VARIO Colloquium –The Role of Science and Innovation in Solving

Societal ChallengesBrussels, 19 December 2019

Addressing Societal Challenges ThroughCorporate Innovation:

A Strategic Leadership Perspective

©Robert A. BurgelmanStanford Business School

Addressing Societal Challenges Through Corporate Innovation:A Strategic Leadership Perspective

Robert A. BurgelmanStanford University

ABSTRACTStrategic leadership insights about corporate innovation may inform efforts to address strategic – that is, consequential – societal challenges such as, among others, global warming, alternative energy sources, population mobility, environmental sustainability, affordable housing. But what does “strategic” leadership actually mean? And, even with increased R&D resources allocated to discovery and invention, how do discovery/invention get translated into successful innovation in a timely way? And, how can the cycle time of strategic change be shortened in the face of rational sources of resistance, even in innovative organizations? I address these questions and briefly refer to two examples. I also make available some conceptual frameworks for further off-line consideration.

Premises of a Strategic Leadership Perspective

1. Strategic leadership is concerned with gaining and maintaining “control of destiny.” Note: Control = Intelligence-in-Action

2. Strategic leadership is concerned with balancing “dependence” and “influence” in relation to relevant forces in situations to maintain control of destiny. Note: Forces = competitive/collaborative; or states of nature

3. Strategic leadership is concerned with “radical” innovation to stay ahead of evolving relevant forces in situations and maintain control of destiny. Note: “Radical” innovation = new technology/organization

Innovation Challenge I:The Growing Gap Between R&D Investment and Corporate Profits

US Research and Development*

• US R&D increasing significantly– Industry is taking on a bigger fraction of R&D

*© Sadas Shankar 5

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1960 1970 1980 1990 2000 2010 2020

Total U.S. R&D

Performer Federal

Performer Industry

Performer Univ.

US R&D (Recap)*

• US R&D increasing significantly– Same as last figure, but with different scale in Y‐axis

*© Sadas Shankar 6

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1960 1970 1980 1990 2000 2010 2020

Total U.S. R&D

Performer Federal

Performer Industry

Performer Univ.

Corporate Profits*

• But Profits increasing even more– Edging close to 2 Trillion dollars

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1960‐03‐25 1968‐06‐11 1976‐08‐28 1984‐11‐14 1993‐01‐31 2001‐04‐19 2009‐07‐06 2017‐09‐22 2025‐12‐09

*© Sadas Shankar

Top Government Policies for Stimulating Innovation*

1. Offer Tax Incentives for R&D2. Promote Free Trade3. Support Skilled Migration4. Train Workers in STEM Fields5. Provide Direct Grants for R&DBut: Don’t Establish “Patent Boxes”

* © N. Bloom, J. Van Reenen, H. Williams, “A Toolkit of Policies to Promote Innovation,”Journal of Economic Perspectives, 2019, Vol. 33 (3): 163-184

Innovation Challenge II:However, even if R&D investment is significantly and rapidly increased, there remain two important innovation challenges:

1. Translating discovery/invention into innovation

2. Even innovative organizations are resistant to change (“Burgelman’s 5th law”)

1. The Translating Discovery/Invention into Innovation Challenge:

Growing awareness that the discovery/invention-to-innovation translation process in many areas, for instance in health care and sustainability, is not as speedy and effective as it could be and the felt need to improve it is growing rapidly (Grove 2003, 2011).

Need to re-examine the discovery/invention-to-innovation translation process in relation to the capability of companies to scale. Rapid and effective scaling has led to many of the breakthrough technological advancements of the last half of the 20th century and earlier two decades of this millennium.

Need to examine how the rapidly increasing knowledge in “machine learning” and “artificial intelligence” are affecting the discovery/invention-to-innovation translation process.

Increasing global concern about the sustainability dimension of the discovery/invention-to-innovation translation process. While sustainability – e.g., “green technologies” – sometimes increase product development and manufacturing costs, they also impose a degree of discipline to the management of organizations that may not only compensate for the higher costs associated with sustainability, but may actually improve the long-term overall organizational efficiency.

2. The Perennial Innovation Challenge for Established Firms*

“The challenge for established firms, we believe, is not either to be well organized and to act in unison or to be creative and entrepreneurial. The real challenge, it would seem, is to be able to live with the tensions generated by both modes of action. This will require top management’s exploitation of existing opportunities to the fullest (because only relatively few will be available), the generation of entirely new opportunities (because today’s success is no guarantee for tomorrow), and the balancing of exploitation and generation over time (because resources are limited). Strategic management approaches will have to accomplish all three concerns simultaneously and virtually continuously.” (emphasis provided)

*Source: Burgelman, R.A. and Sayles, L.R. Inside Corporate Innovation: Strategy, Structure, and Managerial Skills, New York: Free Press, 1986: 191.

Note: Voluminous literatures exist today about “exploitation/exploration” and “ambidextrous” organizations

Hypotheses Derived from My Own Corporate Innovation Research to Address Social Challenges 1. Similar strategic innovation processes apply at multiple levels in “Peers Plus One”

(hierarchical) social systems: Intra-organizational, organizational, regional, national; but not multi-national because there is no “One” at that level (but See 6. below).

2. Effectively pursuing radical innovation usually depends on below-top management strategic leadership skills (the ”Peers”) to provide reasonable validation.

3. Top management’s critical role (the “One”) is to scale-up and vector resources for radical innovation after below-top management efforts have provided reasonable validation.

4. Radical innovation to address social challenges often comes at a cost to a company. But this can be alleviated through increased efficiency in the company’s operations.

5. Government’s role (if it is the “One”) is well-suited for stimulating the process of radical innovation and for alleviating the social costs of radical innovation; but not for managing the process of radical innovation.

6. Exerting strategic leadership in multi-national systems (where there is no “One”) depends on three conditions: (i) Leading by bringing the own national house in order, (ii) leading by supporting cross-national alliances of mutual corporate interest, and (iii) leading by committing the greatest amount of resources to the common purpose.

Appendix I Addressing Social Challenges –Two Examples of Radical Corporate Innovation:

I. Sustainability: Removing Lead from all of Intel’s Semiconductor Products

II. Housing for the Many People: Skanska & Ikea’s BoKlokIndustrialized Construction Venture

I. Sustainability: Removing Lead from Intel’s Products

Intel Eliminates Use Of Lead From Future Microprocessors: (2007) It is the way in which Intel will implement these new materials to replace the tin/lead solder that is the "secret sauce" of the company's solution. Pb Elimination

– Started in 90 nm (2001) technology for low dielectric constant material introduction,

– Completed in 45 nm (2007)

© Sadas Shankar 14

II. Housing for the Many People: Skanska and IKEA’s BoKlokIndustrialized Construction Venture

1996: Ingvar Kamprad, IKEA’s founder, observed that no one was building affordable housing, even though there was an urgent need for it in Sweden. He met with the chairman of the board of Skanska (one of the world’s ten largest construction companies) leading to the founding of BoKlokto develop “affordable” (not “social”) housing through industrialized construction. The first four housing projects were completed in 1997.

Industrialized construction involves developing modules in a manufacturing plant and assembling them as housing units on the construction site. This inverses the traditional construction cost structure: from approximately 80 percent on site and 20 percent off-site to approximately 80 percent off-site (manufacturing) and 20 percent on site.

BoKlok’s target customer was extremely carefully defined: a single parent with one child who earns the wages of a social worker. The company also developed a novel financing method to make it possible for the target customer to actually buy the unit.

By 2017, BoKlok had built over 10,000 housing units in Scandinavia and in 2019 was entering the UK to further expand.

Appendix II Tools for the Strategic Leadership of Radical Corporate Innovation Derived from My Own Research

Strategic Control Factors and Creative Destruction -Incremental vs. Radical Innovation

Hi-end

Low-end

Perceived

Value

(T2,O2)

•(T1,O1 )

Possibilities Frontier

TQC Re-engineering

How do you decide which costs to cut? Examine link with perceived value.

•© Burgelman, R.A. “Strategic Management.” International Encyclopedia of the Social Sciences, Elsevier, 2015.

High Delivered Cost Low

© Burgelman, R.A and Grove, A.S “Let Chaos Reign, then Rein-in Chaos – Repeatedly: Managing Strategic Dynamics for Corporate Longevity.” Strategic Management Journal, 2007.

1. Normative rules – based on laws, ethics, customs, administrative principles

2. Technological rules – based on available technical solutions

3. Economic rules – reflecting: (i) existing bargaining power(often captured in contracts)(ii) familiar business models

4. Cognitive rules – widely shared judgments about key successfactors

Radical Innovation Changes the “Rules of the Game:”

© Burgelman, R.A. Strategy is Destiny: How Strategy-Making Shapes a Company’s Future, Free Press, 2002, p.179.

The Key Strategic Leadership Challenge: Developing andIntegrating Radical Innovation into the Corporate Context

Corporate Context

Internal or ExternalRadical Innovation

Radical Innovation integrated into

corporate Context

© Burgelman, R.A. Strategy is Destiny: How Strategy-Making Shapes a Company’s Future, Free Press, 2002: p. 9.

Blue and Green Strategy-Making Processes in Established Organizations

ACHIEVE ALIGNMENT

eemerging environments E

the existing environment

1. Distinctive Competence

2. Product Market Domain

3. Core Values4. Objectives

OrganizationalLearning

Top Management Beliefs about:1. Organizational Structure2. Planning & Control Systems3. Resource Allocation Rules4. Measurement & Reward Systems• . . . Principles of Behavior

Radical Innovation(initially not necessarily large)

Autonomous Strategic

Action4

Middle/Senior Mgt

Strategic Context

5

Structural Context

3

amend

CREATE LINKAGE

Induced Strategic

Action 2

Incremental Innovation(not necessarily small)

Concept of Corporate Strategy

1

1. Conceptual Skills2. Political SkillsBut: Complement or Substitute?

: Increase Scale

Autonomous Strategic Action: Example #1Senior executives championing autonomous strategic initiatives need to work hard to convince top management to amend the corporate strategy, thereby integrating the autonomous initiatives into the induced process going forward. A powerful example is provided by former IBM CEO Lou Gerstner’s recall of how Dennie Welsh, the senior executive in charge of IBM’s Integrated Systems Services Corporation (ISSC) which was at the time only a sub-unit of the sales force, convinced him that global services was a tremendous new growth opportunity for IBM. In Gerstner’s words:

My mind was afire. Not only was he describing something I’d wanted when I was a customer (for example, I had tried unsuccessfully to outsource the running of RJR Nabisco’s data centers), here was a man who understood what customers were willing to spend money on, and he knew what that meant – not just the business potential for IBM, but the coming restructuring of the industry around solutions rather than piece parts. (Gerstner, L.V.2002. Who Says Elephants Can’t Dance? New York, HarperBusiness, pp: 129- 130.)

The strategic change was dramatic. In 1992, IBM’s total revenues of $59.9 billion were composed of $33.8 billion in hardware (56 percent of total), $11.1 billion of software (18.5 percent) and $15.0 in services (25 percent), In 2001, IBM’s $81.6 billion in revenues were now composed of $33.7 billion in hardware (41 percent of total), $12.9 billion in software (16 percent) and $35 billion in services (43 percent).Source: Burgelman, R.A. et al. Becoming Hewlett Packard: Why Strategic Leadership Matters, Oxford University Press, 2017.

Autonomous Strategic Action: Example #2Another powerful example concerns the development of “multi-touch” for the iPad in the extremely tightly top-down run Apple. Whereas Steve Jobs reportedly told his biographer that he asked his team to come up with a multi-touch screen, Jonathan Ive, the team leader, had a different memory of the development:

He said his design team had already been working on a multi-touch input that was developed for the trackpads of Apple’s MacBook Pro, and they were experimenting with ways to transfer that capability to a computer screen. They used a projector to show on a wall what it would look like. “This is going to change everything,” Ive told his team. But he was careful not to show it to Jobs right away, especially since his people were working on it in their spare time and he didn’t want to squash their enthusiasm. “Because Steve is so quick to give an opinion, I don’t show his stuff in front of other people,” Ive recalled. “He might say, ‘This is shit,’ and snuff the idea. (…)” Isaacson, W. 2011. Steve Jobs, New York, Simon & Schuster: 468.

Source: Burgelman, R.A. et al. Becoming Hewlett Packard: Why Strategic Leadership Maters, Oxford University Press, 2017.

The Role of Middle/Senior Mgt. in Strategic Context Determination for Radical (Autonomous) Innovation

1. The activation and bringing to a conclusion (positive or negative) of a strategic context determination process depends critically on strategic leadership capability at middle/senior management levels:

Downward: To provide strategic direction to the autonomous initiative takers Lateral: To build a network of support from peers (a sort of minimum winning coalition) and help scale the initiative so that it becomes relevant from the organizational point of view Upward: To provide top management with sufficient confidence that it is responsible for the organization to embrace it going forward

2. This middle/senior level strategic leadership capability depends critically on: Conceptual skills: Evolving a strategic framework that is convincing

downwardly, laterally and upwardly Political leadership skills: Not politics (focused narrowly on personal/sub‐system interests) but Politics (focused on the organization’s interests)

© Robert A. Burgelman, Stanford Business School Lecture Material.

Autonomous Opportunity

Validated Not-yet-validated

The critical top management role is to scale up and vector resources related to radical (autonomous) innovation

CashReserves

Sufficient*

Insufficient

Safe bet

Bet the company

Wait to bet; but how long?

Desperate bet

* To protect the organization from disaster in case scaled-up autonomous initiative ultimately fails.

© Burgelman, R.A and Grove, A.S “Let Chaos Reign, then Rein-in Chaos – Repeatedly: Managing Strategic Dynamics for Corporate Longevity.” Strategic Management Journal, 2007.

© Burgelman, R.A. “Designs for Corporate Entrepreneurship in Established Firms.” California Management Review, 1984.

Tools for Augmenting Entrepreneurial Capability -Organizational Design Alternatives

Very Important Uncertain Not Important

DirectIntegration

(Core Business)

3

New ProductsPrograms

7

DivisionalNew Venture

Group

5 Spin-off + Licensing/

Contracting +Nurturing

9

Spin-off +Contract/License

8

StronglyRelated

PartlyRelated

Unrelated

Strategic Importance

•Ope

ratio

nal R

elat

edne

ss

SpecialBusiness

Units

6Independent

BusinessUnits

4CompleteSpin-off

2

1 CorporateNew Venture

DivisionTransit Station, not Destination

© Robert A. Burgelman, Stanford Graduate School of Business, Lecture Material.

Implications for Top Management1. Define community of interest between employees in the “blue” process and entrepreneurial individuals/teams in the “green” process

2. Allow for differentiated measurements/reward systems to reflect career risks taken, but always insist on accountability for agreed-on results against resources made available in the “green” process

3. Put a senior executive in charge of the “green” process who has great credibility in the “blue” process

4. Make sure to create a redeployment process to help people move back from the “green” process to the “blue” process

5. Make sure that those in the “blue” process that have helped entrepreneurial colleagues in the “green” process get commensurate rewards

6. Consider adjusting the optimal organization design as more information about operational relatedness and strategic importance becomes available to help determine when and how to graduate a “green” business venture