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September 24, 2004 10:35 am

More than the sum of its parts

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No man is an island, and these days, few businesses are either. Companies operate in a complex web involving a host of different players, including suppliers, customers, competitors, regulators and collaborators. The challenge is no longer how to manage the business, but how to manage it within the wider context of networks.

A network can be defined as a complex, interconnected group or system, and networking involves using that arrangement to accomplish particular tasks. This is especially relevant in the context of innovation which, at its heart, is about knowledge and combining a wide range of knowledge elements to create something new. Managing innovation is about bringing together different people and the knowledge they carry, and this involves building and running effective internal and external networks.

In the 21st century, innovation involves trying to deal with an extended and rapidly advancing scientific frontier, fragmenting markets, political uncertainties, regulatory instabilities and competitors who are increasingly coming from unexpected directions. The response has to be one of spreading the net wide and trying to make use of a broad set of knowledge signals. In other words, learning to manage innovation at a network level.

Even the largest and most established innovators are recognising this shift. Procter Gamble uses the phrase “Connect and Develop” to refer to what was previously called R&D, and every year spends about $2bn on this activity. The company has set itself the ambitious goal of sourcing much of its idea input from outside the company. As Nabil Sakkab, former senior vice-president of R&D at the company, commented recently: “The future of R&D is C&D - collaborative networks that are in touch with the 99 per cent of research that we don’t do ourselves. Procter Gamble plans to keep leading innovation and this strategy is crucial to our future growth.” Similar stories can be heard at other companies, including IBM, Cisco and Intel. All are examples of what Henry Chesbrough calls the move towards “open innovation”, where links and connections become as important as the actual production and ownership of knowledge.

But innovation networks are more than just ways of assembling and deploying knowledge in a complex world. Systems theory suggests that networks also develop what are termed “emergent properties”, namely the potential for the whole to be greater than the sum of its parts. For example, participating in innovation networks can help even mature businesses bump into new ideas and creative combinations. It is well known from studies of creativity that the process involves making associations. And sometimes, the unexpected conjunction of different perspectives can lead to surprising results.

The same seems to be true at the organisational level. Studies of networks indicate that getting together in such a way can help open up new and productive territory. For instance, recent developments in the use of titanium components in Formula

1 engines have been significantly advanced by lessons learnt about the moulding process from a company that makes golf clubs.

Another way in which networking can help innovation is in providing support for shared learning. A lot of process innovation is about configuring and adapting what has been developed elsewhere and applying it to your processes. While it is possible to go it alone, an increasing number of companies are seeing the value in using networks to give them some extra traction on the learning process. Shared learning within a network helps in a number of ways:

* Potential for structured critical reflection from different perspectives

* Exposure to new concepts (or old concepts that are new to the learner)

* Potential to reduce cost and risk of new ventures

* Support and potential for new lines of inquiry or exploration

* Helps to make patterns apparent and separate “the wood from the trees”

* Provides an environment for exploring mental models outside the normal experience of individual organisations

These principles also underpin an increasing number of policy initiatives aimed at getting companies to work together on innovation-related learning. In the UK, for example, the Society of Motor Manufacturers and Traders has run the successful Industry Forum for many years, helping a wide range of businesses adopt and implement process innovations around world-class manufacturing. This model has been rolled out (with support from the Department of Trade and Industry) to sectors as diverse as ceramics, aerospace, textiles and tourism. The same principles can help to diffuse innovative practices along supply chains. Companies such as IBM and BAE Systems have made extensive efforts to ensure that “supply chain learning” is the next key thrust in their supplier development programmes.

Spreading the load, sharing the risk

Innovation is about taking risks and deploying what are often scarce resources on projects that may not succeed. So, another way in which networking can help is by spreading the risk and, in the process, extending the range of ventures that might be tried. This is particularly useful in the context of smaller businesses, which may not be blessed with abundant resources.

Consider the example of the Italian furniture industry, which has achieved a consistently strong export performance with companies that have an average size of less than 20 employees. Keeping its position at the frontier in terms of performance is the result of sustained innovation in design and quality enabled by a network-based approach.

A similar case is Citer, the highly respected Italian textile research institute. Unlike so many world-class institutions, it was not created in top-down fashion but evolved from the shared innovation concerns of a small group of textile producers, who built on the network model to share risks and resources. In the years since its founding in 1980, the organisation has helped its 500 (mostly small business) members develop a strong innovation capability.

Long-lasting innovation networks can create the capability to ride out major waves of change in the technological and economic environment. A striking example of this is detailed by Michael Best, a professor at the University of Massachusetts Lowell, who looked at the ways in which that state’s economy has managed to reinvent itself several times.

In the 1950s, Massachusetts suffered heavily from the loss of its traditional industries, such as textiles and shoes. But by the early 1980s, the “Massachusetts miracle” had led to the establishment of a new high-tech industrial district. The resurgence was enabled in no small measure by an underpinning network of specialist skills, high-tech research and training centres (the Boston area has the highest concentration of colleges, universities, research labs and hospitals in the world) and by the rapid establishment of entrepreneurial businesses keen to exploit the emerging knowledge economy.

But between 1986 and 1992, this miracle turned to dust when around one-third of the manufacturing jobs in the region disappeared as the computer and defence-related industries collapsed. Despite gloomy predictions about its future, the region built again on its rich network of skills, technology sources and a diverse local supply base. This allowed rapid new product development to emerge again in high technology sectors such as special-purpose machinery, optoelectronics, medical laser technology, digital printing equipment and biotech.

Types of innovation networks

Innovation is a social process - it involves people getting together and sharing ideas. This can happen informally, for example at conferences, but there is also a growing trend towards trying to build innovation networks in a more “purposeful” fashion. This is what Steve Conway and Fred Steward, researchers at Leicester and Brunel Universities respectively, call “engineered” networks.

The purpose of an engineered network might be to create a completely new product or process, bringing together radically different combinations of knowledge. Equally, it might be set up to enable its members to gain some traction on the learning processes around adopting and embedding innovative ideas. The companies could be linked together by some geographical focus - as in a cluster - or as part of a supply chain trying to develop new ideas across the whole system.

What all of these examples share is a recognition that they can get traction on some aspect of the innovation problem through networking (see table 1).

Whatever the purpose of setting up the innovation network, operating within such an entity requires careful management. We have enough difficulties trying to manage within the boundaries of a typical business, so the challenges of innovation networks take us well beyond this: how to manage something we do not own or control; how to consider system level effects and not just narrow self-interests; how to build an environment of trust and shared risk without tying up the process in contractual red tape; and how to avoid “freeriders” and information “spillovers”. It is a new game and one in which a new set of management skills become important.

Configuring innovation networks

There is a big difference between innovation networks in areas where intellectual property management and risk are critical, and those in which there is an established innovation agenda. We can map some of these different types of innovation network on to a simple diagram (table 2), which positions them according to how radical the innovation target is with respect to current activity, and the similarity of the participating companies.

By making this distinction, it is clear that different types of networks have different issues to resolve.

For example, in Zone 1 we have organisations with a broadly similar orientation working on tactical innovation issues. Typically, this might be a cluster or sector forum concerned with adopting and configuring “good practice” manufacturing. The purpose of the network here might involve sharing experiences, disclosing information, developing trust and transparency, and building a sense of shared purpose around innovation.

Zone 2 network activities might involve players from adjacent sectors, such as biotechnology and pharmaceuticals, working to explore new product or process concepts by establishing interesting connections and syntheses. Here, the concern is exploratory and relies on a degree of information sharing and shared risk taking, often in the form of formal joint ventures and strategic alliances.

In Zone 3, the players are highly differentiated and bring different key pieces of knowledge to the party. Their risks in disclosure can be high, so ensuring careful IP management and establishing ground rules will be crucial.

At the same time, this kind of innovation is likely to involve considerable risk, so putting in place risk and benefit sharing arrangements will also be critical.

In a recent review of “high-value innovation networks” in the UK, which corresponds to Zone 4, researchers from the Advanced Institute of Management Research (AIM) found the following characteristics to be important factors for success:

Highly diverse: the network comprises partners from a wide range of disciplines and backgrounds who encourage exchanges about ideas across systems

Third-party gatekeepers: it includes science partners, such as universities, but also consultants and trade associations, who provide access to expertise and act as neutral knowledge brokers across the network

Financial leverage: it has access to investors via business angels, venture capital firms and corporate ventures, which spread the risk of innovation and provide market intelligence

Proactively managed: participants regard the network as a valuable asset and actively manage it to reap innovation benefits

The life cycle of an innovation network

Innovation networks typically go through three discernible stages:

Set-up stage: The priority here is establishing the momentum for bringing the network together and clearly defining its purpose. The network may be crisis-triggered - for example, there may be a perception that the organisation needs to catch up urgently via the adoption of innovation.

Equally, it may be driven by a shared perception of opportunity - the potential to enter new markets or exploit new technologies. Key roles here will often be played by third parties, such as network brokers, gatekeepers, policy agents and facilitators.

Operating stage: Here, the network will be trying to establish a foundation of operating processes that have general support and agreement. These need to cover the following range of issues:

Defining and maintaining the membership of the network

Establishing a process for effective decision-making

Effective conflict resolution

Ensuring that information flows and is managed among members

Deciding how knowledge should be created, captured, shared and used across the network

Motivating members to join or remain within the network

Allocating risks and rewards across members of the network

Co-ordinating and integrating operations across the network

Sustaining (or closure) stage: Networks need not last forever. Sometimes they are set up to achieve a highly specific purpose, such as the development of a new product concept and, once this has been done, the network can be disbanded. In other situations, there is a case for sustaining the networking activities for as long as members see benefits.

This may require periodic review and “retargeting” to keep the motivation high. For example, in 1992, key players in the oil and gas industry, such as BP and Shell, launched Crine, a development programme for the offshore oil and gas industry aimed at reducing costs. Using a network model and with support from the DTI, Crine delivered extensive innovation in products, services and processes. Having met its original cost-reduction targets, the programme moved to a second phase with a focus aimed more at using innovation to capture a bigger export share of the global industry.

Why innovation networks?

Why do we need innovation networks? One reason is that the innovation game has simply become too big and complex for any single player to handle. But it is also about exploiting potential - making the whole genuinely more than the sum of its parts. The UK, for example, consistently scores highly with its science base, yet it still fails to convert this scientific research advantage into products and services. Networking might be able to help with this.

Equally, improving productivity in the “long tail” of underperforming UK enterprises has much to do with the diffusion and adoption of innovative new ideas in products and processes. Increasingly, the issue is being seen not as one of knowledge generation (creating the ideas in the first place), but of knowledge flows (spreading and applying the ideas widely). Once again, this is a vital role for innovation networking.

In fields such as nanotechnology, biotechnology and optoelectronics, where the technological frontier is so far out that we do not even know where the boundaries or crossovers are, there is a strong driver for networking. Creating and deploying these technologies into new products and services, and even whole new industries, will depend critically on linking different perspectives and knowledge sets.

The overriding message seems to be that future growth through innovation is increasingly going to depend on following E.M. Forster’s famous imperative: “Only connect”. Learning to do so effectively is going to be one of the key innovation management challenges, both for researchers and practitioners, for some time to come.

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