The Well Designed
R&D Network
Helsinki
October 11th, 2006
1

Booz Allen Hamilton and INSEAD have joined forces to
conduct a study into Global R&D Networks
Ø What is the current status of global innovation?
Ø How do companies build global R&D networks?
Ø What shifts and trends can be expected?
Ø What future potentials exist, what are the barriers?
Ø What do innovation leaders do differently?
2

186 companies from 19 countries worldwide have
participated in the study
Breakdown of Responses by Country
France
Other American
America Europe
6%
1%
26% 55%
USA
25% Germany
19%
Italy
Other Asia
6%
1%
Japan
Netherlands
6%
5%
Asia Sweden
China
19% 4%
12% Switzerland
UK
Other Total: 186
4%
3%
European
8%
3

The respondents represent a variety of industries
Breakdown of Responses By Industry
Retail Automotive
Industrial Financial Services
Building &
Timber, Paper & Consruction
Packaging
Chemicals
Travel, Transport &
Tourism
Energy/Utilities
Electrical Engineering
& Electronics
Healthcare
Telecommunication
Cosmetics &
Food, Drinks &
Toiletries
Textiles
Media Metal & Mining
Aerospace and Total: 186
Defense
4

Globalization of R&D is not new
Development of Share of Foreign R&D Sites 1975 - 2004 [%]
100% 4% 6% 7% 8% 8%
9% 9% Other
2%
9%
90% 1% 4% 5% 5% India
11% 2%
14% 5%
9% China
80% 20%
19%
18%
31% USA
70% 16%
33%
31%
60%
30%
30%
50% Western
31% 28%
Europe
40%
30% 55%
49% 47%
40%
20% 38%
Home
34%
32%
Country
10%
0%
1975 1980 1985 1990 1995 2000 2004
Source: BAH & INSEAD study on Global Innovation Networks 2005
5

There are various drivers & enablers for globalization of R&D
Drivers Enablers
Ø Need of deep market understanding/ customer Ø Opening of major markets, e.g. break down of
insights in targeted markets the Soviet Union enabled access to
technologies/ know-how in various areas such
Ø Customer, which require closeness of suppliers
as aerospace or computing
becoming more global
Ø Access to and speed of information exchange
Ø Access to technology hot spots, which are e.g.
is getting easier
more dispersed due to industry and technology
convergence
Ø Access to qualified resources as capabilities
getting more dispersed, by e.g. overseas
outsourcing, contract manufacturing
Ø Closeness to production sites, which are
continued to being off-shored
Ø Local incentives/ subsidies being offered in an
increased global competition for R&D
investments
6

Reasons for setting up foreign R&D sites have changed
Most Important Reasons for Decision About Site Location
29%
Long established/ traditional 17%
11%
site (legacy)
18%
Proximity to production facility 17%
13%
16%
16%
Access to qualified workforce 22%
14%
Proximity to headquarters
10%
(group or local) 7%
10%
19%
Market or customer access 19%
9%
13%
Local subsidies & incentives 14%
4%
Access to technology cluster or 3%
3%
academic institutes
0%
2%
Access to low cost skills base 9% Site Established: Until 1979 1980-1995 1996-2005
0%
3%
Local regulations 1%
0% 5% 10% 15% 20% 25% 30%
Less Very
important important
Source: BAH & INSEAD study on Global Innovation Networks 2005
7

The globalization of R&D will continue with China and India
being the almost exclusively the targets for new R&D sites…
Outlook of the Global R&D Outlook of the Global R&D
Footprint in 2007 Footprint in 2007 Comments & Conclusions
–Number of Sites – –Employees –
Ø The share of R&D sites in
140%
Western Europe and the US is
116%
120% expected to remain nearly
120%
106% 12% constant over the next 3 years
100%
100%
3%
100%
100% 14% 9%
10%
13%
Ø The same applies to the number
2% 7%
8% 5%
7% 2%
of personnel employed in R&D
80%
6%
80% 5%
12% 30%
10% 27%
Ø The share of sites in China and
60%
60%
Other
India is expected to grow slightly
28%
27%
Japan
in terms of number of sites, but
40%
40%
India
more significantly in terms of
55%
54%
China
employees
20%
20% 38% 38%
USA
W. Europe
0%
0%
Year 2004 Year 2007
Year 2004 Year 2007
8

… but the reason for setting up a new R&D site differs
significantly by country and also for China vs. India
Reasons for Setting up New R&D Sites by Region
2% 2%
10 0 %
4% 14 % 11% 11%
6% 10 % 10 %
Business Environment
17%
90% 2% 19 %
14 %
24% 3%
30% Low cost skill base
11%
7%
80% 2 1% 23%
8% 2 5%
17%
70 % 14 %
23 % 2 1% Qualified Workers
12 %
14 %
60% 12 %
11%
2 1%
14 %
2 5%
17% 39 %
50 % Proximity to
18 %
Production facilities
30%
2 1% 28%
2 7%
40% 11%
11% 24 %
30%
30% 33 % 2 5% Markets or Customers
3 1% 2 1%
17% 28%
2 7% 26%
20% 24 %
14 %
10 % 13 % Technology Clusters or
13 %
13 %
Academic Institutes
0%
China Ind ia USA Jap an Germany UK France Russia East ern B razil
Euro p e
9

After waves of inorganic growth companies have also started
to stronger integrate their R&D network
Examples of Recent Initiatives regarding R&D Footprint from Major Companies
Company Description of Opportunity
Ø GM has started to stronger integrate the global footprint of Technical
Development Centers by assigning platform responsibilities to various
regions and establishing a global platform steering committee
Ø Vodafone has integrated the development centers for service platforms in
the various countries into a global organization and downsized some of
them significantly
Ø In major countries Centers of Excellence will be group-wide responsible for
service categories e.g. messaging is in Italy; content and digital streaming
is in Spain
10

Companies see significant future improvement potentials
Improvement Potentials by Optimization of R&D Network
Comments & Conclusions
37%
Speed
Ø Companies see significant
of Innovation
improvement potentials by
33%
Process
optimizing their R&D network,
Significant
especially with regard to speed
difference*
of innovation processes and
32% quantity of innovations
Quantity
of Innovations
31% Ø Innovation leaders tend to have
lower targets than innovation
Significant
followers, yet differences are
difference
Optimal Integration of
not statistically significant
R+D network
24%
Cost Optimized
Configuration of R+D
of Innovation Ø This is plausible since
network
Significant 23%
Process innovation leaders are already
difference
operating on a higher level,
leading to less aggressive
0% 10% 20% 30% 40% 50%
target for the future
Improvement potential within next 3 years
Source: BAH & INSEAD study on Global Innovation Networks 2005
11

Companies experience a number of challenges when building
international innovation networks
Challenges and Barriers to Global Innovation1)
4,9 5,5
5,1
Assessing the value of new knowledge
5,0 5,5
5,1
Having the necessary incentives for collaboration2)
4,8 5,5
Breaking down organization and functional barriers – 5,0
such as internal competition and local P&Ls
4,8
Managing the complexity of globally dispersed projects
Innovation leaders
Managing the cultural differences between different Innovation followers
4,6
countries or regions Dispersed companies
Harmonizing the definition of product or service structures, Non-dispersed
4,6
tools and processes across the network to enable
Complex knowledge
involvedx3)
4,4
Finding relevant new knowledge across the globe
No complex know
4,7
4,1
ledge involved
Current footprint and the associated cost of changing this 4,4
configuration
Serious
Not a
challenge
challenge
1. Throughout this presentation, differences of means are (only) shown if they are statistically significant on a 5% level
2. Achieving management buy-in
3. Complex knowledge if: knowledge about markets cannot be codified and transferred, different local contexts
make transfer of knowledge in documentation alone difficult and if technological knowledge cannot
be transferred in codified form alone
12

Dispersion is not dispersion –compare BMW and GM
Comparison of BMW and GM regarding Dispersion of R&D Network
BMW GM
Ø Research: Ø Research:
– Technology Office in Palo Alto: e.g. – Research is mainly concentrated in Detroit
'Human-Machine Interface', 'Mechatronics‘
,
– 6 science labs
'Information, Communication, and
Entertainment‘
– Engineering and Emission Test Center in
Ø Development:
Oxnard, California: most modern technology
available to test the emissions – Major R&D/ Technical Development centers:
• Detroit (20.000 employees)
– R&D center Japan: technology observation,
• Rüsselsheim, Germany (6.000)
development, testing & validation
• Trolhättan, Sweden (2.500)
• Brazil (2.500)
Ø Development: concentration of most of the • Australia (1.500)
~7000 R&D employees at the Munich based • Japan (1.500)
BMW Group Research and Innovation Center
– Further R&D centers in Canada (2.000),
Mexico (1.000), South Africa and UK
13

There are two fundamental starting points for companies to
optimize their global innovation network
Current R&D Footprint Direction of Improvement
Ø Shifting more responsibilities to satellites/ opening new satellites to
Satellites
– Improve market/ customer understanding of R&D by sufficient
closeness of R&D to remote markets
– Increase leverage of qualified resources
HQ
– Better exploit factor cost advantages in low cost countries
– Follow relocation of production sites
Ø Examples: Toyota
Ø Stronger integration and streamlining by
– Centralization of resources in one location to realize economies of
R&D
scale
Center
– Assigning lead for certain competences to one location realizing
economies of scope and reducing duplication of work
HQ
– Closing of sites not needed in an integrated picture
– Harmonizing structures, processes and tools
– Establishing cross-location governance models
14

The optimum depends on a number of parameter, which have
to be evaluated case by case
Innovation Taxonomy
Decentralized Set-up Centralized/
Integrated Set-up
Complexity of knowledge about
local market/ customers
Low
High
Difference of customer needs
between countries/ regions
Low
High
Concentration of qualified
resources in one location/ area
High
Low
Modularity of Knowledge
Architecture of Product/ Solution
High
Low
Economies of scale
High
Low
15

For the network design front- and “back-end”of the
innovation process have to be distinguished
Innovation Front-end
Research Network
1
Market Understanding/
1 2a
Customer Insights (Forward
2a
looking)
Ideation/ Magnet project
3
3
Market Understanding/
2a
Customer Insights
4
4 Development Network (excl.
5
2b
Off-shoring)
5 Off-shoring
Innovation “back-end” Product/ Solution Development
:
16

What do innovation leaders do differently? Fast, broad,
global sensing inside and outside the company…
Importance of Various Aspects Regarding Sensing of Knowledge
4,6 5,4
Sensing allows us to gain faster and more exclusive
5,1
access to new technologies (from clusters/academia)
4,2 5,0
Our sensing activities have global scope 4,9
4,5 4,9
Our sensing activities cover adjacent 4,8
technologies
4,2 5,0
We proactively sense for internal knowledge
4,6
dispersed across our wider group/ corporation
2,9 3,2
Innovation leaders
We use precise incentives and rewards to
3,1 Innovation followers
support sensing activities
Strongly Strongly
disagree agree
Source: BAH & INSEAD study on Global Innovation Networks 2005
17

… Centers of Excellence, harmonized processes and systems,
and centrally steered pipeline & portfolio
Integration of Innovation Network and Processes
4,6 5,4
Our innovation/R&D sites act as regional/global
5,1
centers of excellence
5,0 5,5
4,0 5,1
Processes and systems are harmonized across
4,7
locations
We appoint locations to be wholly responsible for
4,5
specific global/regional platforms, capabilities, etc.
4,2 4,9
Organizational structures are harmonized across
4,5
locations
4,2 4,8
3,7 4,8 Innovation leaders
Our innovation pipeline and portfolio is steered by
4,4 Innovation followers
cross location boards/committees
Dispersed companies
Non-dispersed
Local innovation/R&D centers have full execution
4,4
capability for customizing products or services
Strongly Strongly
disagree agree
Source: BAH & INSEAD study on Global Innovation Networks 2005
18

Foreign R&D sites of Western European automotive companies
are still rather “outposts”…
Role of R&D Site
–Example: Automotive Industry, Western Europe –
Comments & Conclusions
Site Home Western North Other Site
region: country Europe America Regions
Ø In the Western European
Total: Automotive Industry, R&D activities
11% 37 sites
11%
reach out globally, but core
20%
22% 28%
activities are significantly focused
11% 11%
40%
on home country and regional sites
56%
20%
Ø All sites in home country cover core
28%
44%
R&D activities with 78% covering
20%
100%
both research and full development.
78% 77%
22%
Ø 78% of Foreign sites in Western
60%
11%
44%
Europe cover core R&D activities
40%
22% 22%
Ø 40% of sites in North America and
56% of sites in other regions focus
on specific expertise and
Full research
Full research and development Full development
customization for local markets
Development Centre with specific expertise
Development Customization for local markets
Source: BAH & INSEAD study on Global Innovation Networks 2005
19

… whereas Healthcare companies have established centers
with specific expertise
Role of R&D Site
– Example: Healthcare Industry, Western Europe –
Comments & Conclusions
Home Western North Other Site
country Europe America Regions
Ø In the Western European
Total:
Total: Healthcare Industry, R&D activities
6%
5%
10% 51 sites
51 sites centers with specific expertise
30% 33% account for about one third of all
25%
40% 44%
sites
38%
30%
60%
5%
Ø 70% of sites in home country cover
10% 27%
core R&D activities with 35%
13%
30%
covering both research and full
7% development.
70% 19%
40% 60% 57%
Ø 60% of Foreign sites in Western
27% 41%
35%
Europe cover core R&D activities
25%
7%
10%
Ø Only in other regions do sites
Full research
specifically focus on customization
Full research and development Full development
for local markets
Development Centre with specific expertise
Development Customization for local markets
Source: BAH & INSEAD study on Global Innovation Networks 2005
20

International careers are an important basis for global
innovation
Structure of Innovation Projects
People with multi-cultural experience generally
have a greater ability to collaborate in virtual 5,1
teams across location’ s
People with multi-cultural experience generally
5,1
have a greater ability to absorb, interpret and
utilise unfamiliar knowledge
3,4 4,8
We actively encourage staff to work in
different geographies and functions by 4,3
offering direct career or remuneration rewards
3,3 4,6
An ‘ international’background (working in
different countries) is a prerequisite for 4,1
being a senior manager
Too many people with ‘ international’ Innovation leaders
backgrounds can dilute unique local 3,4 Innovation followers
contributions to the innovation process
Strongly Strongly
disagree agree
Source: BAH & INSEAD study on Global Innovation Networks 2005
21

Conclusions
Ø Don’ complain about European companies going East
t
with part of their R&D –it is necessary to be successful
Ø Europe can continue to attract R&D around leading edge
technology clusters with a highly qualified workforce
Ø Encourage our elite to be prepared and skilled to learn
from the world –we often do not have the best answer
22

“Thank you for
your attention”
23