Business Globalization and the

Importance of Entrepreneurial Innovation

Richard B. Dasher, Ph.D. Director, US-Asia Technology Management Center Executive Director, Center for Integrated Systems

Consulting Professor, School of Engineering Stanford University

EMC2 Global Innovation Conference Santa Clara, CA, October 31, 2012

Outline

t  Introduction: innovation as a process

t  Business globalization: has spread throughout the supply chain to R&D

t  Responding to the challenge

t  Open innovation

t  Beyond open innovation, entrepreneurial innovation

2012.10.31 2 Richard B. Dasher, Stanford University

Innovation as a process

Basic Research

Applied Research

Product Development

Manufac-turing, sales

Real-world deployment

Creation (invention)

Idea A Idea B

Idea C Idea D

Definition of innovation: process that leads from creation of a new idea (invention) to its real-world deployment (often by commercialization) New ideas can first appear at any stage of R&D

3 2012.10.31 Richard B. Dasher, Stanford University

Innovation differs from invention

Invention Innovation Some inventions are instantaneous

Innovation is a process, and so it usually takes time

Some things are invented by individuals

Almost always, innovation requires more than one person and group

Some inventions are unplanned

Innovation refers to an intentional, managed process or its result

At first, the practical value of an invention may be unknown; many inventions never yield economic value

Innovation always aims to provide an expected value in the real world • New value-added product or service, or • Greater efficiency

Richard B. Dasher, Stanford University 4 2012.10.31

Most business innovations�are late stage (development-stage), incremental changes

Add new feature to existing product (category) Nintendo “Wii”

Take existing product (category) to new market�

Nintendo DS to “mature” markets

New combination of existing technologies � Apple i-Phone

Change of business process � Outsource employee medical services

New business model �SaaS, new types of discounts (e.g. location-based)

Completely new thing / category (rare) � (c. 1980) Personal computer ? Walkman?

2012.10.31 5 Richard B. Dasher, Stanford University

The spread of globalization to R&D

World trade is ancient The first multinational corporation was…

The Dutch East India Company (1602 – 1800)

V.O.C. was also the first LL joint-stock corp.

“Factory” in Dejima (Nagasaki)

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Globalization goes beyond global trade

t Globalization is …

t Selecting the optimal resource, partner, and market alternatives from a worldwide menu

t  It is not …

t A company conducting all its business activities in every (major) world market

2012.10.31 8 Richard B. Dasher, Stanford University

Factors enabling business globalization (18th through mid-20th Centuries)

t  Improvements in transportation technologies and systems

t  Reductions in tariffs

t  Increase in the relative safety of travel

t  More open borders

t  The industrial revolution …

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Standardization enables outsourcing (which further enables globalization)

Standardized parts … can come from anywhere

… and be assembled anywhere

2012.10.31 10 Richard B. Dasher, Stanford University

Outsourcing in the supply chain (1) Began with distributors in remote markets

R&D

Infrastructure (machine tools,

design software…)

Components

Final manufacturing & Assembly

Distribution & sales

Business processes (HR, finance, …)

• Cost effective • Local market

knowledge

2012.10.31 11 Richard B. Dasher, Stanford University

Outsourcing in the supply chain (2) Soon spread to components, infrastructure

R&D

Infrastructure (machine tools,

design software…)

Components

Final manufacturing & Assembly

Distribution & sales

Business processes (HR, finance, …)

• Specialized knowledge, capabilities • Modular • Work not so critical to final assembler

strategies for competitiveness • Cheaper than in-house

2012.10.31 12 Richard B. Dasher, Stanford University

Outsourcing in the supply chain (3) Outsourced manufacturing, BPs

R&D

Infrastructure (machine tools,

design software…)

Components

Final manufacturing & Assembly

Distribution & sales

Business processes (HR, finance, …)

• Keep mfr close to target markets • Standardized processes • Use lower cost labor

IT-enabled

2012.10.31 13 Richard B. Dasher, Stanford University

Outsourcing in the supply chain (4) R&D traditionally difficult

R&D

Infrastructure (machine tools,

design software…)

Components

Final manufacturing & Assembly

Distribution & sales

Business processes (HR, finance, …)

Negative factors • Closely connected to corp. strategy • Depends on tacit as well as explicit

knowledge – difficult to transfer across company boundaries

• Greatly facilitated by Internet, IT revolutions • New (open) innovation relationships

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Outsourcing = just one channel for R&D cooperation with company-external partners

t  With outsourcing, specs are usually decided in-house

t  Other relationships may allow more ideas from outside

t  Results of exploratory R&D by subsidiary and / or affiliate companies is presented to parent

t  Joint venture research labs with other companies

-----------------

t  Research relationships with universities

t  Venture investments in start-up companies

2012.10.31 15 Richard B. Dasher, Stanford University

Open innovation

Applied Research Development Target market

Co. internal idea incubation

(R&D) Idea D

Co. external idea incubation

Basic Research

University collaboration, multi-firm joint research

Buy tech license, buy start-up

company

Idea B Idea C

Idea A

Idea E

New market

Spin-out company

New market License out tech

2012.10.31 16 Richard B. Dasher, Stanford University

Buy / merge with large company

Corporate VC investing

Based on drawings by H. Chesborough

Beyond outsourcing: Offshoring to foreign countries

Enabling factors Motivating factors

Accessibility and transport Improved responsiveness to customers, better relationships with suppliers

Low cost, data rich communications Cost efficiency

Modularity of parts and processes

Resources, e.g. experienced, skilled workforce

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Share of world spending on R&D

2010

2012 0 5

10 15 20 25 30 35 40 37.8

32.8 34.3

11.8 12

2.6

24.8

3

36.9 32 35.5

11.4 13.1

2.8

24.5

3.1

36

31.1 36.7

11.2 14.2

2.9

24.1

3.2

2010 2011 2012

R&D Magazine, Dec. 2011, Global R&D Funding Forecast for 2012

%

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World Top Five Countries for R&D Spending

R&D spending rank. Country (GDP rank)

2010 2012 forecast 2011 GDP Grow

GDP $billions

R&D % of GDP

GERD $bn

GDP $billions

R&D % of GDP

GERD $bn

1. USA (1) 14,600 2.83% 415.1 15,305 2.85% 436.0 3.7%

2. China (2) 10,090 1.48 149.3 12,434 1.60 198.9 9.2

3. Japan (4) 4,310 3.44 148.3 4,530 3.48 157.6 - 0.5

4. Germany (5) 2,840 2.82 82.9 3,158 2.87 90.6 2.7

5. S. Korea (13) 1,459 3.36 49.0 1,634 3.45 56.4 3.6

R&D Magazine, Dec. 2011

• China: GERD = 0.6% of GDP in 1995, government policy aimed for 2.0% by 2010, but GDP grew so fast the goal could not be achieved

• GDP growth has averaged 9 – 10% / yr; GERD growth has averaged 12%

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Where U.S. firms plan to expand their R&D

22

6

10

11

16

24

24

30

Rest of world

Japan

Eastern Europe

Other Asia

Europe

India

North America

China

% of respondents

survey by R&D Magazine, Dec. 2011

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Motivations for doing global R&D: (A) To locate R&D in developed countries

Survey of 229 MNCs by Kauffman Foundation, reported by De Backer & Basri 2008

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Motivations for doing global R&D: (B) To locate R&D in developing countries

From survey of 229 MNCs by Kauffman Foundation, reported by De Backer & Basri 2008

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China R&D expanding… Why companies locating / outsourcing R&D there?

t  Benefit from presence in long-term growth of China market – not just to service U.S., Europe, Japan markets

t  Technology and product localization activities for China market

t  Technology standardization activities for China market

t  Hire young engineers with long-term potential

t  Closer connections with universities – for long-term benefit

------

t  Not so much (yet): participate in advanced technology development

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But, … joint research paper co-author countries

China, ‘99 – ‘03 China ’04 – ‘08 India ‘99 – ‘03 India ’04 – ‘08

USA 16,389 39.428 6,725 10,728 Japan 7,251 13,418 1,908 3,017 Germany 4,480 8,263 2,667 4,284 U.K. 4,433 9.987 2,137 3,646 Canada 2,806 7,547 927 1,590 Australia 2,796 7,116 643 1,338 Singapore 1,782 4,635 -- (no data) -- (no data) S. Korea 1,565 4,485 558 2,074 Taiwan 1,471 3,219 540 1,102

Battelle, R&D Mag, Dec 2009. 2010 Global R&D Funding Forecast

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Innovation Strategies in the Context of Business Globalization

1. Open innovation: now on a global scale

Applied Research Development Target market

Co. internal idea incubation

(R&D) Idea D

Co. external idea incubation

Basic Research

University collaboration, multi-firm joint research

Buy tech license, buy start-up

company

Idea B Idea C

Idea A

Idea E

New market

Spin-out company

New market License out tech

2012.10.31 26 Richard B. Dasher, Stanford University

Buy / merge with large company

Corporate VC investing

Based on drawings by H. Chesborough

Open innovation aims to take advantage of start-up company strengths

2012.10.31 Richard B. Dasher, Stanford University

Execution Risk High

Market risk High

Low

Low

Typically, only start-up companies will carry both risks

Examples: Tesla, Facebook

Develop new technology for existing market: big companies do this

Example: Honda Jet

Find new market for existing technology: big companies

do this

Examples: iPhone, iPad

Incremental product development: big companies do this

Example: new auto models each year (idea for drawing based on

Christensen 1997)

27

U.S. economy – growth of the small company sector in innovation

Share of total corporate R&D spending in U.S.�

Share of U.S. patents to firms with less than 1,000 employees�

t  1972: 5% of new U.S. patents t  2000: 30% “ “ “

(Borchardt 2008) t  Pattern change shows that venture investors are

financing an increasing share of (national) innovation

Small firms (< 1,000 employees)

Medium (1K – 25K)

Large firms (25K+ employees)

1981 4% 25% 71% 2005 24% 38% 38%

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Open innovation = Acquisition and Development (?)

t  Big companies typically seek fundamentally different kinds of ideas from external sources than they develop in-house t  Robust company-internal R&D is still necessary

t  As start-up companies mature, the risks associated with their ideas decrease, and they become acquisition targets

t  Acquisitions may leverage company-internal R&D budget with funds from elsewhere in company budget

t  This system puts new pressures on company R&D workforce t  Increased allocation of time and effort to integration

(traditionally not incentivized) t  Frustration when company-internal ideas are abandoned

in favor of new ideas from outside

2012.10.31 29 Richard B. Dasher, Stanford University

2. Add (company-internal) entrepreneurial innovation

t  Allowance of some work time for personal projects

t  Company competitions for new innovative ideas

t  Encourage external learning (seminars, etc.)

t  Recognize (incentivize) the creative efforts required to integrate external ideas – successful integration may require new approaches from bottom-up

t  Develop mechanisms to spin out project for company-external incubation

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Summary

t  Introduction to innovation t  Spread of globalization to R&D

t  Spread of outsourcing throughout supply chain

t  Increase of R&D spending in Asia t  U.S. (and other advanced country firms) shift in global R&D

focus toward rapidly developing markets

t  Responding to globalization 1. Open innovation

2. Company-internal entrepreneurial innovation

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Final comments

t  Without company-internal entrepreneurial innovation, open innovation really doesn’t work

t  Company needs entrepreneurial employees in order to t  Keep up with rapidly emerging new ideas in the

start-up world t  Understand entrepreneurs and integrate start-up

ideas (from sources that typically lack the well-defined processes of a large firm)

t  Have the excitement and passion that are essential to robust innovation

2012.10.31 32 Richard B. Dasher, Stanford University