special report: competing on knowledge

Special report

Competingon knowledge

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John Bessant, Julian Birkinshaw, Rick Delbridge, Rachel Griffith, Jonathan Haskel, Andy Neely, Special report: Competing on knowledge, Business Strategy Rewiew, 2008, Volume 19 Issue 1, Pages 73 - 89

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Special report

Competingon knowledgeTraditionally, the UK has been regardedas good at innovation – with manyinventions and scientific breakthroughs.So, can this nation rest easy? No. Basedon extensive research by the AdvancedInstitute of Management Research (AIM),it would appear that the agenda forkeeping Britain competitive is ademanding one. Six AIM authors reporton what you need to know. And do.

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Traditionally, the UK has been regarded as good at innovation –with many inventions and scientific breakthroughs. So, can thisnation rest easy? No. Based on extensive research by theAdvanced Institute of Management Research (AIM), it wouldappear that the agenda for keeping Britain competitive is ademanding one. Six AIM authors report on what the UK needsto know. And do.

Is the UK an innovative country? Sad to say (and formany years), the UK economy has underperformed interms of innovation. Research shows that Denmark,

Finland, France, Germany, Japan, Singapore, SouthKorea, Sweden, Switzerland and the US all spend morethan the UK on Research and Development as apercentage of GDP. The Competitiveness Index, producedby the World Economic Forum, ranks the UK sixth on amore general measure of innovativeness.

The Advanced Institute of Management Research (AIM:www.aimresearch.org) came into existence in 2002 tosustain, among other goals, a rigorous watch on UK’sinnovation performance. This led to research projectslooking at innovation from a number of differentperspectives and at different levels of activity. Inparticular, AIM researchers tried to understand UK’sinnovation performance within the context of a changingbusiness world. From all its work, AIM has pinpointedfour key ways that Britain could overtake its globalcompetitors and achieve higher ranking. Quickly, Britainmust become far better than it is at:

● Opening up innovation The country has to boostcollaboration across organizations and national borders.Britain already has one of the highest levels ofinternational flows of investment; but, in other areas,such as collaboration between universities and theprivate sector – or with India and China, the UK hasfurther to go.

● Mastering higher-order innovation Britain needs a betterunderstanding of the different forms of innovation(especially higher-order innovations, such asmanagement innovations). Business leaders need freshways of looking at innovation in order to move theircompanies up the value chain. In particular, UK firmsneed to adopt smarter innovation practices, leading tonovel business models and better ways of working.

● Developing innovation networks To capitalize on itsstrong science base, the UK should develop innovationnetworks around its leading research centres, whichwould thus become innovation hubs. These innovationnetworks should also reach beyond the UK. In this way,the UK could position itself at the centre of a globalinnovation web. UK firms already invest heavily in R&Din other countries, especially the US. Rather thanworrying about this practice, policymakers should

recognize the important role it plays in technologytransfer and knowledge spillovers into the UK.

● Making the most of international firms in the UKForeign multinationals own large parts of the UKeconomy (40 per cent of private sector companies), andthe trend toward foreign ownership is continuing.Concerns have been raised about the “hollowing out” ofthe UK economy, especially the ability of these foreign-controlled businesses to be innovative andentrepreneurial. AIM research suggests this concern isunfounded. There is evidence that foreign-ownedcompanies are at least as innovative as locally ownedcompanies. There is also evidence that UK firms canuse the local presence of foreign firms to learn fromtheir superior technology.

Competing on knowledgeThere is a thread that links the four measures advocatedabove. AIM research suggests that one of the main driversof differences in productivity is tied to knowledge.Learning is a competitive weapon. That is, both in termsof individual skills and competencies and in terms of theknowledge-based capabilities of firms, the UK needs toshift away from competing via lower costs to competingvia adding value. Put even more simply, Britain and itsbusinesses need to expand their knowledge base.

The challenge now facing the UK is not simply tocreate more knowledge but to capture it in ways that havea positive economic and social impact. Primarily, thismeans converting our knowledge base into economicvalue through commercial innovation. It also meansrecognizing the changing nature of the global knowledgeeconomy.

Attention is shifting from knowledge creation toknowledge flows, with the implication that tradingknowledge may become as important in the 21st centuryas trading physical goods was in previous centuries. Thisrequires the UK’s innovation infrastructure to becomemore effective at identifying and capturing useful know-how. In more ways than most people can imagine, thefate of the UK hinges on its ability to learn how tocompete on the basis of knowledge. That’s why, for eachof the four major AIM recommendations, leaders need tounderstand the actions that people in the UK can take,now, to accelerate the nation’s speed on the path tobecoming boldly innovative. ✣

© 2008 The Author | Journal compilation © 2008 London Business SchoolBusiness Strategy Review Spring 200876

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Innovation has been traditionallyviewed by large companies as aclosed process. Whether it was

innovation involving the source codefor a new software product, theformula for a new drug or the designsfor a radically different motor car, thewatchwords were caution andsecrecy. With large financialinvestments and future profits atstake, commercial innovation, inparticular, typically occurred behindclosed doors.

This made sense in a world wherecompetitive advantage was seen toreside in proprietary R&D, protectedby patents and intellectual propertylaw. Consequently, the exchange ofideas remained in-house. Over thelast decade, however, this situationhas started to change. One majorcatalyst has been the success of theopen source software movement,which freely publishes the sourcecode for new software projects on theInternet. Open source collaborationcan, and does, work. For example,the Linux computer operating system,invented by Linus Torvalds anddeveloped through the open sourcemodel, now offers an alternative toMicrosoft’s Windows.

The open source approach is nowbeing applied not only to thedevelopment of software but to anincreasingly wide range of products.Increasingly, firms are adopting thecollaborative principles of what iscalled open innovation. As the headof innovation at the US consumergoods company Procter & Gamblerecently explained: “We have a broadprogramme we call ‘connect anddevelop’. In the academic world, theycall it open innovation. We want toconnect internally – movetechnologies and ideas across ourbusiness units internally – but wealso want to connect externally. Thishas been a real source of innovationfor us.” Open innovation at P&G nowaccounts for 35 per cent of thecompany’s total innovations andmillions of dollars in revenue.

Exchanging knowledgeThe potential of the Internet as aknowledge resource is huge. →

complex aerodynamic and otherengineering products. And a growingset of tools – such as rapidprototyping, simulation andcomputer-aided design – help usersinteract with professional designers.

Of course, innovation is notconfined to manufactured products.It also encompasses the huge rangeof service activities in both publicand private sectors. Servicebusinesses may not have a formal

R&D department, but they doundertake related activities in orderto deliver a stream of innovations.Importantly, the knowledge sets withwhich they work involve a much higherlevel of user insight and experience –and thus their continuingcompetitiveness, especially in those

In 2001, for example, Eli Lillyand Company set up InnoCentive as a matchmaking tool, connectingthose with scientific problems tothose able to offer solutions. Itsstated aim is to “use the power of the Internet to create and enhanceopen-source scientific research anddevelopment (R&D).” There are now multiple sites offering abrokering service, linking needs and means to create a global

marketplace for sharing ideas.InnoCentive CEO Darrel Carrollexplains: “Lilly hires a large numberof extremely talented scientists fromaround the world, but like everycompany in its position, it can neverhire all the scientists it needs. Nocompany can.”

Another increasingly commonstrategy involves companies seeingusers not as passive consumers ofinnovations, but rather as activeplayers in the process. Their ideasand insights can provide the startingpoint for very new directions andcreate new markets, products andservices. For example, the Danish toycompany Lego has set up the LegoFactory website: users can designtheir own models online and then

have the ready-to-assemble sets sentto them. Lego’s website is aneffective way to capture ideas fromits most advanced users that canthen be incorporated into mainstreamproducts. Such a collaborativeapproach is now used for everythingfrom T-shirts and surfboards to

Of course, innovation is not confined to manufactured products.It also encompasses the huge range of service activities in bothpublic and private sectors.


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sectors which are internationallytraded, will depend on taking anopen approach to innovation.

Opening mindsUnderpinning the move to openinnovation is a growing recognitionthat no single country or organizationcan corner the market in new ideas.The effect of open innovation is afundamental change in the way thatorganizations create value. It involvesa willingness to seek out leading-edge research wherever it occurs andan acceptance that home-grownknowledge is less proprietary thanwas once the case.

This favours the UK, which alreadyhas one of the most open innovationsystems in the world. UK firms, forexample, are big investors in R&Doverseas, especially in the US. In the past, this has been viewednegatively, with calls for UK firms toinvest their R&D budgets mainlywithin the UK. But in the context of a global innovation system, investingin R&D outside the UK offersimportant benefits in terms oftechnology transfer and importingleading edge ideas.

Similarly, the fact that R&D carriedout by foreign-owned multinationalsrepresents almost a third of all R&Din the UK suggests that the UK is a

good innovation system to invest in.This also points to the openness ofthe UK’s innovation infrastructure.

At the level of the UK economy asa whole, AIM research has shown thatthe large-scale market liberalizationundertaken as part of EU integrationand other pro-competitive reformshas had a positive effect oninnovative activity and economicperformance. More open marketsencourage firms to innovate in orderto “escape competition”.

At the level of the individual firm,AIM research has examined thestrategic choices firms make todevelop and commercialize newproduct ideas. This researchemphasizes the importance ofgaining access to external sources ofideas, but it also shows that suchexternal sourcing works best whendone in combination with a lessproprietary attitude to knowledgeprotection. Open innovation relies ontrust and reciprocity betweenpartners. Unless a firm changes itsmindset to reflect the need for suchvalues, the necessary knowledgeexchanges will not occur.

In terms of the UK science base,there is much more to be done toencourage collaboration among firmsand across academic institutions.AIM research shows that the UK’s

share of internationally co-authoredpapers (an indication of scientificcollaboration) with newcomercountries is relatively high, but wellbelow US and Japanese levels. Whenit comes to collaboration with Chinaand India, in particular, the trendfrom 1988 is downwards. Incollaboration with China, forexample, the UK has been overtakenby Germany and the group formed ofSouth Korea, Taiwan and Singapore.Collaboration with India shows asimilar pattern to that with China,but with a more pronounced drop ofthe UK’s share.

Another AIM study focuses on thecommercial outputs from research-council funded projects. Projects thatlead to spin-off companies, licensing,patenting or consulting activities aremore likely to rise in higher-reputation universities; they are alsomore likely to be led by lessexperienced and more junior faculty.This study highlights the difficulty oftrying to steer established research-oriented faculty toward commercialprojects and underlines theimportance of developing a broaderrange of outlooks and capabilitiesamong researchers if the twinobjectives of high-quality researchand commercial outcomes are to beobtained. ✣

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Telecommunications company BThas a long history of technologicalinnovations with a total worldwideportfolio of 7,700 patents andapplications. Deregulation,convergence and fierce competitionmade BT rethink its research anddevelopment (R&D) strategy by“innovating the way it innovates”,in the words of BT’s group chieftechnology officer, Matt Bross.

Bross believed that the company’sinnovation efforts had to be morecommercially – rather than

technologically – driven, with theentire research portfolio structuredaround business needs. With thatpurpose in mind, BT adopted anopen innovation model basedmainly on two pillars.

First, BT is actively managing its patent portfolio (for example,licensing and spinning out newbusinesses) through NVP Brightstar,a firm that specializes in takingtechnology projects out of BT asnew ventures. Second, BT ismoving toward a model where it

leverages the power and speed ofexternal partners to accelerate thecreation of new services. Brossreorganized BT’s R&D function toenhance its ability to identify,understand, select from andconnect to the wealth of availableexternal knowledge. In November2006, BT had scouting units inSilicon Valley, China and Japan, withthe objective of identifying globalsources of innovation (product,service, process, social) and seedingthem into the lines of business.

Open innovation at BT

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There is an important distinction

between the run-of-the-mill innovations

in products and processes that all firms

engage in and the higher order forms of

innovation (such as business model

innovation, discontinuous innovation and

management innovation) that very few

have mastered. UK firms need to find

ways of understanding and managing

these different forms of innovation.

Many organizations around the world are

currently experimenting with new

innovation practices. There is a great

opportunity for UK firms to learn from

and adopt new practices in this area to

develop more sustainable sources of

advantage.

C ritical to improving the UK’sinnovation performance is abetter understanding of

different types of innovation. Formany firms, innovation is seen asapplying narrowly to new productdevelopment or technologicalprogress, but this is an undulyconstraining point of view thatrestricts a firm’s ability to generatenew sources of competitiveadvantage.

Try to think of the different formsof innovation as a stack ofapproaches. At the bottom arerelatively incremental innovations inproducts or processes. So, forexample, the formulation of a productis altered slightly to create the newand improved version or a process isstreamlined to enhance efficiency;but the fundamental approach andtechnology remain unchanged. Theseare the lower-order forms ofinnovation, also called “steady state”innovation. They are important; butbecause everyone is doing them andcan copy each other’s advances fairlyquickly, they are never a lastingsource of advantage.

At the top of the stack are thehigher-order forms of innovation thatcan have a dramatic impact on afirm’s competitiveness if they areeffective. One of AIM’s keycontributions is to examine thenature of these higher-orderinnovations and the managerialchallenges they present. Specifically,the research looked at discontinuousinnovation and managementinnovation.

Managing discontinuousinnovationOccasionally, a disruptive eventoccurs that changes markets,industries – even societies. A goodexample is the advent of the Internet.Such world-changing events give riseto a wave of discontinuous innovationacross many industries. This has adestabilizing, or disruptive, effect forestablished firms.

Successful well-managedcompanies thrive in mature marketsby focusing on doing what they dojust a little bit better (steady state

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innovation). Consequently, when adisruptive event comes along, suchas new technology or a regulatorychange, the successful company isoften blindsided. It is just not verygood at the “doing it different” typeof innovation. The very attributes thatmake it successful in stableconditions hinder its ability to detector exploit the change.

AIM research confirms that theability to manage innovation wellduring steady-state periods and thetypes of routines employed canactually hinder a company’s ability todeal with innovation duringdiscontinuous change. Theconsequences of failing to takeadvantage of such disruptive changeare often severe. Eastman Kodak, forexample, struggled to cope with ashift to digital photography. DigitalEquipment Corporation lost its waywhen the minicomputer wassuperseded by the personal computer(the company was ultimately sold toCompaq). Sectors that currently facedisruptive change include:

● Pharmaceutical firms, in which the dominant model of highinvestment in R&D (15–20 percent of turnover) linked to thequest for blockbuster drugs isgiving way to uncertainty aboutnew technological direction (thebio-pharma challenge). Thisinvolves “low end” disruption fromgeneric drugs, future marketgrowth in low-income countries andnew business models around totalhealthcare services rather thanproduct delivery.

● Telecoms firms, in which acombination of technologiesaround VOIP (Voice Over InternetProtocol), convergence withinInformation and CommunicationTechnology (ICT) and marketfragmentation challenges serviceand delivery models.

● Medical devices, in whichproducers are facing shifts as inpharmaceuticals from productdevelopment to service delivery.

● Engineering companies, in whichcompanies are facing challengesaround new business models thatinvolve offering ‘‘total’’ solutionsbased on a wide range of services

wrapped around a core product.Rolls Royce, for example, nowderives over 50% of its revenuefrom the services surrounding itsaeronautical engines.

● Digital media and entertainmentcompanies, in which firms arestraining in a sector that isfragmenting rapidly, due to theemergence of Web 2.0. Theboundaries between consumersand creators are disappearing(contrast YouTube with a traditionalTV firm; recent data suggests thatYouTube has 100 million viewingsper day, with 65,000 new videosbeing uploaded daily).

How can established firms copewith and thrive on disruptive change?AIM research examined this issuefrom several different perspectives.One AIM study focused on the needfor firms to adopt “smarter innovationpractices”. Steady-state innovationpractices are fine for equilibriumconditions or non-complexenvironments, but they break downwhen used to try and deal with highunpredictability (“the edge ofchaos”). In fact, the approachesneeded to cope with these twodifferent types of conditions aredifferent in almost every respect, asthe related chart illustrates.

Through a detailed study oforganizations such as BT, the BBC,Lego, and P&G, the research suggestsa number of broad findings:

First, not all firms “get it” as far asdiscontinuous innovation is concerned.Many still work inside a comfortzone, defining the “box” which theypretend to want to get out of. But,actually, the decision and resourceallocation structures limit theexploration space and leave the firmvulnerable to new entrants rewritingthe business model or opening upcompletely new markets created byradical technological shifts.

Second, UK firms need to developnew mechanisms to let go of thepast, reframe the present and exploremultiple rather than single futures.This requires them to find new waysto encourage (or at least tolerate)challenges to the industry orthodoxy,including the views held by seniormanagement. The danger, otherwise,is that any radical alternative visionof the future will be killed by thecorporate immune system. There isan important role here for input fromoutsiders with a different frame ofreference.

Third, firms need access to“gatekeepers”, science partners suchas universities, consultants and tradeassociations, who provide expertiseand act as neutral knowledge brokersacross the network. By collaboratingwith those at the forefront of newtechnologies, firms can betteridentify disruptive change and,crucially, use that knowledge tocreate commercial applications.


Type 1 Innovation organization forsteady state

Type 2 Innovation organization for discontinuous conditions

Operates within a mental framework based on a clear and accepted set of rules of the game

No clear rules; these emerge over time

High tolerance for ambiguity

Strategies path dependent Path independent, emergent, probe and learn

Clear selection environment Fuzzy, emergent selection environment

Selection and resource allocation linked to clear trajectories and criteria for fit

Risk taking, multiple parallel bets, tolerance of (fast) failure

Operating routines refined and stable

Strong ties and knowledge flows along clear channels

Weak ties and peripheral vision important

Operating patterns emergent and “fuzzy”

Figure 1.

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One way of coming to grips withthis challenge is for firms to learntogether, sharing experiences and re-flecting on what has and hasn’t workedand looking at new ideas and models.This is the basic idea behind the AIMDiscontinuous Innovation Laboratory(www.innovation-lab.org) that involvesnetworks of around 50 firms in theUK, Germany and Denmark.

Another AIM study focused on thestructures firms put in place tohandle discontinuous changes; thisresearch suggests the goal is tobecome “ambidextrous”. There aretwo major ways to do this:

Underwrite corporate venturingCorporate venture units exist to nurtureand develop start-up businesses fortheir parent company. Many wereestablished in the late 1990s, duringthe boom years of the technologybubble. Not only did these operationsface all the classic challenges of start-ups – inexperienced management,securing access to funding, attractingcustomers – they also had to weather ameltdown in the technology sectorthat left most corporate parentswondering why they had got involvedin corporate venturing in the firstplace.

So how has corporate venturingfared in the post-dotcom world? Is itstill a viable and exciting approach tonew business development in largecorporations? Some venture unitshave been shut down, but many havesurvived the downturn – and a fewnew ones have been started up. Moreinterestingly, the survivors haveadapted their strategies andorganizational models significantly tocope with the more risk-aversebusiness environment we are nowliving in. AIM research shows that thesurvivors have:

● Created enough autonomy to maketheir own investment decisionsrather than allowing corporatemanagement to second-guess theirdecisions

● Made good use of external partners,especially venture capitalists, whocan provide access to new ideasand help them learn how todevelop new businesses

● Ensured top-level support at alltimes; it takes longer to make aventure unit successful than thetypical tenure of a CEO, so it paysto have more than one highlyplaced ally

● Looked for ways of adding value backto the mainstream businesses, forexample, by building new venturesthat they can benefit from or thatthey see as strategically important

Build an innovation culture Thesecond approach involves firms tryingto foster a culture that is supportive ofinnovation. Specifically, this meanswrestling with two diametricallyopposed organizational qualities –adaptability and alignment.Adaptability is about focusing on thefuture. It is the ability to respond tochange, to be nimble, to progress.Alignment is about maximizing thepresent, leveraging existing ideas andexploiting markets.

Organizations that successfullybalance the two qualities are calledambidextrous. The key to success isto empower individuals to make thechoices in their day-to-day work thatallow them to find the balance. Carmanufacturer Renault and softwarefirm Oracle both rate high for ambi-dexterity. Renault achieved it bybuilding a performance context aroundexisting social support. Oracle built aperformance context first, then lookedfor ways of building support and trust across the organization. Despitetheir differences, Renault and Oracleboth have a clear and simple set of priorities. Oracle employeesemphasized the role of goal setting,individual performance appraisal andrisk management as key priorities.With Renault employees, capitalallocation, recruiting and vision wereimportant. Selecting focal elements iscritical, as they have to fit the needsof the organization. However, theconsistency with which they areapplied, and the number of employeesimpacted, is even more important.

Leveraging managementinnovationA second key form of higher-orderinnovation is management

innovation, defined as a markeddeparture from traditionalmanagement principles, processesand practices or a departure fromcustomary organizational forms thatsignificantly alters the way the workof management is performed.

Management innovation has thepower to transform the wayorganizations operate. For example,consider how our ability to managethe consistency of manufacturingprocesses has evolved: from Ford’sintroduction of the moving assemblyline in 1913 and Western Electric’sinvention of statistical quality controlin 1924; through the qualityrevolution begun by Toyota and otherJapanese companies in the periodfollowing WWII; and on to morerecent innovations such as the ISOquality standard and Motorola’s SixSigma methodology. These advancesare as much about innovations in the philosophy and tools by whichmanufacturing processes are managedas the processes themselves.

“If you look over a hundred yearsof industrial history, typically it ismanagement innovation that hasallowed organizations to reach newperformance thresholds – more thanany other kind of innovation,”observes Gary Hamel, visitingprofessor at London Business School,and co-founder of MLab (whichreceived seed funding from AIM).“The challenge is to instilmanagement innovation intoorganizations.”

The trouble is that, while manyfirms have developed establishedprocesses for managing the lower-order forms of innovation, few (if any)have dedicated themselves to thepursuit of management innovation.Instead, when it occurs, managementinnovation is typically ad hoc andserendipitous rather than systematicand planned.

AIM researchers have undertakenthree studies that begin to identifysome of the key drivers ofmanagement innovation. The firststudy focused on ground-breakinginnovations and the conditions thatled to their emergence. Key factorsincluded:

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● A questioning, problem-solvingculture Rather than adopt well-proven approaches, individuals ininnovative companies sought todevelop their own unique solutions.

● Use of analogies from differentenvironments In order to get outsidethe box of traditional thinking,innovative companies importedideas from entirely differentplaces. The Danish hearing aidcompany, Oticon, for example,built its innovative “spaghettiorganization” on the principles ofthe scouting movement.

● A capacity for low-riskexperimentation Becausemanagement innovation is hard toprove in advance, it needs to betested in low-cost experimentalways. P&G applies its standardtesting process, used for new

detergents and foods, to itsmanagement innovations as well.

● Selective use of external changeagents to explore new ideasInnovative firms make selective useof outsiders such as academics andconsultants who fulfil three roles:providing a source of new ideasand analogies, acting as asounding board for emerginginnovations and helping to validatewhat is accomplished.

A second study focused on theconditions under which firmsintroduce management practices thatare new to the firm (typically adaptedfrom other settings). This studyhighlights the importance of aperceived crisis or “burning platform”around which people can bemobilized to seek out new practices

as well as the importance of insightsfrom many different external sourcesto identify the appropriate solutions.

A third AIM study explored therelationship between managementpractices and competitiveness.Management practice data wascollected from 732 medium-sizedmanufacturing firms in the US,France, Germany and the UK. Thesemeasures of managerial practice werelinked with firm-level productivity,profitability, sales growth and survivalrates. Management practices alsodisplay significant cross-countrydifferences with US firms on averagebetter managed than European firms.All three studies, if examined indetail, can help leaders focus onmanagerial innovation and ways toadvance their organizations. ✣ Sp

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The UK’s science base could be better

harnessed by developing innovation

networks around the top research

centres and universities. Importantly,

such networks are not only about

stimulating high tech start-ups but also

about providing the space within which a

variety of knowledge exchange activities

can occur to support existing

businesses. Clearly much effort has

already gone into this but, as innovation

opens up, the importance of networks

will grow. Global innovation networks

can also support knowledge transfer –

but they depend critically on brokers

and gatekeepers to enable the flow. UK

firms already use their R&D investment

in other countries, especially the US, as

an important way to access new

technology and import know-how into

the UK. International links will be

increasingly important to create

networks that span the globe, including

the rapidly developing economies of

Brazil, Russia, India and China (BRIC).

To improve its innovationperformance, the UK needs toget better at exploiting its

knowledge base, especially its strongscience base. AIM research confirmsthe importance of networks forexploiting know-how; they play amajor role in the innovation process.Moreover, a certain type of high-valuenetwork is far more effective atsparking innovation. We call theseInnovation Networks or I-Works, whichhave the following characteristics:

● Highly diverse Network partners aredrawn from a wide variety ofdisciplines and backgrounds andencourage exchange across ideasystems.

● Third party “gatekeepers” Theseinclude science partners such asuniversities, but also consultantsand trade associations, whichprovide access to expertise and actas knowledge brokers across thenetwork.

● Financial leverage Access toinvestors – via business angels,venture capital firms and corporateventuring – spreads the risk ofinnovation and provides marketintelligence.

● Proactively managed Participantsregard the network itself as avaluable asset and actively manageit to reap the innovation benefits.

For firms, access to I-Works offersa potent source of new ideas andcompetitive advantage. Fosteringrelationships with such networksshould be seen by firms as a criticalcapability. Here’s how to get started.

Encourage clustersAIM research also examined the roleplayed by clusters – geographic con-centrations of expertise and economicactivity – in stimulating innovation.

At their most powerful, clusters –which consist of networks ofspecialized skills and knowledge –can dominate an entire global industry.The Hollywood film industry, Detroitautomotive industry and the financialdistrict in London’s Square Mile arefamous examples. But the economicrole model in recent years has beenthe technology cluster of Silicon

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Valley centred on Stanford University.It has been argued that creatingclusters around leading UK researchuniversities could improve theexploitation of the UK’s science base.

Create magnets for R&DAIM research investigated the extentto which foreign business R&Dactivity in the UK was located closeto high-quality university researchdepartments. One study comparedthe concentration of R&D labs withthe results of the 2001 ResearchAssessment Exercise (RAE). Thefindings show that R&D activityclusters around the more highly rateduniversity research departments.

This is particularly strong in thepharmaceuticals and chemicalssectors. A postcode area with achemistry department rated 5 or 5*by the RAE has on average twice asmany pharmaceutical R&D labs as anarea with no chemistry department.The results are even stronger forforeign-owned labs, consistent withtechnology sourcing by foreignmultinationals.

In some sectors, the results are notlimited to highly rated researchdepartments. Postcode areas with amaterials science department rated 4or below have on average moreforeign-owned labs in machinery,aerospace and motor vehicles. Theseresults confirm the role of world-classcentres of research in attractingforeign R&D in some sectors. Butthey also point to the potential role ofmore applied research centres. Themost pronounced effects were foundin pharmaceuticals – where two-wayflows of R&D investment andspecialization were observed.

Successful networks or clustersinclude a wide variety of firms andresearch centres. AIM research onthree UK biotech regions shows howresearch establishments,manufacturers and a variety ofservice providers each contribute indifferent ways to the innovativeoutput of a cluster. It is importantthat the UK continues to encourageand develop both pure science andthe commercial enterprises that bringthese ideas to market.

Potentially, clusters are importantpillars of UK competitiveness, yetthey are still something of an enigma.Theoretically it should be possible tocreate conditions that encouragecluster development. Yet attempts tofoster their formation have had mixedresults. AIM research indicates thatpolicy support should be tailored tothe specific needs of individualclusters and be designed with thecomplexity and lifecycle stages ofclusters in mind.

Enable learning networksAnother area where networks canhelp is in diffusing existingknowledge – essentially reaching thelong tail of less experienced firmswith knowledge that, while not new tothe world, is new to them and whoseapplication can enhance productivity.One AIM study has been looking athow such mechanisms can acceleratethe take-up of innovative practices,for example, in the use of newmanufacturing techniques.

Work in South Africa, for example,indicates that collaboration in learningnetworks significantly enhanced theability of automotive componentmanufacturers to absorb and deploynew manufacturing knowledge andcatch up with the world frontier interms of productivity indicators such asquality, cost and delivery performance.

Learning networks can be configuredin a variety of ways. Another option isto organize across supply chains toprovide the framework for sharing andtransferring learning about innovativepractices. A third option is tomobilize at sector level – as has beenthe case with the Industry Forumapproach in the UK automotivesector.

Build new networks AIM research also examined thespecific strategies firms can use togain access to new networks ofpartners, customers and suppliers,especially when faced with disruptivethreats of the type discussed earlier.This research makes a criticaldistinction between the strategiesused to identify new partners and thestrategies used to build relationships

with partners once they have beenidentified. It highlights a number ofspecific approaches that have beensuccessful for such firms as BT,GlaxoSmithKline, the BBC,AstraZeneca, and Rio Tinto:

● Where the challenges in findingand forming relationships arerelatively low, approach potentialnew partners directly, and structurethe relationship to minimizewhatever obstacles separate you

● Where the challenge is mostlyaround finding new partners,approach them through boundaryspanners or scouts who specializein such activities, and work hard atbuilding the capability to absorbinsights from these partners

● Where the challenge is mostlyaround forming new relationshipswith prospective partners, focus onthe higher-order purpose thattranscends ideological differencesand try to identify crossoverindividuals who can link thedifferent parties

● Where the challenge involvesfinding and forming new networks,be prepared to work with specialistand independent network buildersto bridge the gap and look for waysof gradually breaking down barriersto enable the approaches identifiedabove to work

Once new relationships have beenformed, in order to turn them intohigh-performing networks, it isnecessary to keep the network freshand engaged, build trust andreciprocity across the network,understand your own position in thenetwork and learn when to let go ofold relationships.

Policy can also play an importantrole in encouraging the establishmentand development of networks. AIMResearch has explored innovations indesign principles and build processesin the construction of luxury yachts.UK-based independent design houseshave played a major role in these, butthe majority of construction takesplace elsewhere. The DTI and BritishMarine Federation have combined toestablish the Superyacht UKinitiative in order to promote UKproducers internationally. ✣


The challenge of increasing theinnovative capacity of the UKis complicated by the fact that

approximately 40 per cent ofcompanies in the private sector havenon-UK based parent companies.Major UK businesses such asPowergen, Thames Water andNycomed Amersham are fully ownedsubsidiaries of foreign multinationals;and entire industry sectors, includingcar manufacturing and financialservices, are dominated by foreigncompanies. Foreign ownership hasobvious benefits: it provides UKcompanies with greater access tocapital, cutting-edge technology andnew managerial practices. However,foreign ownership comes at a price: aloss of autonomy and influence forsenior executives and a concern thatimportant decisions will not be madein the best interests of the UKeconomy.

AIM research has addressed theseconcerns in two very different ways.One study focused on the strategicissues facing subsidiary operations inthe UK, with a view to understandinghow much influence subsidiarymanagers have over their own destinyand the extent to which they are ableto drive new ideas and innovationprojects. The research confirmed thatUK subsidiary managers typicallyhave low degrees of autonomy(compared, for example, to subsidiarymanagers in Canada or Australia whoare further away from their corporateheadquarters). However, the researchalso indicated that low autonomy wasnot necessarily a bad thing. Rather,the key factors that made adifference in terms of upgrading thesubsidiary’s activities and influencewere initiative-taking strategiesaimed at acting on opportunities inthe local market and profile-buildingstrategies aimed at raising awarenessback at the home office of what thesubsidiary company was good at.

AIM researchers also looked at thebenefits of innovation networks thatcross national borders for foreign-owned companies. Researchexamined the effects of UK PLCinvesting in R&D in other countries.In particular, it considered theM

akin

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e m

ost o

f int

erna

Large parts of the UK economy are

owned by foreign multinationals, and the

trend towards foreign ownership is

continuing. This has prompted concerns

about the “hollowing out” of the UK

economy and the ability of

foreign-controlled businesses to be

innovative and entrepreneurial. AIM

research suggests this concern is not

well founded: there is evidence that

foreign-owned companies are at least as

innovative as locally owned companies.

Moreover, there are a number of clear

strategies open to managers of

foreign-owned businesses who want to

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AIM’s research on how to boostinnovation in Britain was extensive;however, AIM’s recommendationson how to start can be quicklysummarized:

Embrace open innovationGlobalization presents many newchallenges. Policies that focus onincreasing domestic activity, andparticularly encouraging firms torelocate R&D away from internation-al centres of excellence, may comeat a cost of isolating these firmsfrom international markets andknowledge systems. In addition,focusing policy on larger firms risksfurther strengthening the positionof large dominant firms.

Changes in the economicenvironment now favour greaterflexibility. It is important to focuson policies that facilitate entry-and-exit and experimentation – andallow successful entrants to growand challenge the market positionof incumbent firms. The sorts ofinstitutional reforms that matterare complementary policiespromoting flexibility, highereducation, well-functioningfinancial markets, flexible labourmarkets that encourage theacquisition of general skills andgreater cooperation between thescience base and private sector.

At a national level, competitionin R&D is not between countries; itis between research teams thatoperate within and acrosscountries. It is vital, therefore, toensure that conditions in the UKare conducive to research teamssucceeding here and to UK firmssucceeding in research that iscarried out in other parts of theworld. The UK government’s anti-protectionist stance is clearly onethat helps promote greaterinternational collaboration.

Make mastering higher-orderinnovation a priority It is criticalthat UK firms prepare fordiscontinuous shifts. Specifically,UK managers need to find ways to:

● Broaden their vision to look outfor possible discontinuitysignals; this can be achieved bysetting up networks andbroadening the scope ofresearch.

● Develop alternative strategicframes by using differentbusiness models to examinediscontinuities. For example,Shell has built on its extensivescenario planning experiencethrough a programme calledGamechanger, which seeks toidentify forces that will changethe rules of the game.

● Extend resource allocation,which is critical when a firm isexperiencing discontinuities.

Engage with internationalinnovation networks, includingclusters AIM research suggests thatpolicy makers should consider arange of measures to stimulate theformation of innovation networks.These include:

● Establishing centres forcollaboration in priority areas

● Fostering the diversity ofpartners, for example, activelypromoting local professionalnetworking and pump-primingfunding for foreign researchcollaboration

● Establishing more networkintermediaries in universities andcolleges

● Strengthening the role ofbusiness-angel networks on alocal (sub-regional) level

● Encouraging syndicated invest-ments to improve the quality andthe quantity of investment inentrepreneurial firms

Policies in this area (to developclusters, but also for innovation ingeneral) need to have a long timeframe (decades rather than years).Policy should be consistent andclear in its direction. There havebeen a lot of changes to policyrecently, following variousinnovation reviews. An importantprinciple in this (as in other) areasis that policy shouldn’t change too frequently; too much changewill lead to uncertainty and willmean that policy is less effective at encouraging firms to changetheir behaviour. (Investing ininnovation is a long-term goal; iffirms don’t know what future policywill be, then they will be less likelyto invest.)

Our research also indicates thatfirms should:

● Proactively manage theirnetworks and networkingactivities

● Actively seek out and participatein I-Works

● Collaborate with third partiessuch as trade associations,consultants and science partnerswho can act as neutral networkbrokers

● Recognize that venture financenetworks offer more than justfunding

The first step, however, is for seniormanagers and policy makers in the UK to realize that networking is a critical capability for UKorganizations and should bemanaged as such. Companies need to manage knowledgespillover, but they also need torecognize that, in the globaleconomy, no company can afford to be an island. The failure todevelop networking capability is aself-limiting strategy.

Innovating in Britain: the way ahead



effects of technology transfer fromthe US into the UK, often referred toas technology sourcing or spillovers.

UK firms operating abroad accessnew ideas and technologies and cantransmit these back to the UK.Previous research has emphasizedthe importance of technologysourcing as a method of gainingaccess to foreign know-how. Firmscan tap into leading edge knowledge,for example, by setting up overseasR&D labs close to clusters ofinnovative activity and using thisknowledge to improve productivity intheir home operations. AIM researchexamined whether technologysourcing in the US had a beneficialimpact on UK firms during the1990s. The findings suggest that UKfirms with R&D activity located in theUS benefited more from US R&Dspillovers than firms that were notlocated there.

Knowledge flows are clearlyimportant to innovation, especiallywhen they involve technology transferfrom one country to another. AnotherAIM research project looked at howinformation and know-how flowsaround organizations. The studycompared knowledge sharing inmultinational companies and multi-plant firms. The findings suggest thatmultinationals are more likely toshare information with other parts ofthe business than comparable multi-plant firms. These information flowsare strongly correlated with reportedinnovation activity. This resultsupports the idea that knowledgetransfer is an important factor inexplaining the competitive advantageof multinationals.

Firms that export or, better still,are actually part of a multinationalenterprise tend to have higherproductivity than their purelydomestic counterparts. Gaining abetter understanding of thiscorrelation is a very active area forcurrent research. AIM researchsuggests that one of the main driversof differences in productivity isdifferences in knowledge. The AIMresearch looked at several thousandUK firms covering all industries from1994 through 2000. For each firm,

the study examined multiple detailedmeasures of knowledge outputs,knowledge investments and sourcesof existing knowledge. The findingsindicate that globally engaged firmsinnovate more. But this is not simplybecause they use more researchers; itis also because they learn more frommore suppliers and customers,universities and other networkcontacts. The relative importance ofknowledge sources also appears tovary with the type of innovation.

There is also evidence that this sortof knowledge brought bymultinational firms then spills over tolocal firms. This suggests thatproviding incentives to encouragemultinationals to come to a hostcountry (for example, by offeringsubsidies as many countries do) canbe an effective strategy. But theresearch also suggests that thesubsidies currently paid are, in somecases, too high.

No time to run awaySince the 1980s, the UK economyhas undergone a dramatictransformation. Huge swathes ofindustry have been stripped from thepublic sector and privatized. Tradeunion power has diminished, andpreviously protected industries havebeen deregulated. As a result, the UKis among the most market-orientedand business-friendly economies inthe world.

These changes have successfullyencouraged growth in the UK. Yet,despite the improvements, the UKeconomy continues to underperformrelative to other developed nations onmany key measures. Nationalproductivity and prosperity haveimproved in absolute terms but stillobstinately lag those of direct rivals,especially the US.

The market reforms of the 1980sstimulated growth but wereinsufficient to close the productivitygap with other developed nations.Moreover, the world has now movedon. The rise of India and China andother lower-cost economies meansthat competing on cost is no longer aviable strategy for firms in the UK.Indeed, with the increasing

commitment by those countries toR&D investment and to educationand training, the basis ofinternational competition has shiftedfirmly to knowledge. Clearly, asglobalization expands the competitivenature of the marketplace, learninghow to innovate in new ways iscentral to national progress.

The UK’s Chancellor of theExchequer, Alistair Darling, put it this way in a 2007 speech: “Theanswer is not running away fromglobalization. It’s investing ininnovation, design and training tohelp our skilled workforces provide an unanswerable argument forcontinued investment in the UK.” ✣

ResourcesL. Abramovsky, R. Harrison and H.Simpson, “University research andthe location of business R&D”,Institute for Fiscal Studies, EconomicJournal 117, no. 519, 2007.

J. Bessant and D. Francis, “Dealingwith discontinuity: The innovator’ssolution”, AIM Executive Briefing,Advanced Institute of ManagementResearch, 2005.

J. Birkinshaw and C. Gibson, “Theambidextrous organization”, AIMExecutive Briefing, AdvancedInstitute of Management Research,2005.

N. Bloom and J. Van Reenen,“Measuring and explainingmanagement practices across firmsand countries”, National Bureau ofEconomic Research, 2006.

T. Edwards et al., “Pathways to value:How UK firms can create more valueusing innovation strategically”, AIMExecutive Briefing, AdvancedInstitute of Management Research,2005.

R. Griffith and R. Harrison, “The linkbetween product market reform andmacro-economic performance”,European Economy Economic Papers209, 2004.

R. Griffith, R. Harrison and J. VanReenen, “How special is the specialrelationship? Using the impact of USR&D spillovers on UK forms as a testof technology sourcing”, AmericanEconomic Review 96, no. 5, 2006.

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R. Griffith, H. Simpson and S.Redding, “Foreign ownership andproductivity: New evidence from theservice sector and the R&D lab”,Oxford Review of Economic Policy20, no. 3, 2004.

J. Haskel, S. Pereira and M.Slaughter, “Does inward foreigndirect investment boost theproductivity of domestic firms?”National Bureau of EconomicResearch, 2002.

C. Huxham and P. Hibbert, “Give Andtake: Understanding attitudes tolearning in the collaborativeprocess”, AIM Executive Briefing,Advanced Institute of ManagementResearch, 2005.

M. Jacobides, T. Knudsen and M.Augier, “Capturing the value frominnovation: Who does what and whogets what”, AIM Executive Briefing,Advanced Institute of ManagementResearch, 2006.

E. Kasabov and R. Delbridge, “Biotechclusters in the UK: Challenges andopportunities”, AIM ExecutiveBriefing, Advanced Institute ofManagement Research, 2006.

M. Leseure et al., “Making bestpractice stick: How UK firms canincrease productivity by adoptingleading-edge working practices”, AIMExecutive Briefing, AdvancedInstitute of Management Research,2005.

F. Mariotti, R. Delbridge and M.Munday, “Networks of learning: Howmotorsport companies collaborateand share knowledge”, AIM ExecutiveBriefing, Advanced Institute ofManagement Research, 2005.

A. Neely, P. d’Este, S. Mahdi and P.Micheli, “Mapping the performanceof the UK’s science base: Aninternational comparison”, AdvancedInstitute of Management Researchand Cranfield School of Management,

Figures from the Office of NationalStatistics, 2006.

A. Pierpaolo et al., “The cluster effect:How clusters policy can make the UKmore competitive”, AIM ExecutiveBriefing, Advanced Institute ofManagement Research, 2005.

L. Pittaway, et al., “I-works: How highvalue innovation networks can boostUK productivity”, AIM ExecutiveBriefing, Advanced Institute ofManagement Research, 2004.

W. Powell, “Learning fromcollaboration: Knowledge andnetworks in the biotechnology andpharmaceutical industries”, CaliforniaManagement Review. Spring 1998.

J. Whyte et al., “Intelligent design:How managing the design processeffectively can boost corporateperformance,” AIM ExecutiveBriefing, Advanced Institute ofManagement Research, 2006.

John Bessant is Professor of Innovation and Technology Management at Tanaka Business School, Imperial College,London, where he is Research Director.

Julian Birkinshaw is Professor of Strategic and International Management at London Business School.

Rick Delbridge is Professor of Organizational Analysis at Cardiff Business School and a Fellow of the Sunningdale Institute.

Rachel Griffith is Deputy Director of the Institute for Fiscal Studies (IFS) and a Professor in the EconomicsDepartment, University College, London.

Jonathan Haskel is a Professor of Economics at the Department of Economics, Queen Mary University of London.

Andy Neely is Deputy Director of AIM. He is also Chairman of the Centre for Business Performance at CranfieldSchool of Management.

London Business School Regent’s ParkLondon NW1 4SAUnited KingdomTel +44 (0)20 7000 7000Fax +44 (0)20 7000 7001www.london.eduA Graduate School of the University of London

special report: competing on knowledge

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