tapping into the global brain - squarewise ... · tapping into the global brain ... appendix 2...

How Four Dutch Multinationals Organize R&D in Emerging Economies to Increase their Absorptive Capacity

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Tapping Into the Global Brain How Four Dutch Multinationals Organize R&D in Emerging Economies

to Increase Their Absorptive Capacity

Michiel de Man

Tapping Into the Global Brain Master’s thesis Michiel de Man

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Title: Tapping into the Global Brain: How Four Dutch Multinationals Organize R&D

in Emerging Economies to Increase Their Absorptive Capacity

Author: Michiel de Man

MSc. program: Strategic Management, Rotterdam School of Management, Erasmus University

Supervisor: Prof. H.W. Volberda

Co-reader: Dr. M.C. Schippers

Student number: 300112mm

Date: May 2008


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Preface

This report has been written as the Master’s thesis for my study in Strategic Management at the Erasmus

University Rotterdam. It is the result of a research traineeship at Squarewise B.V., a strategic consultancy

company specializing in knowledge and innovation management based in Amsterdam.

The long journey that has led to this final report has been a very interesting and enjoyable one. Interesting,

because it provided a unique opportunity to explore the fascinating world of management of innovation by

multinational firms. Enjoyable, because I had a great time being part of the energetic Squarewise team

throughout the period of my internship.

The author is indebted to the many people who provided information for this study and to those who kindly

offered professional, financial and emotional support.

First, I would like to thank professor Henk W. Volberda, my coach, for his professional supervision and

constructive feedback and my co-reader, Michaéla Schippers, for her helpful comments and interesting

insights.

I would sincerely like to thank all colleagues at Squarewise for their enthusiasm and support. Special

thanks to Jacco van Uden, Yvonne Gerritsen and Cécile van Oppen who provided many valuable

suggestions during the writing of this report.

Special acknowledgements are due to Berry Kock, Rick Harwig and Frans Greidanus at Philips, Luc

Turkenburg, Peter Gommers, Stefan Diessen and Michael Zeitler at AkzoNobel, Piet van Egmond, Johan

Tiesnitsch and Rob van Leen at DSM, and Peter Boone, Umesh Dowlath, Colin Haine and Emmo Meijer at

Unilever. Thank you very much for enthusiastically spending many valuable working hours on the

interviews that provided for the bulk of the backbone material for this thesis.

Finally I would like to thank my family, friends and especially my girlfriend Karlijn. Thank you for your

crucial encouragement, support and patience!

Responsibility for the information and observations presented in this document ultimately rests with the

author.

The author declares that the text and work presented in this Master thesis is original and that no sources

other than those mentioned in the text and its references have been used in creating the Master thesis. The

copyright of the Master thesis rests with the author. The author is responsible for its contents. RSM

Erasmus University is only responsible for the educational coaching and beyond that cannot be held

responsible for the content.


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Contents

Preface ........................................................................................................................................................... 3

Figures ........................................................................................................................................................... 6

Executive summary ...................................................................................................................................... 7

Chapter 1 Introduction .............................................................................................................................. 13

1.1 Introduction ............................................................................................................................... 13

1.2 Research context........................................................................................................................ 13

1.3 Research questions .................................................................................................................... 20

1.4 Research contribution................................................................................................................ 22

1.5 Research approach..................................................................................................................... 22

1.6 Thesis structure.......................................................................................................................... 24

Chapter 2 The international R&D organization and absorption of external knowledge: a review and

conceptual model ........................................................................................................................................ 25

2.1 Introduction ............................................................................................................................... 25

2.2 The functions of the R&D organization .................................................................................... 25

2.3 The organization of international R&D..................................................................................... 26

2.4 R&D subsidiaries and knowledge absorption............................................................................ 27

2.5 Conceptual model: knowledge absorption via international R&D subsidiaries ........................ 31

2.6 Conclusion................................................................................................................................. 32

Chapter 3 Coordination mechanisms for external knowledge absorption: a review and analytical

framework................................................................................................................................................... 33

3.1 Introduction ............................................................................................................................... 33

3.2 Knowledge ................................................................................................................................ 33

3.3 Reconceptualizing external knowledge absorption ................................................................... 35

3.4 Coordination mechanisms ......................................................................................................... 38

3.5 Analytical framework: coordination mechanisms for knowledge absorption ........................... 39

3.6 Conclusion................................................................................................................................. 39

Chapter 4 Coordination mechanisms for absorptive capacity: a literature review.............................. 41

4.1 Introduction ............................................................................................................................... 41

4.2 Three levels of analysis ............................................................................................................. 41

4.3 Absorptive capacity at the firm level......................................................................................... 42

4.4 Absorptive capacity at the inter-organizational level ................................................................ 44

4.5 Absorptive capacity at the intra-firm level ................................................................................ 46

4.6 Organizational outcomes of absorptive capacity....................................................................... 46

4.7 Reflection on the literature ........................................................................................................ 50

4.8 Conclusion................................................................................................................................. 50


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Chapter 5 Case study methodology........................................................................................................... 52

5.1 Introduction ............................................................................................................................... 52

5.2 Approach ................................................................................................................................... 52

5.3 Unit of analysis and interview method ...................................................................................... 53

5.4 Validity...................................................................................................................................... 55

5.5 Structure of the case study results ............................................................................................. 55

Chapter 6 External knowledge absorption at the R&D subsidiaries of four Dutch multinationals.... 57

6.1 Introduction ............................................................................................................................... 57

6.2 Unilever..................................................................................................................................... 57

6.3 Knowledge absorption at Unilever’s Tomato Center of Excellence (CoE) in Brazil ................ 58

6.4 DSM .......................................................................................................................................... 59

6.5 Knowledge absorption at DSM Food Specialties’ Enzyme lab in Russia ................................. 61

6.6 AkzoNobel ................................................................................................................................ 62

6.7 Knowledge absorption at AkzoNobel’s Car Refinishes R&D center in Bangalore................... 64

6.8 Philips........................................................................................................................................ 65

6.9 Knowledge absorption at Philips Lighting’s R&D center in Shanghai .....................................67

6.10 Additional insights into the process of external knowledge absorption by the international R&D

organization .............................................................................................................................................68

6.11 Knowledge absorption in the emerging economies................................................................... 74

Chapter 7 Discussion: cross-case analysis and confrontation to the literature..................................... 78

7.1 Introduction ............................................................................................................................... 78

7.2 Structuring the results................................................................................................................ 78

7.3 Coordination mechanisms for the valuation of external knowledge.......................................... 80

7.4 Coordination mechanisms for the acquisition of external knowledge....................................... 85

7.5 Coordination mechanisms for the transformation of acquired knowledge ................................ 88

7.6 Coordination mechanisms for the transfer of acquired knowledge ........................................... 91

7.7 Coordination mechanisms for the application of acquired knowledge...................................... 93

7.8 Reflection and confrontation of the empirical and theoretical findings..................................... 95

7.9 Conclusion................................................................................................................................. 97

Chapter 8 Conclusion................................................................................................................................. 99

8.1 Introduction ............................................................................................................................... 99

8.2 Results ....................................................................................................................................... 99

8.3 Limitations .............................................................................................................................. 101

8.4 Theoretical and managerial implications................................................................................. 101

Bibliography.............................................................................................................................................. 103

Appendix 1 Interview protocol................................................................................................................ 110

Appendix 2 Unilever case study .............................................................................................................. 111


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Appendix 3 DSM Case study ................................................................................................................... 131

Appendix 4 AkzoNobel case study .......................................................................................................... 149

Appendix 5 Philips case study ................................................................................................................. 150

Tables

Table 1 Creator and adaptor R&D centers and knowledge absorption......................................................... 29

Table 2 Coordination mechanisms of absorptive capacity: results from the literature review. .................... 48

Table 3 Categorization of the identified coordination mechanisms (based on Martinez & Jarillo, 1989).... 49

Table 4 Overview of companies and R&D managers interviewed for this research .................................... 56

Table 5 Dominant sources of external knowledge........................................................................................ 72

Table 6 Sub-categories of the five knowledge absorption activities ............................................................ 79

Table 7 Results: coordination mechanisms for the valuation of external knowledge................................... 84

Table 8 Results: coordination mechanisms for the acquisition of external knowledge................................ 87

Table 9 Results: coordination mechanisms for the transformation of acquired knowledge ......................... 90

Table 10 Results: coordination mechanisms for the transfer of acquired knowledge .................................. 92

Table 11 Results: coordination mechanisms for the application of acquired knowledge............................. 94

Table 12 Summary: key coordination mechanisms for knowledge absorption .......................................... 100

Figures

Figure 1 Knowledge tapping by the foreign R&D center............................................................................. 16

Figure 2 Basic research framework (based on Cohen & Levinthal, 1990)................................................... 18

Figure 3 Research approach ......................................................................................................................... 23

Figure 4 The organizational structures of internationalized R&D (Von Zedtwitz & Gassmann, 2002).......27

Figure 5 Tapping into external knowledge by multinational company via the foreign R&D centers .......... 31

Figure 6 The five knowledge absorption activities (based on Cohen & Levinthal, 1990 and others). ......... 36

Figure 7 Research model: identifying key coordination mechanisms for knowledge absorption ................ 39

Figure 8 Three levels of absorptive capacity ................................................................................................ 42

Figure 9 Innovation projects and external knowledge absorption ................................................................ 73


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Executive summary

Introduction

Tapping into the increasingly sophisticated knowledge environments of the emerging economies is an

important challenge for western multinationals. India and China, for example, where high-tech industries

rapidly emerge and technical graduates are abundant, are turning into world-class suppliers of intellectual

property. Albeit at a smaller scale, Russia and Brazil are making important strides in the same direction.

The rapid economic and technical developments within these so-called ‘BRIC economies1 provide great

opportunities for Western multinational companies and at this moment many firms are in the process of

expanding their R&D activities in these countries. An important challenge for these firms is to successfully

organize the knowledge tapping processes of their foreign R&D centers in these countries. However, this

subject remains largely unexplored in the management literature.

The objective of this research is to identify key coordination mechanisms determining the absorption of

local technical and scientific knowledge by the R&D centers of Western multinationals in the emerging

economies. The empirical part of this research is based on exploratory case studies at four leading

multinationals: Unilever, DSM, AkzoNobel and Philips. A review of the relevant literatures was carried out

to provide a theoretical basis. The following research set-up was adopted.

1 ‘BRIC’ stands for Brazil, Russia, India and China. The acronym was first prominently used in a report of the Goldman Sachs

investment bank. This 2003 paper argues that the economies of the BRICs are rapidly developing and by the year 2050 will eclipse

most of the current richest countries of the world.


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Contextual findings

To understand the nature of the knowledge absorption processes by the foreign R&D centers of

multinationals, four sub-questions were addressed drawing on a combination of theoretical insights and the

cases studies. The most important contextual findings are discussed below.

1 What are the functions of the international R&D organization?

Aside from its function as a ‘generator’ of new knowledge for the development of new technologies,

processes and products, the R&D organization enables a firm to absorb new knowledge from outside the

firm, such as from universities, research organizations and other companies. Unilever, DSM, AkzoNobel

and Philips all have a network of multiple R&D centers worldwide. Depending on the quality of the local

knowledge environment (among other variables), these R&D centers may be involved in the absorption of

external knowledge and the subsequent leverage of this (processed) knowledge throughout the firm. The

focus of the present research is on the first step only, i.e. on the coordination mechanisms steering the

absorption of external knowledge by the foreign R&D centers.

2 How does the process of knowledge absorption by international R&D centers work?

From the case studies it followed that the R&D activities at the companies of this study are largely framed

into what can be taken as two different categories of multidisciplinary innovation projects: new product

development projects and platform technology development projects2. Together with other functional

disciplines (of which marketing is considered very important), geographically dispersed R&D centers

deliver knowledge inputs throughout the different stages of these projects. For the four companies, external

knowledge was found to be very important for the R&D organization throughout the different stages of

both types of innovation projects. As follows from the case studies, the acquisition of external knowledge

can be the result of several practices, which can roughly be divided into: hiring of qualified personnel;

‘scouting’ of the knowledge environment; arms-length business models (such as licensing-in of

technology); and collaborative business models (such as inter-firm alliances and research agreements). The

main sources of external knowledge include other companies, such as suppliers, peers and clients, and

universities and other research institutes. For the four companies, universities and research institutes

typically are important sources of external knowledge to technology development projects, yet much less

for new product development projects.

3 What are the functions of coordination mechanisms and which different types of coordination

mechanisms may steer the external knowledge absorption processes?

Based on Jarillo & Martinez (1989), coordination mechanisms are defined as “any administrative tool for

achieving integration among different units within an organization”. Five formal and three informal

categories of mechanisms are discussed. To conceptualize the knowledge absorption process, Cohen and

2 The technology development projects result in technologies to be applied in the projects for new product development.


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Levinthals’s (1990) well-known definition of ‘absorptive capacity’ is taken as a basis. In their view, the

absorption of external knowledge consists of the following three activities: to recognize the value of new,

external knowledge, to assimilate it, and to apply it to commercial ends. As follows from a review of the

absorptive capacity literature, early research regarded absorptive capacity mostly as a by-product of R&D

investments: the presence of prior related knowledge was seen as the main determinant of a firm’s ability to

absorb external knowledge. However, in more recent studies the notion that a firm’s absorptive capacity

may result of a variety of organizational coordination mechanisms has become strongly established and

several different types of coordination mechanisms for absorptive capacity have been addressed in existing

research. However, the topic of coordination mechanisms for external knowledge absorption by foreign

R&D centers remains largely unexplored.

4 How may the process and the coordination of external knowledge absorption by the R&D

centers in Brazil, Russia, India and China differ from western countries?

For the four companies researched for this research, the knowledge infrastructures of the BRIC countries

provide an increasingly important basis for the establishment of research-oriented R&D centers3, for a

growing number of scientific and technological domains. Notwithstanding this general conclusion, at the

four country-level case studies conducted for this research the potential to tap into local knowledge

environments to acquire new technical knowledge was found to be modest still. This is largely due to the

comparatively low quality of the local knowledge infrastructure, limiting the potential to establish

collaborative R&D programs with other companies and universities companies. Nonetheless, in all cases,

hiring qualified R&D personnel was seen as a very important way to acquire local knowledge. Overall, the

nature of the knowledge absorption process and its coordination mechanisms in the emerging economies

are not perceived by the R&D managers to be fundamentally different from those applied in Western

countries. Nonetheless, cultural and language issues need careful managerial consideration to secure the

success of external knowledge absorption.

Case study approach

Four case studies were carried out at Unilever, DSM, AkzoNobel and Philips. Given their long history of

managing international R&D and their increasing R&D activities in the emerging economies, these leading

multinationals were assumed to have developed organizational routines to tap into foreign ‘knowledge

resources’ via their subsidiary R&D centers. The case studies discuss the knowledge absorption processes

of the international R&D centers of the firms in general, and more in-depth for one of the subsidiary R&D

centers in an emerging economy. The ‘emerging economy case studies’ are conducted for four R&D

subsidiaries in the so-called ‘BRIC-economies’:

3 Clearly, the large market potential of the emerging countries is also an important reason to establish product development-oriented

R&D centers with adaptive mandates: all companies and many of their businesses typically have a significant number of such R&D

sites in all four of the BRIC countries.


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• Unilever’s Foods Savory and Tomato R&D Center of Excellence in São Paulo, Brazil;

• DSM’s Food Specialties Enzyme Lab in Moscow, Russia;

• AkzoNobel’s Car Refinishes R&D center in Bangalore, India; and

• Philips’ Lighting R&D center in Shanghai, China.

Personal interviews with at least one senior corporate-level R&D manager and one front-line R&D

manager of one of these subsidiary R&D centers form the empirical basis of this research. Extra interviews

were held to provide more in-depth insights, resulting in a total number of 14 interviews.

As discussed, Cohen and Levinthals’s (1990) definition of ‘absorptive capacity’, as a combination of the

valuation, assimilation and application of external knowledge, was taken as a basis to conceptualize the

knowledge absorption process. Based on results from the first two interviews, it was considered useful to

redefine the knowledge ‘assimilation’ activity. This resulted in a conceptualization of ‘knowledge

absorption’ as a combination of the following five activities:

• The valuation of external knowledge;

• The acquisition of external knowledge;

• The transformation of acquired knowledge

• The transfer of acquired knowledge

• The application of acquired knowledge.

The participating managers were asked to describe how they perceive the nature of these five knowledge

absorption activities, as well as what they consider are key coordination mechanisms to steer these

activities. A cross-case analysis of the case studies was carried out to derive to general conclusions.

Results

The case studies at Unilever, AkzoNobel, DSM and Philips provided valuable insights into how the R&D

centers of these companies absorb external knowledge from the foreign knowledge environment as well as

identifying key coordination mechanisms to steer these activities. Based on a cross-case analysis of the case

study results, it is argued that the identified coordination mechanisms steer particular sub-categories of the

five knowledge absorption activities. The 12 sub-categories, which are presented in the table below,

provide insights into how the managers across the four case studies generally perceive the nature of the five

knowledge absorption activities. Typically, a combination of several different types of coordination

mechanisms were identified to steer the (sub-categories of the) knowledge absorption activities.

The main findings of the cross-case analysis are summarized in the following table (see next page).


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Results: Coordination mechanisms for external knowledge absorption by foreign R&D centers

Knowledge absorption activity

Sub-category

Coordination mechanisms and their role

Value Mechanisms to understand the technical/scientific content and business value of external knowledge

Establish a base of qualified R&D employees, through HRM practices, etc. Development of a combination of technical and commercial employee competences, via competence management systems, internal job transfers (e.g. between R&D and marketing).

Mechanisms to keep track of external technology developments

Establish an outward orientation via communication of top-management values; an active knowledge scouting function through structural mechanisms (innovation units, technology teams, etc.), at the employee level through job descriptions etc. Develop technology search and assessment methods.

Mechanisms to frame the external knowledge requirement of R&D centers

Provide focus via strategic planning mechanisms, incl. technology strategy and new product development strategy; portfolio management systems; R&D subsidiary mandates, etc.

Mechanisms to manage a network of external partner firms and research institutes

Develop employee collaborative skills to establish network ties and trust with companies and research institutes, through trainings; employee competence management systems; socialization events, etc.

Acquire Mechanisms to acquire external knowledge by hiring local employees

HRM issues incl. salaries, career perspectives, employee policies. Promote contribution of knowledge of new employees via cultural and professional trainings, practice, job transfers, etc.

Mechanisms to manage collaborative and arms-length R&D activities with local partners

Establish professional management of collaborative and arms-length business models, via managerial competence management; structural mechanisms such as alliance management departments and special management functions.

Transform Mechanisms to manage knowledge transformation in general

Project-based organization of R&D activities, with (partly) standardized R&D deliverables improve efficiency. Enable problem solving via ‘openness’: an informal culture with low barriers to contact colleagues, communication of ‘open’ values by top-level management; reward systems and socialization events. Leverage good practices via internal benchmarking of R&D processes and events.

Mechanisms to match the R&D outputs with the requirements of the other disciplines

Establish narrow communication between the R&D team and the innovation project coordinator (several mechanisms). Development of a combination of technical and commercial employee competences, via competence management systems, internal job transfers, and integrative mechanisms, such as cross-disciplinary functions, communities of practice and technology platforms.

Transfer Mechanisms to promote knowledge sharing within the R&D center

Minimize communication barriers through requirement of one common language and culture and language trainings. Establish 'open culture' within the R&D center. Effective use of simple or more sophisticated communication tools. Events such as R&D conferences.

Mechanisms to promote knowledge sharing with other disciplines

The R&D organization is required to provide ‘deliverables’ in an explicit, documented form. Establish cross-disciplinary interfaces, such as communities of practice and technology platforms.

Apply Mechanisms for the application of knowledge by the R&D center

Funnel-type portfolio management systems and a project-based organization of R&D activities promote efficiency of knowledge application. Strategic and structural mechanism to maximize global exploitation of R&D knowledge.

Mechanisms to exploit knowledge outside the firm

Competences to manage new business models for external kn. application (e.g. spin-out management, licensing-out of IP, selling of technologies), through special departments and functions for ‘open innovation’. Professional IP management as a key requirement.


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Implications

This research contributes to the burgeoning literature of absorptive capacity in several ways. Through its

practical approach and by identifying organizational determinants of absorptive capacity, the findings

contribute to reducing the problem of ‘reification’ of the concept (Lane et al., 2006). This thesis forcefully

underscores that absorptive capacity is not a ‘thing’ and challenges the idea that any one single factor (such

as R&D investments) could serve as a useful proxy for a firm’s level of absorptive capacity. Moreover, the

findings indicate that the five knowledge absorption activities studied in this research (i.e. the valuation

acquisition, transformation, transfer and application) are steered by largely different combinations of

coordination mechanisms.

Most of the identified sub-categories and coordination mechanisms steering the knowledge absorption

activities have not been addressed in existing research. For instance, the participating managers

unanimously argued that strategic focus mechanisms are critical to the R&D center’s ability to value

external knowledge (by determining which areas of knowledge are valuable to the company and the R&D

centers). Notwithstanding its perceived importance, this aspect has largely been overlooked in existing

research on absorptive capacity (Lane et al. 2006: 857). Hence, the findings of this research help improve

our understanding of absorptive capacity and capturing the “richness and multidimensionality of the

concept” (Jansen et al., 2005: 999). The identified sub-categories of the knowledge absorption activities

and their coordination mechanisms may also provide a useful basis for further research on absorptive

capacity, especially for the context of international R&D.

For managers, the case studies underscore the importance of the effective management of both the

‘external’ and the ‘internal’ components of knowledge absorption: to acquire valuable external knowledge

it is important to understand what the company may need and to have the capabilities to effectively manage

the knowledge acquisition process. Yet, this is only half of the work: to be able to successfully apply the

acquired knowledge, the internal knowledge transformation and transfer processes need to be well-

established. The identified coordination mechanisms can be regarded as important factors to take into

account when designing and managing the knowledge absorption processes by international R&D centers.

For the context of the emerging economies, the case studies indicate that the knowledge absorption

processes via the R&D centers in these countries were taken to be essentially similar to those in western

countries. Nonetheless, cultural differences may become barriers for effective knowledge absorption if they

are not effectively managed. This thesis provided insights into how specific coordination mechanisms, such

as tailored HRM practices, temporary internal job transfers, cultural and language trainings (for new

employees and for expatriate managers) may be applied to compensate this problem. In the light of the

growing popularity of the emerging economies as sources of innovation, this issue clearly calls for further

investigation.


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Chapter 1

Introduction

1.1 Introduction

This chapter introduces the subject of this thesis: the absorption of external knowledge by four Dutch

multinationals via their R&D centers in the emerging economies of Brazil, Russia, India and China. First,

section 1.2 discusses the research context. Based on this discussion, the research question is defined in

section 1.3. Section 1.4 discusses the contributions of this research. The research approach and the structure

of the remainder of this thesis are provided in sections 1.5 and 1.6, respectively.

1.2 Research context

The subject of this research is inspired by an important trend in international business: the growing

importance of the ‘emerging economies’ of Brazil, Russia, India and China as destinations for the

internationalization of R&D for Western multinationals. As will be argued, for these firms it is becoming

increasingly important to be able to tap into the increasingly sophisticated knowledge environments of

these countries via their local R&D centers. The aim of this research is to understand how four important

Dutch multinational companies organize to absorb relevant external knowledge via their R&D centers in

these emerging economies.

The internationalization of R&D to emerging economies by western multinationals

The internationalization4 by western multinationals of knowledge-intensive and ‘more core’ business

processes to emerging economies5 has rapidly increased in recent years (Booz Allen Hamilton & Insead,

2006; Couto & Divakaran, 2006; Gottfredson, Puryear & Philips, 2005; Jensen & Pedersen, 2007; Lewin

& Couto, 2007; Meyer, 2004; Szczygielska, Jansen, Volberda & Van den Bosch, 2007). Recent research by

the Rotterdam School of Management concludes that 38% of Dutch firms are now involved in the

4 In the context of this thesis, ‘internationalization’ refers to the establishment of majority and fully owned subsidiaries in foreign

countries. Frequently applied business models include greenfield ventures, acquisitions and majority participations. The management

literature has shown that foreign subsidiaries develop over time and take on increasingly specialized roles (Bartlett and Ghoshal, 1986;

Birkinshaw and Hood, 1996; Lewin & Couto, 2007). In the case of R&D departments, this ‘growing-up’ of subsidiaries may involve

the evolution of a technical center to support a foreign manufacturing process into an R&D center responsible for product

development for a whole region. This type of ‘evolutionary’ R&D internationalization is explicitly included in this research. The

international outsourcing of business processes to third parties, international alliances and joint ventures are not taken into

consideration in this thesis. Finally, in the last few years a lot of academic and media attention has been paid to ‘offshoring’.

Offshoring typically refers to the actual re-location of a business process to another country. Even though the focus of this study on

internationalization includes offshoring, it has a much broader connotation.

5 Emerging economies are defined as middle to low-income, rapid-growth countries using economic liberalization as their primary

engine of growth. These economies typically have less sophisticated market supporting institutions and fewer locational advantages

based on assets, such as infrastructure and human capital (Arnold and Quelch 1998; Hoskisson et al. 2000; Meyer, 2004).


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international relocation of R&D, engineering and product-design, while India and China have become the

dominant destinations (ORN RSM, 2006). The present research focuses on the internationalization to the

emerging economies of the high value-adding business process of Research and Development (R&D)6,

which has become a recurring newspaper topic in recent years. For example, the Pudong area of Shanghai

has rapidly become a highly popular destination for Western multinationals such as DSM to perform

innovative R&D work (NRC, January 19th 2008), while Google recently announced the opening of its

second R&D center in Russia to develop search-related products for both Russian and global markets (New

York Times, December 18th 2006).

Access to knowledge resources is a key driver for R&D internationalization

The growing importance of the emerging economies as destinations for R&D for Western multinationals

can be explained by a combination of three main factors. First, market growth potential has been identified

as a major driver of R&D internationalization to the emerging economies. Since being successful in these

new markets often requires significant adaptations to existing products and services, the need to be close to

the market for product development is a very important driver for R&D internationalization. The increasing

sophistication of industries in the emerging economies is a second important driver for R&D

internationalization. Having access to the technical and scientific competences of these countries (i.e.

qualified R&D personnel and university collaboration in particular) is an increasingly important reason for

companies to set up and expand R&D operations in the emerging economies (AWT, 2007; Booz Allen

Hamilton & Insead, 2006; Goldman Sachs, 2005; Lewin & Couto, 2007; ORN RSM, 2006, Thursby &

Thursby, 2006; UNCTAD, 2005). Cost advantages, which may primarily result from lower wages for

R&D workers, have been identified as a third driver for the internationalization of R&D to emerging

economies (Goldman Sachs, 2005; Lewin & Couto, 2007; ORN RSM, 2006, Thursby & Thursby, 2006;

UNCTAD, 2005)7. However, several recent studies argue the relative importance of cost savings vis-à-vis

the other two drivers is limited, especially for more advanced research activities (e.g. Booz Allen Hamilton

& Insead, 2006, Thursby & Thursby, 2006). An important conclusion for this research is that the

abovementioned studies unanimously confirm the importance for Western multinationals of access and tap

into to the emerging countries’ scientific and technical knowledge resources.

6 The R&D function covers activities for the purpose of discovering or developing new products (goods and services) or more efficient

production processes, including improved versions of existing products and processes (OECD 2002). 7 Notwithstanding the importance of knowledge absorption as a key factor in the internationalization decision, it should not be

overlooked that the overall decision is more complex. The decision about where to establish new R&D units is made by higher

management, usually in consultation with representatives from the R&D and strategy departments. This decision considers R&D-

specific factors such as the quality of input at the new site, the quality of expected output and the general operating efficiency of this

R&D unit. Importantly, the decision is also taken based on R&D-external factors, such as tax optimization, reliability and stability of

the local political and social system, and image enhancement (Reger, 2004).


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The ability to tap into foreign knowledge resources is an important function of foreign R&D centers

Following the broader internationalization pattern of manufacturing in the 1970s, the rise of cross-border

R&D has been extensive since the mid 1980s (De Meyer & Mizushima, 1989; Pearce, 1999). Currently,

many multinational companies have established R&D facilities away from their headquarters at multiple

locations worldwide. Conventionally, the main functions of overseas R&D activities were considered to be

adaptation and demand-oriented: the emphasis was on adapting the technologies generated within the home

country to the local input conditions, regulations, or tastes at the foreign locations, and to support the local

production and sales activities (Vernon, 1966). This vision of foreign R&D sites as adaptive centers no

longer holds. Today, overseas R&D investments are often made with the aim to contribute to company-

wide product and process innovations. Understandably, a key challenge to multinational companies is to

successfully coordinate their complex innovation networks of internationally distributed R&D centers (e.g.

Engardio, 2006; Kuemmerle, 1997; 1999; Von Zedtwitz & Gassmann, 2002).

The innovations may result from creative efforts by the foreign R&D subsidiaries8 themselves (e.g.

Ghoshal and Bartlett, 1988), but especially also from the acquisition of external knowledge by the R&D

centers. Absorption of external knowledge is important because the vast majority of new knowledge is

created outside any particular firm (e.g Chesbrough, 2003). As Von Zedwitz and Gassmann (2002: 580) put

it, “few companies can afford to ignore the benefits of (…) tapping into foreign science clusters”. Seeking,

acquiring and applying foreign knowledge resources have thus become key functions of the international

R&D organization (see also Almeida & Phene, 2004; Ambos, Ambos, & Schlegelmilch, 2006; Kuemmerle,

1997, 1999; Pearce, 1989; 1999; Piscitello & Rabbiosi, 2006; Porter & Stern, 2001). For example, in an

empirical study Almeida (1996) found that that the knowledge used in innovation by foreign subsidiaries in

U.S. regions is predominantly from a local (U.S.) origin. Moreover, foreign firms use regional knowledge

significantly more than similar domestic firms. This conclusion unveils an important function of the R&D

organization: in addition to its ‘traditional’ role as a ‘generator’ of new knowledge for product and process

innovations, the R&D organization also enables a firm to absorb new external knowledge (Cohen &

Levinthal, 1989; 1990; Kuemmerle, 1997; 1999).

Internal and external sources of knowledge are complements that have to be combined to improve the

innovative performance of companies (Cassiman & Veugelers, 2006). The foreign R&D units make use of

their access to sources of external knowledge, such as research institutes, other companies and clients, to

co-develop or acquire new knowledge that can be applied in the R&D process. Subsequently, the newly

acquired (and applied) knowledge can be exploited throughout the firm at multiple locations (e.g. by R&D

centers or other disciplines). This notion that international subsidiary R&D units play a key role in the

acquisition and subsequent intra-firm leverage of new external knowledge has become axiomatic in the

strategic management and R&D literatures (Almeida & Phene, 2004; Cantwell & Piscitello 1999; Doz et

8 Foreign subsidiary refers to any operational unit controlled by the multinational company and located outside the home country.


16

al., 2001; Enright, 2000; Frost 2001; Ghoshal & Bartlett 1988; Kuemmerle, 1997; 1999; Mahnke, Pedersen

& Venzin, 2005; Nobel & Birkinshaw, 1998; Von Zedtwitz & Gassmann, 2002). As will be discussed in

section 2.3, many aspects of the management by multinational companies of their ‘global innovation

networks’ are dealt with in existing research. However, few studies focus on how knowledge absorption by

subsidiary R&D sites from local environments occurs.

Research motivation

As follows from the above, an increasingly important challenge for western multinationals is to effectively

tap into the knowledge resources of the emerging economies via their local R&D centers. Driven by the

author’s personal interest, the motivation behind this research is to understand how multinational firms may

organize this knowledge tapping process. In the following, this broad ambition will be made more specific

in order to define a workable research question.

Conceptualizing ‘knowledge tapping’

As discussed, the knowledge tapping process can be taken as a combination of two subsequent steps. First,

the R&D centers acquire external knowledge and apply that knowledge in their R&D processes. Second,

the acquired and applied knowledge can be leveraged throughout the firm (see section 2.5 for a discussion

and conceptualization of the knowledge tapping process). Given the need to limit the scope of this research,

the focus of is on the first step only, as is illustrated by the following figure:

Figure 1 Knowledge tapping by the foreign R&D center


17

To comprehend how the foreign R&D centers may tap into local knowledge resources, we must specify

which activities actually constitute the ‘knowledge tapping’ process. Arguably, the most dominant concept

in the organizational research literature of this subject is Cohen and Levinthal’s (1990) ‘absorptive

capacity’. Absorptive capacity is seen as the result of three subsequent abilities, namely to:

• Recognize the value of new knowledge outside the firm;

• Assimilate this valuable new knowledge; and

• Apply the assimilated knowledge to commercial ends.

This definition provides a very complete view of the knowledge absorption process: it emphasizes how

recognizing and estimating the value of external knowledge are critical phases preceding the actual

acquisition of the knowledge9, while the application of the assimilated knowledge into a commercially

exploitable form is obviously a critical final phase of the absorption process. Together with the fact that

Cohen & Levinthal’s concept of absorptive capacity has become a dominant construct in the management

literature, this ‘completeness’ is an important reason to use it as a framework to study the knowledge

tapping process by international R&D units. It should be noted that the present research takes a process

view of absorptive capacity: knowledge absorption by the foreign R&D centers is understood as a

combination of the activities (rather than the higher-order abilities) of recognizing; assimilating and

applying external knowledge. The abilities to conduct these knowledge absorption activities are seen as the

results of the mastery by the firm of particular organizational processes.

Coordination mechanisms for knowledge absorption

This thesis adopts the view that the absorption of external knowledge by organizational units (i.e. the

foreign R&D centers) does not occur automatically, but rather results from specific coordinative

organizational processes. In other words, firms apply particular coordination mechanisms to steer the

knowledge absorption process (see Cohen & Levinthal, 1990; Jansen, Van den Bosch & Volberda, 2005;

Lane & Lubatkin, 1998; Van den Bosch, Volberda & De Boer, 1999). Given the desire of this research to

explore any kind of coordination mechanisms for knowledge absorption, the broad definition of

coordination mechanisms by Martinez & Jarillo (1989: 490) as “any administrative tool for achieving

integration among different units within an organization” is applied in this study. A further discussion on

coordination mechanisms is provided in section 3.4. Concluding, this research seeks to identify key

coordination mechanisms for knowledge absorption (Figure 2).

9 As will be discussed in section 3.3, the acquisition of external knowledge can be taken as an element of the ‘assimilation’ process.


18

Figure 2 Basic research framework (based on Cohen & Levinthal, 1990)

From an academic perspective there are two important reasons to research the coordination mechanisms

that are applied by multinationals for external knowledge absorption by their foreign R&D centers. First,

even though Cohen and Levinthal’s (1990) article already encompassed the need to understand the nature

of the organizational mechanisms that could lead to the ability to recognize, assimilate and utilize useful

external knowledge, few scholars have addressed this issue. Moreover, from their review of 289 academic

papers citing Cohen & Levinthal’s concept, Lane, Koka and Pathak (2006) conclude the organizational

processes and dynamics underneath absorptive capacity have hardly been investigated and that this has led

to a reification of the construct. This clearly justifies further research into the coordination mechanisms for

knowledge absorption in general.

Second, although the studies that have focused on the coordination mechanisms of absorptive capacity have

clearly provided valuable insights for specific contexts, the coordination mechanisms applied by

multinational companies for knowledge absorption by their international R&D subsidiaries has not been

explicitly addressed in existing research. As follows from the literature (e.g. Van den Bosch et al., 1999),

the coordination mechanisms of absorptive capacity may vary considerably along contextual variables such

as industry, the business processes under study, the firm’s structural and cultural aspects, and the unit of

analysis. This justifies further research into the coordination mechanisms for the unexplored context of this

study (i.e. the absorption of external knowledge by the R&D centers of western multinational companies in

the emerging economies). Chapter 4 provides a review of the literature of coordination mechanisms for

absorptive capacity.

Brazil, Russia, India and China as important R&D destinations

The most dominant emerging economies in terms of current and projected economic growth and scale are

Brazil, Russia, India and China, popularly known as the ‘BRIC countries’ or ‘BRICs’10. The BRIC

countries are also becoming increasingly important in terms of a wide range of science and technology 10 The acronym ‘BRICs’ was first prominently used in a report of the Goldman Sachs investment bank. This 2003 paper argues that

the economies of the BRICs are rapidly developing and by the year 2050 will eclipse most of the current richest countries of the

world.

Value external knowledge

Coordination mechanisms

Assimilate external knowledge

Apply assimilated knowledge


19

developments and the development of world-class R&D capabilities. The rise of these countries as

important locations for R&D is illustrated by several studies. For instance, a study by Goldman Sachs

(2005) shows that China and Russia took up the second and fourth position respectively in terms of total

numbers of R&D professionals already between 1997 and 2001. A 2005 survey among 209 multinational

companies in the United States and Western Europe found that about 70 percent of the respondents

expected an increase in R&D employment in China in the next three years, while more than 40 percent

anticipated an expansion of R&D in India (Thursby &Thursby, 2006; see also Mitra, 2007) and a research

conducted by Booz Allen Hamilton and Insead (2006) among 186 of the world’s biggest corporations

projected that “by 2007, China and India will account for 31 percent of global R&D staff, up from 19

percent in 2004”, while over the next three years 77% of new R&D centers would be established in these

two countries. Brazil’s R&D intensity remains comparatively low, yet important steps forward have been

made in terms of the development of a strong policy framework for innovation which focuses on the

potential policy synergies among science and technology promotion, trade competitiveness and R&D

support in the business sector (OECD, 2006). As a result, albeit at a smaller scale, Brazil’s position as an

R&D location is also on the rise. The development of these four dominant emerging economies into

knowledge economies is the reason for this research to focus on these countries.

The case of Dutch multinationals

For practical reasons and the author’s personal interest, this research focuses on Dutch multinationals that

manage R&D operations in the abovementioned countries. Philips, DSM, Unilever and AkzoNobel were

selected as the focal companies for this research. These four companies are among the largest Dutch

multinationals, also in real terms of R&D investments (Erken & Gilsing, 2005) and all have a strong history

of managing international R&D. Importantly, in recent years the internationalization of their R&D to the

emerging economies of Brazil, Russia, India and China has intensified (ORN RSM, 2006; AWT, 2007). It

was therefore assumed that these companies have developed (or are in the process of developing)

organizational capabilities to coordinate the external knowledge tapping process via their subsidiaries in

these countries and are therefore valuable ‘research objects’. The choice for these companies will be further

discussed in the methodology section in Chapter 5. Initial interviews with R&D managers of the four

companies confirmed the literature-based finding that it is becoming increasingly important for these firms

to be able to tap into the increasingly sophisticated knowledge environments of these countries via their

local R&D centers and that this poses significant managerial challenges.


20

1.3 Research questions

Based on the above discussion it is concluded that exploratory research into the coordination mechanisms

for the absorption of external knowledge by the foreign R&D centers of multinational companies is

justified from a theoretical point of view. The context of R&D centers of Western firms in the emerging

economies of Brazil, Russia, India and China is considered to be interesting both from a theoretical and

from an empirical perspective, given the public debate on the internationalization of knowledge intensive

activities to the emerging economies. As discussed, Cohen and Levinthal’s conceptualization of absorptive

capacity is applied to specify the main activities of the knowledge absorption process. Hence, the aim of

this research is to identify important coordination mechanisms determining knowledge absorption by the

foreign R&D centers of Unilever, DSM, AkzoNobel and Philips in the emerging economies of Brazil,

Russia, India and China.


21

The main research question is defined as follows:

For four Dutch multinational companies, this research seeks to identify key coordination

mechanisms determining the absorption of external knowledge by their R&D centers in the

emerging economies of Brazil, Russia, India and China

To answer the main research question, the following sub-questions will be answered:

1 What are the functions of the international R&D organization?

To study the knowledge absorption process by foreign R&D centers, it is important to have a basic

understanding of the function of R&D and its international organization. As argued in section 1.2, an

important role of R&D centers is to absorb external knowledge. Yet, not all R&D centers are equally

involved in the generation and absorption of new knowledge. To clarify these issues, elaboration on the

subject of the international organization of R&D and differences in subsidiary R&D mandates is

desirable.

2 How does the process of knowledge absorption by international R&D centers work?

To understand the process of external knowledge absorption by the international R&D centers of

multinational firms, a definition of ‘knowledge’ is needed. Second, the conceptualization of external

knowledge absorption as a combination of the valuation, assimilation and application of knowledge (see

section 1.2) needs to be assessed. Third, insights into the manner in which the R&D centers of the four

companies may acquire external knowledge and into the nature of the dominant types of external

sources of this knowledge are desirable.

3 What are the functions of coordination mechanisms and which different types of

coordination mechanisms may steer the external knowledge absorption processes?

In order to identify key coordination mechanisms for knowledge absorption, it is necessary to gain

further insight into the functioning of coordination mechanisms. A distinction will be made between

different types of coordination mechanisms to be able to classify and analyze the mechanisms identified

in existing literature and this research.

4 How may the process and the coordination of external knowledge absorption by the R&D

centers in Brazil, Russia, India and China differ from western countries?

This research focuses on the context of R&D activities performed by multinational companies in the

emerging economies. How this specific context may have implications for the manner in which firms

organize their knowledge absorption process will be addressed in this research.


22

1.4 Research contribution

By answering the research questions stated above, the author aims to make a valuable contribution to the

academic field of strategic management in general, and to the areas of international R&D and knowledge

management in particular. Moreover, the ambition is to provide meaningful, practical recommendations for

practitioners who are faced with the challenges of improving the ability of their R&D centers to absorb

external knowledge. The context of the emerging economies of Brazil, Russia, India and China is salient,

given the public debate about the emergence of these countries as knowledge intensive economies. Even

though this is not a primary driver of this research, en passant it will hopefully provide the reader with

interesting insights into the nature of and drivers behind the internationalization of R&D of four prominent

multinationals activities to the emerging economies.

Academic contribution

This research will contribute to the academic field by deepening the existing insights on the process of

external knowledge absorption by foreign R&D subsidiaries and its coordination. As Lane et al. (2006:

833) argue, the reification of the absorptive capacity construct “has led to stifling of research in this area”.

By viewing knowledge absorption as a capacity rather than an abstract ‘thing’ and by exploring and

analyzing coordination mechanisms that are important to increase the absorptive capacity of foreign R&D

centers, this thesis aims to help revitalize absorptive capacity research.

Managerial contribution

This research investigates the manner in which companies organize their international R&D operations.

Notwithstanding the importance of successfully tapping into the knowledge resources of foreign countries,

the topic has received only limited attention in the literature. By providing insights how established

companies with a strong heritage of managing international R&D are doing this, this research aims to

inform managers facing similar challenges.

1.5 Research approach

As discussed, the aim of this research is to identify key coordination mechanisms for knowledge absorption

by R&D centers of Dutch multinational companies in emerging economies. The rich and explanatory

nature of the qualitative case study suits this exploratory ambition well (Eisenhardt, 1989; Yin, 2003).

Consequently, a qualitative approach based on multiple descriptive cases at multiple levels of analysis is

followed for the empirical section of this research. The methodological aspects of the case studies are

discussed in more detail below and in Chapter 5. To answer the research questions stated in section 1.3, the

case studies are combined with a review of the relevant literatures.


23

The research trajectory can roughly be divided into four phases, as highlighted in Figure 3. It should be

noted that in line with the exploratory nature of this research, the research approach did not consist of a

simple linear progression of these phases, but rather of an iterative process.

Figure 3 Research approach

Phase 1. The literature review constitutes the first phase of the research, providing an exploration of the

relevant theories. Literatures that have been used include: international business theory and international

R&D (to answer sub-question 1); organizational learning theory, focusing on absorptive capacity; and

organizational theory for the study of coordination mechanisms. The literature of coordination mechanisms

of absorptive capacity has been reviewed in more detail.

Phase 2. Based on the literature review, a conceptual model of the process of external knowledge

absorption by the international R&D organization is developed (sub-question 2). Second, an analytical

framework to classify and analyze coordination mechanisms for knowledge absorption is provided and the

existing literature on coordination mechanisms for absorptive capacity is reviewed (sub-question 3).

Phase 3. For the empirical part of this research, a descriptive case study method has been followed based

on four cases. Unilever, DSM, AkzoNobel and Philips were selected and found willing to participate in this

study. In-depth interviews with senior R&D managers at two managerial levels provide the bulk of the

empirical backbone of this thesis. Case study reports are written to discuss the results (main research

question).

Phase 4. Based on a cross-case analysis of the case study results, additional insights into the process of

knowledge absorption will be discussed (sub-question 2). To answer the main research question the

identified coordination mechanisms are discussed and confronted with the existing literature in order to


24

derive to implications for theory and practice. For both elements, the specificities for the emerging

economy context will be addressed (sub-question 4).

1.6 Thesis structure

The structure of this thesis is as follows.

The present chapter serves as an introduction to the research study. Most importantly, it provided a brief

overview of the research context, it discussed the theoretical concepts, and presented a basic conceptual

model. Furthermore, it discussed the research questions, research objectives, and research approach.

Based on a discussion of the literature of international R&D, chapter 2 provides essential insights into the

international organization of R&D by multinational firms and provides a conceptual model of how

international R&D subsidiaries absorb external knowledge (sub-questions 1, 2).

Chapter 3 discusses the concept of knowledge. Second, based on practical testing of the basic analytical

model, it provides a conceptualization of the knowledge absorption process. Together with a discussion of

coordination mechanisms, a final analytical framework for the case studies is developed.

Chapter 4 reviews a selection of the literature of coordination mechanisms for absorptive capacity. The

insights from this review serve as a reference for the empirical findings of the case studies (sub-question 3).

Chapter 5 discusses the methodological aspects of the case studies, including the case selection and

interview method and research validity.

Chapter 6 introduces the case studies at the four companies. The functioning of the international R&D

organization and the knowledge absorption by the R&D centers in general are discussed, as well as the

R&D developments in the emerging economies. Also, the ‘emerging economy’ case studies are introduced.

Based on the case studies, important insights were derived to answer the sub-questions, additional to the

theoretical findings. Section 6.10 discusses additional observations about the process of external knowledge

absorption by the international R&D organization (sub-question 2). Section 6.11 discusses the knowledge

absorption process specific for the R&D centers in the emerging economies (sub-question 4).

Chapter 7 provides a cross-case discussion of the identified coordination mechanisms steering the five

knowledge absorption activities and relates the findings to the existing literature of absorptive capacity

(main research question).

Chapter 8 concludes this thesis with a recapitulation of the most important findings and a discussion of the

theoretical and managerial implications.

Appendix 1 provides the interview protocol that was applied for the case studies.

The full case study reports of Unilever, DSM, AkzoNobel and Philips are provided in appendices 2,3,4 and

5 respectively.


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Chapter 2

The international R&D organization and absorption of external knowledge: a

review and conceptual model

2.1 Introduction

This chapter discusses important contextual insights to understand the nature of the knowledge absorption

processes by the foreign R&D centers of multinationals. First, section 2.2 discusses the most important

functions of the R&D organization. Section 2.3 provides insights into the structural organization of

international R&D by multinationals and for the four companies of this research. Section 2.4 discusses how

foreign R&D centers with different subsidiary mandates are involved in the absorption of external

knowledge. Finally, a conceptual model about the absorption of external knowledge by the foreign R&D

subsidiaries is provided in section 2.5.

2.2 The functions of the R&D organization

Research and Development (R&D) departments are at the heart of the product and process innovations of

many multinational firms. Traditionally, the R&D organization is viewed as a ‘generator’ of new

knowledge. This vision is reflected in the OECD Frascati Manual (2002) as follows: “Research and

experimental development comprise creative work undertaken on a systematic basis in order to increase the

stock of knowledge, including knowledge of man, culture and society, and the use of this stock of

knowledge to devise new applications (OECD 2002).

Even though the ‘R’ and ‘D’ aspects of the department are typically mentioned in one breath, they are

basically different. Development is the process of creating new products and processes that do have

commercial value, through the application of currently available platforms of scientific knowledge

(Medcof, 1997; Von Zedtwitz & Gassmann, 2002). The development function can be regarded as a process

function, responsible for the development of a specification into a producible product concept. Research is

defined as the process of discovering new scientific knowledge that has the potential to serve as a platform

for the subsequent development of manufacturing processes and commercially viable products. It is not

generally expected that the research outputs will have immediate commercial value. The research function

is a supporting one. Its support can be given to the directors, to the product market policy function which

needs research into new technologies or products, to development which needs basic solutions to be used in

a product oriented development, or to manufacture if its preparation needs basically new methods and

technologies (Vorstman, 1993).


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The second face of R&D

As was argued in the introductory chapter, in addition to the traditional role of R&D as a generator of new

knowledge, the R&D organization also enables a firm to absorb new knowledge from outside the firm, such

as from universities, research organizations and other firms (Cohen & Levinthal, 1989; 1990). The notion

that external knowledge sources can create significant value and that internal R&D is needed to claim a

portion of that value is also a key element of the ‘open innovation’ paradigm as popularized by Chesbrough

(2003) and has become increasingly dominant. The coordination mechanisms that may be applied by an

R&D organization to absorb externally developed knowledge will be discussed in Chapter 4.

2.3 The organization of international R&D

Multinational firms typically have multiple subsidiary centers world-wide performing R&D functions. The

focus of these centers may be on ‘R’, ‘D’, or both. Von Zedtwitz and Gassmann (2002: 575) provide a

classification of four archetypes of R&D organization, which allows for a better understanding of the

organization of R&D by the companies of the present research. Their classification is especially valuable

since it makes a distinction between ‘R’ and ‘D’ (as discussed above) in reference to their

internationalization drivers. The classification is compared to other studies and discussed below:

• National treasure R&D: both research and development are located at the firm’s home base. R&D

may be kept at home because this way, core technologies are easier to control. Another reason

may be that the necessary technical or scientific competences are not available elsewhere, or that a

minimum critical mass of R&D capabilities is important (see Argyres & Silverman, 2004).

• Technology driven R&D: Dispersed research and domestic development. In technology-driven

companies, research is generally more internationalized than development. Access to local

centers-of-excellence for scientific knowledge and the relative scarcity of scientific personnel at

home drives a substantial share of the technology identification and creation process abroad (see

also Kuemmerle, 1997; 1999). Development remains centralized for scale effects or for protective

or other reasons.

• Market driven R&D: Domestic research and globally dispersed development. Companies in this

category have typically followed the ‘call of the market’. Business development is dominated by

customer demands and not by scientific exploration.

• Global R&D: Dispersed research and dispersed development. These companies aim for global

coordination of their R&D activities through integrated R&D networks. Research is located where

there is high-quality scientific input expected from centers-of-excellence (see Box 1 below). At the

same time, development labs conform to local demands and standards.


27

Figure 4 The organizational structures of internationalized R&D (Von Zedtwitz & Gassmann, 2002)

The structural organization of international R&D by the companies of this research

The companies of the present research (i.e. Unilever, DSM, AkzoNobel and Philips) all have multiple R&D

centers world-wide. The focus of these centers is on R, D or on both and therefore all four companies fall

within the ‘global R&D’ category. Importantly, as Von Zedtwitz & Gassmann point out, through these

global R&D networks, local science can be quickly absorbed and adapted for utilization elsewhere within

the firm, and single development centers can take the lead to prepare products for global market launch. At

the same time, as Reger (2004) argues, managing R&D in this environment is significantly more complex

and more costly than in the other three R&D structures. Among the four companies of this research, units

with a development focus are typically more widespread than research centers (as will be discussed in the

case studies, Chapter 5). A reason therefore is that for the research activities typically technical/scientific

‘critical mass’, as well as access to scientific clusters are required (see also Reger, 2004; Von Zedtwitz &

Gassmann, 2002).

2.4 R&D subsidiaries and knowledge absorption

As argued above, the four companies of this research all have multiple R&D centers world-wide, that may

focus on research work, development work, or both. As discussed in the introductory chapter, apart from

creating new knowledge in-house, the international R&D centers play a key role as absorbers of external

knowledge that may subsequently be exploited by other parts of the firm. However, not all R&D centers are

equally involved in contributing to the firm’s innovation processes and in the absorption of external

knowledge. To clarify this issue, this section discusses the differences in subsidiary R&D mandates and

their evolution over time.


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A common classification of the different types of mandates of R&D subsidiaries is provided Nobel and

Birkinshaw (1998). They identify three main categories: the local adaptor, the international adaptor and the

international creator. Combining this categorization with additional insights from the R&D literature these

different mandates and the implications for external knowledge absorption are discussed in the following:

• The local adaptor helps the local producing unit to assimilate and effectively utilize the existing

mainstream technology of the MNC, is always local in scope and has a rather limited development

mandate. The local adaptor can thus be seen as a technical support center and has no significant

research or product development mandate. In recent decades, this adaptation role has become less

common and foreign subsidiaries more often play a role in technological innovation (Pearce,

1989).The role of the local adaptor is not to acquire external technical knowledge, nor to develop

knowledge that can be used by the rest of the company.

• The international adaptor “provides backup for a local producing unit, but aspires to a more

fundamentally creative role than a support laboratory, seeking to endow its subsidiary with some

kind of product autonomy” (Nobel & Birkinshaw, 1998:482). The international adaptor has

responsibility for developing new and improved products specifically. With the globalization of

manufacturing, many operations now have regional or global mandates, so development

responsibilities are likewise international in scope. The international adaptor units mostly build on

existing in-house technical competences. They are involved in the absorption of market-related

knowledge from the external environment, yet not significantly of scientific/ technical knowledge

(Kuemmerle, 1997).

• The international creator R&D center “provides inputs into a centrally defined and coordinated

R&D program, with no necessary connection with host country producing operations” (Nobel &

Birkinshaw, 1998:482). The distinguishing characteristics of competence-creating R&D centers

are the focus both on research and development, including more complex development work, in

contrast to the minor improvement and adaptation responsibilities of international adaptors. They

have linkages primarily to corporate and divisional R&D, not local manufacturing.

Concluding, international R&D centers differ in their focus on R or D, the extent to which they contribute

new technical knowledge to the rest of the organization, and how much they are engaged in the absorption

of new external technical knowledge, as summarized in Table 1.


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Table 1 Creator and adaptor R&D centers and knowledge absorption.

Focus on ‘international creator’ R&D centers

Clearly, of the three types, the international creator is the most important in terms of the research activities

it performs and the development of new concepts, processes and products. Importantly, given the

importance of external knowledge to perform these tasks, the international creators are also dominant in

terms of the absorption of external technical knowledge that is at the basis of the development of new

technological competences (Kuemmerle, 1997; 1999). This also illustrated by the finding that R&D units

that provide more R&D inputs to the company typically have more communication with external

institutions such as local universities, customers, and suppliers (Nobel & Birkinshaw, 1998). The present

research therefore focuses on the ‘international creators’: those subsidiary R&D centers that are both

involved in the absorption of external technical knowledge and contribute to the development of new

technical competences for the firm.

The development of R&D mandates

As discussed in chapter 1, this research focuses on the emerging economies as increasingly sophisticated

sources of new knowledge. The external knowledge environments of these countries are considered to

become more interesting for the R&D centers to tap into. In the following it is discussed how this may

result in the evolution of adaptive R&D centers to become competence creating R&D centers.

Research has confirmed that R&D subsidiary roles are not static, but may evolve over time. The qualities of

the location of the R&D subsidiary are an important determinant of whether or not it may achieve the

competence-creating output of an ‘international creator’ (e.g. Almeida & Phene, 2004; Cantwell and

Mudambi, 2005). Von Zedtwitz and Gassmann (2002) established that the focus of a subsidiary’s tasks may

shift from D to R, or broaden to include a wider spectrum of R&D tasks, as a result of changing local

market conditions and developments in the local knowledge environment. An increase in market demand

Type of R&D center Focus Contributor of new

technical knowledge to

the firm

Involved in absorption

of external technical

knowledge

Local adaptor Technical support Low Low

International adaptor Development Low Low

International creator

(focus of this research)

Research,

Development, or both

High High


30

has a positive correlation to the investments in adaptive development work, while improvements in the

local knowledge environment are a driver for the expansion of research activities. As a result, the

importance of the R&D center as a contributor of new knowledge to the company may also change over

time (i.e. from an adaptor to a creator or vice versa). Under excellent market and local knowledge

conditions, R&D centers may evolve into so-called global centers of excellence (see box 1). In addition to

the identified location-related aspects, the evolution of subsidiary mandate also depends upon a

combination of and an interaction between local initiative and parent company assignment (Birkinshaw &

Hood 1996, Björkman, Barner-Rasmussen & Li, 2004; Frost, Birkinshaw & Ensign 2002).

Box 1 The rise of Centers of Excellence

The rise of so-called centers of excellence (CoE) is a major development within the organization of

international R&D among multinational companies. Reger (2004) defines a CoE as “a set of superior

competencies in research and technology possessed by a particular organizational unit, the use of these

competencies by other parts of the firm, and the explicit recognition of this unit as an important source

of technological knowledge creation” (2004:55). CoEs typically have important research competences

in particular fields of technology and are often located at technology clusters consisting of research

institutes and other companies. Clearly, these CoEs have an international creator role. Typically, the

formation of CoEs is the result of a process of international decentralization of R&D activities,

followed by a ‘recentralization’ into more centralized foreign CoEs. Among many multinationals, over

the last decades the international R&D organization has developed into a network consisting of a

limited number of CoEs, with a larger number of minor R&D centers with (international) adaptor roles.

Often, in this process the historically dominant position of the home country R&D base is being

‘downplayed’, as is clearly visible at AkzoNobel, for example. In those cases, the traditional home-base

R&D center may evolve into one of the multiple global Centers of Excellence for (a more limited set

of) particular domains. Especially regional innovation systems represent a fertile environment for new

ideas and businesses, where competition among concepts and those entrepreneurs promoting them

provides an ongoing forum for the exchange of new ideas and creation of knowledge, challenging the

existing order. This partly also explains the attractiveness of these localities for advanced R&D

activities of MNCs (Frost, Birkinshaw & Ensign 2002; Kuemmerle, 1999).


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2.5 Conceptual model: knowledge absorption via international R&D subsidiaries

As discussed in 2.4, R&D centers with a creator function play a dominant role in the absorption of external

technical / scientific knowledge. This knowledge is taken to reside at different companies and research

institutes that together constitute the foreign knowledge environment. This thesis only focuses on

knowledge from a local origin: knowledge originating from within the foreign country’s national borders.

Once the knowledge has been acquired, the foreign R&D site may use it in its R&D operations to create

new products, processes and technologies (Chapter 3 discusses the knowledge absorption process in more

detail). Secondly, the acquired knowledge may be transferred to other organizational disciplines at the same

location or elsewhere in the world. This includes other R&D sites (such as a center of excellence for further

technology development, or adaptor R&D sites for local product adaptations), marketing (e.g. to develop

new product ideas) or manufacturing (e.g. to develop a new production process) (Kuemmerle, 1997; 1999).

As Schulz argues (2001: 661): “Knowledge creation by individuals or subunits is of limited value if they do

not share the resulting knowledge with other parts of the organization”. Also, Miller, Fern and Cardinal

(2007) empirically established that transferring knowledge across divisions in a diversified firm cultivates

innovation. Indeed, one of the major reasons why multinational companies exist is their ability to transfer

and exploit knowledge more efficiently in the intra-corporate context than through the market (Gupta &

Govindarajan, 2000). Notwithstanding the importance of the intra-company exploitation of knowledge

acquired by the foreign R&D centers, for reasons of focus this study will investigate the first step only: the

absorption of local knowledge by foreign R&D centers. The concept of ‘knowledge’ will be discussed in

section 3.2.

Figure 5 Tapping into external knowledge by multinational company via the foreign R&D centers


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2.6 Conclusion

This chapter discussed important contextual insights to understand the nature of the knowledge absorption

processes by the foreign R&D centers of multinationals.

• Section 2.2 discussed important differences between the functions of research and of development

within the organization. Aside from its function as a knowledge ‘generator’, the R&D organization

enables a firm to absorb new knowledge from outside the firm, such as from universities, research

organizations and other firms.

• In section 2.3, the international organization of R&D by the companies of the present research was

analyzed based on a categorization of four archetypical structural forms. Unilever, DSM,

AkzoNobel and Philips all have a network of multiple R&D centers world-wide. The focus of

these centers is on R, D or both. In general, among the four companies, units with a development

focus are more widespread than the research centers.

• Section 2.4 discussed how international R&D centers may take on different mandates: ‘creator’

R&D centers are important contributors of new knowledge to the company, while ‘adaptors’

largely make use of knowledge that already exists within the company. The ‘creator’ R&D centers

are also the most important in terms of the absorption of external technical knowledge that is at the

basis of the development of new products and processes, which is the reason to focus on this type

of R&D centers. Importantly, the mandates of subsidiary R&D centers are not rigid, but often

develop over time and the increasing sophistication of the local knowledge environment is an

important driver for the establishment of or evolution into ‘creator’ R&D sites.

• Section 2.5 conceptualized the knowledge absorption process by the multinational firm via its

foreign R&D centers as a two step process: first the foreign R&D center absorbs (i.e. values,

assimilates and applies) knowledge from its external environment, and second this knowledge can

be transferred within the organization. The focus of the present research is on the first step.


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Chapter 3

Coordination mechanisms for external knowledge absorption:

a review and analytical framework

3.1 Introduction

Given the centrality of ‘knowledge’ to this research, section 3.2 discusses the concept of knowledge for the

context of this research. Section 3.3 and 3.4 constitute the building blocks for the analytical framework for

the case studies. Section 3.3 provides a discussion and reconceptualization of the knowledge absorption

process. Section 3.4 provides a definition and categorization of coordination mechanisms. The resulting

analytical framework for the case studies is provided in 3.5.

3.2 Knowledge

Knowledge and organizations

Since the classical Greek, the question of defining knowledge has been the driver of ongoing

epistemological debate. Clearly, knowledge is a complex and abstract concept that is used differently in

different contexts. This thesis is especially interested in knowledge that is of importance to organizations,

and the R&D organization in particular. This section therefore focuses on theories of organizational

knowledge. Many definitions of knowledge refer to the concepts know-how and information. For example,

Grant and Baden-Fuller (1995: 18) use the following definition: “knowledge comprises information,

technology, know-how, and skills”, a definition that is considered to be appropriate for the context of the

present research.

Already in the 1950s economists empirically established the growth of (technological) knowledge as an

important source of economic growth (Solow 1957). The value of knowledge for organizations was further

emphasized by Drucker (1993), who called knowledge a production factor together with capital, labor and

materials. In line with the increased importance of and interest for knowledge for organizations, the so-

called knowledge-based theory of the firm has been developed in the strategic management literature. As

an organizational theory inspired by the Resource Based View (Penrose, 1959), the knowledge-based view

takes knowledge and knowledge processes to explain the structure and performance of organizations (e.g.

DeCarolis & Deeds 1999; Dierickx & Cool, 1989; Gupta & Govindarajan, 2000; Grant, 1996; Kogut and

Zander 1992; Nonaka 1994; Nonaka & Takeuchi 1995; Spender 1996). Since knowledge-based resources

are usually difficult to imitate and socially complex, the knowledge-based view of the firm posits that these

knowledge assets may produce long-term sustainable competitive advantage. The difficulty to transfer tacit

knowledge, or ‘stickiness’ (Von Hippel, 1994) makes it difficult to imitate or substitute by competitors,

which may contribute to the establishment of a knowledge-based competitive advantage. Notwithstanding

that knowledge is often viewed as residing in individuals (Grant, 1996), theorists of the knowledge-based


34

view emphasize the collective characteristics of knowledge in organizations: the capabilities of an

organization reside not only in the knowledge of individuals, but particularly in the way this knowledge is

integrated through organizational processes, and, ultimately into products (Kogut & Zander 1992; Grant

1996).

Types of knowledge

Knowledge in organizational research is often characterized based on taxonomies, of which the most

frequently used will be discussed here. Nonaka (1994), drawing on the work of Polanyi (1967), discusses

the tacit and explicit dimensions of knowledge. This distinction has been frequently adapted by

management scholars. Explicit knowledge is or can be articulated, codified, and transmitted in a symbolic

form or natural language. An example of explicit knowledge is an owner’s manual of a new mp3-player,

containing knowledge on the appropriate operation of the product. Tacit knowledge on the other hand is

rooted in action, experience, and involvement in a specific context. Tacit knowledge is difficult to express

and to communicate to other people by means of symbols or natural language (Szulanski, 1996). An

example of tacit knowledge is knowledge of the best means of approaching a particular customer, e.g. using

flattery, using a hard sell, or a no-nonsense approach (example adapted from Alavi & Leidner, 2001). It is

important to note that tacit and explicit are mutually dependent and reinforcing qualities of knowledge,

since tacit knowledge forms the background necessary for assigning the structure to develop and interpret

explicit knowledge (Polyani, 1967 c.i. Alavi & Leidner, 2001). As addressed in the previous paragraph, a

second common dichotomy is the view of knowledge as existing in the individual or the collective (Nonaka

1994). Individual knowledge is created by and exists in the individual, while social knowledge is created by

and inherent in the collective actions of a group. A third important characteristic is knowledge complexity,

that can be defined as the number of interdependent technologies, routines, individuals, and resources

linked to a particular knowledge or asset (Simonin, 1999).

Knowledge characteristics and absorptive capacity

Several studies have focused on relations between the characteristics of external knowledge and the ability

of an organization to absorb that knowledge. Based on the literature review on absorptive capacity (Chapter

4), it can be concluded that apart from the organizational factors, knowledge characteristics are a highly

important variable to determine the success of a knowledge absorption process. As Lane et al. (2006) argue

based on a review of 289 absorptive capacity papers, the primary knowledge characteristic studied is

knowledge content (the subject of the knowledge). Factors such as common skills, strategy, knowledge

bases, similar culture and similar cognitive structures have been found to enhance knowledge acquisition

and assimilation. The second commonly examined knowledge characteristic is tacitness. The fact that tacit

knowledge is embedded in complex interactions, processes and routines results in its difficulty to absorb by

other organizational units (Lane et al., 2006; Szulanski, 1996; Von Hippel, 1994). Third, knowledge

complexity has been the subject of several studies. Obviously, simpler knowledge is easier to absorb than

complex knowledge. To absorb complex knowledge an organization needs to absorb more areas of


35

knowledge content, as well as understand the linkages between the different content areas (e.g. Lane et al.,

2006; Simonin, 1999). As argued by Van den Bosch et al. (1999), organizational routines may be

developed to enhance the absorption of complex external knowledge.

Knowledge in the context of this research

This research focuses on the absorption of local scientific and/or technical knowledge by R&D centers

from external organizational sources11. As discussed, this knowledge may comprise of information,

technology, know-how, and skills and it is used by the R&D discipline for the development of new

technologies, processes and products. The knowledge may be of a tacit nature, embedded in people, or

explicit, such as articles or patents. Based on the literature it is argued that the most dominant

organizational sources of external technical knowledge for the R&D organization include universities, other

research institutes and other companies such as peers, competitors, suppliers and clients (Chesbrough,

2003; 2006; Kuemmerle, 1997; 1999). ‘Local’ refers to the geographic proximity. For this thesis, a broad

definition is taken: local refers to knowledge generated within the country’s national borders.

3.3 Reconceptualizing external knowledge absorption

As discussed in the introductory chapter, Cohen and Levinthal’s (1990) concept of ‘absorptive capacity’ is

applied in this research to study the knowledge absorption process of the foreign R&D subsidiaries, given

its academic popularity and ‘completeness’: to understand a firm's absorptive capacity, one should focus

not only on the relationship between the firm (or an organizational unit) and external organizational sources

of knowledge, but also on the internal organization of the innovation process, that determines the

exploitation of technological knowledge within the organization (Argyres & Silverman, 2004; Cohen &

Levinthal, 1990; Jansen et al, 2005; Zahra & George 2002).Consequently, knowledge absorption is defined

as a combination of the valuation, assimilation and application of external knowledge.

This thesis acknowledges the reconceptualization of Cohen & Levinthal’s (1990) model by Zahra &

George (2002). Zahra & George (2002) distinguish between potential and realized absorptive capacity.

Potential capacity refers to the acquisition and assimilation of external knowledge, and realized absorptive

capacity entails the transformation and exploitation. In line with Todorova & Durisin (2007), one can argue

that this reconceptualization has some important flaws, including the omission of ‘recognizing the value’ of

new knowledge as a critical capacity. For this reason the decision was made to ‘stick to the classics’ and

use Cohen and Levinthal’s seminal article as the basis for the study of knowledge absorption.

11 Having access to non-technical knowledge, such as market and industry knowledge is also very important for the R&D

organization. These types of knowledge may be acquired directly by the R&D centers or via other organizational disciplines, such as

sales, marketing, finance, etc. (Kuemmerle, 1997). Notwithstanding the importance of non-technical knowledge to the R&D

organizations, given the need to focus this thesis will only address the absorption of technical and scientific knowledge by the R&D

centers.


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Redefining knowledge assimilation

Using Cohen and Levinthal’s (1990) conceptualization of knowledge absorption as a starting point, it

became clear from the initial two interviews that the connotations of participating R&D managers with the

concept of ‘assimilation’ were ambiguous. Therefore, the assimilation activity has been redefined based on

these initial interviews and the literature as a combination of three activities, namely the acquisition,

transformation and transfer of knowledge.

• Acquisition: The actual inflow of external knowledge into the organization was seen by the

managers as a key activity following the estimation of the value of that knowledge. In line with

Zahra and George (2002), this thesis argues this knowledge inflow is called ‘acquisition’.

• Transformation: After the acquisition, the external knowledge is typically transformed by the

acquiring R&D site into a different form, useable by other disciplines within the firm.

• Transfer: Several managers emphasized how the acquired external knowledge needs to be

effectively shared or transferred within the R&D center.

In the following, the five main activities of the knowledge absorption process are discussed. Particular

attention is paid to the three activities that substitute the assimilation activity.

Figure 6 The five knowledge absorption activities (based on Cohen & Levinthal, 1990 and others).

1 Value external knowledge

Through its R&D activities, a firm develops organizational knowledge about certain areas of science and

technology and how those areas relate to the firm’s products and markets (Cohen & Levinthal, 1990; Lane

et al., 2006). This results in the ability to identify and recognize the value of external knowledge upon

which the decision can be made whether or not to acquire the knowledge.

2 Acquire external knowledge

To be able to make use of the valuable external knowledge, it must somehow be acquired by the R&D

center first. The literature of absorptive capacity argues that the firm develops processes, policies and

procedures to acquire external knowledge (Cohen & Levinthal, 1990; Lane et al., 2006; Zahra & George,

2002). However, this literature is not very explicit about how external knowledge may actually be acquired

by the firm. How the knowledge is acquired will therefore be explored in the case studies.

Recognize the Value of external knowledge

Acquire external knowledge

Transform acquired knowledge

Transfer acquired knowledge

Apply acquired knowledge


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3 Transform acquired knowledge

In line with Zahra & George (2002), this thesis argues the transformation of the acquired knowledge by the

R&D units into a useable form is the second important capability underling the assimilation process.

“Transformation denotes a firm’s capability to develop and refine the routines that facilitate combining

existing knowledge and the newly acquired knowledge. This is accomplished by adding or deleting

knowledge or simply by interpreting the knowledge in a different manner” Zahra & George (2002:190).

The process of combining external and internal knowledge is a highly operational issue, which is typically

embedded in the daily operations in distinct units in the multinational organization. Nonaka (1994)

emphasizes the conversion of tacit into explicit knowledge (and vice versa) as an important aspect of

knowledge transformation.

4 Transfer acquired knowledge

The sharing or transfer of knowledge within the R&D center was identified in the initial interviews as a

third important element of knowledge assimilation. Zahra and George (2002) argue that effective internal

knowledge sharing is a critical part of absorptive capacity. As Carlile (2004) argues, ‘knowledge transfer’

is the most common label used to describe the movement of knowledge in organizations. The concept has

its basis in the information processing approaches to boundaries in organization theory (Lawrence and

Lorsch 1967). Although intra-organizational knowledge transfers are typically seen as ‘easier’ than

knowledge exchanges with external firms, Teece (1977) already pointed at the difficulties and related costs

of internal knowledge transfers are often substantial. This is especially the case for tacit knowledge, which

is difficult to codify and teach. Of particular importance for this research is the fact that cultural barriers

may obstruct the effective transfer of knowledge within the R&D centers (Bhagat, Kedia, Harveston and

Triandis, 2002). Transfers are also at the basis of the subsequent ‘flows’ to other organizational units, such

as other R&D units to the marketing and manufacturing disciplines, yet this is beyond the scope of this

research.

5 Apply acquired knowledge

As discussed, the application of knowledge can take several forms. In general it can be stated that the R&D

centers uses the transformed knowledge to create new technologies, processes and products. Application

thus refers to incorporating transformed knowledge into operations (Zahra & George, 2002: 190). Apart

from direct commercial applications, other important outputs have been discussed in the literature, which

are called ‘knowledge outputs’ by Lane et al., 2006. They argue that firm performance is influenced by a

combination of commercial and knowledge outputs. Examples of commercial outputs include products,

services and intellectual property. Knowledge outputs can be categorized into general, scientific, technical

and organizational outputs (Lane et al. 2006: 858). This importance of outputs with an indirect commercial

application is confirmed by other literature. For example, Cohen & Levinthal (1990) addressed the


38

development of internal routines and the ability to forecast technological trends, while Van den Bosch et al.

(1999) underscored the ability to maneuver strategically as an important outcome of absorptive capacity.

3.4 Coordination mechanisms

Having defined the five activities of the knowledge absorption process by subsidiary R&D centers, the aim

of this research is to understand which coordination mechanisms may be important to steer these activities.

In their review study on coordination mechanisms in organizational research, Martinez & Jarillo (1989:

490) define coordination mechanisms as “any administrative tool for achieving integration among different

units within an organization”. The study lists eight mechanisms identified by past researchers that “could

be divided roughly into two groups: structural and formal mechanisms, and other mechanisms, less formal

and more subtle” (1989: 490), as discussed in the following table.

Structural and formal mechanisms

Departmentalization or grouping of organizational units, shaping the formal structure.

Centralization or decentralization of decision making through the hierarchy of formal authority.

Formalization and standardization: written policies, rules, job descriptions, and standard procedures,

through instruments such as manuals, charts, etc.

Planning: strategic planning, budgeting, functional plans, scheduling, etc.

Output and behavior control: financial performance, technical reports, sales and marketing data, etc.,

and direct supervision.

Other mechanisms, more informal and subtle

Lateral or cross-departmental relations: direct managerial contact, temporary or permanent teams, task

forces, committees, integrators, and integrative departments.

Informal communication: personal contacts among managers, management trips, meetings,

conferences, transfer of managers, etc.

Socialization: building an organizational culture of known and shared strategic objectives and values by

training, transfer of managers, career path management, measurement and reward systems, etc.

As will follow from the literature review on coordination mechanisms for absorptive capacity for different

contexts in Chapter 4, the coordination mechanisms that have been the subject of these studies can be

meaningfully classified into Martinez and Jarillo’s eight categories. Therefore, this categorization will also

be used as a framework for the case studies of the present research.


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3.5 Analytical framework: Coordination mechanisms for knowledge absorption

Combining the revised conceptualization of knowledge absorption with the categorization of coordination

mechanisms, a final analytical framework is presented below. This framework serves as a basis to study the

coordination mechanisms for knowledge absorption by the foreign R&D centers of the four multinational

companies of this research.

Figure 7 Research model: identifying key coordination mechanisms for knowledge absorption

3.6 Conclusion

• As discussed in section 3.2, many different definitions and classifications of knowledge exist. For

the context of the present research, the definition “knowledge comprises information, technology,

know-how, and skills” of Grant and Baden-Fuller (1995: 18) is considered to be appropriate.

• Management scholars widely agree about the importance of knowledge (and its successful

management) for the performance of organizations.

• This research focuses on the absorption by R&D centers of technical and scientific knowledge.

Knowledge is taken to comprise information, technology, know-how, and skills.






Different types of coordination mechanisms

• Departmentalization

• Centralization and decentralization

• Formalization and standardization

• Planning

• Output and behavior control

• Lateral or cross-departmental relations

• Informal communication

• Socialization


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• In section 3.3, Cohen & Levinthal’s ‘assimilation’ activity (as one of the three knowledge

absorption activities) was replaced by a combination of knowledge acquisition, transformation and

transfer. The resulting conceptualization of knowledge absorption, as a combination of the

valuation, acquisition, transformation, transfer and application of external knowledge was

discussed.

• Section 3.4 provided a definition and categorization of eight types of coordination mechanisms

based on Martinez & Jarillo (1989). They discuss five formal and three informal categories of

mechanisms. The formal mechanisms are: departmentalization, centralization and decentralization,

formalization and standardization, planning, and output and behavior control. The informal

mechanisms are lateral or cross-departmental relations, informal communication and socialization.

• The analytical framework for the case studies was provided in section 3.5.


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Chapter 4

Coordination mechanisms for absorptive capacity: a literature review

4.1 Introduction

This chapter aims to explore the different academic interpretations of absorptive capacity, its coordination

mechanisms and its outcomes based on a review of a selection of the absorptive capacity literature12. As

will be argued in section 4.2, absorptive capacity and its coordination have been studied in several different

contexts that are relevant to this study. Sections 4.3, 4.4 and 4.5 will discuss a well-known body of

literature of absorptive capacity, focusing on the firm-level; the inter-organizational level and the intra-firm

level respectively. Organizational outcomes are discussed in 4.6. Final reflections on the literature are

provided in 4.7.

The identified coordination mechanisms of absorptive capacity are presented in italics. The review also

includes a number of factors that were identified to have an important effect on an organization’s

absorptive capacity, but which should not be regarded as ‘coordination mechanisms’ (e.g. the availability of

prior related knowledge). In those cases, this will be explained.

4.2 Three levels of analysis

From the selection of the literature of absorptive capacity it follows that studies have focused on absorptive

capacity in different contexts. For this thesis it is useful to organize the literature according to the different

organizational levels of analysis. In section 3.3, the external knowledge absorption process by the firm

through its international R&D center can be taken as the sum of an external and an internal aspect: first the

foreign R&D center absorbs external knowledge, whereupon other organizational units may subsequently

absorb this internalized knowledge from the R&D center. Taken together, the internal and external aspects

constitute firm-level absorptive capacity (the absorption of external knowledge by the firm as a whole): this

is the first level of analysis. The external aspect of knowledge absorption is typically studied as the result of

interactions by the firm with other organizations. This second level is referred to as the inter-organizational

level of analysis. Given that R&D is more and more often the result of collaborative activities with external

parties, this context is clearly important. The third category of literature focuses on absorptive capacity at

the intra-firm level of analysis: the absorption of internal knowledge from one unit within the firm by

another.

12 Given the vast number of papers on absorptive capacity (see Lane, et al., 2006), this review cannot be exhaustive. A selection has

been made of well-known studies published in A-journals, that were judged to be theoretically and/or empirically relevant for the

context of this research.


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Figure 8 Three levels of absorptive capacity

4.3 Absorptive capacity at the firm level

R&D investments and other forms of prior knowledge

In an article preceding their seminal 1990 paper, Cohen & Levinthal (1989) focus on the role of R&D in

organizational learning and innovation. The article argues that firms invest in R&D not only to generate

innovations, but also to learn from competitors and non-industrial knowledge sources such as universities

and government labs. Until then, technological knowledge was considered to be a more or less public good

that could be utilized by firms without much cost. By pointing at the investments made in R&D as a

prerequisite to easily acquire external knowledge, Cohen and Levinthal lay the basis for the

conceptualization of absorptive capacity as the result of a firm’s prior related knowledge and its

investments in R&D in particular. In their 1990 article Cohen and Levinthal build on socio-cognitive theory

to provide explanations for the organizational processes determining the three abilities of absorptive

capacity. The authors argue that absorptive capacity is a result of a firm’s prior innovation and problem

solving and that absorptive capacity ultimately depends on the level of absorptive capacity of the individual

employees. Importantly, the article also underscores the ability of the organization to internally transfer

acquired knowledge to be exploited by the part of the organization that does this best. By itself, knowing

where and how knowledge can be effectively used within the organization can thus be regarded as

important prior knowledge that increases the firm’s absorptive capacity.

Van den Bosch et al. (1999) also emphasize the relationship between absorptive capacity and the level of

prior related knowledge, which they view as a positive feedback loop: “an increase in absorptive capacity

causes a change in prior related knowledge in such a way that, ceteris paribus, the absorptive capacity

increases”. Importantly, they note such a feedback loop may not always lead to positive outcomes. “This is

in line with Levinthal's (1994) notion of a competency trap, created by the fact that firms may be blindsided


43

by new developments in the field because they focus on their prior related knowledge” (Van den Bosch et

al., 1999: 566).

Van Wijk, Van Den Bosch and Volberda. (2006) provide deeper insights into the effects of a firm’s prior

related knowledge on absorptive capacity. They distinguish between the breadth and depth of a firm’s

‘knowledge stocks’ (the concept of knowledge stocks is based on Argyres, 1996). The knowledge stock of a

firm can be understood as accumulated knowledge assets, which are internal to the firm. The depth

dimension is associated with specialist knowledge within a small domain, which increases the ability to

acquire, assimilate and exploit external knowledge within that domain. The breadth dimension of

absorptive capacity is related to generalist prior knowledge across a range of subject areas. Accordingly,

firms with a broad knowledge base are better able to absorb knowledge in domains that are different, but

related to what is currently known.

Prior related knowledge, whether conceived in the form of knowledge stocks or as R&D investments has

thus been regarded by several key authors as one of the most important determinants of absorptive capacity

at all units of analysis (i.e. the firm, intra-firm and inter organizational level). However, prior knowledge

per se can hardly be regarded as a coordination mechanism, as it is not clear which organization

mechanisms are responsible for its development. In those cases where R&D investments are taken as a

proxy for absorptive capacity (such as Tsai, 2001), this can be regarded as a planning mechanism.

In their review study on absorptive capacity literature Lane et al. (2006) question the appropriateness and

validity of prior knowledge and R&D intensity in particular as the dominant proxy for absorptive capacity

and in line with Van de Bosch et al., 1999 they stress the need for research to focus on organizational

factors. The significance of this point is illustrated by Lane & Lubatkin (1998), who demonstrated that in

comparison to the similarity of knowledge bases, other organizational characteristics, in particular

similarity in organizational structure and compensation practices, explained much more variance13.

Organizational form

The case-study based research by Van den Bosch et al. (1999) explores how organization form and the

fims’s ‘combinative capabilities14’ interact over time and what their combined effect is on the level of a

firm's absorptive capacity. They discern different dimensions of absorptive capacity: 1) the efficiency

dimension refers to the cost and economies of scale perspective, 2) the scope dimensions refers to the

breadth of component knowledge, and 3) the flexibility dimension refers to the extent to which firms can

access additional and reconfigure existing component knowledge. The authors argue that an organization’s

13 They found that the traditional measure of R&D spending explained only 4% of the variance in interorganizational learning, while

the knowledge similarity variables explained another 17% and the five knowledge-processing-similarity variables

explained 55% of the variance. 14 Combinative capabilities “synthesize and apply current and acquired knowledge” (Van den Bosch et al, 1999: 556) and are taken to

consist of systems capabilities, coordination capabilities and socialization capabilities.


44

efficiency, scope, and flexibility dimensions of absorptive capacity vary depending on the particular

organizational form (i.e. the functional, divisional, and matrix forms) of the firm. The firm adopts its form

in response to characteristics of the knowledge environment, and the matrix form is found to be most

positively related to absorptive capacity15.

Coordination capabilities, systems capabilities and socialization capabilities

Building on the distinction between potential and realized absorptive capacity by Zahra and George (2002)

and the framework of ‘combinative capabilities’ by Van den Bosch et al., (1999), Jansen, Van den Bosch

and Volberda (2005) empirically assessed the impact of specific coordinative capabilities for potential and

realized absorptive capacity. An important contribution of this study is their development and empirical

testing of constructs to measure potential and realized capacity16. Their results indicate that organizational

mechanisms they classify as coordination capabilities (i.e. cross-functional interfaces, participation in

decision making, and job rotation) primarily enhance a unit’s potential absorptive capacity, while

organizational mechanisms associated with socialization capabilities (i.e. connectedness and socialization

tactics) increase a unit’s realized absorptive capacity. Their results for systems capabilities (i.e.

routinization and formalization) are also interesting. Routinization was found to impede the flexible

incorporation of newly acquired and of existing knowledge, while “in contrast to making established

behavior tacit through routinization, codification efforts through formalization enhance a unit’s ability to

transform and exploit new external knowledge”.

4.4 Absorptive capacity at the inter-organizational level

The process and the coordination mechanisms of knowledge absorption by foreign R&D subsidiaries have

not received little attention in the literature. As an exception, a recent study by Mu et al. 2007 found that

the learning and innovation of U.S.-based subsidiaries are significantly influenced by their local

embeddedness, which “helps to increase awareness of local strategic knowledge and to access and acquire

it and thus improve subsidiary innovation.”(2007: 95). Also, top management team heterogeneity, and the

corporate entrepreneurial culture of their parent company were found to be important coordination

mechanisms for knowledge absorption and local innovative performance. The results also show that

subsidiary innovation positively influences outflow of knowledge from the subsidiary to the rest of the

MNC.

15 However, not for the efficiency dimension 16 In their attempt to extend and reconceptualize the construct of absorptive capacity, Zahra and George (2002) make a distinction

between potential and realized absorptive capacity and relate these dimensions to corresponding capabilities. Potential absorptive

capacity refers to the capabilities to acquire and assimilate external knowledge (i.e. efforts expended in identifying and acquiring new

external knowledge and in assimilating knowledge obtained from external sources), while realized capacity involves knowledge

transformation and exploitation, i.e. deriving new insights and consequences from the combination of existing and newly acquired

knowledge, and incorporating transformed knowledge into operations (Zahra & George, 2002: 190).


45

Collaborative practices with other companies have become a critical source of external knowledge for most

large firms (including the focal companies of the present research), which has resulted in a number of

studies on absorptive capacity at the inter-firm level of analysis (by focusing on alliances and joint

ventures). Several studies argue that apart from the existing knowledge base, the level of absorptive

capacity is at least partly attributable to similarities in organizational characteristics between the firms and

its partner firm. It is important to note these many studies take a two-way (instead of a one-way) learning

approach: both partners learn from each other. Based on their research among pharmaceutical–

biotechnology R&D alliances, Lane and Lubatkin (1998) found one firm’s ability to learn from another

firm depends not only on the similarity of both firms’ knowledge bases, but also on the similarities in

organizational structures, compensation policies and dominant logics. Based on this insight, they

reconceptualized the concept of absorptive capacity and proposed that absorptive should be viewed as a

dyad-level, rather than a firm level, construct which they call relative absorptive capacity. The similarity in

organizational structure (i.e. especially lower management formalization) and compensation systems is

related to a firm’s ability to assimilate new external knowledge, while the ability to commercialize new

external knowledge is depended on the proportion of the organizational problem solving set that is shared

with the partner.

In their study on absorptive capacity in international joint ventures (IJV), Lane, Salk and Lyles (2001)

found support for the existence and importance of relative absorptive capacity. For the understanding of

external knowledge, the relatedness of the businesses and the similarity of the problems and priorities with

which the participating companies are faced, are most important for the recognition of new knowledge.

They view the assimilation of (foreign parent) knowledge as a sensemaking process whereby the IJV

connects the new knowledge and to its existing knowledge. Flexibility and adaptability in organization

structures are important in facilitating this assimilation process, as well as a high level of training by the

foreign parent. Such training may help provide the context for large volume of knowledge acquired and its

connection to existing knowledge. Importantly, the study found a positive relationship between the level of

trust17 between the parent companies of an IJV’s and the IJV’s ability to learn from the foreign parents.

Although the present research focuses on knowledge absorption by western multinationals from emerging

economies, for local companies in these countries it is typically very important to be able learn the other

way around. From their study of 173 international joint ventures in Vietnam, Anh, Baughn, Minh Hang and

Neupert (2006) provide evidence linking the level of a firm’s absorptive capacity, the acquisition of

knowledge and performance. Apart from relatedness of initial knowledge bases, factors predicting

knowledge acquisition include investment in training, employees’ ability to learn, and joint participation by

17 “Trust entails having confidence that the other firm will refrain from exploiting your vulnerabilities, and will also contribute their

valuable knowledge to the IJV” (Lane et al., 2001: 1140).


46

foreign and local employees. Especially the acquisition of tacit knowledge was found to contribute

significantly to the performance of the international joint ventures.

4.5 Absorptive capacity at the intra-firm level

Absorptive capacity has also been investigated in research on knowledge flows between different units

within multinational firms. Tsai (2001) for example examined how an organizational unit may gain useful

knowledge from other units to enhance its innovation and performance. The study does not investigate

particular coordination mechanisms of absorptive capacity, but rather takes absorptive capacity, together

with the position within the intra-firm network, as a determinant of innovation and performance. R&D

intensity was taken as the proxy for absorptive capacity. The results indicate that centrally located

organizational units with high levels of absorptive capacity reach higher levels of innovative performance

as well as financial performance.

Minbaeva, Pedersen, Björkman, Fey and Park (2003) examine the linkages between the application of

specific HRM practices and the level of absorptive capacity at the subsidiary level. They suggest that

absorptive capacity should be conceptualized as a combination of employees' ability and motivation, since

both are needed to facilitate the transfer of knowledge from other parts of the MNC. Particular human

resources management practices, namely training, performance-based compensation, and internal

communication increase the ability and motivation of employees to transfer knowledge, enhancing a

subsidiary’s absorptive capacity.

Mahnke, Pedersen, and Venzin (2005) further explore the influence of HRM and knowledge management

practices on the development of a unit’s absorptive capacity and adopt the view that employee motivation

and ability are key to effective knowledge absorption Their results indicate that knowledge management

practices, such as corporate university, communities of practice, group benchmarking, learning systems

and rewards upon absorptive capacity and performance are positively related to a unit’s absorptive

capacity.

4.6 Organizational outcomes of absorptive capacity

The ability to value, assimilate and apply external (and internal) knowledge is assumed to have a positive

effect on the firm’s performance. The effect of absorptive capacity on different types of organizational

outcomes has been studied by several authors. For example, Cohen and Levinthal (1990) explicitly relate

absorptive capacity to the firm’s innovative abilities. This positive relation has been empirically affirmed

by Tsai (2001) and Mu et al. (2007). Similarly, Van Wijk et al. (2006) specify this relation by pointing at

the effects of deep and broad knowledge stocks on exploratory and exploitative innovation. Another

important performance-related outcome of absorptive capacity is the ability to predict external business and

technology trends (Cohen & Levinthal, 1990; Van den Bosch et al., 1998; Volberda, 1998). Lane et al.,

2001 and Lane and Lubatkin (1998) focus on the effects on inter-organizational learning. Tsai (2001) and


47

Anh (2006) empirically assessed the impact of absorptive capacity on financial performance, which is

found to be positive. Finally, Jansen et al. (2005) and Zahra and George (2002) found absorptive capacity

to contribute to the firm’s competitive advantage, by playing an important role in the renewal of a firm's

knowledge base and the skills necessary to compete in changing markets, and to capitalize upon emerging

strategic opportunities. “These opportunities may help the firms sustain superior performance because of

first mover advantages and responsiveness to customers” (Zahra & George, 2002:169).

Table 2 highlights the results of the above discussion (see next page).


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Level of Analysis

References Coordination mechanisms of absorptive capacity

Organizational outcomes of absorptive capacity

Firm Cohen & Levinthal, 1989; 1990 Van den Bosch et al, 1999 Van Wijk et al., 2006 Jansen et al., 2005 Zahra and George (2002)

Prior knowledge (*), R&D investments Prior knowledge (*), organizational form, combinative capabilities Deep vs. broad knowledge stocks (*) Coordination capabilities, systems capabilities, socialization capabilities Exposure to complementary sources of knowledge (*); activation triggers (*); social integration mechanisms and regimes of appropriability (*)

Innovative performance; ability to predict external business and technology trends (not empirically validated) Ditto Exploratory and exploitative innovation Competitive advantage Ditto (not empirically validated)

Inter-organizational

Lane & Lubatkin, 1998 Lane et al., 2001 Mu et al., 2007 Anh et al., 2006

Similarities in organizational structures, compensation policies and dominant logics Relatedness of businesses (*); similarity of the problems and priorities (*); flexibility and adaptability of org. structures; level of trust (*) Local embeddedness; TMT heterogeneity; corporate entrepreneurial culture of parent company Investment in training; employees’ ability to learn; and joint participation.

Inter-organizational learning outcomes Inter-organizational learning outcomes and financial performance Inter-organizational learning outcomes and innovative performance Inter-organizational learning outcomes and financial performance

Intra-firm Tsai, 2001 Minbaeva et al. 2003 Mahnke et al., 2005

R&D intensity HRM and knowledge management practices Ditto

Innovative and financial performance (empirically validated) Level of knowledge inflows into a particular unit Ditto

Table 2 Coordination mechanisms of absorptive capacity: results from the literature review.

Note: the *’s indicate the identified factor does not fit the applied definition of coordination mechanisms.


49

Table 3 categorizes the coordination mechanisms for absorptive capacity based on Martinez & Jarillo, 1989

(see section 3.4).

Table 3 Categorization of the identified coordination mechanisms (based on Martinez & Jarillo, 1989)

Categorization of coordination mechanisms

Structural and formal coordination mechanisms Departmentalization Organizational form (Van den Bosch et al., 1999)

Organizational structure (Lane & Lubatkin, 1998) Flexibility and adaptability of org. structures (Lane et al., 2001)

Centralization or decentralization through hierarchy

Organizational form (Van den Bosch et al., 1999) Organizational structure (Lane & Lubatkin, 1998) Partcipation in decision making (Jansen et al., 2005)

Formalization and standardization

Routinization and formalization through policies, procedures and manuals (called ‘systems capabilities’) (Jansen et al., 2005; Van den Bosch et al., 1999). Flexibility and adaptability of organizational structures (Lane et al., 2001)

Planning R&D investments (Cohen & Levinthal, 1990; Tsai, 2001) Output and behavioral control

Performance-based compensation (Minbaeva et al., 2003) Group benchmarking (Mahnke, et al., 2005)

Informal coordination mechanisms Lateral, cross-departmental relations

Job rotation (Jansen et al., 2005; Van den Bosch et al., 1999) Natural liaison devices (Jansen et al., 2005; Van den Bosch et al., 1999) Local embeddedness (linkages with parties in local knowledge environment) (Mu et al., 2007) Communities of practice (Mahnke et al., 2005)

Informal communication

Internal communication (Minbaeva et al., 2003)

Socialization (Similarity in) compensation practices (Lane & Lubatkin, 1998) (Similarity in) dominant logics (Lane & Lubatkin, 1998) Socialization capabilities(Van den Bosch et al., 1999), or socialization tactics (Jansen et al., 2005) promoting: a coherent set of beliefs; a high degree of shared values; a common language; a strongly agreed-upon kind of appropriate behavior Connectedness (dense linkages among organizational members) (Jansen et al., 2005) Social integration mechanisms (Zahra & George, 2002) HRM mechanisms promoting employees' ability and motivation to absorb knowledge (Minbaeva et al., 2003) via: training; performance based compensation; internal communication Knowledge management practices to promote knowledge absorption (Mahnke et al., 2005): corporate university; communities of practice; group benchmarking; learning systems; rewards


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4.7 Reflection on the literature

As becomes clear, even though a modest number (12) of studies that have been reviewed, a diverse range

of coordination mechanisms for absorptive capacity were found. The identified mechanisms cover all

categories of Martinez & Jarillo’s (1989) classification: from organizational structure (departmentalization)

to personnel trainings for knowledge absorption (socialization). The notion that a firm’s absorptive capacity

results of a variety of organizational mechanisms (rather than solely the availability of prior related

knowledge) has thus become strongly established, especially in the more recent literature. Based on the

relative ‘newness’ of this strand of literature (focusing on coordination mechanisms for absorptive

capacity) and the diversity of coordination mechanisms that have been explored by these studies, it can be

assumed that many coordination mechanisms are yet to be uncovered by researchers.

Second, the coordination mechanisms for absorptive capacity may differ significantly per context. For

instance, Lane and Lubatkin’s (1998) notion of relative absorptive capacity, based on similarities in

organizational structures, compensation policies and dominant logics between independent companies, is

clearly important for the inter-organizational context. However, its value to the intra-firm context (where

knowledge transfer takes place between organizational units within the same firm) is uncertain, since there

the mentioned similarities can be expected to be present and other mechanisms may thus be of more

importance (e.g see Minbaeva et al., 2003)

Third, as hypothesized by several authors and empirically established by Jansen et al., (2005), different

coordination mechanisms are important for different components of absorptive capacity (in this case

‘potential’ and ‘realized’ absorptive capacity).

Based on these observations, this thesis argues that further research into the coordination mechanisms that

may steer different components of absorptive capacity in different contexts is clearly desirable.

4.8 Conclusion

• This chapter provided a review on coordination mechanisms for absorptive capacity for three

different organizational levels that are relevant to this research, i.e. the firm level, at the inter-

organizational level and the intra-firm level.

• Since its introduction by Cohen & Levinthal in 1990, ‘absorptive capacity’ has become a

dominant concept in the management literature. However, the number of studies into the

coordination mechanisms that may steer knowledge absorption remains modest (Lane et al., 2006)

and only recently research has started to investigate the specific context of the present research:

the organizational coordination of knowledge absorption by foreign R&D subsidiaries (Mu,

Gnyawali & Hatfield, 2007).


51

• Notwithstanding the limited number of studies into the coordination mechanisms for absorptive

capacity, the notion that a firm’s absorptive capacity results of a variety of organizational

mechanisms (rather than solely the availability of prior related knowledge) has become strongly

established in the more recent literature.

• Based on the review, a variety of coordination mechanisms were identified and discussed. Several

studies have empirically validated positive relationships between the level of a firm’s absorptive

capacity and its innovation strength and financial performance.


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Chapter 5

Case study methodology

5.1 Introduction

This chapter details the methodological aspects of the empirical study. Case studies were conducted among

four Dutch multinational companies to identify the important coordination mechanisms determining the

knowledge absorption activities by their foreign R&D centers. Section 5.2 discusses the case study

approach and the selection of cases. In section 5.3 the unit of analysis and the interview method are

discussed. Aspects concerning research validity and the structure of the case studies are discussed in

sections 5.4 and 5.5.

5.2 Approach

For the empirical part of this research, a descriptive case study method was followed based on four cases18.

Unilever, DSM, AkzoNobel and Philips were selected and found willing and able to participate in this

study. Semi-structured face-to-face interviews and interviews by telephone with selected R&D managers

were the dominant source of information for the case studies. Different sets of secondary data sources were

also used. As Eisenhardt (1989) argues, the use of different data collection methods adds to the unique

strength of case studies. The data collection process for each case study started with a review of articles in

newspapers, academic journals and business magazines and a scan of the publicly available information of

the firm, such as the company website and online presentations. Based on this information a general

company profile was written. Based on this company profile and the analytical framework provided in

section 3.5, interviews were held with selected R&D managers, as will be discussed below. In the

interviews, the managers were asked to discuss what they consider to be key coordination mechanisms for

the five knowledge absorption activities. The interviews were recorded and fully transcribed. Subsequently,

the interview results combined with the other sources of data were used to develop the case reports. The

categorization of coordination mechanisms (provided in section 3.4) was used as a reference to interpret

and classify the identified mechanisms mentioned in the interviews. The full case reports are provided in

appendices 2, 3, 4 and 5. Based on the case reports further cross-case analysis was carried out as the basis

for the discussion in Chapter 7.

18 The number of four cases results from the desire to include at least one example per ‘emerging’ country (i.e. Brazil, Russia, India

and China). Even though more cases could provide a larger number of examples, the required time-investment would be beyond the

scope of this master’s thesis.


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Selection of cases

The case studies were conducted at Unilever, DSM, AkzoNobel and Philips. The cases were selected based

on their similarities (to define a coherent research group) and their dissimilarities, which enhances the

possibility to build theory based on the case descriptions (Eisenhardt, 1989). The similarities include the

fact that all four multinationals have large R&D organizations: they belong to the top-five of Dutch

multinationals in terms of expenditures on R&D (AWT, 2006). More importantly, all companies have a

developed strong capabilities of managing international R&D and all have a large share of their R&D

(typically around 50% or more) being carried out outside of the home country19. Importantly, the four

companies all have subsidiary R&D centers in at least one of the emerging economies of Brazil, Russia,

India and China. The dissimilarities between the four firms are also significant. The diversity of industrial

settings together with the very different mandates of the R&D units in the emerging economies provide a

fruitful basis to explore the differential scope of knowledge absorptive capacity processes for different

settings.

• Unilever is active in the fast-moving consumer goods industries of foods and personal care, with

its Savoury and Tomato R&D Center of Excellence (CoE) in São Paulo as an important R&D

center in Brazil.

• DSM is primarily active in the business-to-business arenas of Nutrition, Pharma, Performance

Materials and Industrial Chemicals. The Russian Enzyme lab develops important biochemical

knowledge for the company.

• With its operations in coatings and chemicals for the business markets, in terms of industry

AkzoNobel is quite comparable to DSM. However, whereas the activities of DSM’s small R&D

site in Russia are largely limited to analytical work, AkzoNobel’s much larger R&D center in

Bangalore performs a broad range of R&D activities for its Car Refinishes business.

• Philips, a major global player in the electronics industry, focuses on the markets of Consumer

Electronics, Medical Systems and Lighting (since 2008). Its Lighting R&D center in Shanghai,

which had a typical production supporting function, is becoming increasingly important as a

source of innovation.

5.3 Unit of analysis and interview method

This research takes the system of action as the unit of analysis: the process of external knowledge

absorption by the foreign R&D centers, as coordinated by different organizational units or constellations of

managers, rather than an individual or group of individuals (Yin, 2003). Based on the literature review and

19 In 2005 the share of R&D activities performed abroad was 57% for Philips; 49% for AkzoNobel; 85% for Unilever; 44% for DSM

(AWT, 2007).


54

initial interviews it was concluded that normally, the knowledge absorption processes by the foreign R&D

centers are at least partly steered by mechanisms at a higher organizational level than the R&D center itself

(see the discussion on subsidiary mandates in 2.4). Typically, the overarching international R&D

organization plays an important role in defining the activities of the foreign R&D centers. For example,

strategies for external knowledge acquisitions may be developed at the business group or even at the

corporate levels (Meijer, 2006). Based on this insight, two groups of respondents were selected. The first

group consisted of senior high-ranking R&D managers (i.e. Chief Technology Officers and Innovation

Officers). They were selected based on their ability to oversee the dynamics of knowledge absorption

processes by the R&D centers company-wide, as well as to provide insights into the strategic coordination

of international R&D activities, including knowledge absorption. The second group of interviewees

consisted of experienced front-line R&D managers supervising R&D operations at the subsidiary level in

one of the emerging economies. These managers could provide insights into the day-to-day business and

knowledge absorption processes at the subsidiary level and yield insights into the specific coordination

mechanisms steering knowledge absorption by the R&D centers in the emerging economies.

Per company at least one manager at each organizational level were interviewed. On average, the

interviews lasted around 1,5 hours, while the minimum interview time was 45 minutes. In some cases, extra

interviews were held (typically based on suggestions by the interviewed managers) to acquire additional

information. This resulted in a total number of 14 interviews. Most interviews (9) were held in a face-to-

face setting. In case the managers were not available for a personal meeting, interviews by telephone were

held as a second-best option. Table 4 provides an overview of the managers that participated in this

research.

An interview protocol was prepared to guide the interviews (Appendix 1). The interviews were structured

as follows:

• First, the background and method of this research were briefly explained to the managers.

• Second, the participating managers were asked to briefly introduce their function and provide

background information (complementary to the collected documentation) into the functioning of

the international R&D organization, its structural aspects, internationalization trends to emerging

economies, and the subject of knowledge absorption.

• Third, the participants were asked to assess the applied conceptualization of knowledge absorption

as a combination of the valuation, acquisition, transformation, transfer and application of external

knowledge, in the sense that it provides a useful model of the complex reality. The applicability

was confirmed by all managers20.

20 As discussed in section 3.3, based on the initial interviews the assimilation activity (Cohen & Levinthal 1990) was redefined


55

• Fourth, the managers were asked to identify the most important coordination mechanisms to

coordinate the five activities of knowledge absorption. Per knowledge absorption activity the

participant was asked to describe the activity and to discuss what, in his experience, are the most

important coordination mechanisms to steer that activity. In nearly all cases this resulted in a

useful description without much ‘helping’ by the interviewer. Only by exception extra information

was provided, typically to clarify the connotation of concepts. Often the descriptions covered two

or more types of coordination mechanisms and multiple mechanisms were typically identified to

steer one absorption activity. In most cases, the participants found it impossible to assess the

relative importance of one mechanism to another.

5.4 Validity

Several methodological measures were taken to secure the validity of the research. As mentioned, the

interviews were recorded and fully transcribed. This improved the quality of the interviews by allowing the

interviewer to pay full attention to the discussion and optimized the possibility to analyze the data ex-post.

Furthermore, the interpretations were sent back to the interviewees for verification. Based on the comments

of the participants final conclusions were drawn. Together with the triangulation of the interview results

with the other sources of data, these actions optimize the validity of the research. Finally, it may be useful

to mention that in case study research, generalization of results from either single or multiple designs, is

made to theory and not to populations (Yin, 2003). In line with the exploratory nature of the research, the

study cannot claim any generalizability of identified mechanisms. Nonetheless, based on a qualitative

approach this thesis aims to build contributions to theory as well as case-specific insights.

5.5 Structure of the case study results

To curb the volume of this thesis, the decision was made not to discuss the coordination mechanisms for

knowledge absorption processes in detail per case, but to provide a cross-case analysis of the results. A

drawback of this approach is that it compromises the explanatory power of the analysis. For more complete

insights, the author refers to the full case reports, provided in appendices 2-5. Apart from a more complete

picture of the identified coordination mechanisms for knowledge absorption, the appendices also provide

important contextual information concerning the organization of R&D and the internationalization to the

emerging economies. The presentation of the case study results in this thesis is as follows.

• First, the case studies are introduced Chapter 6. Key background information is provided about the

company, the functioning of its international R&D organization, knowledge absorption and the

R&D activities in the emerging economies.

• Chapter 6 will also discuss the relevant background information of the R&D subsidiaries of the

four companies.


56

• Together, the case studies yield important additional insights into the knowledge absorption

processes of international R&D organizations, answering sub-question 2. These are discussed in

6.10. Also, the knowledge absorption process for the R&D centers in the emerging economies is

discussed in 6.11.

• Finally, to answer the main research question, Chapter 7 provides a cross-case discussion of the

identified coordination mechanisms for the absorption of external knowledge by the R&D centers

in the emerging economies, and compares these insights to the existing literature.

Company Name and position of interviewees Date and location

Unilever (R&D in Brazil)

Mr. Emmo Meijer, Senior Vice President Foods R&D Mr. Colin Haine, R&D program director of Unilever’s Savoury and Tomato R&D Center of Excellence in Brazil Mr. Umesh Dowlath, R&D manager of Unilever’s Spreads R&D Center of Excellence in Vlaardingen, The Netherlands Mr. Peter Boone, Global Brand Manager Spreads, globally responsible for Unilever’s margarine portfolio

Nov ’07 The Hague, Nl. Nov ’07 São Paolo, Brazil Sep ’07 Vlaardingen, Nl Aug ‘07 Rotterdam, Nl

DSM (R&D in Russia)

Mr. Rob van Leen, Chief Innovation Officer Mr. Piet van Egmond, Senior Project Manager R&D, responsible for DSM’s Food Specialties’ R&D unit in Russia Mr. Johan Tiesnitsch, Former R&D manager DSM solutions Geleen (Nl)

Aug ’07 Delft, Nl. Sep ’07 Delft, Nl. Jul ’07 Weert, Nl.

AkzoNobel (R&D in India)

Mr. Mike Zeitler, General manager Global Innovation Unit Mr. Peter Gommers, Strategy and Business Development Decorative Paints Mr.Luc Turkenburg, Manager R&D services, Regulatory affairs and Knowledge management, responsible for AkzoNobel’s Car Refinishes R&D unit in India Stefan Diessen, Manager New Business Development AkzoNobel Car Refinishes

Sep ‘07 Arhem, Nl Feb ’08, Amsterdam, Nl Aug ’07 Sassenheim, Nl. Feb ’08, Arnhem, Nl

Philips (R&D in China)

Mr. Rick Harwig, Chief Technology Officer Mr. Frans Greidanus, General Manager Philips Research Shanghai and Chief Technology Officer East Asia Mr. Berry Kock, CTO of product category Compact Fluorescents, also responsible for Philips Lighting’s R&D unit in China

Sep ’07 Eindhoven Nl. Oct ‘07 Shanghai, China Aug ’07, Eindhoven, Nl

Table 4 Overview of companies and R&D managers interviewed for this research


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Chapter 6

External knowledge absorption at the R&D subsidiaries of four Dutch

multinationals

6.1 Introduction

This chapter introduces the case studies that were conducted at Unilever, DSM, AkzoNobel and Philips.

First, key background information is provided about the company, the functioning of its international R&D

organization and the topic of external knowledge absorption, and about the R&D activities in the emerging

economies. Also, the relevant background information of the R&D subsidiaries of the four companies is

discussed. Together, the case studies provided important additional insights into the knowledge absorption

processes of international R&D organizations. These are discussed in 6.10. Also, findings about the

knowledge absorption process for the R&D centers in the emerging economies are discussed in 6.11.

6.2 Unilever

The first case study is based on face-to-face interviews with Senior Vice President of R&D Foods Emmo

Meijer, Global Brand Manager for Unilever Foods’ Spreads Peter Boone and R&D manager of Unilever

Foods’ Spreads Umesh Dowlath. The Brazil case study is based on an interview by telephone with R&D

project director Colin Haine in São Paolo. Secondary sources of data include the company website and

Unilever’s annual report of 2006.

Background

As one of the largest fast-moving consumer goods companies, Unilever owns many of the world's

consumer product brands in foods, beverages, cleaning agents and personal care products. Unilever

employs approximately 179,000 people, is represented in approximately 150 countries worldwide and had

revenues of almost €40 billion in 2006. As follows from the interviews, Unilever is strongly focused on

global consumer interests. Over the last decades, the company has put a lot of effort in improving the

efficiency of the company’s supply chain, marketing and R&D activities through large reorganizations.

Unilever’s R&D organization

Coming from a highly decentralized organization structure, centralizing of business activities has been a

key aspect of the recent reorganization programs, and this is also the case for the R&D organization. As

Emmo Meijer argues, the essence of the strategy is that a reduced number of larger research centers at the

business group level are developing fewer, yet more globally exploitable product ideas. All of Unilever’s

R&D activities are framed in a project-based organization for new product development. In 2005, a new

operating framework was established. This ‘brand development’ approach established a much narrower

cooperation between marketing and R&D in all phases of the product development process which leads to a


58

better fit between marketing and R&D activities, resulting in a faster development of new products and a

higher rate of commercial success of innovations. If an interesting idea for a new product is identified, it is

adopted by the brand development manager and enters the company’s ‘innovation funnel’. Throughout the

different stages in the project, the R&D organization delivers different inputs. The brand manager acts as a

gate keeper for the different product development phases within the funnel, in narrow cooperation with the

R&D manager (Peter Boone, 2007). As Umesh Dowlath indicates, the R&D manager is fully responsible

for all technical aspects of the product development process. This R&D system is implemented globally

and although differences exist, its functioning is largely uniform.

Knowledge absorption

Unilever has six principal research and development laboratories: two in the UK, one in the Netherlands,

one in the US, one in China (Shanghai) and one in India (Bangalore). Most of the long-time-to-market

R&D activities are carried out at these centers. In recent years, Unilever has put a lot of effort in opening

up its innovation process. These large R&D centers also play a key role as absorbers of new technical and

scientific knowledge for the firm. Second, the ‘centers of excellence’ are more development-oriented.

These centers develop new concepts that are globally exploited. Third, many small adaptive development-

oriented R&D centers exist to adjust the global concepts to local markets. As Emmo Meijer argues, the

absorption of technical knowledge is a ‘global game’: technical knowledge is seldom sourced from the

local environment of the R&D centers. To acquire new technical knowledge, co-creation with research

institutes and specialist firms has become the norm at Unilever. In recent years Unilever has structurally

embedded and professionalized three types of scouting competences within the organization: science

scouting, venture scouting, business partner scouting.

R&D and emerging economies

Historically, Unilever’s R&D has been strongly internationalized21. In the years to come, Unilever plans to

strengthen its R&D position in China and India and a larger impact of Asian R&D on concept and product

development of the corporation is expected in the years to come. The economies of Russia and Brazil are

booming in terms of market potential. For R&D especially more adaptive development activities in these

countries are expected to grow.

6.3 Knowledge absorption at Unilever’s Tomato Center of Excellence (CoE) in Brazil

Tomatoes are a major ingredient in many of Unilever’s soups and sauces. Over the last decades, Brazil has

developed into a large producer of the crop and Unilever is one of the largest players in the tomato-based

foods industry. The CoE for tomato-based products in São Paulo Paolo plays a central role in the

21 In 2006, Unilever invested around €1 billion in research and development21, of which only 15% was spent on R&D in The

Netherlands.


59

development of new tomato-based products22 that are ‘rolled-out’ globally. The center is also globally

responsible for the development and maintenance of all relevant information in relation to the use of

tomatoes in Unilever’s products.

To fulfill its global functions, the CoE collects and processes a lot of knowledge. A first important type of

knowledge it needs is agricultural information: the center needs to understand the agricultural conditions

for all regions and the technical (genetic) information of the different tomato types that are used in

Unilever’s products. Technical knowledge underneath the breeding and processing activities is a second

type of knowledge that needs to be collected. Third, the CoE needs to understand the global market

conditions (such as commodity prices). Most of this information is collected via the intranet from

colleagues at R&D, purchasing and supply chain departments from different countries. As discussed, this

thesis focuses on the absorption of scientific / technical knowledge (i.e. the second category only).

The Brazilian CoE is regarded as an important knowledge basis for the rest of the company and one of the

main roles of the center is to absorb external knowledge. However, relatively little technical knowledge is

derived from local sources. In most cases, scientific knowledge is bought from or co-developed with other

companies and research institutes, and these can be located anywhere. For example, a specialized seed

company located in the Netherlands is responsible for the development of tomato varieties with specific

desired traits, while partnerships have been established with academic institutions in the USA and Europe.

The involvement of the CoE in basic research activities, either in-house or with local universities, is very

limited. As a noteworthy exception, a significant part of breeding-related knowledge is developed locally,

often in cooperation with other companies. Also, the hiring of qualified staff is an important way to acquire

external knowledge, yet many R&D employees are hired from different countries.

6.4 DSM

The second case study discusses the external knowledge absorption process of DSM’s R&D organization.

Apart from the discussion of external knowledge absorption for DSM as a whole, the country study details

the knowledge absorption process at DSM’s Enzyme Lab in Russia. The first section is based on face-to-

face interviews with Global Innovation Officer Rob van Leen, R&D manager for Food Specialties Piet van

Egmond, former research director Emmo Meijer and an interview by telephone with former R&D manager

DSM solutions Johan Tiesnitsch. The Russian case study is based on the interview with Piet van Egmond,

responsible for DSM’s Enzyme Lab in Moscow. Secondary data sources include the company website,

several annuals and academic publications.

22 Apart from this global responsibility, the Brazilian R&D center has a second, regional R&D role for savory products (of which

Colin Haine is the R&D director). The focus of this section is on the Tomato CoE, however.


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Background

Established in 1902 as a state-owned coal mining company, DSM has evolved into a multi-specialty

company in the chemical business to business sector. The firm is active worldwide in life science and

nutritional products, performance materials and industrial chemicals. The activities of DSM are now

grouped into four clusters: Nutrition, Pharma, Performance Materials and Industrial Chemicals. The

company aims to be world leader in specialty products with a high added value (by focusing on the life-

sciences industry and on performance materials) and become less dependent on bulk chemistry product. To

structurally embed the company’s innovative potential, a corporate level Innovation Center was installed in

the beginning of 2006, which can be seen as an integrative function between the business groups. Among

other roles23, the Innovation Center supports the businesses with the aim to achieve innovation excellence.

DSM’s R&D organization

As part of a large reorganization trajectory, DSM started decentralizing its R&D structure in the 1990s and

the company has now fully abandoned its central R&D. Both long-time-to-market research and shorter-

term product development activities are organized within a project structure. Both types of R&D projects

are decentralized to the level of the different business groups. As the other companies of this research,

DSM explicitly aims only to engage in R&D projects that have a clear business orientation. The company

intends to capture the needs of the (business) customers as well as the technology trends to an R&D

agenda, based on a long-term technology development strategy and a shorter term product development

strategies. R&D is organized in three business clusters, which cover a total of ten business groups, each of

them with its own research organization. As Rob van Leen argues, DSM aims to manage the research

centers as ‘one global virtual lab’. The main R&D sites are located in The Netherlands, Switzerland and

Austria. These large research centers focus on the development of new technologies, processes and

products, both for the individual businesses (often more applied research activities) and combinations of

multiple businesses (typically longer term new technology development).


DSM’s R&D organization has a strong external orientation. The most radical technological innovations

often start in the form of cooperation with universities or institutes. Aside from intensive research

cooperation, DSM also actively scouts for start-ups with promising innovations in the relevant fields of

activity, mostly for product development projects. DSM supplies these companies with the financial,

scientific, manufacturing and management support they need to successfully exploit those innovations.

23 The DSM Innovation Center comprises several units: an Innovation Office, Corporate Technology, Intellectual Property, Licensing

and Venturing, the Business Incubator, four Emerging Business Areas and Base of- the-Pyramid activities.


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Ultimately, these successful start-ups may be fully integrated in DSM24. This is done either by the

establishment of a fully-owned group, or acquiring a company.


Increasing its activities in the emerging economies is one of the three pillars of DSM’s corporate strategy

‘Vision 2010’. Substantial growth is expected in China25 and India, in the mid-term especially in the form

of commodity products. At this moment, the emerging countries are primarily important in terms of market

potential, yet much less as sources of innovation. According to Rob van Leen, DSM currently does not

learn many things in the BRIC countries that can be applied elsewhere in the organization. For example, at

this moment in Brazil there are no research activities. In Russia, there is one molecular biological lab (as

will be discussed in the case study) and in India only process research for anti-infectives takes place. Also

in China at this moment very little original research is done. Nonetheless, in the Pudong New Area of

Shanghai, a large R&D capacity, centralizing DSM’s R&D activities in China, is now being established.

This is envisaged to become a key R&D location within the next decades, also for long-time-to-market

research and complex development tasks. The development of a collaborative network with research

institutes in Beijing and Shanghai is an important aspect of this strategy. According to Rob van Leen, one

of the reasons to set up this long-time-to-market R&D in China is the belief DSM can tap into knowledge

sources that are typically Chinese and unknown to the West.

6.5 Knowledge absorption at DSM Food Specialties’ Enzyme lab in Russia

Innovation is becoming ever more important to DSM’s Food Specialties division and over the last few

years, Food Specialties has been able to realize high innovation-based growth rates. However, as R&D

manager Piet van Egmond argues, making radical innovation the dominant business model is not easy: first,

the profitability of new inventions typically only occurs after 5 to 7 years, which is very long compared to

typical consumer products. This partly results from the conservatism among food consumers. Second, in

addition to stamina, for the development of innovative food products high and long-term research

investments are needed.

Over the last seven years, Food Specialties invested significantly to map the detailed knowledge of the

genome of one of DSM’s fungi, named Aspergillus Niger. This research was carried out in a large

consortium of institutes and grew into one of the most important industrial genomics projects in Europe.

Based on the sequencing of the gen, thousands of enzymes were identified, of which many have interesting

characteristics (such as taste, preservability, texture, etc) for application in foods (such as bread, cheese,

beer). However, extensive laboratory testing of the applicability of the enzymes was needed before

24 Besides direct participation, DSM Venturing’s portfolio includes investments in market-selected venture funds. 25 Currently, DSM employs 3500 to 4000 people in China (in The Netherlands this number lies somewhere between 6000 and 7000,

and is decreasing) and the most important units do now have a basis in China.


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commercial decisions could be made. As Piet van Egmond argues, “this testing is quite advanced genetic

and biochemical work, at the same time, the analytical work is of a routine nature. The challenge was to do

this fast and cheaply”. Since this routine work is not a core activity of DSM, several options were identified

to have the job done, including companies in the Netherlands, the USA and Russia. Eventually Russia was

chosen for several reasons, of which cost savings and the availability of high-class scientists were the most

important. An existing university research infrastructure was hired and converted into a DSM laboratory. A

core team was set up, consisting of key scientists who set up the Russian laboratory that would consist of

eight workplaces and four post-docs for Russian R&D employees. The Russian Enzyme Lab was set up

primarily to benefit from the low wage environment, with the availability of highly qualified molecular

biologists as a prerequisite to guarantee the high quality of the analytical work. The applications of the

research project include a number of successful food-applications, hundreds of patent filings (that can be

sold on the market), and the building of a strong scientific network. Although the center can be classified as

a ‘creator’ R&D site, the Russian lab itself is not significantly involved in the absorption of locally

available knowledge sources. Russia does not provide a state-of-the-art knowledge infrastructure for foods,

medicine, or materials, which is the reason why the research facility is unlikely to evolve into a Center of

Excellence. The acquisition of qualified local staff is the most important mechanism to acquire knowledge

from the local environment.

6.6 AkzoNobel

The case study at AkzoNobel is based on face-to-face interviews with general manager of the Global

Innovation Unit Mike Zeitler and Strategy and New Business Development manager for Decorative Paints

Peter Gommers. The India case study is based on a face-to-face interview with R&D services manager Luc

van Turkenburg and an interview by telephone with New Business Development manager Stefan Diessen.

Secondary sources of data include the company website and the annual of 2006.

Background

AkzoNobel is one of the world’s leading industrial companies for both the business-to-business and the

business-to-consumer markets. Located in Arnhem since 1911, in 2007 AkzoNobel moved its head office

to Amsterdam. In the same year, the company divested its divisions for human and animal pharmaceutical

products Organon and Intervet, and acquired UK-based chemical company ICI. These activities are part of

AkzoNobel’s ongoing efforts since the 1990s to establish a strong strategic focus. From 2008 onwards, the

firm consists of three divisions: decorative paints; performance coatings; and specialty chemicals and

significant internal reorganization activities are now taking place (May 2008). In 2006, the company had

activities in more than 80 countries and employed around 68,000 people. Sales were €13.7 billion, of which

around €10 billion was accounted for by the Coatings and Chemicals products divisions (since 2008 the

coatings division is split up into paints and coatings). It is envisaged that AkzoNobel’s divisions will be


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reorganized into 10-15 business units. Traditionally, AkzoNobel’s business units (including their R&D

organizations) operate largely autonomously.

AkzoNobel’s R&D organization

The vast majority of AkzoNobel's products are based on chemicals. Before they appear in the marketplace

they undergo complex research and development processes which may take two up to seven years to

complete. Innovation in the paintings, coatings and chemical products divisions focuses on product

development, process improvements and finding new solutions in cooperation with clients. On a yearly

basis, the company spends two to three percent of sales on R&D, which comes down to €200 to 300

million. The R&D activities are dispersed over 48 countries.

AkzoNobel has a strongly decentralized R&D structure, enabling the company to closely cooperate with its

customers and suppliers, while its global reach also enables the access to qualified personnel. Within the

business groups, the existence of many dispersed R&D units requires effective coordination of

competences, which is centralized at the business group-level. There is no one big research center: in the

1990s, AkzoNobel’s central research was largely reduced to the extent that it currently constitutes only a

marginal share of total R&D. AkzoNobel has little basic research activities, with the exception of a small

number of long-term research programs with scientific research centers. The R&D efforts are strongly

customer-focused and AkzoNobel focuses its R&D functions in terms of markets and customer groups, not

technology fields. An international project-based operating framework is applied for all R&D activities.

This ‘New Product Development’ process consists of a stage-gate-model where the different R&D centers

(typically from multiple countries) deliver their specific contributions to the different phases within the

process.

Cross-business unit integration is limited. However, several integrative functions have been established.

For example, cooperation within and between different business groups is promoted through (intranet-

based) communities and socialization events such as workshops and congresses. Also, the ‘Innovation

Unit’ that was set up in 2003 and the recently established function of a Chief Technology Officer are

considered to be important to improve cross-business unit synergies.


The nature of R&D activities and the way how the R&D processes are organized by the different divisions

and business units is quite diverse. Consequently, the degree to which the different R&D centers are

involved in the absorption of external knowledge and how the knowledge absorption activities are

organized is multiform. The different ways to acquire external knowledge are largely similar to those

applied by Unilever and DSM. As an important difference with DSM, it was found that AkzoNobel is less

involved in long-time-to-market research. The dominant approach is not to develop new basic technologies,

but to acquire technologies with a proven applicability. In line with this strategy, AkzoNobel is little

involved in collaborative research with research institutes and universities.


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AkzoNobel has a high number of international R&D centers, of which many are very small (AWT, 2007).

The company has longstanding large R&D facilities in Western Europe, the United States, Mexico and

Brazil. In recent years R&D centers were opened in Turkey, India and China. R&D activities in Russia

remain small. Similar to Unilever and DSM, of the BRIC economies, China and India are seen as the

dominant new R&D destinations. Among AkzoNobels’ technology managers, the vision that in the mid-

term much of the innovative R&D will be carried out in India and China is widespread. As Mike Zeitler

puts it, “you only have to look at the number of graduates and you know what’s going to happen”. At this

moment AkzoNobel already employs more personnel in China than in the Netherlands. The drivers to

establish foreign R&D sites include being close to emerging markets; following the movements of key

customers and access to talented personnel.

6.7 Knowledge absorption at AkzoNobel’s Car Refinishes R&D center in Bangalore

Background

AkzoNobel Car Refinishes (ANCR) is one of the world’s leading producers of coatings for car repair

and commercial vehicles and of automotive plastics coatings. Aside the product, the company offers related

services including software for car refinishes. As a business unit within the coatings division, it had annual

revenues of over € 900 million in 2006 and is active in over 60 countries. Its headquarters are in

Sassenheim in the Netherlands. ANCR’s customers include automotive suppliers, fleet owners, distributors,

and bus and truck producers. Over the last decades, ANCR has significantly increased its R&D efforts.

Within its R&D organization three groups can be distinguished: local market support, typically for large

industrial clients; new product development, based on the inputs from basic research and the marketing

section; and basic research. Since the 1980s the R&D activities of ANCR have become strongly

internationalized. The R&D network of ANCR constitutes of four major R&D facilities in The

Netherlands, North America, Brazil and India. Europe and the United States are the dominant markets of

ANCR. However, India and China are the largest growth markets. Through a number of acquisitions in

China and large investments in India over the last decade, the Car Refinishes aims to grow significantly in

these markets.

In 2002, a large R&D center was established in Bangalore. The main reasons to set up the R&D facility in

India (and not in China) were the availability of well-educated scientists who speak English and the better

enforcement of IP regulations. ANCR decided to focus on product development head-on: first for simple

products and solutions, with a gradual evolution into more complex projects (this contrasts with the typical

mandate development model where the R&D evolves from local market adaptations to product

development and/or basic research activities). Established seven years ago, the Indian R&D center has

quickly developed into the second most important R&D center (after Sassenheim). Currently, it accounts

for 30% of the total R&D efforts. The Bangalore R&D center is mainly involved in the development of


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new products and color formulations for both the regional and global market, which is seen as basic

research work. Product development activities focus around perceptual aspects, such as color and gleam, as

well as user characteristics, such as fast drying, applicability at low temperatures, durability, adhesion, etc.

The center further assists the other disciplines, such as purchase and supply chain.

In recent years, the use of external knowledge in the R&D processes has significantly increased. The

principal external source of technical knowledge for ANCR consists of technical patents (from other

companies and research institutes). These are applied in different phases of the R&D process, including

both basic research activities and product development. It should be noted that the patents used by the

Bangalore R&D site are often filed in other countries (e.g. the US and Europe) and thus not typically

‘local’. Although the R&D center in Bangalore has established several relationships with local universities,

thus far the objective of these ties is not to conduct collaborative research: these ties serve as a basis to

recruit talented scientists and managers, which is regarded as the principal way of acquiring local

knowledge. Many of the coordination mechanisms for the knowledge absorption activities that were

identified by the R&D managers of Car Refinishes were very similar to those at the corporate level.

6.8 Philips

The case study at Philips is based on a face-to-face interview with Chief Technology Officer Rick Harwig

and two interviews by telephone with General Manager Philips Research Shanghai and Chief Technology

Officer East Asia Frans Greidanus. The case study of Philips Lighting’s R&D center in Shanghai is based

on face-to-face interview and second one by telephone with Berry Kock, who worked in China between

2005 and 2007 as the global technology manager26 for product category Compact Fluorescent Lamps27 and

as a General Manager of China’s Lighting R&D division. Secondary sources of data include the company

website and the annual report of 2006.

Background

Founded as a lamp factory in Eindhoven, the Netherlands in 1891, Philips has become one of the leading

electronics companies in the world. Currently, the company is headquartered in Amsterdam. The company

employs around 125.500 people in more than 60 countries (Philips, 2007). Per 2008, Philips is organized

into the following divisions: Philips Healthcare, Philips Lighting and Philips Consumer Lifestyle. Philips

positions itself as a high-growth technology company, ensuring competitive advantage by generating

innovative products and processes. In recent decades Philips has become highly involved in the outsourcing

of production. As Frans Greidanus argues, this greatly improves the company’s flexibility and allows the

26 The position of a Chief Technology Officer within a Product Division was created when Philips adopted the contract research model.

He is responsible for the technologies needed for product development and production of the product divisions and its business groups

(Reger, 2004:68). 27 Compact Fluorescents are compact energy saving lamps.


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company to do business with a negative working capital model: the suppliers invest in the necessary

resources and are paid only after Philips has sold its product on the market.

Philips’ R&D organization

Innovation plays a central role at Philips and with the largest R&D investments of all Dutch multinationals

and over 130.000 registered patents and design rights, the company is known as a real technology

‘powerhouse’. Its high R&D investments have resulted in many breakthrough inventions in the past, such

as the compact cassette and the CD player. Philips’ technology development is organized in a project

organization and takes place at three levels. First, the business units are mostly involved with short time-to-

market development work. Development laboratories of the product divisions carry out the later phases of

product development projects. Second, sectoral divisions develop broader, longer term technologies. Third,

apart from the development of new technological options, corporate research looks at the boundaries

between the divisions and coordinates cross-business unit exploitation of technologies.

Philips’ R&D is strongly internationalized. Internationalization at Philips has been taking place since the

1950s. The small size of the Dutch market made internationalization of sales and production necessary

early on. Between 1945 and 1970, research laboratories were founded in England, France, Germany and the

USA. In recent decades, apart from development activities Philips has also further expanded its research

into East Asia and India. Acquisitions and cooperative agreements such as alliances and strategic

collaborations with local companies have become the dominant business model for R&D

internationalization.

Similar to Unilever, Philips practices a ‘global’ product development model: the products are designed for

the global markets by globally dispersed R&D centers. Local-for-local R&D is scarce. Philips has around

100 R&D units world wide, some of which are very small. To overcome the problems of fragmentation and

duplication of activities in central research, Philips has formed Centers of Excellence (CoEs) specializing in

particular technologies and uses several coordination mechanisms to link them together. Philips has built

strong capabilities to manage cross-border R&D projects. The different R&D activities are conducted

where the necessary capabilities are available and dispersed competencies are linked together (see also

Reger, 2004). Similar to Philips and DSM, there is always one product manager and one business manager

who make the decisions.

At the heart of the development of technologies new to the company, corporate technology is a complete

business organization. Philips no longer develops stand alone technologies without clear exploitation

perspectives, but corporate research develops the concept into a fully operational company. This is called

‘incubating’. As Rick Harwig argues, ‘landing’ a technology within a business unit thus does not occur

until there is a complete running business, including a technology, industry solutions, clients, channels, etc.

(Harwig, pers. comm., 2007).


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As Rick Harwig argues, the wide array and complexity of the technologies underlying Philips’ products,

processes and services and the acceleration of innovation as a result of globalization and digitization have

led Philips to realize in an early stage that it could not develop all the necessary competences in-house.

Indeed, Philips is regarded as a frontrunner in practicing the ‘open innovation’ approach, as illustrated by

the promotion of open innovation practices at the high-tech campus in Eindhoven, since 1999. Essential

elements of the open innovation model include the development of business models for the spinning-in and

spinning-out of technology. Close, innovative types of strategic collaborations with external suppliers and

other external parties, including customers, are central to the open innovation strategy.


In recent decades, Philips has strengthened its position in the emerging economies. Access to the growth

markets and labor costs advantages are important reasons to establish subsidiary centers in these countries.

As Rick Harwig argues, Philips invests in R&D to be able to keep track with local market developments

and increasingly also to build on unique local expertise. Today, China is by far the largest growth market,

but India, Russia and Brazil are also significant. China has also become the most important supplier of

technology. At this moment around 800 engineers are employed in the Chinese R&D labs. Hosting one of

the corporate R&D laboratories, Shanghai is one of Philips’ main research locations, hosting all business

groups. Currently an Innovation Campus is being built in Shanghai, where most of Philips local activities

will be concentrated. As an important aspect of the R&D strategy, collaborative programs have been set up

with Chinese top-universities and other research institutes, which is seen as an important long-term

investment for ‘future knowledge absorption’. Other Asian innovation campuses have been established in

Bangalore and Singapore.

6.9 Knowledge absorption at Philips Lighting’s R&D center in Shanghai

In 1997, Philips Lighting set up its first production plant in China, in a Joint Venture with a local lamp

producer. Since then, the operations have grown steadily and at this moment about 90% of the Compact

Fluorescent Lamp (CFL) products are produced in China. It should be noted that the manufacturing process

is largely outsourced to low-cost suppliers. To secure the quality of the products, the largest share of

Philips’ R&D staff works at the suppliers’ work-floor to control and improve the manufacturing process,

leading to a high quality product28. This way, Philips’ sustains a competitive advantage based on its brand

value in combination with the exploitation of its technical competences.

28 To understand the nature of Philips’ R&D activities, it is important to understand that the industry of compact fluorescent lamps is a

typical process-industry: the production process is key to the eventual quality and efficiency of the output, while the product’s quality

is at the heart of the competitive advantage. Mastery of the production process therefore demands the continuous involvement of

highly skilled and experienced engineers to control the machines and improve the overall production process.


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The mandate of the Shanghai R&D section was not to create new technologies or products, but to improve

the quality and efficiency of local production processes. Nonetheless, over the last decade Philips Lighting

Compact Fluorescent Lamps in Shanghai has evolved into a strongly established research and development

organization. The ambition is to become an important player in the development of new technologies and

products. Philips Lighting has a very strong heritage of high-mechanization and quality engineering of

production lines. Paradoxically, as a critical lesson, Philips Lighting learned from China how to control the

quality and efficiency of production processes in a low labor cost and low-tech environment, with simple

machines and a high number of operators. As Berry Kock argues, this shift in the dominant logic proved to

be key to the success of the company in the CFL market. Furthermore, it is expected that this ‘absorbed

knowledge’ can be applied without little adaptations in other low-labor-cost countries.

For the Lighting business, China does not (yet) provide a strong scientific knowledge environment. The

recruitment of local qualified personnel is the most important way to make use of the local ‘knowledge

base’. Nonetheless, with a increasing focus on innovation, the Chinese R&D personnel is becoming more

involved in the development of new concepts and products, for which external scientific and technical

knowledge is needed. In this regard it is important to note that the R&D organization is a global one: this

knowledge can be generated through collaborations with research institutes or other companies (in Europe

the US or Asia), or acquired through patents.

6.10 Additional insights into the process of external knowledge absorption by the

international R&D organization

Chapter 2 provided a conceptualization of the knowledge absorption process by the international R&D

centers of multinational firms. Based on the case studies this section discusses important additional insights

into this issue (sub-question 2).

International and multidisciplinary innovation projects

From the cases studies it has become clear that the vast majority of international R&D activities of

Unilever, DSM, AkzoNobel and Philips are organized within a multidisciplinary project structure for

product and process innovations29. Teams from the different functional disciplines, including R&D,

marketing, finance and supply chain deliver their inputs to different phases in the projects. The R&D

activities can thus be seen as one of the most important types of inputs into the innovation projects.

Importantly, these teams may be located at different locations over the world. The innovation projects are

29 As follows from the interviews, among all four companies R&D has become increasingly product- and market-driven in recent

decades. Most of the responsibilities for R&D have been transferred to the different business groups, demanding a clear market

rationale for all R&D activities. At the same time, traditional centralized in-house research for long-term technology development has

become less popular. To improve the efficiency and the market-focus of R&D, most of the R&D activities of the four firms are

organized within a multidisciplinary project structure.


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typically coordinated by one or two project leaders, in close collaboration with the managers of the teams

from the different disciplines.

Among the four companies of this research two major categories of innovation projects can be

distinguished: new product development projects and technology platform development projects.

Technology platform projects are at the basis of the development of new technical competences that serve

as important inputs for the new product development projects. This is very similar to the distinction made

in section 2.2 between R and D: the technology platform development projects typically require long-time-

to-market research task, while the new product development projects typically require development work:

New product development projects generally require short-time-to-market R&D activities with an emphasis

on Development. The product development projects are typically carried out by one business group, yet it

is important to note that the different R&D tasks are often performed at globally dispersed R&D locations

(as illustrated by the case studies).

Technology platform development projects require research-oriented R&D work. Different business groups

may be responsible for these activities and the developed technologies are also typically applied by

different business groups, or at least for different products. By their nature, the commercial applicability of

technology platform projects is less predictable, yet at all companies of this research the market rationale

has become more central also to these projects in recent decades.

New product development and the technology platform development projects are not always separated into

different projects: they may be integrated within one process structure, as was recently the case at

AkzoNobel’s Car Refinishes for example. Nonetheless, as confirmed by the R&D managers, it is typically

well possible to distinguish the two different functions. As several R&D managers noted, apart from the

‘radical’ new product and technology development, less innovative projects, such as product and process

improvement activities account for a large share of the total R&D efforts. For this discussion it is

appropriate to consider these activities as development-oriented tasks that take place in the later stages of

the product development projects.

Different stages within the innovation projects

The multidisciplinary product development and technology development projects are typically managed by

the companies of this research as a ‘stage-gate’ process (see Cooper & Edgett, 1993; Wheelwright & Clark,

1993). The essence of the stage-gate approach is that it divides the total product and technology

development processes (from idea to launch) into different stages and gates:

At the stages, teams from the different disciplines, including marketing, R&D and manufacturing, deliver

specified inputs. Each stage thus consists of a set of parallel activities undertaken by people from different

functional disciplines within the firm, but working together as a team led by the project team leader.


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At the gates, the project leader and the managers of the teams evaluate the inputs and decide about project

resourcing and coordination issues, such as the question whether or not the project should continue. Also,

requirements and coordinative issues of the next steps of development are defined. The decisions at the

gates are based on a review of the delivered inputs and predefined criteria (based on the business strategy)

and are taken by the project leader, together with the combined experience and insights from the different

team managers. At the companies of this research, marketing and R&D are typically jointly responsible

throughout the different phases in the new product development projects. This way, the market-focus is

strongly embedded throughout all phases of the project.

The stage-gate models for the innovation projects that are applied by the different companies and their

business groups have become increasingly sophisticated and complex over time and are seen by the R&D

managers as an important basis for the competitive advantage of the firm, since they enable the effective

and efficient exploitation of innovations into commercial applications. The models that are applied by the

companies of this research differ in their typologies, the number of different stages and off course the

activities. Nonetheless, the functions of the different stages in these models are essentially similar.

Consequently, it was possible to draw a general model specifying the different stages of the R&D projects.

To this end, the case study results were combined with insights derived from the literature of project-based

product and technology development. It was found that Cooper and Edgett’s models and the insights by

Vorstman (1993) capture the nature of the technology and product development processes of the companies

of this study very well (Cooper & Edgett, 2006; Cooper, Edgett & Kleinschmidt, 2002; Vorstman, 1993).

Combining the results from the case studies with insights from these articles, the following seven stages in

product development projects can typically be discerned:

• Discovery: this stage entails the generation of new product ideas. This may happen by different

disciplines (marketing, R&D, manufacturing, sales, etc.) or outside the company, e.g. by, other

companies, such as clients and suppliers, or research institutes.

• Scoping: a quick investigation and scoping of the project. Typically, this stage is undertaken by a

small core team of technical and marketing people;

• The Business Case stage can be seen as the detailed homework leading to a business case. This

stage includes market research, detailed technical and manufacturing assessments and a detailed

financial and business analysis;

• Development entails the actual design and development of the new product;

• Testing and validating: the verification and validation of the proposed new product, its marketing,

and its production;

• Product launch: the beginning of full production and commercial selling. This stage sees the

implementation of the marketing launch plan, the production plan, and the post launch activities,

including monitoring and adjustment.


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For the technology platform development projects, the following three stages can be distinguished:

• Discovery: entailing the generation of ideas for new technologies;

• Technical assessment: gaining understanding of the IP situation, technical feasibility studies and

documented results of experiments;

• Detailed investigation: in this stage elaborate experimental work and commercial application

assessments are carried out to determine the value to the company.

R&D inputs into the innovation projects

As discussed, together with other disciplines, the company’s R&D centers provide specific knowledge-

based inputs at the different stages of the two types of innovation projects. Based on the case studies and a

reiew of the literature on innovation management, Figure 9 summarizes the types of inputs that are

typically delivered by the R&D centers at the different stages of the innovation projects (Cooper & Edgett,

2006; Cooper, Edgett & Kleinschmidt, 2002; Vorstman, 1993). Typically, teams from different R&D

centers are responsible for the inputs within the different stages of the two types of projects and these R&D

centers are often located across different countries. For example, as illustrated by the case on DSM Food

Specialties, a specialized R&D center in Russia may perform particular research tasks (analytical work),

while a large center of excellence (in The Netherlands) is responsible for the further application of that

knowledge into the technology platform development process as well as its subsequent integration into new

product development projects. This finding supports the increasing evidence that innovation in the

multinational firm cannot be understood as either local or global, but that sources of input shifts over the

length of the innovation process (Zander & Sölvell, 2000).

Dominant sources of external knowledge

From the case studies it is concluded that external knowledge is highly important for the R&D

organizations of all four companies of this research. Furthermore, several managers from the four

companies agree that the effective absorption of external knowledge is important throughout all the

different stages within the two types of R&D projects.

The R&D organization may thus ‘tap into’ different sources of external knowledge at different stages of the

innovation projects. Which external knowledge sources are dominant at the different stages may differ

significantly per company and per project. Nonetheless, based on the case studies the most important

sources of external knowledge were identified. It is concluded that the dominant sources of external

knowledge for the R&D activities underneath the technology platform development and the product

development projects are different. Of the partner firms, in particular key suppliers and (for the business-to-

business activities) client firms were mentioned as very important partners to co-develop and absorb

external knowledge. These collaborations are not only important for development projects: although less

common, they may also be at the basis of long-term R&D projects for the development of new


72

technologies. Start-up firms were found to be especially interesting as a source of technologies that are new

to the firm. The importance of scientific research institutes for the development of new technologies is

widely affirmed, yet for the new product development projects they generally play a minor role.

Table 5 shows the external parties that were found to represent the most important sources of external

knowledge for the R&D activities underlying the New Product Development and the Technology Platform

Development projects. The table represents the vision of the corporate level R&D managers on what, in

general, are common sources of external knowledge for the company as a whole.

Type of

innovation

project

Industrial and non-industrial

partner firms, including client firms,

suppliers and peers

Scientific research organizations, such as

Universities and technology institutes

Technology

Platform

Development

Unilever +

DSM +

AkzoNobel +

Philips +

Unilever +

DSM +

AkzoNobel +

Philips +

New Product

Development

Unilever +

DSM +

AkzoNobel +

Philips +

Unilever -

DSM -

AkzoNobel -

Philips –

Uncommon - Common +

Table 5 Dominant sources of external knowledge

Interestingly, the participating R&D managers view the knowledge absorption process largely as the result

of the application of different business models. Several different business models are applied by the R&D

organizations to acquire external knowledge. Collaborative agreements, licensing-in of intellectual property

(IP), spinning-in of (technology) start-up companies and hiring of qualified employees are seen as the key

mechanisms to acquire external knowledge. The interviewed R&D managers stressed that collaborative

models to co-develop knowledge with external partners have become an increasingly dominant. These

acquisition mechanisms are discussed in detail in section Chapter 7 and in the case study reports.

The main elements of the above discussion are highlighted in Figure 9 (see next page).


73

.

Application of P

latform Technology in

New Product D

evelopment project stages

1,2,3,4

Figure 9 Innovation projects and external knowledge absorption


74

Conclusion

• From the case studies it has become clear that the R&D activities at the companies of this study

are largely framed into what can be taken as two different categories of innovation projects: new

product development and platform technology development projects. The technology development

projects result in technologies that are integrated in the new product development projects.

• The multidisciplinary innovation projects are managed as ‘stage-gate’ processes. Together with

other functional disciplines (of which marketing is very important), geographically dispersed

R&D centers deliver knowledge inputs throughout the different stages of these projects.

• At all companies, external knowledge was found to be very important for the R&D organization

throughout the different stages of both types of innovation projects.

• The main sources of external knowledge are different for the two types of innovation projects, as

summarized in Table 5. The most important difference is that universities and research institutes

typically are important sources of external knowledge to technology development projects, yet

much less for product development projects.

6.11 Knowledge absorption in the emerging economies

To answer sub-question 4, this section discusses a number of important overall observations about the

internationalization of R&D of Unilever, DSM, AkzoNobel and Philips to the emerging economies of

Brazil, Russia, India and China, and about the absorption of external knowledge in these countries by the

subsidiary R&D centers of these companies in these countries.

From the literature review in the introductory chapter it was concluded that for Western companies the

absorption of external knowledge through their R&D centers in the emerging economies of Brazil, Russia,

India and China is increasingly important. The following discusses to what extent the case studies among

the companies of this research support this view. Also, findings from the cases about the nature of and the

drivers behind the internationalization of R&D are compared to the literature review in chapter 2.

The first conclusion is that the case studies at Unilever, DSM, AkzoNobel and Philips unanimously

affirmed that Brazil, Russia, India and China provide an important basis for the internationalization of

highly-skilled R&D activities, for an increasing number of scientific and technological domains. This

includes long time-to-market research work and more complex development tasks. Also, the large market

potential of the emerging countries is an important reason to establish product development-oriented

centers with ‘adaptor’ mandates: all companies and many of their businesses typically have a significant

number of adaptor R&D sites in all four of the BRIC countries. At the country-level case studies of this

research the potential to tap into local knowledge environments to acquire new technical knowledge was

found to be limited still. This was seen largely to be due to the comparatively low quality of the local


75

knowledge infrastructure, limiting the potential to locally establish collaborative R&D programs with other

companies and universities companies. Nonetheless, in all cases, hiring qualified R&D personnel was seen

as a very important way to acquire local knowledge.

Second, similarly to the Western countries, the absorption of local external knowledge is perceived by the

R&D managers to be very important in the emerging economies. This is the case both for technology

development and for product development activities. Of the BRIC countries, China is often highlighted as

the economy where the market growth and the developments within a variety of high-tech industrial

domains are highest. Interestingly, all of the interviewed corporate-level technology managers indicated

that for several different industrial sectors as diverse as foods (Unilever), biotechnology (DSM) and

medical equipment (Philips) China is now at a ‘turning point’ of becoming an important provider of new-

to-the-company scientific and technical knowledge. As for Brazil, Russia and India, the case studies

affirmed that these countries are also important sources of knowledge that can be tapped by the R&D

centers and used for new product and technology development. Again, this is the case for specific industrial

(sub-) domains. This point is illustrated in the case studies by the establishment of global Centers of

Excellence in Brazil (Unilever, AkzoNobel) and India (AkzoNobel, Unilever and Philips), and of scientific

research laboratories, such as DSM’s Enzyme Lab in Russia. Notwithstanding this general conclusion, for

the country-level case studies of this research the potential to tap into local knowledge environments to

acquire new technical knowledge was found to be limited. In all cases, this was seen largely to result from

the comparatively low quality of local knowledge infrastructures, limiting the potential to establish

collaborative R&D programs with universities and other companies. In all cases, hiring of qualified R&D

personnel was seen dominant way to acquire local knowledge.

Based on the literature review on R&D in section 2.4, it was argued that the ‘adaptor’ R&D centers

typically do not provide important innovative inputs for the R&D system. This argument may hold in

general, yet the case study at Philips Lighting nuances the point: the R&D lab in Shanghai developed a new

manufacturing method for compact fluorescent lamps, which can be seen as a typical adaptation task.

However, not only were these Chinese adaptations essential to the competitive advantage of the business,

but importantly this capability is now exploited by the firm without significant alterations at other low-

wage environments.

A third important conclusion is that the nature of the knowledge absorption process and its coordination

mechanisms in the emerging economies are not perceived by the R&D managers to fundamentally different

from those applied in the West. The reason therefore appears to be that the R&D centers in these countries

are managed as part of the global R&D systems. These systems entail largely uniform structures and

processes world-wide and their managers make use of the same management practices as applied in

Western countries. Nonetheless, the absorption of new knowledge from external, non-western sources does

pose additional challenges to the firms of this research. For example, several managers underscored that for

the success of the R&D activities in emerging economies, it typically is not sufficient to train and educate


76

the local employees to adopt the company’s western practices and codes. Foreign R&D centers often

consist of a majority of locally hired employees and are managed by expatriate managers. To operate

successfully, the managerial sensitivity for cultural differences and the willingness and ability to adapt the

Western communication methods and the overall business approach to the local conditions is equally

important. Clearly, cultural differences also require adjustments to the ‘regular’ coordination mechanisms

for knowledge absorption. For example, collaborative R&D projects with external partners may be

hampered by concerns over the weak protection of Intellectual Property Rights. This is considered a

problem especially in China, although the issue is now high on the agendas of Chinese policy makers.

Cultural and language barriers may also be significant. The coordination mechanisms that are specific for

knowledge absorption in the emerging economies will be discussed in Chapter 7.

Fourth, in relation to the earlier discussion (section 2.4), the case studies provide supporting evidence for

the existence of different location drivers for Research and Development (see Von Zedtwitz & Gassmann,

2002). The reason to establish a foreign R&D center with typical research tasks is largely ‘knowledge-

driven’ i.e. by the presence of local sources of technical and scientific knowledge. As is illustrated by

DSM’s Enzyme Lab in Russia, for this type of internationalization the availability of a local market is not a

prerequisite. By contrast, development-oriented R&D centers are typically established to adapt existing

concepts, products and processes to foreign conditions (such as market, labor and industry conditions, etc.)

as illustrated by the case study on Philips Lighting in Shanghai. In those cases where both the local market

potential is high and a strong local knowledge infrastructure is present (or at least developing speedily) this

may lead firms to invest in activities within the full R&D spectrum, as illustrated by the large innovation

center that is currently being set up by Philips and DSM in the Pudong area of Shanghai. These innovation

centers of excellence are established with the aim to cover a broad spectrum of R&D activities for several

businesses within a number of years. Examples of dynamic changes in R&D mandates of the foreign R&D

centers were also found (see section 2.4): over the last ten years, Philips Lighting’s typical development-

oriented R&D site in Shanghai (with the main task to service and control the local production process) has

developed into an increasingly powerful R&D center with unique capabilities that can be exploited

elsewhere. At Philips Lighting this ‘R&D mandate spanning’ is seen as the result of an ongoing bottom-up

process of competence development. By contrast, at AkzoNobel a top-down planned strategy steered the

swift development of its Car Refinishes R&D site in Bangalore from a small research center for relatively

simple product development tasks into become one of the business group’s three major Centers of

Excellence.

Conclusion

Four major conclusions were drawn from the case studies about the absorption of external knowledge via

R&D centers in the emerging economies by the four companies of this study:

• First, for an increasing number of scientific and technological domains, Brazil, Russia, India and

China provide an important basis for the internationalization of more complex and highly-skilled


77

R&D activities, enabling the establishment of research-oriented, ‘creator’ R&D centers. Also, the

large market potential of the emerging countries is an important reason to establish product

development-oriented centers with ‘adaptor’ mandates.

• Second, similarly to the Western countries, the absorption of local external knowledge is

perceived to be highly important for the R&D activities in the emerging economies and externally

developed knowledge is important for all phases in the product development and technology

platform development projects. At the country-level case studies of this research the potential to

tap into local knowledge environments to acquire new technical knowledge was found to be (still)

limited, however.

• Third, the nature of the knowledge absorption process and its coordination mechanisms in the

emerging economies are not perceived by the R&D managers to be fundamentally different from

those applied in the West. Nonetheless, cultural issues need careful consideration to secure the

success of the overall R&D operations and of knowledge absorption.

• Fourth, the case studies confirmed the existence of different location drivers for Research and

Development activities, while the case studies at Philips and AkzoNobel illustrate the dynamic

changes in R&D mandates from basic development-oriented R&D tasks towards highly skilled

research-oriented work.


78

Chapter 7

Discussion: cross-case analysis and confrontation to the literature

7.1 Introduction

To answer the main research question, this chapter discusses the identified coordination mechanisms

applied by Unilever, DSM, AkzoNobel and Philips to steer the absorption of external knowledge by the

international R&D centers in general, and for the R&D centers in the emerging economies of Brazil,

Russia, India and China in particular.

7.2 Structuring the results

As discussed, the knowledge absorption process by the R&D centers is understood as a combination of the

valuation of external knowledge, its acquisition, transformation, transfer and application (section 3.3). As

discussed in the methodology chapter (Chapter 5) in the interviews the R&D managers were asked to

identify important coordination mechanisms steering these activities. From the total of 14 interviews a large

number of coordination mechanisms were identified. To draw further conclusions it was necessary to

organize and cluster the results. To this end, within-case interpretation of the results was carried out and

cross-case patterns were looked for (Eisenhardt, 1989). The categorization of Martinez & Jarillo (1989, see

section 3.4) was used as the main conceptual reference for interpreting and labeling of the interview results.

It became clear that many overlaps existed between the case studies30. To reduce the total number of

coordination mechanisms, only those mechanisms that were mentioned by at least two R&D managers are

reviewed in this chapter.

Across the cases it became clear that many of the identified coordination mechanisms actually steer

particular sub-categories of the five knowledge absorption activities. These sub-categories provide insights

into how the managers across the four case studies perceive the nature of the knowledge absorption

activities. For instance, in the interview discussions on the valuation of external knowledge, the

mechanisms that steer the focus of the R&D organization on particular areas of external knowledge

(enabling the R&D employees to assess the value of external knowledge for the organization) were a

recurring issue. Consequently, these mechanisms could be clustered into the sub-category ‘mechanisms to

30 Apart from similarities, differences in the identified coordination mechanisms were also found. Importantly however, the different

identified mechanisms were typically found to complement rather than to exclude mechanisms identified at the same or at other

companies. For example, the establishment of HRM practices tailored to local employee markets was identified at Philips and

AkzoNobel as an important mechanism to attract qualified personnel in China and India, which in turn is seen as an important way to

acquire external knowledge. Even though this mechanism was not explicitly mentioned at DSM, there is little reason to assume HRM

would not have played any role of significance when establishing the Russian Enzyme lab.


79

frame the external knowledge requirement of R&D centers’. Table 6 presents the different identified sub-

categories per knowledge absorption activity.

Knowledge

absorption activity

Sub-categories

Valuation of

external knowledge

Mechanisms to frame the external knowledge requirement of R&D centers;

Mechanisms to understand the technical/scientific content of external knowledge

and its business value;

Mechanisms to keep track of external technology developments;


(providing access to external knowledge)

Acquisition of

external knowledge

Mechanisms to acquire external knowledge by hiring local employees

Mechanisms to manage collaborative and arms-length R&D activities with local

partners

Transformation of

acquired knowledge

Mechanisms to manage knowledge transformation

Mechanisms to match the R&D outputs with the requirements of other disciplines

Transfer of acquired

knowledge

Mechanisms to promote internal knowledge sharing

Mechanisms to facilitate knowledge transfers with other disciplines

Application of

acquired knowledge

Mechanisms to apply knowledge by the R&D center


Table 6 Sub-categories of the five knowledge absorption activities

The following five sections of this chapter will discuss the identified coordination mechanisms underneath

the five knowledge absorption activities. The discussions of the sub-categories provide important insights

into the nature of the knowledge absorption processes from a managerial perspective. Per sub-category

typically around five key coordination mechanisms have been identified. The tables at the end of each

chapter summarize the identified coordination mechanisms underneath the sub-categories of the valuation

activity. Per coordination mechanism it is indicated at which company and at which managerial level the

coordination mechanism was identified (i.e. the corporate: C, or the subsidiary level: S). Note that the C’s

and S’s only indicate that the coordination mechanism has been mentioned by an interviewee in the

discussions. Hence, the absence of a C or S does NOT indicate the mechanism is not present at the

company, but only that it was not mentioned by the interviewees on their own accord.


80

7.3 Coordination mechanisms for the valuation of external knowledge

As a result of the external orientation of the R&D organizations of this research for innovation, and

increasingly also in the emerging economies, the ability to recognize the value of external technical and

scientific knowledge has become a key function of the international R&D centers. From the case studies

four categories of sub-categories were identified that together promote the ability of the R&D centers to

value external knowledge:

• Mechanisms to understand the technical/scientific content of external knowledge as well as its

business value;

• Mechanisms to keep track of external technology developments;

• Mechanisms framing the external knowledge requirement of R&D centers (allowing the R&D

center to focus on those knowledge domains that are considered of value to the firm);

• Mechanisms to manage a network of external partner firms and research institutes (providing

access to external knowledge).

The identified coordination mechanisms steering these sub-categories are discussed in the following.

Mechanisms to understand the technical/scientific content of external knowledge and its business value

The notion that the value of external knowledge depends on its eventual application by the firm is widely

supported by the participating managers. Therefore, the R&D center’s employees need not only be able to

understand the technical / scientific content of externally developed knowledge, but also to asses the

applicability and market potential of this knowledge (i.e. a boundary-spanning role). Having a base of

experienced in-house R&D employees, who possess over this combination of capabilities, is seen as a key

prerequisite by all companies31.

31 This result is in fully line with the theory of Cohen & Levinthal (1989, 1990) that was adopted by many others, including Tsai

(2001), Van den Bosch et al. (1999) and Van Wijk et al. (2001) and focuses on the presence of prior related knowledge as a key

determinant of absorptive capacity.







81

Several coordination mechanisms were identified to employ and sustain such a qualified base of in-house

R&D employees, including HRM activities, such as applicant selection, remuneration systems and training

programs. As argued by several subsidiary-level managers, HRM practices need to be tailored to the

specificities of local labor markets, which is considered especially important in the emerging economies.

The R&D employees stay up-to-date with the relevant scientific and technology developments as well as

with relevant business developments typically through reading journals, visiting congresses and technology

road shows, etc. To promote the boundary-spanning capabilities of R&D employees, several participants

mentioned competence management system and internal job transfers (e.g between marketing and R&D)

are regarded as important coordination mechanisms.


To be able to assess the value of externally developed knowledge, the R&D organization must be aware of

the important developments outside the firm for relevant knowledge domains. As several managers argued,

in the first place this requires an outward orientation of the R&D organization. This outward orientation

implies a shift from the traditional role of R&D as a generator of knowledge, to that of an ‘absorber’ of

externally developed knowledge32. Top-management commitment to ‘open innovation’ and the

communication of these values across the R&D organization are important mechanisms to promote the

openness to external knowledge among employees.

Apart from an open attitude, keeping track of external developments requires significant organizational

efforts from the R&D centers. Several structural mechanisms were mentioned to establish an active

knowledge search and assessment (or ‘scouting’) function, such as the establishment of outward-oriented

innovation units (DSM) ‘technology teams’ (Philips), and special task forces (AkzoNobel).

At the level of individual employees, often the scouting of externally developed technologies is made part

of the job descriptions and several managers argued that reward systems need to be aligned with the

aspiration of the organization to identify and acquire external knowledge. The focus of external technology

scouting ranges from long-time-to market scientific developments by universities to technological

applications developed by suppliers for direct implementation in product development projects. For

instance, whereas DSM is highly involved in basic research programs with universities for new

technologies, AkzoNobel primarily focuses on spinning-in ready developed technologies, of which the

commercial applicability is considered to be certain. For DSM it is therefore more important to have

researchers in house with strong scientific skills than it is for AkzoNobel33.

32 Although Minbaeva et al. (2003) and Mahnke et al. (2005) focus on intra-organizational knowledge absorption, an interesting

similarity exists with their observations: the authors point at the difference between the willingness and the ability to transfer and

absorb knowledge. The cultural mechanisms to promote an outward orientation are typical mechanisms to promote the willingness of

employees to focus on external knowledge. 33 This statement was affirmed by the interviews with AkzoNobel’s Peter Gommers and former DSM manager Emmo Meijer.


82

To improve the quality of technology scouting by the R&D organization, technology search and

assessment methods are developed. In line with the different dominant sources of external knowledge for

research and development tasks, different value assessment methods exist. For platform technology

development projects, ‘science scouting’ is important. As discussed, collaborative projects with research

institutes are a common form to acquire new knowledge. However, the eventual resulting commercial value

of such new technologies is typically difficult to foresee. Therefore, indirect valuation systems, such as

rankings of the research groups and individual researchers are applied to maximize the likelihood that the

newly developed knowledge will be of value to the R&D organization. ‘Venture scouting’ is the screening

of start-up companies that apply new concepts. ‘Business partner scouting’ involves the search for other

companies to establish collaborative innovation programs and supplier audits are held to benchmark new

technologies provided by supplier companies. The latter two mechanisms are applied both for technology

development and for new product development projects.

Mechanisms to frame the external knowledge requirement of the R&D centers

Without a clear focus on which knowledge is needed for the development of new products and processes, it

is impossible to attach a value to external knowledge. Mechanisms that frame the external knowledge

requirement increase the ability of the R&D centers and their employees to recognize the value of external

knowledge. A combination of strategic planning mechanisms was identified at all companies: typically, a

long-term (+/-5 year) business strategy is defined at top-management level. Aligned with this overall

business strategy, a technology strategy is developed, specifying the objectives for long-time-to-market

technology development carried out within technology platform development projects (see section 6.10).

Also, the (short time-to-market) technology requirement for new product development objectives is

established and new products development projects are defined. At all companies, a portfolio management

system is at the basis of the selection of R&D projects to be resourced. The assignment of subsidiary R&D

mandates (to the extent these can be controlled top-down) is an important coordination mechanism to steer

which R&D unit is responsible for the valuation and acquisition of specific external knowledge. Finally,

based on an assessment of internally and externally available competences it is decided by R&D managers

whether the required knowledge should be developed in-house by the R&D center, or acquired from

external sources. Together, these mechanisms establish the external knowledge requirement in a largely

structured way.


‘External’ knowledge is often developed through collaborative projects with external partners.

Consequently, developing collaborative skills and having strong network ties with other companies and

research institutes are highly important to keep track of and value external knowledge developments. The

promotion of collaborative skills of employees happens through trainings, applicant selection procedures

and employee competence management systems. To establish network ties with other companies and

research institutes, building trust with external partners, through frequent communication, transparency


83

etc. is seen as essential. For technology development projects in particular, the establishment of network

ties with research institutes is important. This can be promoted via participation in scientific advisory

boards at universities and by employing scientists with part-time academic functions.

Table 7 summarizes the above discussion on coordination mechanisms for the valuation of external

knowledge (see next page).


84

Coordination mechanisms Function

Uni

leve

r

DS

M

Akz

oNob

el

Phi

lips

Category

Different for emerging economy

Mechanisms to understand the technical/scientific content of external knowledge and its business value HRM activities, such as applicant selection,

remuneration systems and training programmes Employ and sustain a qualified base of in-house R&D employees

C,S S Socialization *

Competence management systems Manage technical and commercial competences of employees

C C,S C Output and behavioral control

Internal job transfers Develop combined technical and commercial competences of employees

C,S C S S Lateral relations

R&D employees keep track of journals, visit congresses and technology roadshows, follow courses etc.

Stay up-to-date with the relevant scientific, technical and business developments

C,S C,S C,S C,S Socialization

Employing specialized scientific staff, invest in good research facilities

Establish strong research capabilities C,S C,S C S Planning

Mechanisms to keep track of external technology developments Top-management commitment to, and

communication of, outward orientation Promote outward orientation throughout the R&D organization

C,S C C,S C Socialization / informal comm..

Establishment of externally oriented business groups, such as technology teams and scouting groups

Keep track of technology developments C,S C,S C C,S Departmentalization

Employee trainings, reward systems, job description and rules. For example: keeping track of developments at industrial and non-industrial partner firms is part of job description

Keep track of technology developments C,S C,S C C,S Formalization & socialization

Develop and implement search and assessment tools to scout external technology developments, including methods for venture scouting, business partner souting, benchmarking of suppliers, and science scouting.

Keep track of technology developments C C,S S Standardization

Mechanisms to frame the external knowledge requirement of R&D centers Assignment of subsidiary R&D mandates Determine to what extend the R&D center should

be involved in the absorption of external knowledge

C C,S S C Centralization

Technology strategy (derived based on the overal business strategy)

Specify the long-term technology development objectives and requirements (for research)

C,S C,S C C,S Planning

New product development strategy Specify short-term technology development objectives and requirements (for development)

C,S C,S S C,S Planning

Portfolio management systems Selection of R&D projects C C,S C C Planning

Mechanisms manage a network of external partner firms and research institutes (providing access to external knowledge) Trainings, applicant selection procedures and

employee competence management systems Develop R&D employees' capabilities to form partnerships with external partners

C,S C,S S Socialization *

Building trust with external partners, through frequent communication, transparancy, etc.

Establish network ties with other companies and research institutes

C C Socialization

Establishment of scientific advisory boards at universities

Establish network ties with research institutes (for research activities)

C C Socialization

Employing scientists with part-time academic functions

Establish network ties with research institutes (for research activities)

C C Socialization

Table 7 Results: coordination mechanisms for the valuation of external knowledge


85

7.4 Coordination mechanisms for the acquisition of external knowledge

In general, the R&D managers considered the acquisition of external knowledge to be a result of practical

organizational processes. The hiring of qualified technical graduates and experienced R&D personnel was

often mentioned as an important way to directly acquire local external knowledge. Secondly, the

discussions often centered on the application by the companies of different business models at the basis of

acquire external knowledge. Several corporate R&D managers emphasized that the co-development of new

knowledge as a result of collaborative projects with external research centers and companies has become

one of the dominant ways to develop and acquire new external knowledge. Also, less collaborative, or

‘arms-length’ business models were found to have become increasingly popular ways to acquire external

knowledge. Consequently, the identified coordination mechanisms for the acquisition of external

knowledge are divided into two sub-categories:

• Mechanisms to acquire external knowledge by hiring local employees;

• Mechanisms to manage collaborative and arms-length R&D activities with local partners.


Hiring of qualified technical graduates and experienced employees was often mentioned as an important

method to directly acquire local external knowledge. Furthermore, it was considered to be the dominant

way to acquire knowledge among the four country studies in the emerging economies. The successful

management of HRM issues such as salaries, attractive career perspectives, employee policies, etc., is

therefore an important mechanism to acquire external knowledge via new employees. For the R&D

activities in the emerging economies, where competition for talent is increasingly fierce and the

characteristics of labor markets can be quite different, several R&D managers argued that a successful

approach consists of a combination of leveraging the strengths of the home-base HRM system, while

tailoring the practices to the local situation.

By hiring new employees, new technical knowledge appears to enter the firm directly. Nonetheless, new

employees do not contribute their knowledge and skills to the R&D processes automatically. Instead,

internal trainings and practice are often in place to promote this. Due to language and cultural barriers,

knowledge absorption through internalizing employees may be more difficult in emerging economies. For







86

example, Chinese employees often need to develop a more pro-active attitude. Well-designed training

programs and temporary job transfers to develop working experience at the Western R&D centers are seen

as important mechanisms to improve the effectiveness of this type of knowledge acquisition. Second, the

inter-cultural management skills of the R&D managers are considered to be very important to optimize the

knowledge-based contributions of the individual employees to the R&D processes, which can be promoted

via training and employee selection.


Collaborative and ‘arms-length’ business models are seen as a second important basis for the acquisition of

external knowledge by the R&D organization. Therefore, the professional qualities of the in-house R&D

employees are essential, re-emphasizing the importance of having a qualified base of R&D employees (for

which the coordination mechanisms were discussed above). The identified collaborative business models

include joint ventures, alliances, non-commercial collaborative agreements and joint-development projects.

Arms-length approaches include licensing-in of intellectual property, spinning-in of start-up companies,

equity stakes and outsourcing of R&D to external organizations. The professional management of these

collaborative and arms-length business models is considered key to improve the quality and efficiency of

the knowledge acquisition activity. Also, the ability to make the right choice for a particular model is seen

as important. Hence, the strategic decision-making for the application of different types of business models

is being professionalized at all firms. This professionalism is achieved via HRM systems, such as

competence management systems, trainings and courses to develop managerial competences. Also,

structural mechanisms, alliance management departments, and functional assignments, such as scouting

functions are considered key coordination mechanisms to improve the management of the different

business models at the basis of knowledge acquisition by the R&D centers.

Table 8 summarizes the above discussion on coordination mechanisms for the acquisition of external



87


Uni

leve

r

DS

M

Akz

oNob

el

Phi

lips

Category

Different

for

emerging

economy


HRM practices tailored to local employee markets,

such as remuneration, policies etc.

Attract and hire qualified employees who contribute

new knowledge to the R&D center

C,S S Socialization *

Trainings, job transfers, developing working

experience

Promote the contribution of new employees'

knowledge and skills

C,S S S Socialization *


Establishment of externally oriented business groups

such as alliance management teams, technology teams

and special task forces

Professionalize the management of collaborative

business models, including joint ventures, alliances,

non-commercial collaborative agreements and joint-

development projects.

C,S C,S C C,S Departmentalization

Trainings, applicant selection procedures, job

descriptions

Develop R&D employees' capabilities to form

partnerships with external partners

C C C S Socialization *

Employee competence management systems Manage technical and commercial competences of

employees

C C,S S Planning /

formalization

Strategic decision making for application of different

types of collaborative and non-collaborative business

models

Select appropiate business model to acquire external

knowldge

C C C,S Planning /

formalization

Building trust with external partners, through frequent

communication, transparancy, etc.

Enable knowledge exchange with external partners S C Socialization

Table 8 Results: coordination mechanisms for the acquisition of external knowledge


88

7.5 Coordination mechanisms for the transformation of acquired knowledge

Knowledge transformation by the R&D centers was found to consist of a combination of a variety of

interacting processes, steered by many different coordination mechanisms. Notwithstanding this

complexity, it was possible to identify a number of general patterns.

To assess which coordination mechanisms may improve the quality of the knowledge transformation

activities, it is critical to understand the desired outcome of these processes first. Among the four

companies of this research, the R&D activities are organized in multidisciplinary innovation projects,

where organizational units (including the R&D centers) from different locations provide specific inputs

(see section 6.10). Even though this thesis only focuses on the knowledge absorption activities that are

carried out by the foreign R&D centers, these activities are to a large extent coordinated by the

overarching management of the global innovation projects. Consequently, the effectiveness of the

knowledge transformation and transfer processes can only be understood in the context of the international

project organization. An important observation from the case studies was that once the external knowledge

is acquired, it is typically managed in the same way as internally developed knowledge. Hence, based on

the cases studies, the knowledge transformation process by the international R&D centers can be divided

into two sub-categories:

• Mechanisms to manage knowledge transformation in general;

• Mechanisms to match the R&D outputs with the requirements of the other disciplines.


Several managers argued that the project-based organization of R&D activities, with (partly) standardized

R&D deliverables improved the efficiency of the knowledge transformation activities. The centralized

responsibility to define R&D activities for innovation projects at the level of the R&D manager was

identified as a second important aspect34. An informal culture, with low barriers to contact colleagues

either within or outside the discipline, and an attitude of ‘helping each other out’ (Unilever) were also

mentioned to be of great value to the quality of the knowledge transformation process by enabling problem

34 The standardization of R&D deliverables and formalization of tasks were identified to be important mechanisms to coordinate the

knowledge transformation and transfer activities. In line with this finding, the formalization of tasks was found by Jansen et al. (2005)

to be positively related to both potential and realized absorptive capacity (as discussed in Chapter 4).







89

solving. Such a culture is promoted by the communication of values promoting ‘openness’ by top-level

management, as well as reward systems and socialization events. Also, the benchmarking of R&D

processes within the R&D organization was mentioned as a useful mechanism to leverage good practices,

improving the quality of the knowledge transformation processes of the R&D centers. Finally, as with the

other knowledge absorption activities, the overall quality of the knowledge transformation processes

largely depends on the quality of the established base of R&D employees (for which the coordination

mechanisms have been discussed in section 7.3).


The new product and technology development projects are centrally coordinated by a project manager.

Narrow communication between the manager of the R&D team and the overall project manager is often

mentioned as an important mechanism to coordinate the fit of the R&D activities with the overall

innovation project, thus steering the quality of the transformation activities. Also, the development of a

combination of technical and commercial competences is considered to improve the quality of knowledge

transformation processes carried out by the R&D employees35. This is promoted via competence

management systems, internal job transfers and integrative mechanisms, such as cross-disciplinary

functions, communities of practice and technology platforms.

Table 9 summarizes the above discussion on coordination mechanisms for the transformation of acquired


35 By enabling better coordination between different disciplines, the innovation projects can be seen as an example of ‘cross-

functional interfaces’. Jansen et al. (2005) found that in general cross-functional interfaces promote potential absorptive capacity (i.e.

the acquisition and assimilation of knowledge), but not realized absorptive capacity (i.e. the transformation and exploitation of

knowledge). Whether this finding would also hold for the specific case of collaboration between marketing and R&D managers and

the context of this research appears unlikely, as the case studies of this research indicate that the narrow collaboration between R&D

and marketing is important for the effective management of the total new product development projects, including the knowledge

transformation and exploitation phases.


90

Table 9 Results: coordination mechanisms for the transformation of acquired knowledge


Uni

leve

r

DS

M

Akz

oNob

el

Phi

lips Category

Different for

emerging

economy


Project-based organization of R&D activities, R&D

deliverables are (partly) standardized through stage-

gate systems

Improve the efficiency of knowledge transformation

activities

C,S C,S C,S C Output control

Centralized responsibility to define R&D deliverables

to innovation projects

Improve the coordination of knowledge

transformation activities

C,S C,S C S Centralization /

planning

Establishing an 'open culture' within the R&D center,

through higher-level management values, reward

systems and socialization events

Promote problem solving C,S C C C Socialization

Internal benchmarking of R&D processes Improve the quality of knowledge transformation

activities

C, S Standardization

/ output control

Culture and language trainings for employees and

managers

Improve the quality of knowledge transformation

activities

C S C,S Socialization *

HRM activities, such as applicant selection,

remuneration systems and training programmes

Employ and sustain a qualified base of in-house

R&D employees

C,S C C,S S Socialization

Competence management systems Management of technical and commercial

competences of employees

C,S C,S S C,S Planning


Centralized responsibility of management of

multidisciplinary innovation projects

Improve the coordination of R&D activities C,S C,S C Centralization /

lateral relations

Establishment of an 'open culture' across disciplines,

through top management values, reward systems and

socialization events.

Promote problem solving across discplines C,S C C Socialization /

informal

communication

Cross-disciplinary interfaces, such as communities of

practice, technology platforms and temporary job

transfers

Improve the effectiveness of knowledge

transformation activities

S C C C,S Lateral

relations


91

7.6 Coordination mechanisms for the transfer of acquired knowledge

From the interviews it followed that the transfer and the transformation of knowledge are strongly

interrelated. For instance, Peter Gommers at AkzoNobel argued that “the promotion of knowledge transfers

throughout the R&D organization is the strongest conduit to knowledge transformation”. Also, the

requirement to be able to transfer the knowledge within the organization has implications for how the

deliverables are presented, and hence for the transformation process. Similar to the above discussion on

knowledge transformation, the knowledge transformation activity is subdivided into two sub-categories:

• Mechanisms to promote knowledge sharing within the R&D center;

• Mechanisms to facilitate knowledge transfers with other disciplines.

Mechanisms to promote knowledge sharing within the R&D center

Knowledge sharing between R&D employees is facilitated by several mechanisms. Given that most R&D

centers consist of employees from several different nationalities, communication barriers need to be

minimized. Typically, all employees within the R&D organization are required to speak one common

language (normally English). Also, culture and language trainings for employees and managers were

mentioned as a method to improve the quality of communication, especially for the R&D centers in the

emerging economies. Establishing an informal, 'open culture' within the R&D center, through top-

management values, reward systems and socialization events was also often mentioned as a coordination

mechanism to promote knowledge sharing within the R&D centers. Advanced communication tools, such

as video conferencing, are applied by some companies (e.g. Philips). However, in general, relatively simple

communication tools, such as telephone, email and intranet-based applications to share data, such as

communities of practice are used predominantly. Finally, events such as R&D conferences stimulate

internal knowledge transfer both directly (through the dissemination of relevant knowledge) and indirectly,

through their socialization function (as discussed above)36.

36 Knowledge transfer has not received much attention in the absorptive capacity literature. As an exception, Minbaeva et al. (2003)

and Mahnke et al. (2005) took inter-unit knowledge transfers as an indicator of absorptive capacity and they found HRM and

knowledge management practices to have a positive impact. No publications were found that study internal knowledge transfers as a

part of the total external knowledge absorption process. Nontheless, the internal transfer of knowledge has been subject to extensive

research in the management literature (e.g. Boone, 1997; Björkman, Barner-Rasmussen & Li, 2004; Buckley & Carter, 1999; 2001;

Carlile, 2004; Gupta & Govindarajan, 2000; Kuemmerle, 1997; Schulz, 2001; 2003; Szulanski, 1996, Teece, 1977).







92


As argued in the above discussion on coordination mechanisms for knowledge transformation, the acquired

knowledge needs to be transformed in such a way that is possible to transfer either within the R&D center

or to other organizational units or disciplines. To this end, the R&D organization is required to provide its

‘deliverables’ in an explicit, documented form as much as possible. The establishment of cross-disciplinary

interfaces, such as communities of practice and technology platforms, is seen as an important coordination

mechanism for knowledge sharing by the R&D center and other organizational units.

Table 10 summarizes the above discussion on coordination mechanisms for the internal transfer of acquired

knowledge.


Uni

leve

r

DS

M

Akz

oNob

el

Phi

lips

Category

Different

for

emerging

economy

Mechanisms to promote internal knowledge sharing

One language requirement Improve communication S S C Standardization *

Establishing an 'open culture' within the R&D center,

through higher-level management values, reward

systems and socialization events

Promote knowledge sharing C,S C C Socialization /

informal

communication

Culture and language trainings for employees and

managers

Promote knowledge sharing C S C,S Socialization *


Establishing an 'open culture' across disciplines,

through top management values, reward systems and

socialization events.

Promote knowledge sharing with other disciplines C,S C S Lateral

communication/

socialization /

informal

communication

Communication tools, such as video conferencing,

and intranet applications such as online 'team rooms'

Enable knowledge sharing with other disciplines S C C C Lateral

communication

Cross-discipinary platforms such as communities of

practice and technology platforms

Promote knowledge sharing S C C,S C,S Lateral

communication

Table 10 Results: coordination mechanisms for the transfer of acquired knowledge


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7.7 Coordination mechanisms for the application of acquired knowledge

As discussed in the literature review in section 3.3, the application of knowledge by the organization may

take several forms. A direct form of application is using the assimilated knowledge to create and improve

products and services that can be sold on the market. Apart from direct commercial applications,

‘knowledge outputs’ such as the ‘production’ of intellectual property and the development of internal

processes and routines are important applications of external knowledge. From the case studies, two

categories of coordination mechanisms for knowledge application by the international R&D centers were

identified.

• Mechanisms for the application of knowledge by the R&D center;

• Mechanisms to exploit knowledge outside the firm.

Mechanisms for the application of knowledge by the R&D center

An important common element of the new product and technology development projects that as carried out

by the companies of this research, is that they are managed by funnel-type portfolio management systems.

Throughout the project development, the commercial feasibility of the project is assessed at different stages

of the project by expert managers and only a limited number of ideas with high market potential are

selected to be developed. Hence, the portfolio management systems are regarded to improve the efficiency

of knowledge application. Also, the project-based organization of R&D activities, as discussed in 6.10 is

seen as an important mechanism to improve the speed and efficiency of the knowledge application

processes. Finally, strategies maximizing the global exploitation of R&D knowledge, such as Unilever’s

‘global roll-out strategy’ are seen as a mechanism to improve the efficiency of knowledge application.


All R&D organizations are actively involved in developing competences to manage new business models

for the application of their knowledge resources outside the firm’s boundaries. These include the spinning-

out of young firms, licensing-out of IP, and selling of technologies to third parties is important to maximize

the efficiency of knowledge exploitation. As with the management of business models for the acquisition of

external knowledge, structural coordination mechanisms are established to professionalize the exploitation

of knowledge outside the firm, such as special departments or functions for ‘open innovation’. Sound IP







94

management was identified as a key requirement for these types of business models. Especially Philips and

DSM have developed advanced capabilities for the ‘spinning-out’ of venture companies. Venture

companies are young businesses that are built-up either in-house, or with intensive support from the mother

company, but do not have a sufficient ‘fit’ with the business strategy. Interestingly, as follows from the

case studies at DSM and Philips, by some R&D managers spinning-out is seen as a profitable business

model and not as an undesired phenomenon. At AkzoNobel and Unilever these flexible business models

are less broadly applied.

Table 11 summarizes the above discussion on coordination mechanisms for the application of acquired

knowledge.

Table 11 Results: coordination mechanisms for the application of acquired knowledge


Uni

leve

r

DS

M

Akz

oNob

el

Phi

lips

Category

Different

for

emerging

economy

Mechanisms to apply knowledge by the R&D center

Portfolio management systems Promote efficiency of knowledge application C C,S C C Planning

Project-based organization of R&D activities, R&D

deliverables are (partly) standardized through stage-

gate systems

Improve the efficiency of knowledge application C,S C,S C Output control

Global 'roll out' of new products etc. Improve the efficiency of knowledge application C,S C Standardization /

output control


Establishment of business groups for external

knowledge exploitation

Professional management of (new) business models

for the exploitation of acquired knowledge, such as

spin-out management and selling of IP

C C,S C C Departmentalization

Building managerial competences for external

knowledge exploitation, such as IP management skills

Professional management of (new) business models

for the exploitation of acquired knowledge, such as

spin-out management and selling of IP

C C,S C Socialization *


95

7.8 Reflection and confrontation of the empirical and theoretical findings

Based on the discussion in the preceding sections, it is concluded that the aim of this thesis to identify key

coordination mechanisms for knowledge absorption by the foreign R&D centers of the four multinational

companies of this research has led to the desired result: a considerable number of coordination mechanisms

that are considered to be important to coordinate external knowledge absorption have been identified and

interpreted. Clearly, the absorption of external knowledge by R&D centers is not perceived by the

managers as something that automatically ‘happens’ to the company. On the contrary, the five external

knowledge absorption processes (i.e. the valuation, acquisition, transformation, transfer and application of

external knowledge) are generally interpreted in a practical sense and are taken to result of specific

managerial practices. Interestingly, most of the managers across the four different companies share similar

ideas about the nature of the knowledge absorption processes by the R&D organization and their

coordination mechanisms.

All managers confirmed the importance of external knowledge absorption by the foreign R&D centers (also

for those the emerging economies), and recognized the five different activities to be relevant37. The case

studies underscore the importance of the effective management of both the ‘external’ and the ‘internal’

components of knowledge absorption: to acquire valuable external knowledge it is important to understand

what the company needs and to have the capabilities to effectively manage the knowledge acquisition

process. Yet, this is only half of the work: to be able to successfully apply the acquired external knowledge,

the internal knowledge transformation and transfer processes need to be well-established.

Typically, per knowledge absorption activity multiple different coordination mechanisms are applied by the

firm. Often, both formal and informal coordination mechanisms are applied simultaneously, as follows

from the categorization based on Jarillo and Martinez (1989). Also, the case studies affirm that the

knowledge absorption processes by the foreign R&D subsidiaries are only partly steered by the R&D

centers themselves (e.g. by applying mechanisms promoting the scouting capability of employees).

Overarching coordination mechanisms, such as corporate-wide technology strategies, the promotion of

‘openness’ to external knowledge and the organization of R&D processes within global innovation

projects, were found to steer the knowledge absorption by foreign R&D centers to a large degree.

Confrontation of the findings to the theory

The insights from the discussion underscore that the five knowledge absorption activities are steered by

largely different combinations of coordination mechanisms. Therefore, this thesis argues that the approach

followed by several studies (e.g. Jansen et al., 2005; Zahra & George, 2002) as well as by the present

research, to study the coordination mechanisms for the different elements of knowledge absorption, has


96

been useful to improve our understanding of absorptive capacity and to appreciate the “richness and

multidimensionality of the concept” (Jansen et al., 2005: 999)38.

In the above discussions of the identified coordination mechanisms per knowledge absorption activity,

several references to existing absorptive capacity literature (as reviewed in chapter 4) were made (in the

footnotes). Overall, it can be concluded that only a small number of the coordination mechanisms identified

in this research have been addressed in the existing literature of absorptive capacity. For example, the

availability of qualified employees as a basis of prior knowledge is one of the ‘classical’ determinants of

absorptive capacity (e.g. Cohen & Levinthal, 1989; 1990). Also, the impact of HRM systems (Mahnke et

al., 2005; Minbaeva et al., 2003) and integrative functions (Jansen et al., 2005) has been the subject of

studies on absorptive capacity. However, most of the coordination mechanisms for absorptive capacity

identified in this research have not been addressed in the existing absorptive capacity literature.

The findings from the preceding sections of this chapter contribute to the existing literature of absorptive

capacity in two ways. First, the discussions on the sub-categories of the five knowledge absorption

activities provide important new insights into the managerial perspectives on the nature of the knowledge

absorption process by foreign R&D centers (sub-question 2), that have remained outside of the focus of the

absorptive capacity literature. Second, the discussion of coordination mechanisms details how managers

perceive the (sub-categories of the) five knowledge absorption processes are steered (main research

question). Since most of the identified mechanisms have not yet been addressed in the existing absorptive

capacity literature, the insights derived in this research may serve as a basis for future research.

The relevance of the findings to the absorptive capacity theory may best be illustrated by a number of

examples. For instance, the participating managers unanimously argued strategic focus mechanisms are

critical to the R&D center’s ability to value external knowledge (by determining which areas of knowledge

are valuable to the company and the R&D centers). Notwithstanding its perceived relevance, this aspect has

largely been overlooked in existing research on absorptive capacity, as confirmed by Lane et al. (2006:

857). The findings in 7.3 indicated that several strategic and structural coordination mechanisms are

applied at all four companies to steer the focus of the R&D centers towards specific valuable areas of

external knowledge.

Similarly, the hiring of local employees is widely regarded as one of the most important ways to acquire

local external knowledge, yet the issue has remained unexplored in the absorptive capacity literature. This

second example touches upon an important issue: the absorptive capacity literature is little explicit about

38 With regard to defining the process of external knowledge absorption, as discussed in 3.3, the aim was to stay close to Cohen &

Levinthal’s (1990) original conceptualization of absorptive capacity as a combination of the valuation, assimilation and application of

external knowledge. However, for the context of this research it was considered useful to redefine the knowledge assimilation process

into the actual acquisition of the external knowledge by the foreign R&D center, its internal transformation, and its transfer within the

R&D center, as discussed in section 3.3. As follows from the discussions, this reconceptualization has provided interesting insights

into the knowledge absorption process by the R&D centers.


97

the business models firms may apply to absorb external knowledge. This thesis identified several

mechanisms that are regarded to be at the basis of the valuation and acquisition of external knowledge (i.e.

hiring of personnel, active technology scouting, and arms-length and collaborative business models), while

for the application of knowledge, mechanisms to develop and professionalize the competences of R&D

centers to commercially apply knowledge outside the boundaries of the company (e.g. through spin-out

management and licensing out of technology) were regarded as increasingly important. Hence, based on the

case studies, the quality of the overall knowledge absorption process can be regarded to be largely

dependent on how well firms are able to manage these different business models. Although these

mechanisms remain unexplored in the absorptive capacity literature, they are addressed in several related

literatures, such as the literature of strategic management and organizational learning and recent research

on open innovation39. This thesis suggests that by incorporating insights from these literatures, the theory of

absorptive capacity could develop into a theory more valuable to managerial practice.

7.9 Conclusion

• To answer the main research question, this chapter provided a cross-case discussion of the

coordination mechanisms for the absorption of external knowledge by the foreign R&D centers of

Unilever, DSM, AkzoNobel and Philips.

• Many overlaps were found in the results, indicating that the R&D managers share similar views of

the nature of the different knowledge absorption activities (i.e. the valuation, assimilation,

acquisition, transfer, transformation and application) and their coordination mechanisms.

• The identified coordination mechanisms steer particular sub-categories of the five knowledge

absorption activities. The sub-categories provide important new insights into the managerial

perspectives on the nature of the knowledge absorption process by foreign R&D centers (sub-

question 2).

• Typically, several different types of coordination mechanisms were identified per (sub-category of

the) knowledge absorption activities (i.e. the valuation, acquisition, transformation, transfer and

application of external knowledge).

39 Some examples of the literature of different business models underneath knowledge acquisition include the co-creation of

knowledge with external parties, as is the case with collaborative research programs with universities (e.g. Chesbrough, 2003; 2006);

joint ventures (Lane & Lubatkin, 1998; Lane, Salk & Lyles, 2001) and strategic alliances (Dyer & Singh, 1998; Hagendoorn, 2002;

Hamel, 1991; Ireland, Hitt & Vaidyanath, 2002). In these cases, the acquisition of knowledge typically happens through the learning

of individual members of the firm and the development and subsequent appropriation of new explicit technological knowledge. More

‘direct’ forms of knowledge acquisition including licensing in of technology and patents and the hiring of qualified experts, up to the

acquisitions of another company have been studied by Ahuja & Katila, 2001 and Bresman, Birkinshaw & Nobel, 1999 and

Chesbrough, 2003; 2006.


98

• Most of the identified coordination mechanisms have not yet been addressed in the existing

absorptive capacity literature. Hence, the practical new insights derived in this research may serve

as a basis for future research.

• A summary of the identified mechanisms is provided in section 8.2.


99

Chapter 8

Conclusion

8.1 Introduction

This chapter recapitulates the key findings of this research in section 8.2. Section 8.3 addresses the

limitations. Theoretical and managerial implications are discussed in section 8.4.

8.2 Results

The objective of this research was to identify key coordination mechanisms determining the absorption of

local technical and scientific knowledge by the R&D centers of Western multinationals in the emerging

economies of Brazil, Russia, India and China. The empirical part of this research was based on exploratory

case studies at four leading multinationals: Unilever, DSM, AkzoNobel and Philips. A review of the

relevant literatures was carried out to provide a theoretical basis.

Four sub-questions have been addressed to be able to understand the nature of the knowledge absorption

processes of the subsidiary R&D centers of multinational firms and to provide insights into the R&D

activities of the four firms in the emerging economies. The main findings to these questions were

summarized at the end of each chapter.

For the case studies, ‘knowledge absorption’ was (re)conceptualized on the basis of Cohen & Levinthal

(1990) as a combination of the following five activities: the valuation of external knowledge; the

acquisition of external knowledge; the transformation of acquired knowledge; the transfer of acquired

knowledge; and the application of acquired knowledge (see section 3.3). The participating R&D managers

were asked to describe how they perceive the nature of these five knowledge absorption activities for the

foreign R&D centers, as well as what they consider are key coordination mechanisms to steer these

activities.

The case studies at Unilever, AkzoNobel, DSM and Philips provided valuable insights into how the R&D

centers of these companies absorb external knowledge from the foreign knowledge environment as well as

identifying key coordination mechanisms to steer these activities. It was found that the identified

coordination mechanisms steer particular sub-categories of the five knowledge absorption activities. The

12 sub-categories, which are presented in the table below, provide insights into how the managers across

the four case studies generally perceive the nature of the five knowledge absorption activities. Typically, a

combination of several different types of coordination mechanisms were identified to steer the (sub-

categories of the) knowledge absorption activities.

The main findings of the cross-case analysis are summarized in Table 12 (see next page).


100

Knowledge absorption activity

Sub-category

Coordination mechanisms and their role

Value Mechanisms to understand the technical/scientific content and business value of external knowledge

Establish a base of qualified R&D employees, through HRM practices, etc. Development of a combination of technical and commercial employee competences, via competence management systems, internal job transfers (e.g. between R&D and marketing).


Establish an outward orientation via communication of top-management values; an active knowledge scouting function through structural mechanisms (innovation units, technology teams, etc.), at the employee level through job descriptions etc. Develop technology search and assessment methods.

Mechanisms to frame the external knowledge requirement of R&D centers

Provide focus via strategic planning mechanisms, incl. technology strategy and new product development strategy; portfolio management systems; R&D subsidiary mandates, etc.


Develop employee collaborative skills to establish network ties and trust with companies and research institutes, through trainings; employee competence management systems; socialization events, etc.

Acquire Mechanisms to acquire external knowledge by hiring local employees

HRM issues incl. salaries, career perspectives, employee policies. Promote contribution of knowledge of new employees via cultural and professional trainings, practice, job transfers, etc.


Establish professional management of collaborative and arms-length business models, via managerial competence management; structural mechanisms such as alliance management departments and special management functions.

Transform Mechanisms to manage knowledge transformation in general

Project-based organization of R&D activities, with (partly) standardized R&D deliverables improve efficiency. Enable problem solving via ‘openness’: an informal culture with low barriers to contact colleagues, communication of ‘open’ values by top-level management; reward systems and socialization events. Leverage good practices via internal benchmarking of R&D processes and events.

Mechanisms to match the R&D outputs with the requirements of the other disciplines

Establish narrow communication between the R&D team and the innovation project coordinator (several mechanisms). Development of a combination of technical and commercial employee competences, via competence management systems, internal job transfers, and integrative mechanisms, such as cross-disciplinary functions, communities of practice and technology platforms.

Transfer Mechanisms to promote knowledge sharing within the R&D center

Minimize communication barriers through requirement of one common language and culture and language trainings. Establish 'open culture' within the R&D center. Effective use of simple or more sophisticated communication tools. Events such as R&D conferences.

Mechanisms to promote knowledge sharing with other disciplines

The R&D organization is required to provide ‘deliverables’ in an explicit, documented form. Establish cross-disciplinary interfaces, such as communities of practice and technology platforms.

Apply Mechanisms for the application of knowledge by the R&D center

Funnel-type portfolio management systems and a project-based organization of R&D activities promote efficiency of knowledge application. Strategic and structural mechanism to maximize global exploitation of R&D knowledge.


Competences to manage new business models for external kn. application (e.g. spin-out management, licensing-out of IP, selling of technologies), through special departments and functions for ‘open innovation’. Professional IP management as a key requirement.

Table 12 Summary: key coordination mechanisms for knowledge absorption


101

8.3 Limitations

Even though this research has been carried out with due consideration and care, it has some limitations.

First, the number of respondents, cases and business units of this research is limited. Therefore, even

though many similarities were found in terms identified coordination mechanisms, the question to what

extent the research findings can be extrapolated to other companies cannot be answered. Second, R&D

managers provided most of the empirical inputs for the study. It can be argued that their thinking about how

external knowledge is absorbed and how this is coordinated is framed by what they have learned from their

education and training, interactions with colleagues, etc., which may bias the case study results. For

example, the emphasis on the establishment of systems to manage the innovation process may partly be

attributed to a (hypothesized) inclination of the R&D managers to think in terms of technical systems,

whereas people with a different backgrounds (e.g. sociology) may focus on different aspects (e.g. social

interaction patterns) and hence identify different coordination mechanisms to be important for knowledge

absorption. As discussed in section 5.4, several measures were taken to maximize the validity of the case

studies.

8.4 Theoretical and managerial implications

Theoretical implications

In this research several valuable new insights were derived both into the nature of the knowledge

absorption processes of subsidiary R&D centers and into the coordination mechanisms to steer these

processes. Most of the identified sub-categories and coordination mechanisms of the knowledge absorption

activities have not been addressed in existing research. For instance, the participating managers

unanimously argued that strategic focus mechanisms are critical to the R&D center’s ability to value

external knowledge (by determining which areas of knowledge are valuable to the company and the R&D

centers). Notwithstanding its perceived importance, this aspect has largely been overlooked in existing

research on absorptive capacity (Lane et al. 2006: 857).

Through its practical approach and by identifying organizational determinants of absorptive capacity, the

findings contribute to reducing the problem of ‘reification’ of the concept (Lane et al., 2006). This thesis

forcefully underscores that absorptive capacity is not a ‘thing’ and challenges the idea that any one single

factor (such as R&D investments) could serve as a useful proxy for a firm’s level of absorptive capacity.

Moreover, the findings indicate that the five knowledge absorption activities studied in this research (i.e.

the valuation acquisition, transformation, transfer and application) are steered by largely different

combinations of coordination mechanisms. The identified sub-categories of the knowledge absorption

activities and their coordination mechanisms may provide a useful basis for further research on absorptive

capacity, especially for the context of international R&D. Section 7.8 provides a more elaborate reflection

on the results and confrontation to the literature.


102

Managerial implications

This thesis has explicitly focused on the topic of external knowledge absorption by R&D centers from the

perspectives of senior R&D managers. The case studies underscore the importance of the effective

management of both the ‘external’ and the ‘internal’ components of knowledge absorption: to acquire

valuable external knowledge it is important to understand what the company may need and to have the

capabilities to effectively manage the knowledge acquisition process. Yet, this is only half of the work: to

be able to successfully apply the acquired knowledge, the internal knowledge transformation and transfer

processes need to be well-established. The identified coordination mechanisms can be regarded as

important factors to take into account when designing and managing the knowledge absorption processes

by international R&D centers. For the context of the emerging economies, the case studies indicate that the

knowledge absorption processes via the R&D centers in these countries were taken to be essentially similar

to those in western countries. Nonetheless, cultural differences may become barriers for effective

knowledge absorption if they are not effectively managed. This thesis provided insights into how specific

coordination mechanisms, such as tailored HRM practices, temporary internal job transfers, cultural and

language trainings (for new employees and for expatriate managers) may be applied to compensate this

problem. In the light of the growing popularity of the emerging economies as sources of innovation, this

issue clearly calls for further investigation.


103

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Appendix 1

Interview protocol

Company and address

Respondent name and position

Background

Briefly describe the main characteristics of:

• The organization of international R&D

• The dominant business and R&D internationalization trends of the last decade

• The business activities in the emerging economies countries

• R&D activities in emerging economies of Brazil, Russia, India China


Discuss:

• The importance of external knowledge for the company

• How does the R&D organization absorb external knowledge?

• What types of knowledge are important and what are its major sources?

• Recognition of validity of this study’s conceptualization of the external knowledge absorption

processes (i.e. valuation, acquisition, transformation, transfer, application)?

• Recognition of what is understood by coordination mechanisms? (Discuss categories of Jarillo &

Martinez, 1989)

Coordination mechanisms

Describe the process and discuss its coordination mechanisms for:

• The Valuation of external knowledge by the R&D organization

• The Acquisition of external knowledge

• Its Transformation by the R&D organization and other organizational units

• The Transfer of the knowledge within the organization

• The commercial and non-commercial Application of the transformed knowledge


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Appendix 2

Unilever case study

2.1 Introduction

This chapter discusses the coordination mechanisms underneath the knowledge absorption activities of

Unilever’s R&D organization. As with the case discussions of the other three companies, first the

contextual background information is provided. This includes information about Unilever’s organizational

heritage and the most important current organizational characteristics, the organization of international

R&D, and its activities in the emerging economies. Subsequently, the knowledge absorption process and

the underlying coordination mechanisms of the company as a whole are discussed. Finally, the knowledge

absorption process at Unilever’s Tomato and Savoury Center of Excellence in São Paolo is discussed.

This first section is based on face-to-face interviews with Senior Vice President of R&D Foods Emmo

Meijer, Global Brand Manager for Unilever Foods’ Spreads Peter Boone, and R&D manager of Unilever

Foods’ Spreads Umesh Dowlath. Secondary sources of data include the company website, Unilever’s

annual of 2006 and powerpoint presentations of Meijer.

Background

Formed of Anglo-Dutch parentage, Unilever owns many of the world's consumer product brands in foods,

beverages, cleaning agents and personal care products. Unilever employs approximately 179,000 people, is

represented in approximately 150 countries worldwide and had revenues of almost €40 billion in 2006. As

a fast moving consumer goods company, Unilever is strongly focused on global consumer interests.

Understanding better than competitors what the consumer wants is a key capability of the company (Boone,

pers. comm., 2007). However, marketing is not all: as a result of increasing competitive pressures the R&D

organization needs to be able to develop new products based on more complex technologies within shorter

time spans and at lower costs and highly efficient supply chain management has become the norm. Over

the last decades, the company has put a lot of effort to improve the efficiency of the company’s supply

chain, marketing and R&D activities. Coming from a highly decentralized organization structure,

centralization of activities has been a key aspect of these reorganization programs.

The reorganization round started in 2004 involves the implementation of a global category structure and

simplified product offering. The implementation of a simpler structure, with shorter lines and fewer

managerial layers has improved Unilever’s speed to market. In the current matrix structure:

• Categories are responsible for brands, R&D, Innovation, Strategic Pricing and global leverage.

• Regions are focused only on execution, deploying investment, customer management, tactical

pricing and promotions, and the supply chain. They are responsible for in-year profit delivery.


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• Functions partner with the regions and categories and ensure functional excellence. Activities that

are not competitively critical are increasingly outsourced.

Within the categories, ‘brand development’ has become the new operating framework. Global brand teams

consist of the brand managers in the different regions. They meet every two to three months to discuss

brand development issues. Options for new projects are put forward and if an interesting idea is identified,

it is adopted and enters the ‘innovation funnel’. The brand manager acts as a gate keeper for the different

product development phases within the funnel, typically together with the R&D manager.

Centralization of R&D

In line with the highly decentralized organization set up of the past, the different countries used to have

significant R&D autonomy. Consequently, little synergy existed which led to a duplication of R&D

activities, a lack of intra-organizational knowledge exploitation and difficulties with attempts to roll-out

new products across the different countries (Meijer, pers. comm., 2007). Since 2005, R&D is organized

into one organization (no longer per country). A simplified R&D infrastructure is being implemented40,

including the restructuring of R&D into a lower number of larger research centers, focusing on fewer,

larger R&D projects. These R&D projects result in product concepts that are rolled-out globally with

minimal local adaptations. To remain locally responsive, local units gather marketing knowledge that is

communicated to regional centers that are responsible for developing local adaptation to the product

concept (based on an economy of scale rationale) (Dowlath, pers. comm., 2007). Unilever has six principal

research and development laboratories: two in the UK (Colworth House and Port Sunlight), one in the

Netherlands (Vlaardingen), one in the US (Trumbull), one in China (Shanghai) and one in India

(Bangalore). According to the company website, “scientists and engineers in these sites work seamlessly

with a network of global and regional technology centers that stretches from São Paulo, Brazil in the west,

to Shanghai, China in the east.”

R&D strategy

A five year innovation roadmap is developed based on the goals of the corporate Vitality strategy, global

marketing insights, and technology trend and capability analyses. Based on this roadmap (which serves as

an input for the full brand organization) a technology strategy is distilled for the businesses and, in those

cases where the technology can serve as a platform for multiple businesses, corporate R&D programs

(Meijer, pers. comm., 2007).

40 In 2006, Unilever announced dramatic reorganizations in its R&D structure. In 2006 Unilever had 64 R&D locations. In 2008 this

number should be brought back to 27. Six large centers of excellence spread around Europe with specific expertise will form

Unilever’s research backbone.


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Figure 10 R&D program development at Unilever

The 4D organization

Since 2002, all R&D activities are organized in projects. Project teams coordinate all aspects in a ‘4D’

organization. An assignment for an R&D project is handed over by the brand developer to R&D in the form

of a brief, implying the commitment of the marketing manager to the R&D project. Often, the brief is

developed jointly with the R&D project manager. The development of this input for the project is called the

Define phase. The other three D’s stand for the different categories of R&D activities: basic research

(Discover), product platform development (Design), and implementation work (Deploy). Together with the

Define phase, this constitutes the four elements of the 4D organization.

Figure 11 Unilever’s 4D R&D organization

The different R&D categories cooperating in a project are typically separated geographically. Nonetheless,

the idea is that these different units co-operate seamlessly within the project organization and the R&D

managers are positive about the functioning of the system. For example, a Brazilian deploy unit wants

certain traits in margarine. Its R&D managers work in the same project team as project developers, so they

get to see each other often and are able to launch product development together. As soon as a project in

launched, it appears in the innovation funnel, that is managed by the category managers (they do the

portfolio management). The choice to ‘land’ a market trend in a particular development program is based

on the research capabilities of the (Discover) research center or (Develop) center of excellence (CoE)

(Umesh Dowlath, pers. comm., 2007).

Emerging economies

India has traditionally been a large market and supplier of innovation and technology for Unilever. In the

last decade, China has become Unilever fastest growing market. Brazil’s and Russia’s consumer markets

are also growing rapidly. Traditionally, Unilever transfers a lot of its know-how and innovations to the

Business R&D

Program

Corporate

Research

Program

R&D Program

Business

Strategy

Business

Technology

Analyisis

Technology

Strategy

Define Portfolio Definition

Discover (Science) Research

Design Product Development

Deploy Local Adaptation & Implementation


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emerging countries, primarily to regional CoEs and supply chain activities (Meijer, pers. comm., 2007).

Yet in the last few years, aside from India, especially China and to a lower extent Russia and Brazil are

becoming important providers of new technological knowledge and marketing innovation. The case study

will describe the knowledge absorption processes at Unilever’s Savoury and Tomato Center of Excellence

in São Paolo.

Market growth is the major reason for Unilever to expand its business and R&D in the emerging

economies. In these countries, Unilever needs to operate very close to the market to build up market

understanding. This need to be locally responsive is the primary reason to establish local and regional

deploy- and development centers. In all emerging economies of this study Unilever is building up its local

capabilities in the areas of R&D, brand development and supply chain. Apart from understanding the

market, building networks with suppliers, government institutes and research centers are essential to

strengthen its research position over time. In this respect, the quality of local graduates and the presence of

world class research institutes in the specific fields of business are important factors that determine the

potential of the emerging economies to become significant R&D forces (Meijer, pers. comm., 2007).

By 2006, Unilever invested around €1 billion in research and development41. Of this amount only 15% was

spent on R&D in The Netherlands. In the years to come, Unilever plans to strengthen its R&D position in

China and India. R&D director Westrate does expect a larger impact of Asian R&D on the product

development of the corporation. For example. Unilever aims to leverage local knowledge about Chinese

medicine in its products (De Ingenieur, 2007). The R&D units in Shanghai and Bangalore are already

strongly developed and are envisaged to grow much faster than those in Europe. Vice president of Unilever

Foods Meijer believes Unilever’s current organization can handle this reverse in innovation potential and

the organization structure and processes are robust enough. The important coordination mechanisms

41 http://www.unilever.com/ourcompany/aboutunilever/introducingunilever/unileverataglance.asp

Box: China’s innovation potential

In the last few years, it has become clear that especially China is rapidly becoming a dominant source of technical know-how for

Unilever. Its vast number of graduate chemists sharply contrasts with the lack thereof in Europe, increasing China’s attractiveness

as a supplier of more science oriented research (i.e. Discover and Develop activities). Another factor that is identified by Meijer

(pers. comm., 2007) is the pride and desire of Chinese employees to become innovators. Indeed, there are several examples of

product development research projects already taking place in China. For example, a cube of jelly-based stock (for soups etc.)

was developed in China and is now ready to be rolled-out to the rest of the world. It is envisaged that Unilever will expand its

R&D activities in China, and for particular categories, the mandates of these centers are expected to shift from local adaptation

work towards more scientific research activities in the mid-term. Currently, a large number of western expats are training the

Chinese employees, in order to breed a highly professional R&D workforce that in the future will be able to match the

competences of Unilever’s established research centers (both Develop and Discover centers).


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enabling the successful valuation, assimilation and application of the innovative knowledge sources of the

emerging economies are discussed below.

2.2 Knowledge absorption by Unilever’s R&D organization

As discussed, the absorption process is understood as a combination of the valuation of external

knowledge, its assimilation (i.e. acquisition, transformation and transfer) and its application. Based on the

interviews among Unilever R&D managers, a first conclusion should be that the absorption of external

knowledge among Unilever’s R&D centers of the different divisions and business units is a complex and

multifaceted phenomenon that differs per division, product category and even per R&D project. It is

therefore impossible to provide an overview of all coordination mechanisms applied by the company as a

whole. Nonetheless, in recent years significant efforts have been made to restructure the R&D processes

company-wide, which has led to the implementation of a more uniform approach to managing R&D tasks.

As will be discussed, a number of the implemented mechanisms play a key role in coordinating the external

knowledge absorption process.

Coordination mechanisms for the valuation of external knowledge

Unilever’s R&D units play a key role in the absorption of external technical knowledge and the

combination of this knowledge with market inputs to create new products. As follows from the interviews,

the valuation process by R&D units can be understood as a combination of personal and organizational

processes. How individual R&D employees judge the value of external knowledge is a very complex

process. Individual employees form a personal idea of which knowledge may be needed to fulfill his / her

current or future tasks or otherwise advance the company goals, based on a multitude of inputs and

professional experience. To the extent these inputs are of an organizational nature, they will be discussed

below. Often, valuating and acquiring external knowledge is an explicit part of the R&D job, as will be

discussed below. If the employee judges the external knowledge to be relevant, he or she will make an

implicit or explicit decision to learn the details of the ‘knowledge object’, or hint a colleague to do so

(Umesh Dowlath, pers. comm., 2007). The major external knowledge sources available to R&D employees

include, but are not limited to: documentation such as scientific literature and professional journals,

congresses, communications with external colleagues and business partners, cooperative activities with

research institutes, etc.

R&D mandates

At Unilever, different types of R&D units exist with different roles in the overall R&D process. This R&D

mandate determines to a large extent which types of knowledge are absorbed and by which unit and is

therefore seen to have a strong moderating effect on the valuation and acquisition activities of the R&D

center. The different types of R&D centers are:


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Global centers of Discovery: these mainly absorb scientific knowledge (through literature, congresses, co-

operation with universities and other companies) and transform this to concepts to be exploited in other

parts of the company (mainly CoEs).

Regional Centers of Excellence: combining global market inputs with concepts from Discover units these

CoEs develop differentiated products for the local markets. They also absorb external technical knowledge

from literatures, universities and other companies.

Local Development centers: these mainly absorb market knowledge and use this for local product

adaptation and as an input for CoEs. No technology knowledge is absorbed at this level.

It is important to note that the R&D mandates are not rigid, but subject to market developments and

international technology developments. Typically, in the countries with an increasing innovation potential,

such as the BRIC countries, R&D mandates evolve over time from local Deploy centers (implementation)

to more research oriented centers (Develop and Discover). Mandate development is directed top-down by

R&D top management and there is little room for bottom-up ‘mandate-spanning’ developments. Especially

the Deploy and Develop centers play an important role as absorbers of external technical knowledge, which

is the most important type of knowledge for the R&D units (Dowlath, pers. comm., 2007; Meijer, pers.

comm. 2007). Concluding, the different R&D mandates have a large moderating impact on the absorptive

capacity of the company in the sense that they frame the search for and acquisition of external knowledge.

R&D portfolio management

R&D project portfolio management has been strongly professionalized over the last five years. Within the

strategic boundaries set by the brand directors, the developed portfolio determines which technologies are

needed. In case the desired capability is not available in-house, the decision can be made to acquire it

externally. Unilever’s portfolio is now moving towards the creation of new markets (above left in the

portfolio figure), i.e. a higher level of differentiation through radical new technologies for new core

products. This movement results in a higher total need for specific new technologies. Thus, the valuation of

external (technical) knowledge is highly contingent on the demand for specific technology resources put

forward by the technology strategy and the individual research programs.


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Figure 12 Unilever’s portfolio management. Adapted from presentation by Meijer, 2007.

Open innovation culture

Driven by the increasingly complex and interwoven array of technologies underlying its products, and the

recognition of the idea that these technologies are often developed better, cheaper or faster by external

parties, Unilever has embraced the open innovation model, which resulted in a strong increase in the use of

externally developed ideas. Over 40% of Unilever’s R&D portfolio now builds on external capabilities,

which could be expected to lead to friction among R&D employees. However, according to Meijer, the

promotion of the open innovation model among employees did not provoke a lot of resistance among

employees, since top management has been able to explain the need to acquire external knowledge to the

employees quite well. The open innovation mindset is promoted among the full R&D staff through a

cultural reward system for external knowledge sourcing, promoted by top management (Meijer, pers

comm., 2007). The outward orientation results in a more frequent and more positive valuation and

acquisition of external knowledge.

Technology scouting

In line with the fact that external technical knowledge has become much more important to Unilever, the

‘scouting’ of technology and companies has been professionalized and structured over the last years.

Scouting is done based on assignments (stemming from the technology strategy) issued by technology

managers. The scouting mechanisms are centrally organized. Three types of scouting can be distinguished

(Meijer, pers. comm., 2007):

• Science scouting: Corporate scientists and program directors are expected to seek contacts at

universities and attend the important congresses, build networks etc. This forms the basis for pre-

commercial research cooperation.


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• Venture scouting: Unilever has senior R&D employees, typically program directors, who scout the

development of start-ups and companies working with new concepts. This is at the basis for

acquisition, JV or alliances.

• Business partner scouting, typically in the product development area. Central is the co-creation of

innovation with suppliers and other companies. For example, in the field of flavors, Unilever

cooperates with three flavor houses on collective innovation programs. Apart from pre-

competitive cooperation, Unilever engages in closed knowledge development programs with

external partners, such as suppliers, for competitive programs.

A combination of science scouting and venture scouting, typically for closed research co-operations in the

competitive phases of product development.

In-house scientists

Having top class scientists in-house can be seen as a sine qua non for successful external science screening

by scientific research employees. Also, the more development oriented R&D employees also need

sufficient expertise and capabilities for science and venture scouting. It can be concluded that the role of

R&D employees is expanding from technical knowledge creation to technology screening and co-creation

of knowledge in collaborative settings. Concluding, the professionalizing of individual and organizational

scouting capabilities contribute to the quality of the external knowledge valuation process.

Concluding, given the increasingly external orientation of Unilever as a whole and R&D in particular,

managing external collaborations effectively (i.e. to acquire high quality knowledge in an efficient way)

has become very important. The assessment whether a particular stock of new external technological

knowledge is valuable enough to the company to be acquired by an R&D unit is subject to many processes.

The most important coordination mechanisms to valuate external knowledge, that were identified in the

interviews are the assignment of clear R&D mandates to the international R&D centers, the framing the

knowledge requirements by the technology strategy of the category and R&D portfolio management, the

outward-oriented innovation culture, and the professionalized scouting function that is being developed at

Unilever, in combination with having top-class scientists in-house.

Coordination mechanisms for the acquisition of external knowledge

As discussed in chapter two, the knowledge assimilation process can be seen as a combination of the

acquisition, transformation and internal transfer of external knowledge. The importance of these three

activities was affirmed by Meijer. Based on the interviews it can be concluded that R&D employees can be

seen as the main ‘acquirers’ of valuable external knowledge. This knowledge can be applied within the

company, and more specifically the R&D project either directly by using the knowledge for improving the

business process, or via communication to colleagues. Second, hiring qualified R&D personnel is identified

as an important direct method to acquire external knowledge. Third, as with the valuation process, the


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interactions with external organizations form an ever more important basis for the acquisition of external

knowledge. In this section the dominant coordination mechanisms at these different levels are discussed.

As discussed, all R&D activities are managed within projects. External technical knowledge may enter an

R&D project at different phases of the project (i.e. the Discover, Develop and Deploy phases), which is

illustrated in the following figure. The acquired knowledge is subsequently transformed and applied in new

product and knowledge outputs (these mechanisms are discussed in the following sections on assimilation

and application processes).

.

Figure 13 Knowledge absorption in the project organization. Based on a presentation of Emmo Meijer, 2007

Acquiring through hiring

Hiring technically trained personnel on an individual basis and group-wise through company acquisitions

are direct forms of acquiring expert technical knowledge as well as less specific competences. Hiring

qualified personnel and keeping them is a challenge. Problems include the lack of graduate chemists in

Europe and, to a varying degree, the low innovation potential of R&D employees from emerging countries.

Employee run-off was not identified as a critical problem at Unilever. To attract and keep employees,

European HRM best practices can be exploited in the emerging economies, albeit local adaptations are

necessary (Meijer, pers. comm., 2007).

Training new employees

Typically, internal trainings and practice are needed before new employees can contribute their expertise to

the organizational processes in a fruitful way. Knowledge absorption through internalizing employees may

take more time in emerging economies. For example, in the case of Chinese employees, extra trainings are

needed to teach them how to adopt a more pro-active attitude. Learning from the expertise and skills of

senior R&D managers, newcomers improve their competence level, enabling them to improve their

personal contributions to R&D projects. The newcomers are also trained to adopt the open innovation

mindset, increasing their capacities to spot and acquire externally developed knowledge. Well-designed

Internal Technology Base

External Technology Base

Market

External (technical) knowledge

Discover Develop Deploy


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training programs are therefore seen as an important element to improve the knowledge acquisition and

valuation capabilities.

Employee boundary spanning capabilities

Having in-house highly qualified scientists with strong collaborative skills has become essential to the

effectiveness of co-operative knowledge creation efforts with research institutes and science clusters,

especially for the more basic research activities. At the same time, the developed knowledge must also be

applicable within the company, which demands a thorough understanding of the business and the internal

processes. The desired capacities of R&D employees to acquire external knowledge therefore include:

An outward orientation and the ability to form partnerships with other scientists, research institutes and

companies. The ability to team-up with other companies in the Discover and Develop phases of the R&D

process requires sufficient intelligence of the developments at companies in the field, as well as business

and personal skills to achieve a fruitful form of co-operation.

Understanding the external technology. Discover people need strong scientific skills, while Develop

employees need a broader and less in-depth orientation.

Understanding the internal business demands, including the technology requirements for different phases in

the project, and being able to ‘sell’ the developed knowledge within the R&D project and especially to the

marketing people.

Thus, the development of boundary spanning capabilities among employees, and especially the abilities of

employees to team-up with external parties, as well as to align the external cooperative activities with the

project planning, have become increasingly important for the successful acquisition of external knowledge.

Employee competence management

As follows from the above section, it is very important for Unilever R&D to have the right people on the

right positions for successful knowledge acquisition. Obviously, this argument also holds for the valuation,

assimilation and application processes. In the last two years, personal competence management within the

R&D organization has become more structured based on to the so-called ‘3 dimensional’ competence

management model, distinguishing science capabilities, project management capabilities and resourcing

capabilities. This particular model was originally designed and is still being applied at DSM, where it was

also mentioned as an important coordination mechanism. Therefore, it will be further discussed in the DSM

case study.

Strategic management of collaborative business models.

In the last decade, the range of business models applied by Unilever co-develop and acquire technical

knowledge has become more diverse. Important categories include licensing-in, joint ventures, acquisitions,

non-commercial cooperative agreements, joint development projects with other companies, and equity

stakes. At the same time, the interactions with external organizations form an ever more important basis for


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the acquisition of external knowledge. Together, this has led Unilever to professionalize its external

development activities for knowledge acquisition. At Unilever, 10 years ago, the only external knowledge

acquisition systems were science scouting (typically based on the personal academic networks of top

scientists) and corporate planning-level managers looking for business partnerships (not specific for R&D).

The managerial choice for specific models for different conditions is now being structured and optimized

according to strategic considerations in R&D portfolio management. This choice depends on several

contingencies. For Unilever, important variables include the time to market (and thus the position in the

product development funnel), and the desired level of strategic autonomy. The essence of the decision

comes down to acquiring the relevant knowledge through applying the business model that offers the best

possible cost/benefit solution within the desired time span. For example, if competitors are already ahead

with the development of a competitive technology, rapid acquisition of that technology may drive Unilever

to acquire the company, even though this may be a costly option. Several departments support the external

business development functions (M&A, Legal, Accounting etc.) and their cooperation with R&D has

significantly improved over time.

Str

ateg

ic A

uto

no

my

TimeShort Long

Low

High

Acquisition

License

JointDevelopment

JointVentures

Internal Development

Equity Stake

ExternalR&D

Figure 14 DSM’s business models for external knowledge absorption. Based on a presentation of Emmo Meijer, 2007.

For early-stage projects with a long time horizon to market launch, the desired competences are necessarily

less narrow defined. Joint development and equity stakes are typically applied for the (partly) external

development of new technologies with uncertain and/or long-term market application potential.

Acquisitions are a costly option to acquire technological know-how and acquired companies may be

difficult to integrate within the company. In this respect it is important to note that the success of post-

acquisition integration is key to ensure the effectiveness of knowledge acquisition. Licensing of external

technological knowledge is typically an option for projects with a short time span to market launch. The

attractiveness of this option also depends on whether the competence to utilize this knowledge is already

present within the company, since the licensed technology should be ‘landed’ in the project within a short

period. Concluding, the professional management of the wide range of collaborative business models is key


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to secure the successful acquisition of relevant external knowledge (i.e. it increased its quality and

effectiveness).

Concluding, the knowledge acquisition process (as part of the total assimilation activity) is promoted by the

by the following coordination mechanisms: the hiring and training of talented employees, the development

of employee boundary spanning capabilities, professional competence management, and the strategic

management of cooperative business models.

Coordination mechanisms for the transformation of acquired knowledge

To answer the question which are the important coordination mechanisms underneath Unilever’s

knowledge transformation and transfer activities, it is critical to understand the importance of the

integration between R&D and the market. Historically, Unilever was a typical brand-led company, with

R&D trailing behind the marketing discipline. The current reorganization entails a strong effort to

rebalance R&D with marketing. Institutionalizing partnerships between marketing and R&D throughout the

company is a key element of this effort. As a result, R&D managers now not only closely interact with

marketing in the product launch phase, but also co-decide about the brand strategies.

Acquired external technological knowledge by the R&D unit is transformed into new routines and

concepts. These are eventually applied in product designs that are handed over to supply chain management

for production and selling on the market. Low return on R&D investments corresponds to a low efficiency

in terms of the application of R&D knowledge, which was largely attributed to poor cooperation between

marketing and R&D. Examples of past problems include: promising R&D ideas ending up to be put in a

drawer by marketing, R&D units pulling back in ivory towers because they were not feeling acknowledged

in their work by marketing (as a result of poor communication and the power imbalance), R&D projects

suddenly being aborted or continuously changed by marketing, etc. Clearly, this led to a suboptimal

exploitation of research outputs. Over the last five years, the relative position of R&D has improved as a

result of several actions. An important aspect is that the co-operation between marketing and R&D at all

managerial levels has been institutionalized since 2005. For example, apart from managing the R&D

project, the R&D manager now cooperates very closely with the marketing manager to ensure the

developed concept or product fits seamlessly with the business requirements (timing, price, specifics, etc.).

The close interaction between marketeers and R&D managers leads to a better understanding of each

other’s context, which is believed to lead to the more efficient development of products that also better suit

the market needs. Thus, this thesis argues that the narrow cooperation between marketing and R&D

improves the quality of the transform, transfer and application processes.


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The project-based R&D organization

As discussed above, external technical knowledge may enter the project in different phases of the process

(i.e. the Discover, Develop and Deploy phases) and through different acquisition systems. Since all R&D

activities are managed in projects, the project organization can be seen as the critical coordination

mechanism for the knowledge assimilation and exploitation processes. For example, the output of the

Deploy R&D unit may be a product formula (in a standardized format), that is transferred to the (Develop)

Center of Excellence. The formula is developed into a product concept, based on the recombination of this

formula with other knowledge inputs such as marketing specifications and additional technological inputs

(transform). This concept can be seen as a standardized output of the Develop center, serving as the input

for the regional Deploy centers.

Figure 15 Unilever’s project based R&D organization

Centralized project coordination responsibility

The R&D project manager is responsible for the coordination of all R&D phases within the projects

(ranging from basic idea generation by the Discover employees to concept development activities by the

Develop people and concept adaptations by the Deploy employees). Based on his/her working experience

in all phases of the R&D continuum, the R&D project manager is able to oversee and coordinate the full

project. The centralization of the responsibility for all R&D processes for a product with one manager

eliminates the problem of ambiguity of responsibilities, which improves the quality of the total knowledge

assimilation process from formula development to product launch.

Discover Develop formula (global)

Design Development of product concept (regional)

Deploy Local Adaptation & Implementation (local)

Produce & Sell

Umesh Dowlath (pers. comm., 2007) illustrates the integration of R&D and marketing as follows: “Typically, the

brand developer and r&d manager work together on the brand vision, combining the input from a consumer angle

and a technical angle. The vision could say we want to be completely Vitality compliant, and we want to have value

added ingredients in it, without affecting the image or the quality of the product. Peter Boone [the brand developer

for spreads and Umesh’ colleague] might say: “consumers are talking about trendy grains in bread, maybe we

should think about that”. In turn, the R&D manager says what this means technically. For example, the vitality

mission implies taking out the bad fats, to make it nutrionally good. R&D must thus also understand what ‘good’

means in the consumer’s eyes, for example, adding omegas, calcium, vitamins, fish oil, grains, etc.”.


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Clear input/output responsibilities

To enable the effective transfer of knowledge between the different phases, clear responsibilities are

assigned to the different units. These responsibilities include the definition of the output-input interfaces

between the different R&D phases. How knowledge is transformed within the units is a complex issue,

coordinated by different managerial systems, which is beyond the scope of this research. Important for this

section is that clear, preferably standardized input and output responsibilities increase the efficiency of

knowledge assimilation (both transform and transfer) by avoiding duplication and reducing the problems of

ambiguity at the boundaries between units. This also minimizes the need for managerial overhead.

Mechanisms for the transfer of acquired knowledge

‘Family culture’

Next to the mechanisms to standardize knowledge assimilation processes within the R&D projects,

communications between the project team members remain an important coordination mechanism. The

‘oil’ for this system is the informal and open culture among R&D and non-R&D people within Unilever,

allowing employees to contact each other (by telephone or email) at any time to solve minor and more

major issues. When necessary, the project manager decides about situation-specific adaptations to the basic

procedures.

Cultural and language trainings and socialization events

Within projects, both within and between R&D units, employees from different cultural and technical

backgrounds have to work together. Cultural and language barriers are not seen as important obstacles to

efficient cooperation (and thus knowledge assimilation). This is probably the result of the fact that

Unilever’s R&D organization has since long been global, so that the company has been able to build up

routines for effective cooperation. The R&D employees are all obliged to speak fluent English, which is

essential for international R&D projects. Also, a variety of training programs exists to improve the quality

of communication among the employees. These measures improve both the transformation and transfer

aspects of the knowledge assimilation capability.

Concluding, the following coordination mechanisms for the effective transfer and transformation of

acquired knowledge have been identified:

• Centralization of project coordination responsibility with the R&D project manager

• Routinization: trainings and practical learning by R&D employees to play the business game

• Formalization of operational processes for the transformation and transfer of knowledge, including

managerial, employee and unit responsibilities (particularly output-input specifications and

professional project management for effective boundary spanning)


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• Socialization: project and general meetings, informal communication structure

Mechanisms for the application of acquired knowledge

From the interviews it followed that the assimilated technological knowledge can be applied by the

company into different outputs. These include new knowledge outputs, organizational routines, product

concepts and eventually, products sold.

Global roll-out

Unilever’s R&D organization is responsible to fully develop a product, ready to be handed over to the

supply chain organization for large scale processing. The global product formula (Discover) is rolled-out to

the regions (i.e. the Develop R&D units) that may develop minor adjustments based on the market inputs of

the local Deploy units. However, for these adjustments permission must be asked from the brand manager.

Thus, the extent of local differentiation is centrally controlled to maintain advantages of scale (eliminating

duplications), as well as to secure control over brand image (Boone, pers. comm., 2007). In turn, the actual

formulation of adjustments is centralized at the regional level. This ‘global roll-out’ system, i.e. optimizing

for efficiency by centralization of R&D activities (including decision making and product formulation) can

be seen as an important coordination mechanism for the efficiency of knowledge exploitation.

Innovation funnel

As discussed, external knowledge may be acquired by Unilever at different phases of the project

development process. By default, a new project proposal enters Unilever’s stage-gate funnel. This is a

standard mechanism of the brand managers to monitor the feasibility of the projects at different phases of

development. Whether external knowledge will be acquired and assimilated within the R&D project and

ultimately applied in a product thus depends on this system. Important characteristics of Unilever’s

‘innovation funnel’ include an attitude of openness to new ideas combined with an ‘early kill’ strategy at

the charter gate, to make sure only projects with a high feasibility are further developed. The decision to

fund a project only partly depends on the quality and commercial feasibility of the idea: market and product

focus and available resources are at least as important.

The effect of the organization’s openness to new ideas from within and outside the company on the

valuation ability has already been discussed above. The early kill strategy aims to improve the effectiveness

of R&D through having fewer larger R&D projects. This strategy reduces the number of ideas (and, hence,

of externally acquired knowledge) to be further developed (i.e. assimilated), as well as the need for external

knowledge resources in further phases of product development (i.e. further acquisition of external

knowledge). It is important to note that by itself, this reduction of the total number of assimilation activities

does not say much about the ability of the company to assimilate and apply external knowledge.

Nontheless, it can be argued that by reducing the number of projects and providing them with more or

higher quality resources, the quality of these processes is likely to improve. The quality of the assimilation


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process is also directly improved by the coordinative function of the innovation funnel: The brand manager

is responsible for the go/no-go decisions. To make this decision, a standardized protocol exists, requiring

inputs from different disciplines, including marketing, R&D, accounting, and supply chain. Thus, this

mechanism directs the further development of the project and, hence, improves the qualitative aspect of the

knowledge transformation and transfer ability, as well as the efficiency of the application process, since a

larger share of the assimilated knowledge is likely to be applied in products.

Promotion of non-routine knowledge exploitation

Being able to contact colleagues for advice on an informal basis has since long been promoted through an

‘open culture’ of helping each other. To foster this culture, international employees get to meet each other

on congresses two to three times per year and are able to build strong personal networks by working in

different teams throughout their careers. According to the managers interviewed for this study, the culture

of helping each other out is well-established: “it is not done not to help colleagues” (Boone, pers. comm.,

2007). Often, expert employees within a brand are asked to contribute their expertise to a project of another

brand within Unilever for several days. This happens on a reciprocal basis (without financial

compensation). The helping attitude is further promoted through the open innovation culture. The

promotion of cooperation can be seen as an important mechanism to increase the use of (application) of

available (R&D) knowledge within the firm.

New business models for the external exploitation of knowledge resources

Even though Unilever intents to only develop technologies and products that can be launched within the

organization, this may not always be possible. For example, the strategic focus of the company may change

during the development phases, which may result in developed technological capabilities that no longer fit

the new business strategy. To exploit the value of the knowledge developed, a strategy for spin-out

management has been developed as part of the open innovation strategy. Licensing is another way to

exploit the value of developed knowledge, yet this is very rare at Unilever.

Efficiency versus innovation?

Theoretically, a drawback of the focus of the innovation funnel system on efficiency may be that it could lead to a lack of

innovation. Based on the interviews, this thesis argues this is not necessarily the case. According to Emmo Meijer (pers. comm.,

2007), Unilever made the explicit choice to create more innovative products (products for new markets, based on new

technologies: see the above discussion on the R&D project portfolio). If the efficiency in the product creation process is improved

(by the effective implementation of all of the systems described above), the simple consequence may be that Unilever becomes

more efficient at innovating. The commitment to innovation is also illustrated by Umesh Dowlath (pers. comm., 2007): “Last

week, an idea fair was organized by R&D for the high-level foods leadership team. These ideas already exist as projects in the

program, but are not currently resourced. The team selected promising projects and invests extra resources, for example 20 extra

people. There is a strong commitment to ideas that may not be currently brand-linked or even category linked, yet they believe

have a future.”


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Concluding, in the interviews, the following important coordination mechanisms for the effective

application of (externally acquired) knowledge were identified: the global roll-out strategy for new

products, the innovation funnel; the promotion of non-routine knowledge exploitation, and the

establishment of new business models for the exploitation of knowledge outside the company boundaries.

2.3 Knowledge absorption at Unilever’s Tomato center of expertise in Brazil

Background

This section discusses the knowledge absorption process and its underlying coordination mechanisms of

Unilever’s Tomato center of excellence (CoE) in Brazil. An interview by telephone with R&D project

director Colin Haine in São Paolo and a face-to-face interview with R&D manager Umesh Dowlath in the

Netherlands provided the main inputs for this chapter. As discussed, the absorption process is understood as

a combination of valuation of external knowledge, its assimilation (i.e. acquisition, transformation and

transfer) and its application.

Mandate

Tomatoes are a major ingredient in many of Unilever’s soups and sauces. Over the last decades, Brazil has

developed into a large producer of the crop and Unilever is one of the largest players in the tomato-based

foods industry. The CoE for tomato-based products in São Paulo Paolo plays a central role in the

development of new tomato-based products42 and is globally responsible for the development and

maintenance of all relevant information in relation to the use of tomatoes in Unilever’s products. Thus, the

center has both a Define and a Design role. According to Nobel & Birkinshaw’s classification, the CoE is a

typical ‘international creator’, i.e. it “provides inputs into a centrally defined and coordinated R&D

program” (1998: 482). The knowledge base of the CoE is quite broad. Project leaders are assigned with

different aspects of tomato science, including the breeding side (varieties, market information etc.), process

technology (converting the tomatoes into consumer products), and application (developing the raw

materials into a product the consumer would buy). The expertise of the CoE is mainly applied by the

development oriented Deploy centers in the different regions worldwide.

The importance of external knowledge

To fulfill its global function, the CoE collects and processes a lot of information. A first important type of

knowledge it needs is agricultural information: the center needs to understand the agricultural conditions

for all regions and the technical (genetic) information of the different tomato types that are used in

Unilever’s products. Technical knowledge underneath the breeding and processing activities is a second

type of important knowledge that needs to be collected. Third, the CoE needs to understand the globally

42 Apart from this global responsibility, the Brazilian R&D center has a second, regional R&D role for savory products (of which

Colin Haine is the R&D director). The focus of this section is on the Tomato CoE, however.


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different market conditions (such as commodity prices). Most of this information is collected via the

internet from colleagues, including R&D, purchasing and supply chain departments, in the different

countries. Managing this information collection process is a very important task of the CoE.

Notwithstanding the centrality of the Brazilian CoE as a knowledge basis for the rest of the company and

the fact that one of the main roles of the center is to absorb external knowledge, little knowledge is derived

from local sources. As an exception, a significant part of breeding-related knowledge is developed locally,

often in cooperation with other companies. The involvement of the CoE in basic research activities, either

in-house or with local universities, is limited. In most cases, scientific knowledge is bought from or co-

developed with other companies and research institutes, and these can be located anywhere. For example, a

specialized seed company located in the Netherlands is responsible for the development of tomato varieties

with specifically desired traits, while partnerships have been established with academic institutions in the

USA and Europe. It can be concluded that, for this business, Brazil does not provide a strong scientific

basis to ‘tap into’. As discussed, this is different for the breeding-related knowledge.

Coordination mechanisms for the absorption of external knowledge

Value

As discussed, much of the needed external knowledge can be seen as a ‘standard’ requirement (i.e. the

agricultural, technical and market information) and is acquired by globally dispersed organizational units of

different disciplines and subsequently collected and processed by the CoE in São Paolo. This standard

knowledge requirement is embedded in the business strategy through formal systems, such as assignments

that are issued by the CoE to the other organizational units (who actually collect the knowledge). The

ability to understand the importance and the value of this knowledge is based on the many years of business

experience in the tomato-based foods section of the company. To a certain degree, these knowledge

requirements have been made explicit in manuals.

Apart from the standard knowledge requirement for the business operations, often specific technical,

scientific knowledge is needed at different phases in the product development process (as was discussed

above in Unilever’s 4D product development model). Screening of external knowledge is done by a global

team that is responsible for open innovation management and separated out (per knowledge area) to

individual operating managers: “part of their day to day work is to be aware what happens outside

Unilever” (Colin Haine, pers. comm., 2007). The program director is responsible for this scouting function.

The screening process involves searching the internet, keeping track of publications in journals, visiting

congresses, etc. Also, the individual managers are responsible to maintain professional relations with key

suppliers and academia as suppliers of technology. This formalization of the scouting function can be seen

as an important mechanism to coordinate the knowledge valuation and acquisition processes.


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An important element of Unilever’s strategy is to develop long-term partnerships with these companies, to

exchange information on technology and agricultural practices. Hence, both in the more basic research

phase and in the application phases of the product development process, partnerships with external parties

have become the norm. This approach makes it possible for Unilever to keep track of the knowledge that is

being developed and, thus, to correctly judge its value for the company. Also, the collaborative approach

ensures that Unilever’s knowledge base in that particular area is maintained ‘up-to-date’, which facilitates

the acquisition and subsequent transformation of the knowledge.

Acquisition, transformation, transfer and application of external knowledge

The hiring of talented R&D employees was identified as a direct way to acquire external knowledge. It is

important to note that the R&D organization is strongly international and its employees come from all over

the world. Apart from the ‘direct’ acquisition of essential expertise, hiring world-class personnel increases

the firm’s ability to keep track of global developments, especially within the technical/ scientific

knowledge domains. Thereby, it also promotes the firm’s ability to value external knowledge.

As discussed, the CoE plays an important role as a source of tomato-based product-related knowledge for

the rest of the firm. Obviously, many complex knowledge transformation, transfer and application activities

take place in the CoE. This section illustrates the product development process as one of the main functions

of the CoE, based on a practical example. Based on a brief by the brand manager a new concept for tomato

soup is to be developed by the Tomato CoE. Inputs acquired by the globally dispersed R&D units in the

different regions (such as information on local tastes, agricultural data, market prices etc.) is collected and

transferred to the CoE. Important to note, this information is transformed into a standard, explicit form that

facilitates its transfer by the internet. Based on locally developed breeding knowledge, the CoE decides a

new tasty tomato variant can be used for the soup at an affordable price. Based on all these knowledge

inputs the CoE develops (transforms the inputs into) a ‘platform’ soup concept, that can be ‘rolled out’

(which includes the transfer process) to the global regions, with as little as possible local modifications

(hence, minimizing the costs of further transformations to the concept). The concept is subsequently

applied by the Deploy centers, which use it as the basis for the supply chain disciplines, typically after

some minor adjustments. As becomes clear, the product development process that was outlined in the

previous section for Unilever as a whole is fully adopted by the Tomato CoE.

Importantly, the CoE applied many of the same coordination mechanisms as at the corporate level: the

integration of marketing and research, the project-based R&D organization with centralized project

coordination and the standardized input/output requirements can be seen as the most important coordination

mechanisms for the knowledge transfer and transformation processes. The global roll-out strategy and the

innovation funnel are important coordination mechanisms for the application quality and efficiency.


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Conclusion

The Brazilian Tomato Center of Excellence has an important knowledge absorbing function. The most

important types of external knowledge include information related to the breeding of tomatoes, market

information, process technology (related to converting the tomatoes into consumer products), and

application (developing the raw materials into a product the consumer would buy). The expertise of the

CoE is mainly applied by the adaptive R&D (‘Deploy’) centers in the different regions worldwide.

Notwithstanding the importance of the center as a collector of knowledge, only a small proportion of this

knowledge is of a local origin. Most of this knowledge is collected by the internet from different subsidiary

Deploy units around the world. At the local level mainly breeding-related knowledge is absorbed.

Important to note, the corporate level knowledge processing systems appear to be implemented by the

Brazilian CoE without many adaptations.


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Appendix 3

DSM Case study

3.1 Introduction

This chapter discusses the coordination mechanisms underneath DSM’s absorptive capacity. As discussed

in chapters 1 and 2, knowledge absorption is seen as a combination of the valuation of external knowledge,

its assimilation and application. As with the case studies of the other three companies, the contextual

background of DSM is discussed first. This includes information about DSM’s organizational heritage and

its current organizational dynamics, the organization of international R&D, and its activities in the

emerging economies. Subsequently, the knowledge absorption process and the underlying coordination

mechanisms of the company as a whole are discussed. Finally, the knowledge absorption process at DSM’s

Enzyme Lab in Moscow is discussed.

This first section is based on face to face interviews with Global Innovation Officer Rob van Leen, former

Research director Emmo Meijer, R&D manager for Food Specialties Piet van Egmond and an interview by

telephone with Mr. Johan Tiesnitsch, Former R&D manager DSM solutions. Secondary data sources

include the company website, several annuals and academic publications.

Background

Royal DSM N.V. was founded in 1902. Originally a state-owned coal mining company, De StaatsMijnen

(Dutch State Mines), has evolved into a multi-specialty company in the chemical business-to-business

sector, active worldwide in life science and nutritional products, performance materials and industrial

chemicals. The activities of DSM are now grouped into four clusters: Nutrition, Pharma, Performance

Materials and Industrial Chemicals. Its headquarters are in Heerlen, the Netherlands. With over € 8 billion

million in revenues in 2006, the company employs 22000 people at 270 locations in 49 countries. Markets

include human and animal nutrition and health, personal care, pharmaceuticals, automotive, coatings and

paint, electrics & electronics, textiles, life protection and construction. The company aims to be world

leader in specialty products with a high value added by focusing on the life-sciences industry and on

performance materials, and become less dependent on bulk chemistry products.

Corresponding to this strategy, the corporate New Business Development (NBD) activities, for which a

special group was created in the 1990s, have steadily grown over the last decade. The NBD primarily took

ideas from DSM’s own researchers to be developed into new businesses with a good fit with the corporate

strategy (Kirschbaum, 2005). To further embed its commitment to innovation within the organization, a

corporate level Innovation Center was installed in the beginning of 2006. Among other roles43 the

43 The DSM Innovation Center comprises several units: an Innovation Office, Corporate Technology, Intellectual Property, Licensing

and Venturing, the Business Incubator, four Emerging Business Areas and Base of- the-Pyramid activities.


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Innovation Center supports the businesses to achieve innovation excellence. Benchmarking the innovative

practices of the different business groups and providing support by putting together all the services for open

innovation (i.e. the DSM Licensing Center, corporate venturing, patents and trademarks, etc.) are important

activities of the Innovation Center (Van Leen, pers. comm., 2007). In its strategic “Vision 2010”, DSM set

the ambitious goal to achieve € 1 billion new sales from innovation by 2010.

Decentralization

Up to the early 1990s, DSM was a strongly hierarchically led organization, stemming from the coalmining

years, when ‘militaristic’ control was considered necessary to secure the safety of the employees

underground. The historical heritage of limited organizational freedom for the different business units

proved anachronistic in the 1990s, when DSM’s businesses had become strongly internationalized and the

changes within the industry44 demanded higher levels of responsiveness and organizational flexibility, and

decentralizations followed (Meijer, pers. comm., 2007).

R&D

In 2006, DSM spent € 327 million on R&D, equivalent to 3.9% of net sales. Worldwide, the company

employs around 2000 R&D staff. The main R&D sites are located at Delft, Geleen (both in The

Netherlands), Kaiseraugst (Switzerland) and Linz (Austria). These large research centers focus on the

development of new technologies, processes and products, both for the individual businesses (often more

applied research activities) and combinations of multiple businesses (often longer term new technology

development). The corporate research program, focusing on the more ‘basic’ research, generates the most

radical technological innovations within DSM (Van Leen, pers. comm., 2007). This is typically done in

cooperation with external parties, and can be located anywhere in the world. Such a cooperative project

often continues for a couple of years, until DSM decides the technology has become so important to be

internalized as a competence within one of the large R&D centers. At that point in time it has also become

critical in radical innovations driven by the business groups. The developed technology may be moved to

Western Europe (Delft, Switzerland, etc) or not, in case the technology base is difficult to move (for

example because it’s based on a local network of employees and external knowledge sources). In the latter

case the activities of the external center can be expanded (Van Leen, pers. comm., 2007).

R&D structure

As part of the overall reorganization, DSM started decentralizing its R&D structure in the 1990s and the

company has now fully abandoned its central R&D. All R&D activities are now organized within the

44 As Meijer (2006) argues, in the past few decades the chemical sector has undergone significant changes. “Changes in portfolios

have resulted into strongly backward-integrated companies in the base chemicals industry, hybrid players in specialty chemicals and

companies specializing in life sciences. ‘Classical’ chemistry continues to play a leading part in those portfolios, but now as an

enabling rather than an autonomous discipline” and “rapidly progressing molecular sciences have become the industry’s leading

competence, supporting and helping to transform both materials science and the life sciences”.


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different businesses and the business-specific R&D activities are mainly managed and carried out by the

business groups themselves. Following restructuring in 2002, R&D is organized in three business clusters,

which cover a total of ten business groups, each of them with its own research organization. This set-up

secures business group ownership of R&D activities dedicated to a particular business and promotes greater

involvement of R&D employees in business processes. Taken together, the research labs are seen and

managed as ‘one global virtual lab’. This vision entails that a business group does have its own R&D

organization, yet manages this “on behalf of everybody” (Van Leen, pers. comm., 2007). Thus, the

business groups share ownership of these R&D units (located in DSM’s large R&D centers) which foster a

set of core competences that are important for the entire cluster. For example, any unit (e.g. DNP, DPP,

DAI) that needs biotech hires the required expertise in Delft, at DFS or DAI: indeed, at this moment half of

the research organization of DAI works for other business groups (Van Leen, pers. comm., 2007).

Also in 2002, R&D councils were created for the different business clusters to safeguard long-term

corporate and business group R&D interests and coherence in R&D strategies and priorities across business

group borders45. The R&D directors of the different business groups are member of one of the following

three councils:

• Life science council: nutrition and pharma business groups: these groups technologically are

strongly related, consisting of the business groups DAI (anti infectives), DFS (food specialties),

DNP (nutritional products), DPP (pharmaceutical products)

• Performance materials: elastomers, engineering plastics and resins DE (elastomers), DEP

(engineering plastics), DR (resins)

• Industrial Chemicals: DAG (agro: very little research activities), DMM (melamine), DFI (fibre

intermediates).

The councils are headed by a council president. The three council presidents, together with the CTO and

the president of DNP46 form the DSM Science & Technology council, are responsible for the overall

coordination of R&D. The Science and technology council reports to the Chief Innovation Officer (CIO)

and to the responsible Managing Board member, via the Chief Technology Officer. The high-ranking

position of the CIO illustrates the importance DSM attaches to innovation.

45 Meijer (2006:266) mentions the following responsibilities of the R&D councils:

technology strategy development and implementation for the cluster

competence management across business groups within the cluster

development and implementation of shared long-term R&D programmes

career development for employees in the shared R&D unit

planning and financing of shared R&D resources according to capacity

financing model

representation in external knowledge infrastructure. 46 As a result of historic heritage the senior R&D officer heading DNP, which is a very large research organization, is part of this team.


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Figure 16 DSM’s R&D councils

Strategic coordination of R&D

The overall strategic coordination at DSM consists of a long term business strategy, the underlying

technology strategy and the needed competences to implement this strategy (Van Leen., pers. comm.,

2007). A ‘Corporate Strategy Dialogue’ was established to determine the total strategic direction for time

spans of five years (recently, Vision 2010 was finalized). One of the outcomes of this dialogue is the

identification of ‘global megatrends’ (market developments), as well as global trends in technology.

Building on these trends, the business strategy is chosen. The R&D directors and council presidents

understand which technologies should be(-come) available in the next 5 years. In practice, a large part of

the technology is usually in place, but may need updates etc. Also new directions are identified where

DSM decides to take in a position within the next few years. These are typically emerging technologies that

DSM expects to need in the coming years. For this purpose, the Corporate Research Program is in place.

Together with the CTO, the leader of the R&D council decides how the budgets should be spent. Together

with corporate scientists the decision is taken whether to develop the competence in-house or externally. If

the competence is built in-house, a decision is made about the site and who will manage it, again on behalf

of everyone who needs this competence (Van Leen, pers. comm., 2007). The initiatives for developing new

capabilities (also the ‘in-house ones’) often start in the form of cooperation with universities or institutes.

Aside from intensive research cooperation, DSM also actively scouts for start-ups with promising

innovations in the relevant fields of activity. DSM supplies these companies with the financial, scientific,

manufacturing and management support they need to successfully exploit those innovations. Ultimately,

these successful start-ups may be fully integrated in DSM47. This is done either by the establishment of a

fully-owned group, or acquiring a company.

47 Besides direct participation, DSM Venturing’s portfolio includes investments in market-selected venture funds.

Science and Technology council Chair; 3 council chairmen; and VP R&D DNP

Life science council: nutrition and pharma

DAI, DFS, DNP, DPP

Performance materials council:

DE, DEP, DR

Industrial Chemicals council:

DAG, DMM, DFI


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R&D internationalization

As discussed, the main R&D centers of DSM are located in Western Europe. For the near future DSM

plans to increase its technical research capacity in the USA. Although exceptions exist, a general pattern

can be observed within DSM’s R&D internationalization process. Typically, entering a new country starts

with establishing local application research. Especially in foods, local adaptation labs are necessary. This

type of close-to-the-market research focuses on the tweaking of global products to local demands. Such

application research is not very high-tech, yet it is crucial to develop a successful business. At this moment,

such application research takes place at 25 locations. In the second phase local factories are opened. These

need support, and process know-how is transferred in the form of technical and scientific staff that helps to

establish pilot plants and run operations. For example, a fermentation process, developed in Netherlands, is

implemented in China and know-how is needed to adapt to local specificities such as small differences in

resources. If the problems are serious it may be necessary to install a permanent group of expatriate

managers. This local research team also has an important function as a recipient of concepts developed at

DSM’s centers of excellence. In the third phase of R&D internationalization, the technical competences at

the foreign location have developed to a world-class level, which lays the basis for establishing a more

basic research facility. Whether the foreign R&D center develops to this Center of Excellence phase,

largely depends on the external knowledge infrastructure, including the presence of highly qualified R&D

personnel, universities, research institutes, partner companies, etc.

Emerging economies

Increasing its activities in the emerging economies is one of the three pillars of DSM’s corporate Vision

2010. Substantial growth is expected in China and India, especially in the form of commodity products.

Currently, DSM employs 3500 to 4000 people in China (in The Netherlands this number lies somewhere

between 6000 and 7000, and is decreasing) and the most important units do now have a basis in China.

Currently, DSM is building an innovation campus in the Pudong New Area of Shanghai (PRC). Apart from

the current offices and business groups, also DSM’s R&D laboratories will be located in Shanghai. It is

envisaged that at the start, about 400 employees will work at the Shanghai campus. Activities in India will

Moving out Centers of Excellence?

It is important to note that it is typically impossible to ‘move’ a competence center to another country. “For example, in the

Netherlands, 400 people work on biotechnology, costing (e.g) €100 million. Even though it may be possible to carry out

this work in Russia for €20 million, you cannot bring these 400 people (i.e. the knowledge base) to Russia: 90% or more of

your employees simply won’t do it! Part of the knowledge is in the infrastructure and is therefore moveable, but people

simply are not. It is already a problem to get them from Delft to Geleen! Moving a competence center would thus imply a

massive destruction of human intellectual capital, including expertise that has been built up over many decades. This also

counts for the new research capacity that is being built up in China: impossible to move, since it is organically grown.” (Van

Leen, pers. comm., 2007).


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be stepped up, the aim being to double the 2005 sales level towards €300 million by 2010. Studies into

Russia are expected to yield the first concrete results in 2007. Basic chemistry is rapidly growing in all

developing countries. For example, fiber intermediates (half products for Nylon) is a large growth market

in developing countries, since construction is booming and there is a huge demand for the cheapest possible

carpet, which is based on nylon. It does not make sense to transport such commodities all over the world,

so the base chemicals must be produced locally.

As discussed, the major part of DSM’s research operations take place at the large research centers in

Western Europe. At this moment, the emerging countries are seen as important in terms of market potential,

yet much less as sources of innovation. According to Van Leen (pers. comm., 2007), DSM does not learn

many things in the BRIC countries that can be applied elsewhere in the organization. To illustrate this

point, at this moment in Brazil there are no research activities. In Russia, there is one molecular biological

lab and in India only some process research for anti-infectives takes place. The case study will detail the

knowledge absorption processes at the Russian R&D site.

Of the BRIC countries, China has the highest R&D potential, yet at this moment very little original

research is done in China (Van Egmond, pers. comm., 2007). of the BRIC countries, only in China a basic

research capacity is being build. The development of cooperation with research institutes in Beijing and

Shanghai is an important aspect of this long-term strategy. The reason to set up R&D in China is the belief

DSM can tap into knowledge sources that are typically Chinese and not existent in the Western world (Van

Leen, pers. comm., 2007). Interestingly, Van Leen sees Eastern Europe as a next important arena for (more

basic) research activities for DSM. “The location for basic R&D activities is unimportant. Many companies

entered China as if they were Lemmings. However, China has become very messy: it is highly polluted,

clean water has become scarce, there are shortages, etcetera. Also the language barriers and distance are

large problems. At the same time, there are many unused resources in Romania, Czechia and other eastern

European countries, with a good infrastructure, no time-difference problems and a smaller cultural

distance.” At this moment the potential for R&D of Eastern Europe is being explored. As is the case for the

other emerging economies, the availability of world class scientists, but especially a strong research

infrastructure appear to be the major contingencies. Consequently, Van Leen expects the Western European

advantage resulting from a unique set of knowledge based capabilities, will remain steady for many years

to come, also vis-à-vis China.

3.2 Coordination mechanisms for the absorption of external knowledge by DSM’s R&D

organization

As follows from the above discussion, over the last decade DSM’s R&D organization has undergone

significant changes and, triggered by the increased focus on new business development, several advanced

organizational mechanisms have been implemented to effectively coordinate the development of new

products from ideas to marketing. A key element of this approach is the radical increase in the company’s


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dependence on external knowledge sources. To manage the absorption of external knowledge by the

dispersed R&D centers, a range of coordination mechanisms were highlighted by the interviewed

managers. In the following, the dominant processes behind the valuation, assimilation and application of

external knowledge by DSM’s R&D organization are discussed.


DSM’s R&D program and mandates of R&D centers

Similarly to Unilever, AkzoNobel and Philips, the strategic ambitions of DSM and of the individual

businesses, and especially the translation thereof into R&D programs with specific mandates for the

different R&D units, play a key role in determining the receptivity to (and actual absorption of) external

knowledge by these units. Based on the interviews, it has become clear that technical knowledge can be

seen as the most important type of external knowledge for the R&D organization. As discussed in the

above section, over the years DSM has established an organizational routine to formulate and implement

the R&D strategy. Based on the interviews and company documents, this routine (which can be flexibly

adapted to changing business needs) appears to be effective. The R&D strategy entails both short term and

long term objectives for the development of technological competences for the businesses. A structured

analysis of available and needed competences leads to a clearly defined focus for externally developed

(technical) knowledge (Kirschbaum, 2005). Which (section of an) R&D unit should absorb particular

knowledge is also well-organized, as will be discussed below. Consequently, this thesis argues that the

valuation of external knowledge at DSM is very strongly framed by the (structurally derived) strategic

focus and clear R&D mandates.

The promotion of an outward orientation

With the increasing focus on new businesses development since the mid 1990s, DSM has become much

more externally oriented. The reasons behind this outward focus include the increasing dependency on

multidisciplinary technologies for new products and the recognition that not all of these rapidly emerging

and changing technologies can successfully be developed in-house (Van Leen., pers. comm., 2007). Over

the last decade, achieving innovation through strategic partnerships with third parties48, including

universities and other research institutes, suppliers and other partners49 in all phases of business

development has become the norm. Several mechanisms have been implemented to organize this shift in

orientation of R&D employees towards the external knowledge infrastructure. According to Van Leen

48 DSM has over a hundred bilateral partnerships. About 40 of our R&D staff hold part-time professorships or other high academic

positions. DSM forms part of a network of some 2000 university departments and is also a member of twenty research consortiums

representing both academia and industry (Meijer, 2006). 49 The shift in perspective towards building wider and deeper strategic alliances is reflected in the company’s new strategy program,

Vision 2010, which focuses on accelerating profitable and innovative growth of DSM’s specialties portfolio to generate its target of €1

billion of sales from innovation by 2010.


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(pers. comm., 2007), creating an open innovation culture is probably the most important coordination

mechanism to promote the external orientation among R&D employees. This thesis argues that structural

mechanisms and top-management commitment are important mechanisms to implement this culture shift.

Establishment of externally focused business groups

Over the last decade, the increasingly external orientation is illustrated by the evolution of DSM’s business

group responsible for the promotion of innovation.

• In the 1990s, the New Business Development (NBD) group was created to promote effective

innovation and coordinate innovation processes from idea to product launch. In the beginning, this

group, consisting of 50 employees, mainly focused on the development the ideas of in-house

scientists. Over time, the need to also focus on outside knowledge sources for new product

development became more apparent and the external orientation got more and more promoted by

the managers.

• In 2001, NBD evolved into the business group DSM Venturing and Business Development

(DV&DB). The adding of the venturing capability illustrates the increased focus on external

cooperation, which was further professionalized in the years to come.

• In 2006, the new corporate Innovation Center absorbed the activities of DV&DB. At this time, the

external orientation of DSM had become strongly established. The flexible use of different

business models for open innovation (including the spinning in of early stage business

opportunities and spinning out others that are in a position to bring significant financial return, as

well as professionalized venture management) has become the norm.

Clearly, in the last decade the mandate of DSM’s business group for the promotion of innovation has

become explicitly externally oriented. Institutionalizing the outward focus within the organization structure

(i.e. through a special business group) has led to the more frequent and more positive valuation of external

technical knowledge.

Professional the scouting function

At all phases of the product development trajectory (which will be discussed below), DSM’s R&D

organization is now heavily involved in the active screening of the external technical developments. The

external search techniques applied vary per business, with some methodologies being better developed than

others. For example, in Nutrition there are scouts whose only task is identifying potentially interesting

leads. “They do this by looking at other companies and what they are developing, visiting start-ups,

conferences, scanning Google, etc. Then they just go after it. They talk to the people who have the

interesting technology and see if DSM and they can reach an agreement.” (Van Leen, DSM internal doc.,

2007). Professionalizing the scouting function can be seen as an important mechanism to increase the

frequency and quality of external knowledge valuation.


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Top-managerial vision and commitment

Based on the interviews (Meijer, 2007; Tiesnitsch, 2007; Van Egmond, 2007;Van Leen, 2007) and

additional documentation (i.e. Kirschbaum, 2005; Meijer, 2006; DSM annuals 1995; 2001; 2006), this

thesis argues that high-level managerial commitment; first to more product innovation in general, and

increasingly to the application of collaborative methods to achieve this, is an important factor to explain the

success of shifting the internal focus of R&D personnel to become more open to external knowledge

developments. This commitment played an important role to downplay the not-invented-here problem

among employees, which is typical for an inward oriented organization.

Scientific competences

At the individual level, DSM’s R&D employees must have a clear notion of the (external) technological

knowledge requirements, and be well aware of the state-of-the art of the developments within their

technical domain. Typically, this role is fulfilled by senior scientists with a solid experience within the

company. Unlike other companies in the chemical sector, throughout its reorganizations DSM in the last

decade maintained a solid basis of top scientists and capabilities for basic research in-house. This can be

seen as an important prerequisite behind the ability to identify and value external knowledge (Meijer, pers.

comm., 2007).

Concluding, over the last decade, the external orientation of DSM’s R&D organization has been promoted

through the organization culture and professionalized through structural mechanisms, including the

establishment of business groups for external co-development activities and professionalizing the scouting

function; top-level commitment to the open innovation approach; as well as investing in the necessary in-

house scientific competences (i.e. well-trained and experienced R&D staff). In turn, this external

orientation has increased the valuation of external knowledge sources, both quantitatively (i.e. the number

of times that external knowledge is sought) and qualitatively (i.e. external knowledge is considered as a

positive opportunity rather than a threat).


As affirmed by the interviews, the assimilation of external knowledge acquired by the R&D units can be

perceived as a combination of the acquisition of external knowledge, its transformation of the acquired

knowledge into another form (e.g. to be applied by organizational units in a later phase of the product

development trajectory) and the intra-organizational transfer of this knowledge to other units within DSM.

New business models for knowledge acquisition

Similar to Unilever, DSM has developed a managerial routine for the application of different business

models for the acquisition of external technical knowledge. For a large part, the use of particular business

models depends on the phase within the R&D project development process at which the external

knowledge is needed.


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Figure 17 DSM’s open innovation model. Adapted from presentation by Van Leen, 2007.

The ‘front end’ is about new technology development with a long time to market, to fill the ‘gaps’

identified by the technology strategy. Non-competitive collaboration programs with research institutes,

especially best-in-class universities, are the preferred option50. This collaboration usually continues for a

couple of years, when the business unit decides whether or not to internalize the developed capability. Also,

DSM has established several scientific advisory boards (often a university chair function) that serve as a

platform to build alliances between companies and research institutes. The knowledge acquisition process

should thus be seen as the result of co-development practices, where both the external partner and DSM’s

R&D employees develop new (technical) knowledge.

• Licensing-in of IP developed by external parties has becoming very important to DSM. Licensing-

in is typically seen as a tool to accelerate the development of the product development pipelines

(DSM, int. doc., 2007). Acquiring a license to use a specific piece of IP can be seen as a very

direct form of external knowledge acquisition. Obviously, the R&D unit must have sufficient

capabilities to fully understand and successfully integrate the acquired technology.

• Venturing has also become very important. DSM takes participations in start up companies with

promising innovations in the relevant fields of activity and supplies these companies with the

financial, scientific, manufacturing and management support they need to successfully exploit

those innovations. Ultimately, these successful start-ups may be fully integrated in DSM (i.e.

spinning in or acquisition). At this moment, DSM investigates more than 300 companies each year

50 DSM has over a hundred bilateral partnerships. About 40 of its R&D staff hold part-time professorships or other high academic

positions. DSM forms part of a network of some 2000 university departments and is also a member of twenty research consortiums

representing both academia and industry (Meijer, 2006).


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and directly approaches the most interesting ones to identify collaboration options. DSM carries

out the due diligence and then usually takes a share ranging between 5 and 20% of the company

(DSM, int. doc., 2007). Currently DSM has around 15 direct investments. Apart from direct

participations, DSM Venturing’s portfolio also increasingly includes investments in market-

selected venture funds. These venturing activities enable DSM to remain up-to-date about the

relevant activities in its technical domains (improving the valuation ability), as well as acquire the

technological knowledge it judges to be most relevant in a cost-efficient manner (improving the

knowledge acquisition ability).

• Spinning-in at DSM is bringing in products or technologies developed by other companies that

may benefit from DSM’s ‘exploitation power’, i.e. its capabilities such as process and industry

knowledge, supply chain, marketing etc. Spinning in can be seen as a model to acquire a whole

new technical competence, yet without taking full control over the company supplying the

technology.

• Over the last few years, DSM has considerably increased its budget for mergers and acquisitions

of small start-ups that are in a late stage of growing up. These acquisitions can be seen as a model

to quickly acquire and completely control ready developed technologies.

Concluding, for the acquisition of external knowledge within the sequential phases of the product

development process, different business models are applied in a coordinated manner. The strategic

management of these different business models can be seen as a critical mechanism to improve the

effectiveness and efficiency of DSM’s knowledge acquisition capability.

Hiring employees

Qualified technical employees constitute the backbone of DSM’s R&D organization. Similar to Unilever,

hiring personnel is identified as an important direct method to acquire external expert knowledge and to

build up technological and more market-oriented competences. DSM increasingly scouts new technical

graduates abroad, which is partly due to the low number of graduate chemists in Europe and, contrastingly,

the growing pool of academic talent in emerging economies, especially China. Recruitment programs,

tailored to the employee markets in these new countries, are developed to attract the best possible

candidates. More generally, HRM practices that suit the local employee market are believed to be an

important prerequisite to hire and keep talented personnel.


At DSM’s R&D organization, the internal knowledge assimilation processes are highly structured (Van

Leen, pers. comm., 2007). The following section details the organizational mechanisms that were identified

as critical to the knowledge assimilation ability.


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Managing R&D employee competences

In the early 1990s, Rob van Leen (then head of R&D food specialties at Gist-brocades, which was acquired

by DSM in 1995) developed a ‘3-dimensional’ (3D) R&D organization to manage employee competences

company-wide. After the acquisition of Gist Brocades, the model was adopted by DSM and it still plays an

important role in the internal knowledge assimilation process of DSM (and of Unilever, which has recently

adopted the model).

The essence of the 3D model is that it increases the transparency of the different roles of R&D employees,

by distinguishing three strictly divided domains (axes) of responsibilities:

• The business axis, determining what should be done and by whom. This involves program and

project management and coordinative roles deducted from the business strategy;

• The Science axis, determining how the different activities should be carried out. This includes

various scientific roles to develop the required competences either internally or externally; and

• The line organization, taking care of people and resources management.

Figure 18 The 3D competence management model. Adapted from Meijer, 2006.

The three axes represent the three major categories of competences needed within the project based

organization. Within the R&D projects, an R&D employee may perform a role that is positioned on any

one of these three axes or a role that incorporates elements of two or all three axes, depending on his or her

specific capabilities and interest: in other words, people get to do what they can do best51. Important to the

knowledge absorption process is the distinction between the scientific and the project management

functions. Employees that are specialized in the scientific axis have strong skills in terms of the

51 Apart from R&D project management, the model is also used as the basis for the career development of R&D personnel (Meijer,

2006).


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development of new scientific ideas, which, as described, increasingly results from co-operative practices

with external partners. These ‘science people’ are thus specialized in valuation and acquisition of external

knowledge. Similarly, the employees who specialize in project management are likely to be particularly

good at coordinating the internal knowledge transfer and transformation processes. As a result of this

specialization, the 3D model can be seen as a coordination mechanism to improve the effectiveness of the

overall assimilation process (i.e. the acquisition of external knowledge, and its internal transformation and

transfer).

Project based R&D management

To advance our understanding of the knowledge assimilation processes at DSM, it is important to

comprehend how the R&D activities are embedded within the total business development process. In the

following, the essential aspects of DSM’s business development process are discussed. This system has

been developed based on a model designed by Harald Vorstman, a former quality manager at Philips and

consultant at DSM (see also Vorstman, 1993).

Figure 19 Project based R&D management

As discussed, DSM’s R&D is organized within the business groups. The business projects together with the

longer term technology strategy determine the content of the R&D activities. A business development

manager (BDM) is responsible for the coordination of the full business development trajectory, involving

market research; the specification of the product; product design; product launch and sales. The BDM

carries the responsibility for achieving a result in the market. The BDM decides about what should be done

and is responsible for the overall coordination, including the full project planning and setting up a business

Market research

Specification Develop (Project manager R&D)

Production Selling

Business Development Manager

R&D process step 1

R&D process step 2

R&D process step 3

R&D process step 4


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development team comprising of managers of the different underlying disciplines (marketing, R&D,

production, etc.). The managers of the different disciplines work closely together with the BDM, as well as

among each other. Obviously, the BDM must thus have strong competences within the ‘business axis’, as

well as sufficient knowledge of the science aspects. The managers from the different underlying

organizational disciplines are fully responsible for the execution, and they make all decisions concerning

‘how’ the R&D assignment should be carried out52. For R&D, this includes decisions about which technical

processes should be used to produce a specified molecule, and whether the needed technology should be

developed in-house or externally; which scientist should work on it, etc. Within the develop phase carried

out by R&D, different sub-processes can be distinguished, ranging from basic research (i.e. typical ‘science

axis’) activities to product and process development activities.

The centralization of the product development responsibility with the BDM, who communicates closely

with the managers of the different disciplines, appears to be effective to integrate the business processes

underlying product development, and allows for a ‘smooth’ business development process. Hence, this

combination of structural divisionalization (with a clear formalization of tasks) and the strong integrative

function of the BDM improves both the effectiveness of the transfer and transformation processes of

technical knowledge acquired or co-developed by the R&D units, and consequently of the assimilation

ability of DSM.

Coordination mechanisms for the transfer of acquired knowledge

Formalized routines

Based on many years of experience, the processes to support this management model have been improved.

The projects are managed via a stage-gate model (similar to the innovation funnel at Unilever) to effectuate

strategic control between the different phases. A multidisciplinary team of business/marketing managers

and R&D managers make the decisions at the end of each phase in this process. An important aspect is that

at the interfaces of the different phases, sophisticated checklists have been developed to facilitate the

transition from one phase to the next. It is important to note that even though the development of a new

product can be perceived to move from the left to the right in the above figure (i.e. from market research to

sales), for the coordination of this process a lot of interaction between the managers of the different

disciplines is needed throughout the project, since different types of assessments are needed from all

disciplines, at all stages (Van Egmond, pers. comm., 2007). The ‘formalized routinization’ of all the

necessary checks and required contributions by the different disciplines along the development time-line,

provides the company with a powerful tool to secure the effectiveness of both the knowledge

transformation and internal transfer activities (and thus of the assimilation ability). According to Van Leen

(pers. comm., 2007) “it took some time to learn how to play this game, but it proved to be the most

52 The managers of the different disciplines do not hierarchically report to the business development manager (these are dotted lines).


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effective way to manage the research organization. As soon as this had been worked out, it had also

become much easier to manage the project across sites”.

Figure 20 DSM’s stage gate model for product development. Adapted from Meijer, 2006

Coordination mechanisms for the application of external knowledge

New business models for the external exploitation of knowledge (efficiency

DSM generates a large amount of knowledge and capabilities that for one reason or another it may not use

itself. In these cases licensing out and spinning off are increasingly applied a DSM, especially at the growth

markets for commodity products. As discussed, large scale production of bulk chemistry products is no

longer considered to be strategically interesting to DSM. Licensing out of process technology to production

companies proves to be a very profitable business, however. Also, rendering its R&D services to other

companies is done in some exceptional cases, but it is not DSM’s strategy to make money from R&D

services. The increased use of new business models to acquire technical competences from the outside

world, as well as of the external exploitation of internally developed knowledge have increased the

importance of sound IP management. To this end, R&D employees are trained and support services have

been improved (Van Egmond, pers. comm., 2007). Thus, the more extensive and professional application

of new business models for external knowledge exploitation promotes the effectiveness of DSM’s

knowledge application ability.

Exploiting cross-cluster synergies

The explicit goal of DSM is to become ‘intrinsically innovative’. A special diagnostic tool has been

developed by the Innovation Center to map the innovation performance of the different business groups,

allowing for internal benchmarking, as well as with the industry’s best performers. To improve the

performance of the business groups that are lagging behind, best practices are identified and passed-on by

the Innovation Center. For example, if a particular business group performs very well at project or portfolio

management, internal learning activities are developed to allow the other business groups to adopt the


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superior practices. This promotion of exploitation of internal operational know-how can be seen as a useful

mechanism to improve the quality of the knowledge assimilation processes of the different business groups.

3.3 Knowledge absorption at DSM’s Enzyme lab in Russia

Background


DSM’s Enzyme Lab in Moscow. Face-to-face interviews with Foods Specialties R&D manager Piet van

Egmond and Innovation Officer Rob van Leen provided the main inputs for this section. As discussed, the

absorption process is understood as a combination of valuation of external knowledge, its assimilation (i.e.

acquisition, transformation and transfer) and its application.

Innovation is becoming ever more important to DSM’s Food Specialties division and over the last few

years, Food Specialties has been able to realize high innovation-based growth rates. However, as R&D

manager Van Egmond (pers. comm., 2006) argues, making radical innovation the dominant business model

is not easy: first, the profitability of new inventions typically only occurs after 5 to 7 years, which is very

long compared to typical consumer firms. This partly results from the conservatism among food

consumers. Second, in addition to stamina, for the development of innovative food products high and long-

term research investments are needed.

Over the last 7 years, Food Specialties invested significantly to map the detailed knowledge of the genome

of one of DSM’s fungi, named Aspergillus Niger. This research was carried out in a large consortium of

institutes and grew into one of the most important industrial genomics projects in Europe. Based on the

sequencing of the gen, thousands of enzymes were identified, of which many have interesting

characteristics (such as taste, preservability, texture, etc) for application in foods (such as bread, cheese,

beer). However, extensive laboratory testing of the applicability of the enzymes was needed before

commercial decisions could be made. “This testing is quite advanced genetic and biochemical work, at the

same time, the analytical work is of a routine nature. The challenge was to do this fast and cheaply” (Van

Egmond, pers. comm., 2007). Since this routine work is not a core activity of DSM, several options were

identified to have the job done, including companies in the Netherlands, the USA and Russia.

Eventually Russia was chosen for several reasons, of which cost savings and the availability of high-class

scientists were the most important. The research infrastructure was hired and converted into a DSM

laboratory. Interestingly, a non-for-profit legal form under a non-western name was chosen to benefit from

tax exemption and keep the costs low. A core team was set up, consisting of key scientists, who set up the

Russian laboratory that would consist of 8 workplaces and 4 post-docs. Part of the analytical work is done

in the Netherlands, and the samples are subsequently sent to Russia, where a large number of processes are

carried out. The results (i.e. deep-frozen samples, plus all the information on the characteristics) are sent

back to the Netherlands (by courier and internet, respectively) for further analysis. Telephone, email and a

web-based application to share protected data are the main communication tools. The project is very


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successful: the quality of the work is high and cost-savings compared to the alternatives amount between

65 and 75%, with a payback time of only two years. The Aspergillus niger genome project has resulted in

numerous patent filings by DSM and has laid the basis for a number of new DSM products such as

PeptoPro, an ingredient for muscular recovery after physical exertion and an enzyme for preventing chill-

haze in beers. Importantly, in addition the project has resulted in a valuable scientific network.


Based on the above discussion, it can be concluded that DSM’s R&D operations in Moscow are mainly

cost-driven. The Russian Enzyme Lab was set up to benefit from the low wage environment, with the

availability of highly qualified molecular biologists as a prerequisite to guarantee the high quality of the

analytical work. The Russian lab itself is not significantly involved in the absorption of locally available

knowledge sources and the high-level, yet exploitative research facility is unlikely to evolve into a

competence center, since Russia does not provide a state of the art knowledge base for foods, medicine, or

materials. Hence, for now and the near future, DSM’s knowledge tapping process will remain limited to

making use of the professional expertise of the Russian scientists.


The need for particular expertise (i.e. the ability to perform semi-routinized scientific work) could be well-

defined by DSM: based on their experience, the home-base scientists knew exactly which ‘external

knowledge’ (i.e. scientific qualities) was needed and this enabled them to identify the optimal source of that

knowldge. Even though the knowledge ‘need’ was clearly established, its eventual commercial value

remained quite uncertain: it is not possible to predict the applicability of the enzymes, let alone the

potential of the eventual commercial success (nonetheless, several potential applications were expected).

This ‘search for the unknown’ results from DSM’s R&D portfolio management system that explicitly

promotes the development of innovative, high-margin products based on new technologies and therefore

allows for the engagement in more risky knowledge development and acquisition trajectories. This

illustrates an interesting issue: to create innovative products based on knowledge that is not yet developed,

a company must accept that its ability to value the commercial potential of that knowledge is limited.


As discussed, the Russian R&D center is not significantly involved in the acquisition of external

knowledge. Hiring of qualified staff is regarded as the main method to acquire technical knowledge.


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Importantly, as discussed above, DSM Food Specialties has an organizational heritage of being successful

at transforming very different types of molecular inventions into commercial products, which can be seen

as the result of its assimilation and application skills. Thus, even if the yield of the costly enzyme analysis

(in terms of discovered functionalities of the enzymes) would be limited, the chance that the company

would be able to transform some of the outputs into successful products (and compensate for the research

costs) would be relatively high. To this end, having a base of scientific and technical experts from different

backgrounds is crucial. Also, DSM Food Specialties needs to be able to understand the market and how

technical inventions may be eventually sold on the market. Operating in the business-to-business sector,

having a thorough understanding of the desires of the ‘customer behind the customer’ is critical. This

requires strong marketing skills in addition to scientific competences as important traits of the business

development managers, which contributes to the quality and efficiency of the assimilation and the

application processes. The transformation of the knowledge (samples and information) generated by the

Russian R&D center into useful forms, such as product concepts, happens at the large R&D center in the

Netherlands.


As discussed, the information accompanying the samples is of an explicit form and can be easily

transferred via the internet. The contributions of the Moscow R&D center are a standard input in the

formalized product development process.

Coordination mechanisms for the application of acquired knowledge

As discussed, the applications of the research project include a number of successful food-applications,

hundreds of patent filings (to be sold on the market), and the building of a strong scientific network. The

coordination mechanisms that were already discussed at the corporate level play a critical role to steer the

application processes.


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Appendix 4

AkzoNobel case study

4.1 Introduction

This chapter discusses the coordination mechanisms underneath the knowledge absorption processes of

AkzoNobel’s R&D organization. As discussed, knowledge absorption is seen as a combination of the

valuation of external knowledge, its acquisition, transformation transfer and application. The contextual

background of AkzoNobel is discussed first. This includes information about the company’s organizational

heritage and its current organizational dynamics, the organization of international R&D, and its activities in

the emerging economies. Subsequently, the knowledge absorption process and the underlying coordination

mechanisms of the company as a whole are discussed. Finally, a discussion of the knowledge absorption

process at AkzoNobel’s Car Refinishes R&D center in Bangalore is provided.

This first section is based on face-to-face interviews with General manager of the Global Innovation Unit

Mike Zeitler and Strategy and New Business Development manager for Decorative Paints Peter Gommers,

the company annual 2006, and a powerpoint presentation of Michael Zeitler.

4.2 Coordination mechanisms for the absorption of external knowledge by the

international R&D organization of AkzoNobel

Based on the interviews among AkzoNobel’s R&D managers, it becomes clear that the nature of R&D

activities performed and the way how the R&D processes are organized by the different divisions and

business units is quite diverse. Consequently, the degree to which the different R&D centers are involved in

the absorption of external knowledge and how the knowledge absorption activities are organized is

multiform. Nonetheless, it was possible to identify a number of widely applied and important coordination

mechanisms framing the external knowledge absorption processes. As discussed, the knowledge absorption

process is understood as a combination of the valuation of external knowledge, its assimilation (i.e.

acquisition, transformation and transfer) and its application by the company.

Valuing external knowledge

4.3 Coordination mechanisms for knowledge absorption at AkzoNobel Car Refinishes in

Bangalore


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Appendix 5

Philips case study

5.1 Introduction

This chapter discusses the coordination mechanisms underneath Philips’ absorptive capacity. As discussed

in chapters 1 and 2, knowledge absorption is seen as a combination of the valuation of external knowledge,

its assimilation and application. As with the case studies of the other three companies, the contextual

background of Philips is discussed first. This includes information about the company’s organizational

heritage and its current organizational dynamics, the organization of international R&D, and its activities in

the emerging economies. Subsequently, the knowledge absorption process and the underlying coordination

mechanisms of the company as a whole are discussed. Finally, the knowledge absorption process at Philips

Lighting’s R&D center in Shanghai is discussed.

This first section is largely based on a face-to-face interview with Chief Technology Officer Rick Harwig

and two interviews by telephone with General Manager Philips Research Shanghai and Chief Technology

Officer East Asia Frans Greidanus. Secondary data sources include the company website, the company

annual of 2006 and academic publications.

Company background

Founded as a lamp factory in Eindhoven, the Netherlands in 1891, Philips has become one of the leading

electronics companies in the world. Currently, the company is headquartered in Amsterdam. In 2006, its

sales were €26.976 billion and it employed 125,500 people in more than 60 countries (Philips, 2007). Per

2008, Philips is organized into the following divisions: Philips Healthcare, Philips Lighting and Philips

Consumer Lifestyle. Philips positions itself as a high-growth technology company, ensuring competitive

advantage by generating innovative products and processes. Philips’ brand promise is captured in its global

tagline ‘Sense and simplicity’ which stands for delivering products and solutions that are advances, easy to

use and designed to meet the needs of all users.

R&D organization

Innovation plays a central role at Philips and with the largest R&D investments of all Dutch multinationals

and over 130.000 registered patents and design rights, the company is known as a real technology

‘powerhouse’. Its high R&D investments have resulted in many breakthrough inventions in the past, such

as the compact cassette and the CD player. In 1914, Dr. Gilles Holst became the first true researcher in

Philips. He developed Philips Research into a major center of technical competence and innovation and to

date, Philips Research Eindhoven, the NatLab, remains Philips’ largest research laboratory. Besides the

NatLab, Philips Research consists of smaller laboratories in various other countries. Philips has around 100

R&D units world wide, some of which are very small.


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The functions of R&D

Philips’ technology development takes place at three levels. First, the business units are mostly involved

with short term development work. Development laboratories of the product divisions carry out the later

phases of product development activities. Second, sectoral divisions develop broader, longer term

technologies, such as plasma and lcd screens, etc. Third, apart from the development of new technological

options, corporate research looks at the boundaries between the divisions and coordinates cross-business

unit exploitation of technologies. For example, corporate research may investigate whether molecular

diagnostics may be applicable in the medical systems division. Corporate technology is a complete business

organization. Philips no longer develops stand alone technologies without clear exploitation perspectives,

but corporate research develops the concept into a fully operational company. This is called ‘incubating’.

Landing a technology within a business unit thus does not occur until there is a complete running business,

including a technology, industry solutions, clients, channels, etc. (Harwig, pers. comm., 2007). Total R&D

efforts amount to around 8% of total sales. About 10% takes place in central research, and 90% in

development in the division and in their Business Groups (Reger, 2004).

R&D Internationalization

Philips’ R&D is strongly internationalized. Internationalization at Philips has been taking place since the

1950s. The limited availability of researchers and the small size of the Dutch market made

internationalization of sales and production necessary early on. Also, increasingly production and system

developments had to be adapted to specific national or regional customer requirements and technical

standards. Third, as Reger (2004: 64) argues, “the proximity to leading scientists and research

establishments has played an important role in setting up the central research laboratories. Due to the

frequent real coincidences of ‘excellence in science’ and ‘lead markets’ (as with microelectronics in Silicon

Valley in California), market aspects were also indirect determinants of the choice of locations.” The

decisions about new locations are made by the board in agreement with the management of Philips

Research. Between 1945 and 1970, research laboratories were founded in England, France, Germany and

the USA. In recent decades, apart from development activities Philips has also further expanded its research

into East Asia and India (Reger, 2004). In 2000, Chinese labs in Shanghai and Xian and Taipei formed a

research organization called Philips Research East Asia. Acquisitions and cooperative agreements such as

alliances and strategic collaborations with local companies have become the dominant business model for

R&D internationalization.

Since the 1990s, the distribution of research domains among the dispersed laboratories has been decided

only on grounds of competence. Competences include the corporate-wide responsibility for topics of

research and the development of technologies for specific applications. Accordingly, international core

competences have crystallized out. As Reger (2004: 65) argues, to overcome the problems of fragmentation

and duplication of activities in central research, Philips has adopted a strategy of forming Centers of

Excellence (CoEs) and using several coordination mechanisms to link them together. Cross-border R&D


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projects are conducted where the necessary capabilities are available and dispersed competencies are linked

together. Over the years, the increasing complexity of technologies underlying Philips’ product, together

with the global dispersion of competences have led to an increase in complex cross-border R&D projects.

As a result, the coordination between the globally distributed Philips laboratories has become both more

complex and more important (see Reger, 2004 for a detailed description of the mechanisms to coordinate

the research activities).

Open innovation strategy

The increasingly wide array and complexity of the technologies underlying Philips’ products, processes and

services, and the acceleration of innovation as a result of globalization and digitization have also led Philips

to realize in an early stage that it could not develop all the necessary competences in-house (Harwig, pers.

comm., 2007). Since the early 1990’s external networks of companies have become critical to the

development of new products. In the Netherlands, the company took the lead in practicing ‘open

innovation’, as illustrated by the establishment of the High Tech Campus Eindhoven in 1999. Essential

elements of the open innovation model include the development of business models for the spinning-in and

spinning-out of technology. Close, innovative types of collaborations with external suppliers and other

external parties including customers, are central to the open innovation strategy.

Global product development

Philips practices a ‘global’ product development model: the products are designed for the global market by

globally dispersed R&D centers and it’s unimportant at which location things are done. Cross-border R&D

projects are conducted where the necessary capabilities are available and dispersed competencies are linked

together (Reger, 2004). For example, software for a new product may be developed in Bangalore, part of

the hardware for sensors in Eindhoven, part of the data processing equipment in Beuningen, while the R&D

for the integration of all these elements is located in Seattle. This process is coordinated with a global

project manager and organizations that operate globally. For example, the development of patient

monitoring is in Seattle and Shanghai, while the coordination is in Eindhoven. Similar to Philips and DSM,

there is always one product manager and one business manager who make the decisions (Harwig, pers.

comm., 2007).

The international R&D organization is little involved in ‘local for local’ research. Yet it happens where the

demand for specific products is strictly local. For example, the market for rice-cookers is highly

concentrated in Asia. At the same time the Senseo is only well developed in Europe, since “Asia drinks tea,

while America drinks weak coffee” (Harwig, pers. comm., 2007). Yet also at the Senseo project the way of

working was typically local for global. The product has been developed with Sara Lee, with the idea that

the concept should be exploitable elsewhere. A second reason for local for local R&D is that businesses are

driven by their local view of the world. For example, with the acquisitions of US companies (including

ATL, Intermagnetics, Marconi, Agilent), Philips Medical Systems has become an US-style company (since


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the accents have shifted away from the Dutch/German business culture). In addition to this US business

culture, the fact that half of its market is in the US, the view of the world is largely based on the American

market, and product development also focuses on this market.

Emerging economies

In recent decades, Philips has strengthened its position in the emerging economies. Rapid growth is mainly

achieved though acquisitions and strategic partnerships. Typically, through those agreements Philips ‘gets’

local capacity, employees, market knowledge and access to existing networks, while the company ‘adds’ its

unique experience in terms of process knowledge, quality control, project management and ‘global

specification thinking’. Access to these growth markets and labor costs advantages are important reasons to

establish subsidiary centers in these countries. Important to note, in recent years Philips has progressively

reduced its in-house production operations. Strategic collaborations with external suppliers and

manufacturers are becoming the norm. This greatly improves the company’s flexibility and allows the

company to do business with a negative working capital model (the suppliers invest in the necessary

resources and are paid only after Philips has sold its product on the market (Greidanus, pers. comm., 2008).

Today, China is by far the largest growth market, but India, Russia and Brazil are also significant. In the

emerging countries, Philips invests in R&D to be able to keep track with local market developments and to

build on unique local expertise (Harwig, pers. comm. 2007). Among the emerging economies, China has

also become the most important supplier of technology. At this moment around 800 engineers are

employed in the Chinese R&D labs. Hosting one of the corporate R&D laboratories, Shanghai is one of

Philips’ main research locations. Currently an Innovation Campus is being built in Shanghai, where most of

Philips local activities will be concentrated. As an important aspect of the R&D strategy, collaborative

programs have been set up with Chinese top-universities and other research institutes. Other Asian

innovation campuses have been established in Bangalore and Singapore.


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5.2 Coordination mechanisms for the absorption of external knowledge at Philips’

international R&D organization

As both the interviewed R&D managers underscore, Philips is a very large organization and its

management of innovation is not a standardized process. As a result, the R&D centers of the divisions and

the different businesses differ significantly in how they absorb external knowledge and what types of

external knowledge are required. Nonetheless, it proved possible to identify a number of important

coordination mechanisms that are applied throughout the R&D organization of the company. In the

following, the dominant processes behind the valuation, assimilation and application of external knowledge

at Philips are discussed.


Strategic coordination

As discussed, Philips’ R&D can be divided into short-term development work and research for the

development of broader, longer term technologies. The total ‘technology need’ is defined based on the

global business strategy. Similar to DSM and Unilever, this results in a strategy for the development of new

core technologies and concepts with a long time-to-market, and shorter term, business-related R&D

projects for the business groups. Within these two categories, the need for external knowledge differs, as

will be discussed below. The strategic planning of R&D activities frames the need for external knowledge,

and hence, defines which external technological knowledge is of value to the company.

Philips’ second Open Innovation Campus in Shanghai

Built on the site of Philips Research in Eindhoven, Philips’ High Tech Campus was established in 1999. Since then

it has become a key element in Philips’ adoption of the philosophy of ‘open innovation’. The campus houses over

40 (external) technology-based companies and institutes employing several thousand people in developing new

technologies and products through the open innovation model. Philips goal was to establish an environment and

structures which promote interactions, networking and knowledge-sharing, leading to joint projects and joint

ventures among the companies at the campus. For Philips this means that the company can spin in ideas and

innovations from outside, enriching the services it can offer Philips’ business divisions. Also, it can spin out

technologies from its own extensive IPR portfolio to high-tech companies in the HTCE, which can bring

innovations to market more quickly. For the companies on the campus, networking and co-operation on ideas is

reinforced by shared facilities and technology. In most cases, start-ups can make free use of those facilities.

Building on this experience, in 2005 Philips started building a second Innovation Campus in Shanghai, with annual

investments of about 40 million Euro. Philips’ objectives are twofold. First, it aims to increase efficiency and

internal collaboration by bringing different R&D centers together on one campus. Second, they want to open up the

campus to external parties, facilitating R&D cooperation and open innovation (De Ridder, 2007). Clearly, the ideas

and technologies developed at the Shanghai campus are envisaged to be at the basis of Philips’ next generation of

products.


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Development R&D.

As discussed, the majority of the R&D activities are carried out by the business groups, in the form of

product development projects. The knowledge that is needed in the product development projects can

typically be well-defined. Within the different phases of these development projects, decisions about

whether the required knowledge is developed in-house or externally (via collaborations with external

companies or acquiring patents) are made by the project managers.

The absorption of external knowledge by the development R&D centers is often the result of collaborations

with suppliers. To understand this point, it is important to note that Philips is has a low level of vertical

integration. In other words, many components of its products are developed and produced by its suppliers.

Indeed, more and more often Philips outsources the complete production process. Typically, to coordinate

this process, Philips ‘development’ R&D centers cooperate narrowly with their suppliers. In turn, the

suppliers play an important role as a base for knowledge that is needed by the company for the

development of new products. For example, an external supplier develops and produces small LCD screens

that are applied by Philips in its Senseo machines. The knowledge that is needed to apply the LCDs in its

products, and knowledge about the expected developments within the technology are very important for

Philips’ development center to have access to. Frequent communications and trust between Philips and its

suppliers are therefore seen to be at the basis of the ability to keep track of technologies and to recognize

the value external knowledge. On a regular basis, supplier audits are held by the supply chain group and

the development R&D managers. The suppliers must not only conform to world-class technical

requirements, but also to Philips ethical policies. These audits are therefore seen as an important

coordination mechanism for the development R&D centers to value external sources of knowledge.

Research R&D.

The research centers develop technologies for the global business groups and aim to benefit from local

science networks through tight cooperative programs with local universities and other technical institutes.

These different types of collaborative agreements have become the norm. Regarding the development of

new technologies, uncertainties about the value of the knowledge (that is developed by Philips’ research

centers in collaboration with the external partners) is inherent. Nonetheless, to maximize the potential

outputs of a project, indirect valuation mechanisms are applied. The quality of the external research groups

is obviously critical and its scientific reputation is seen a useful proxy for the quality of ‘knowledge’ that

may eventually be generated in a collaborative project. Hence, quality rankings of universities as well as

the screening of professional profiles and the academic history of the foreign scientists are used as

indicators. Before a collaborative agreement is established, several meetings are organized between the

R&D managers and the scientists to get to know each other and build a trust base between Philips and the

external research groups.


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Having top-class technologists in the R&D organization

As a technology company, having top-class technologists in the R&D organization is key to be able to

value external knowledge. This holds both for the technical research and the product development centers.

As Harwig (pers. comm., 2007) argues, Philips’ technologists are able to foresee technological

developments for the next 15-20 years: “they already saw LCD TV coming, even when the TV industry

was saying it would never happen. They can even calculate when this is more or less going to happen.

Also, the camera with video, music and data, and remote control was prototyped in 1988. In 2001 this has

landed at the youth segment. This is absolutely predictable”.

Outward orientation

Within the R&D organization technology teams are assigned the responsibility to keep track of external

technical developments within their domain, through reading scientific journals, visiting congresses,

benchmarking other companies, etc. This technology scouting is a formal part of their job. Special

‘technology teams’ are established that assign different technology domains to its members. The outward

orientation is thus professionalized and structurally embedded within the company, which improves the

ability of Philips to valuate external knowledge.


Hiring qualified staff

As with the other companies of this study, the hiring of qualified staff is seen as an important way to

acquire external knowledge. This is the case both for research and development oriented R&D centers. As

Harwig (pers. comm., 2007) argues, a stable organization, treating people respectfully and HRM

management tailored to local conditions are important elements to hire and keep qualified staff. This

strategy appears to be successful: the turnover in Shanghai is even lower than in Eindhoven (Harwig, pers.

comm., 2007).

Collaborative models

Apart from hiring staff, different types of models are used to co-create knowledge with external partners

(Greidanus, pers. comm., 2007). As discussed, for the research activities, research institutes are the

dominant partners and the scientific level of research institutes, particularly in China and India provide

opportunities. Different collaborative models with these institutes are applied:

The partner performs the research task. The external research group may perform a research assignment

and write a technical report or develop a prototype, without the involvement of Philips employees in the

process.

Narrow collaboration with partner. If the research institute possesses a strong network (of clients or other

companies) and a strong infrastructure, Philips may also choose to place its own researchers within the


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institute and work on a project together with the scientists of the institute. This is the case for the Institute

of Health Science in Shanghai, for example.

Using the partner’s research infrastructure. Philips uses the infrastructure of the institute, but its own

employees work on the project.

Other forms of external knowledge acquisition applied by Philips are licensing-in of technology, and

spinning-in of technology start-ups. Inter-firm alliances and full acquisitions also provide access to external

knowledge. These business models have already been discussed in the chapters on Unilever and DSM. The

management of these external collaborations has become more professional and in recent years, and

dedicated management functions have been established to manage them.

Coordination mechanisms for the transformation and transfer of acquired knowledge

As discussed, Philips’ R&D is organized in global projects, where different R&D centers provide their

inputs at different phases of the product development process. How a research project is managed is not

clear from the start. The project leader defines the method. Different tools to manage such projects have

been developed, but, as Harwig (pers. comm., 2007) notes, “these are not very sophisticated. In the end it

all comes down to good and frequent communication”. Examples of tools that facilitate the knowledge

transfer (between the globally dispersed R&D units) processes include:

• Video conferencing, combined with a facility to share different types of data simultaneously

facilitates the transfer of project-related knowledge and improves coordination. Email and video

conferencing are used frequently, to avoid too much traveling.

• ‘Team rooms’, where all project documentation is stored in a standardized way, so that it can be

easily retrieved by the project members (enabling on-line knowledge transfers and knowledge

transformation).

• Other coordination instruments are large research conferences, which take place about twice a

year, as well as personal and direct contacts among researchers (Reger, 2004).

• A global competence management system is in place to make sure people with the right experience

base work on the right projects. This promotes the quality of the knowledge transformation

processes (see also DSM).

Clear input/output responsibilities

To enable the effective transfer of knowledge between the R&D units, clear responsibilities are assigned to

the different units by the project leader. This is similar to Unilever and DSM’s project management

systems. These responsibilities include the definition of the output-input interfaces between the different

R&D phases. How knowledge is transformed within the units is a complex issue, coordinated by different

managerial systems, which is beyond the scope of this research. Important for this section is that clear,


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preferably standardized input and output responsibilities increase the efficiency of knowledge assimilation

(both transform and transfer) by avoiding duplication and reducing the problems of ambiguity at the

boundaries between units. This minimizes the need for managerial overhead.

Coordination mechanisms for the application of external knowledge

From the interviews it followed that the assimilated technological knowledge can be applied by the

company into different outputs. These include new knowledge outputs, organizational routines, product

concepts and eventually, products sold.

Integrative functions

Several structural mechanisms have been established to improve the coordination of, and increase the level

of collaboration between the different R&D organizations. Through the better coordination of R&D

activities, the integrative functions lead to a higher efficiency of the application of the developed

knowledge by the different R&D units. As an important example, technology platforms have been

established at Philips in the 1990s to cope with the tendency towards the fusion of various technologies and

cross-corporation topics. The platforms cut across the departments of the research labs, which are mainly

organized according to technical disciplines. Project proposals and applications can come from the research

centers and the product divisions and business groups worldwide. The participation is global and facilitates

the fusion of various technologies, as well as the coordination among the central labs and among the central

labs with the product divisions and business groups (Reger, 2004).

Portfolio management

Similar to the other companies of this study, Philips uses a portfolio management system to select R&D

and manage projects. As Harwig argues, over the years Philips has learned to kill projects early to improve

the effectiveness of R&D through having fewer larger R&D projects. This strategy increases the success

rate of projects and thus improves the efficiency of the application of knowledge that may be developed

internally or come from external sources.

Global roll-out

Philips’ R&D organization (including the corporate incubator function) is responsible to fully develop a

product, ready to be handed over to internal or external the supply chain organization. Similar to Unilever,

this ‘global roll-out’ system, i.e. optimizing for efficiency by centralization of R&D activities (including

decision making and product formulation) can be seen as an important coordination mechanism for the

efficiency of knowledge application.

New business models for the external exploitation of knowledge

Philips does not only develop technologies and products that can be launched within the organization.

Indeed, patenting of IP, the selling of technologies, and spinning-out of companies raised by Philips has


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become part of Philips’ strategy. As Harwig (pers. comm., 2007) argues, since the early 1990s, the

company has become very succesful at this spinning-out strategy and he expects the company will be able

to make 600 million Euro per year by selling companies a continuation for the next 20 years to come.

Concluding, in the interviews, the following important coordination mechanisms for the effective

application of (externally acquired) knowledge were identified: the establishment of integrative functions, a

global roll-out strategy for new products, R&D portfolio management and the establishment of new

business models for the exploitation of knowledge outside the company boundaries.

5.3 Absorptive capacity at Philips Lighting’s R&D center in Shanghai

Background


Philips’ Chinese R&D organization of the product category Compact Fluorescent Lamps (CFL). As

discussed, the absorption process is understood as a combination of valuation of external knowledge, its

assimilation (i.e. acquisition, transformation and transfer) and its application. Philips Lighting is one of

Philips three corporate divisions. It consists of the following businesses: Lamps, Luminaries, Lighting

Electronics, Automotive, Special Lighting and Lumileds. The division has sales- and service organizations

in over 60 countries and many processing plants in Europe, Latin America and Asia. Together with the

consumer market, where the company is very well-known for over a century, Philips lighting’s main

market consists of Business clients and the market of semi-finished products for Original Equipment

Manufacturers (OEM's).

This section is largely based on a face-to-face interview and an interview by telephone with Berry Kock,

who worked in China between 2005 and 2007 as the global technology manager53 for product category

Compact Fluorescent Lamps54 and as a General Manager of China’s Lighting R&D division. In this double

position, Kock was responsible both for technology development for the CFL business55, and for general

management tasks, such as the staffing of the Shanghai lab with competent people, quality management

53 The position of a Chief Technology Officer within a Product Division was created when Philips adopted the contract research model.

He is responsible for the technologies needed for product development and production of the product divisions and its business groups

(Reger, 2004:68). 54 Compact Fluorescents are compact energy saving lamps. 55 Currently the Lighting division employs around 2000FTEs in R&D, of which 400 in Shanghai (20%). The key motivation to start

production in China was to cut costs. CFL has become Lighting’s most dynamic product category, as a result of the so-called ‘green

switch’ in consumer behavior that was triggered by Al Gore’s movie about the dangers of global warning. In this product segment,

consumer demand had remained quite stable over the last 30 years, yet in the last few years, demand has risen very rapidly, with

growth numbers of 25-30% in value annually and 30-40% in volume.


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(through the implementation of procedures to avoid recalls and guaranteeing decent engineering), the

design of uniform processes for knowledge protection, and for the transition from Europe to China.

In 1997, Lighting set up its first production plant in China, in a Joint Venture with a local lamp producer.

At this moment about 90% of the CFL products are produced in China and by 2006, the business turnover

of CFL was around 600 million euros. The business group consists of approximately 100 employees, of

which 60% are located in China. CFL also has industrial activities in Roosendaal, a large park in Poland,

and a research ‘satellite’ in North America for local product specification and facilitating design-ends with

original equipment manufacturers.

The business model applied in China is quite interesting: typically, the manufacturing process is outsourced

to low-cost suppliers. To secure the quality of the products, the largest share of Philips’ R&D staff works at

the suppliers’ work floor to control and improve the manufacturing process. This way, Philips’ competitive

advantage is based on its brand value in combination with the exploitation of its technical competences.

CFL’s R&D internationalization

To understand the drivers behind the R&D internationalization process, it is essential to note that the lamp

industry is a typical process-industry: the production process is key to the eventual quality and efficiency of

the output and the product’s quality is at the heart of the competitive advantage. Mastery of the production

process demands the continuous involvement of experienced technicians to control the machines and

improve the overall production process” (as indicated, Philips’ R&D employees are currently mainly

occupied by controlling these production processes at the supplier’s work floor). Consequently, the

establishment of foreign production facilities is typically accompanied by the internationalization of

process-related R&D.

Innovation ambitions

As a result of large business growth of the CFL business in recent years, most of the R&D employees

mainly work on process control as a result of limited R&D capacity. At the same time however, over the

years the experience and professionalism of the Shanghai R&D organization has dramatically improved. In

this light, Kock argues it is unrealistic to think that radical innovations cannot come from China: “my

electronics engineers in Shanghai are at least as good as my people in Europe and, furthermore, they are on

top of the supply base in China”. Kock’s vision is that in the near future CFL’s people in China will work

on radical innovations and budgeting commitments have been made to realize this.

Learning from China

As discussed, the mandate of the Shanghai R&D section was not to create new technologies or products,

but to improve the quality and efficiency of local production processes. With over 90% of all compact

fluorescent lamps currently produced in China, over the years the center of gravity of the process-related

R&D work has shifted to China and this has led to some interesting consequences. At the time of the


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relocation of its manufacturing processes to China, Philips Lighting had (and still has) a heritage of making

very well-engineered, safe, long-life, over-specified and therefore costly manufacturing process lines. This

mechanization had been largely driven by defensive motives, particularly to reduce labor costs and with the

‘techno-conservatist’ idea that you need high-tech machines to make high-quality products. When setting-

up its first CFL manufacturing operations in China ten years ago, Philips intended to transfer its Western

European highly-mechanized production lines to China. However, this approach proved not very

successful. In particular, the highly mechanized process did not fit very well with the Chinese labor

intensive, capital extensive manufacturing environment. Eventually, the full production process had to be

re-designed to Chinese standards, with a much higher (both skilled and unskilled) labor content (of 10 to 15

times more employees!) and lower technological capital investments. Quite surprisingly, replacing

mechanized work with labor did not by default lead to lower quality products. In fact, a test revealed that

only 15% of the investments in the highly mechanized production process in Eindhoven were important for

quality, the rest of the investments were mainly done to replace labor. In this regard, Kock highly values

the Chinese capacity to reduce all sensitivities related to tolerance in the labor-based manufacturing

process. The Chinese manufacturing process also allows for the use of much cheaper and lower-end

machines, which is a very important cost saver. Taken together, the following four aspects are key to the

cost difference with western facilities:

• The Bill of materials, that is much higher at highly mechanized product lines.

• Overhead costs, which are much higher in the Western (European or American) setting

• Labor costs

• Depreciation costs, that are much higher with highly mechanized product lines

As Kock indicates, the experience built up by Philips Lighting Chinese R&D organization with controlling

the quality and efficiency of production processes in a low labor cost, low-tech environment is very

valuable to the company, since it is at the core of Philips competitive advantage in the CFL market.

Furthermore, it is expected that this ‘absorbed knowledge’ can be applied without little adaptations in other

low-cost countries. In general however, according to Kock, the transfer of knowledge from Chinese to

western organizational units (and the subsequent application of this knowledge by these units) is

suboptimal. Important reasons include the differences in the ‘dominant logic’ (e.g. the western engineers

may think it’s daft to manually produce a lamp) as well as the thinking about China in competitive terms

(i.e. seeing China as a threat). According to Kock, this is unnecessary, since the western and Chinese

activities are fully complementary.

Coordination mechanisms for the valuation and acquisition of external knowledge

In the Lighting domain, the local Chinese infrastructure does not provide a high-class (scientific)

knowledge base. Nonetheless, partly as a result of large government investments, lighting has grown up in

the last decade to a mature industry. Nonetheless, China does not yet offer the state-of-the-art technical


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science base as Western Europe and the United States. As a result, knowledge absorption by Philips mainly

takes place in the form of the hiring of qualified graduates and experienced technical engineers.

As with the other companies of this research, having in-house high-class R&D personnel is a precondition

to be able to estimate the value of external knowledge, while the hiring of qualified graduates and

experiences professionals can be seen as the major (direct) way of acquiring external knowledge.

According to Kock, the fact that at the time the Lighting R&D center was established in Shanghai, there

were not so many other companies around, which enabled Philips to hire the top-1 percent at the

universities. Over time however, competition for talent has increased. Several HRM practices are applied to

hire and keep high-level employees and these appear to work well. First, Philips pays more than the

average salary, which is important at the application phase. To keep the qualified people, it is important to

provide them with career perspectives, and personal development programs are standardized. Also,

temporary internal job-transfers (to the Netherlands, for example) are considered to be an important

premium by Chinese employees.

The valuing of external knowledge has been institutionalized at Philips Lighting’s research organization by

the establishment of technology teams. For all laboratories world-wide, technology teams are assigned that

are responsible to keep track of the state-of-the-art of a specific part of their professional domain (e.g.

electronics, processing).These teams provide the necessary background information based on which the

choice for particular technological options is made. Also, once a year, the technology teams make a

roadmap about the technological developments within their technical domain. An explicit part of their

assignment is to make benchmarks with external actors in the same technology domain, which enforces the

outward orientation of the employees. These benchmark analyses also serve as one of the inputs for

assessments at the basis of interfirm alliances or full acquisitions. Clearly, the institutionalization of the

valuation function with the technology teams is believed to improve CFL’s valuation capability.

Coordination mechanisms for the transformation and application of acquired knowledge

As Kock indicates, an important ‘cultural’ drawback of hiring local staff lies in the fact that the Chinese

employees are generally not very entrepreneurial. As confirmed by Chief Technology Officer for East Asia

Frans Greidanus, this largely results from the education culture that fosters a rather passive attitude. Also,

Chinese companies tend to have a more directive organization culture. This results in the problem that these

employees may not contribute their knowledge to Philips’ business processes in an optimal way. To

compensate this problem, Philips established intensive training programs where new employees are taught

to adopt a more pro-active approach (e.g. to raise questions when something is unclear, come up with

solutions, learn to deal with ambiguous research assignments, etc.).


An important element of these programs is the management of temporary job-transfers to the Western

R&D sites, to learn from their Western colleagues. This way Philips is able to leverage its experience base


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among new employees. It can be stated that these mechanisms contribute to the quality of the assimilation

process: the quality of the acquisition of external knowledge improves, since the Chinese employees are

better able to contribute their knowledge to the company, the knowledge transformation processes improve

because the Chinese employees learn to know how to transform their knowledge into a useable form, and

the internal knowledge transfers improve as a result of better communications with their overseas

colleagues.

Global organization

Lighting’s R&D organization is managed as a global organization. The organization is such that inter-unit

dependencies exist and the research groups need each other for different phases in the research and

development projects. Based on these ‘forced’ collaborations, intrafirm personal networks are created that

in turn serve as a basis for further collaborations. This leads to a higher degree of exploitation (application)

of R&D knowledge throughout the firm. Also, Technology platforms have been established, typically they

are intranet-based. These improve the quality of the transformation and transfer processes, and stimulate

the exploitation (application) of knowledge company-wide. To the same end, meetings and congresses are

organized.

Conclusion

Over the last decade, Philips Lighting’s R&D organization for compact fluorescent lamps in Shanghai has

evolved into a strongly established research organization. As a result of the business dynamics, the largest

share of its 400 R&D employees is involved in the management of production processes at the supplier’s

workfloor. Nonetheless, the ambition is to become an important player in the development of new

technologies and products. Paradoxically, as a critical lesson, Philips Lighting (with a strong heritage of

high mechanization and quality engineering of production lines), has learned from China how to control the

quality and efficiency of production processes in a low labor cost, low-tech environment, which proved to

be key to the success of the business. For the Lighting business, China does not (yet) provide a strong

scientific/technical knowledge base. The recruitment of local personnel is the most important way to make

use of local competences.

The following mechanisms are considered to be important to coordinate the knowledge absorption

processes by Philips CFL’s R&D organization. For the valuation of external knowledge, having a strong

base of qualified R&D employees is key. Hiring and keeping qualified graduates and expert employees is

promoted by European style HRM practices. Technology teams have been set up to keep track of external

technological developments within specified technical domains. Hiring of qualified graduates and

experienced technical engineers is the dominant ways to acquire external technical (process-related)

knowledge. Intensive training programs have been established to teach new employees to adopt a more pro-

active approach. Together with the temporary job-transfers to the Western R&D sites these improve the

knowledge transformation and application processes. The establishment of a global R&D organization with


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narrow inter-unit collaborations as a result of inter-unit dependencies and technology platforms are

important for the quality of the transformation and transfer processes, and stimulate the exploitation

(application) of knowledge company-wide.

tapping into the global brain - squarewise ... · tapping into the global brain ... appendix 2...

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