, ideas, and designs. Although it challenge is especially acute in mar-
benefit when each R&D site has may be difficult to impose exactly kets like China and India.) One
clear responsibilities and stimulating the same organizational structure on solution is to move these sites “up
work to do. Moving more substan- a 50-person team in Thailand and a the innovation food chain” by
tive work to a site or giving that site 15,000-person development organi- assigning them more complex
3 more challenging assignments sig- zation in Japan, technology innova- responsibilities. A site need not have
nals a commitment to the country, tors believe that some measure of full development capabilities to be
the site, and the employees. With standardization is important. an interesting place to work; it
respondents reporting that 23 per- The soft levers are geared could, for example, be designated a
cent of their overseas sites do noth- toward evoking and sustaining a center of excellence for a particular
ing but local market customization, healthy innovation culture and process or technology.
a real potential to enhance retention attracting and developing talent. Global innovation networks are
and results exists. They can seem like luxuries in a an integral piece of the emerging
Another critical factor when world where every minute counts international economic system, but
creating a geographically diverse and every dime spent is questioned, creating networks that deliver real
R&D network is to ensure that but our experience suggests they value requires thorough, painstaking
well-planned processes and tools are make a critical difference to per- consideration. All too often, man-
in place that can help foster innova- formance. Our respondents general- agers pursue ill-defined economic
tion and collaboration across geog- ly agreed that successful innovation and political value when creating
raphies, cultures, and organizational depends on team members who can and expanding their innovation net-
silos. Innovation based on disparate work effectively in culturally diverse works, or fail to provide the shared
knowledge gleaned globally can environments. Yet only the technol- processes and common language the
deliver real competitive advantage, ogy innovators report that they view networks need to excel.
but with the diversity comes com- an international background as a A truly lean global innovation
plexity and cost. The “technology prerequisite for a senior manage- network that operates with seamless
innovators” in our survey — those ment role. Accordingly, only the efficiency across borders and cultures
who seek to be first to market and to technology innovators put signifi- is a rare, beautiful thing. The most
introduce breakthrough technolo- cant effort into developing employ- powerful levers — cost-effective
gies — use a number of hard and ees’ cross-cultural leadership skills. node location, well-designed prod-
soft levers to ensure that their glob- The levers of choice in this uct development platforms, an inno-
al networks deliver maximum value. regard are financial and career incen- vation-friendly global culture, and a
The hard levers are both techni- tives to encourage staff to work in well-aligned set of incentives — are
cal and organizational. On the tech- different geographies. In fact, few available to all companies. But com-
nical side, they include common factors operate as powerfully as panies so rarely put all of them
product and component architec- incentives to influence and reshape together that creating such an effec-
tures as communication platforms organizational culture and work tive network is undeniably a tower-
that give global teams a shared lan- practices. However, it appears that ing achievement, and a notable
guage to foster collaboration. For organizations need to do much more example of innovation in itself. +
example, component reviews should to align their incentives with their
be conducted the same way regard- innovation strategies. Although
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Originally published as “The Well-Designed