Chapter 2
Knowledge is Power

Science and Science Policy

A significant trend at the beginning of the twenty-first century is the increasing importance of multinational organizations in the formulation of science policy. Most research institutions continue to be national in character and the bulk of financial support for these institutions continues to be from government and other state agencies. Several trends however, including the transnational character of many scientific problems and the emergence of regional free-trade areas, were at the turn of the century eroding the purely national character of many such institutions and increasing interest in multinational policy approaches.

Governments and private companies in the US, the EU and Japan account for approximately 85% of the world's investment in and performance of research and development. Emerging, however, are several other economies – particularly in East Asia and the Pacific Rim – where R&D and trade in high technology is the most significant long term science policy trend at the beginning of the new century.

Japan

Japan's R&D investment, which had been decreasing in the early 1990s mainly due to a reduction in private sector investment, in turn caused by poor trading conditions and the initial effects of recession in the Japanese economy, showed an increase over the period 1997 to 2003. Japan's investment at 3.0% of GDP is still impressive with a roughly 80/20 split between the private and state sectors respectively. In spite of this lead, Japan remains concerned that its research system lacks breadth and flexibility. In July 1996, the Japanese Cabinet adopted the Science and Technology Basic Plan which was intended to 'promote science and technology policies comprehensively, systematically, and positively from a new standpoint ... and to provide concrete science and technology promotion for five years from 1996 to the 2000 fiscal year'.

The most important feature of this Basic Plan was the Government's commitment to double its 1992 R&D investment by the year 2000, making its share of such R&D comparable to that of the US and the EU. The Plan pledged to shift R&D expenditure toward the solution of global problems such as natural resource depletion, the environment generally, energy use and food shortages, but also emphasized the importance of basic research 'which produces the common intellectual property for human kind'. Latest OECD figures at the time of preparation of this book indicate that Japan, at 3% of GDP, still trails behind the EU average investment at 3.5%.

South Korea

During the middle and late 1990s South Korean GDP grew by 8% compared to 3-4% average across the US, EU and Japan. This growth was fuelled by high-tech industrial success and in turn led to an increase in R&D. At the turn of the century R&D investment stands at 6.0% of GDP – ahead of France, UK and Germany. The private sector accounts for 70% of this investment – an industrial investment matched only by Japan. South Korea is moving aggressively to assert its aspiration to become a world leader in science – working hard with OECD and Asia-Pacific Economic Cooperation (APEC) multinational organizations and hosting the second annual meeting of the APEC ministers of science. Like Japan, South Korea intends to increase basic science and to create an institute for advanced sciences modelled on the US Institute for Advanced Studies in Princeton, New Jersey.

European Union

Germany, France, UK and Sweden all invest more than 2.5% of GDP in R&D whilst Denmark, Finland, the Netherlands and Italy invest rather more than 1.5%. Western Europe continues to boast world-class R&D facilities across all areas of science and engineering and basic research continues to flourish in spite of pressure from most EU governments to deliver more short-term gains from investment. Germany slipped behind France in 1996 in its state-sector R&D investment, largely due to continuing high costs associated with unification. At the time of writing this book, however, there is consternation amongst French state-sector research institutions at the recent cutback in expenditure on basic science. Whether this is a short-term phenomenon remains to be seen. Unusually for the UK the position in science investment appears to be improving. The Chancellor of the Exchequer in March 2004 unveiled plans for a ten-year investment strategy for science, linking state expenditure with incentives for corporate investment.

Personnel issues continue to be an important aspect of EU science policy. European universities are struggling with sharply increased enrolments encouraged by negligible tuition fees and continuing high unemployment (a process known as 'massification') and the implications of this in terms of quality of graduates and effect on research are as yet unclear.

EU institutional research and development budgets continue to hold up in the early 2000s, whilst those of research facilities not under direct EU control such as the European Laboratory for Particle Physics (CERN) and the European Synchroton Radiation Facility (ESRF) face some uncertainty. Unlike the US, where most basic research is supported by federal funding and performed in university facilities, most EU governments continue to support a parallel system of basic research institutions in addition to universities. Examples include the Max Planck institutes in Germany and the National Centre for Scientific Research laboratories in France.

The EU's Framework Programme for R&D which provides partial, usually matching, support for pre-competitive applied research projects undertaken in two or more EU countries, is being used as an explicit instrument of European integration. Although its budget is less than 5% of the combined R&D budgets of the EU member states, the Framework Programme exerts a significant influence on national priorities. For example the fact that it restricts support to direct research costs as opposed to salaries, permits it to play an important catalytic role. Finally, the weakness of the euro has adversely impacted the spending power of EU research institutions. It remains to be seen how this particular problem will be managed.

The Us

In spite of budget difficulties in the US, federal R&D budgets have been upheld to a large extent with most major recipients of federal investment seeing small increases. Viewed in aggregate, US expenditure in R&D is healthy and competitive, totalling $282 billion, matching the combined totals for Japan and the principal EU players (although in non-defence R&D the US's combined direct competitors have a significant lead). The share of GDP, at 6% in 2003, increased from 1993 when it was approximately 3%. Recent figures on corporate R&D show a surge in investment, certainly among the bigger US corporations. The war on terror – a significant political factor in the early 2000s – has seen a significant shift towards military R&D. The long-term effect of this shift on non-military industrial research has yet to be assessed.

In the early 1990s industry and government accounted for roughly equal shares of R&D investment in the US. By 1997, however, the industrial share had reached 59% and the federal share had slipped to 36%. This disparity will probably increase in the early years of the twenty-first century as government retreats from traditional areas of support. To what extent this may impact US competitiveness in global markets remains to be seen.

An important federal-funded report into how well the US capitalizes on its R&D investments (Capitalizing on Investments in Science and Technology, published jointly by the National Academy of Sciences, National Academy of Engineering and Institute of Medicine in 1999), noted that large companies which had traditionally supported important long-term R&D were forced to reduce expenditure in this area. The report commented on the growing importance of external sources of R&D across most industrial sectors.

Future Proof – The Need to Monitor Knowledge

New technologies, the advance of science, increasing regulation and changes in society at large make it essential that organizations monitor developments generally, in order to be able to develop and reorient themselves, and respond to new and impending developments. It is unlikely that any major organization today will contain or be able realistically to develop all the information and knowledge that they need. A simple illustration: in the early days of aviation the technologies, skills and knowledge required to develop, build and operate aircraft were capable of containment within a single organization. So, motor engineers were able to branch into aviation engineering with little difficuty- the engineering skills and knowledge were similar. As technology developed, however, aircraft firms were required to absorb a greater range of skills – for example stress analysis, metallurgy, fluid dynamics, ergonomics and psychology. Some firms were able to bring major elements of these new disciplines in-house. But as technology advanced further into advanced electronics, new sources of power and fuel and computer-controlled flight dynamics, aero industry management were required to make key strategic decisions. Rather than bring all skills in-house, the industry developed a pool of specialist suppliers with expertise in areas that were vitally important technologies, but of secondary importance to the core competencies of design, development, integration and manufacturing.

The aviation experience can be seen in other industries. As customer demands grow, products become more complex, ever greater reliability and effectiveness are required, and self- or government-regulation increases. Organizations have to make strategic choices about what knowledge and skills are required in-house, and what can safely be outsourced. It is becoming increasingly difficult, in any case, for organizations to remain abreast of all developments.

Globalization has forced organizations to become more effective in developing new products and processes as increasingly fierce competition threatens virtually all markets. Technology is becoming ever more complex, product life cycles are shortening and substitute technologies follow in rapid succession. This is true of every industry and every activity that has a technology/knowledge basis. Organizations are finding it increasingly difficult to carry the internal resources to sustain knowledge capabilities in all areas of interest and therefore concentrate capabilities into core competencies. Knowledge management in other non-core capabilities is increasingly managed through forming strategic partnerships or contracting out non-core activity.

Buying knowledge services is a form of commercial and organizational integration of the buyer and the seller, albeit on a temporary basis. The decision to purchase knowledge services should be based on the overall strategy of the organization, but evidence shows that this may not always be taken in a systematic fashion. Readers who need to explore the problems, pitfalls and rationale of knowledge procurement in advanced technology/science industries can pick up useful information in The Outsourcing R&D Toolkit–full details of which are contained in Appendix 1.

Knowledge is Power: Creating and Diffusing New Knowledge

It is no surprise that the world's wealthy nations – and for those read member countries of the Organization for Economic Cooperation and Development (OECD) – anxiously monitor their own and their direct competitors' ability to create and benefit from new knowledge. Statistics can be dry, but sometimes reveal very important trends – trends that if followed through could lead to a wholesale change in a particular situation. Just such a change may be on the way for the rich nations which currently control the bulk emerging new knowledge. According to the OECD's R&D productivity data for 2003 the US, Canada, the Netherlands and Australia, amongst the OECD nations, received the largest boost from investment in information and communications technology (ICT). Much of OECD labour productivity growth in 2003 was concentrated in knowledge intensive activities, notably ICT services, together with high-technology and medium-high technology manufacturing.

A significant new development in the first few years of the twenty-first century was that the ability to create and use new knowledge through investment in technological and scientific R&D, use of ICT, development of scientists/engineers and the filing of patents, was extending to a wider range of countries – many of them outside the OECD's membership. This suggests increasing competition for the factors of knowledge creation – skilled people, innovative businesses and capital – with a likely reduction in some of the broad advantages that OECD countries enjoyed in the 1990s.

OECD-wide investment in R&D rose in 2001 and into 2002, while patenting nearly doubled over the decade. This was stimulated by developments in the ICT and biotechnology sectors. This activity however is no longer the sole province of the OECD countries. Major non-OECD economies currently account for 17% of global R&D expenditure, with Chinese R&D expenditure of some US $60 billion, putting China third in the world behind the US and Japan. India spent about US $19 billion on R&D in 2000-01, putting it among the top 10 countries worldwide. Chinese Taipei was the fourth largest recipient of US patents, ahead of France, the UK, Korea and Canada.

Human capital is an essential factor of economic growth based around science and technology. In the early 2000s universities in the EU awarded 36% of science and engineering degrees in the OECD area while the US universities awarded 24%. To compensate, the US continues to draw on the skills of foreign-born scientists and engineers – a continuation of Europe's perennial complaint of a 'brain drain' in favour of the US – first recognized in the late 1950s. While some OECD countries such as the UK and Canada are important sources for scientific personnel in the US, today three times as many foreign-born scientists are from China and twice as many from India as from the UK. In many cases, these foreign-born workers come from the national university system. Foreign students represent more than a third of Ph.D. enrolments in Switzerland, Belgium and the UK, 27% in the US, 21% in Australia, 18% in Denmark and 17% in Canada. In absolute numbers, the US has far more foreign Ph.D. students than other OECD countries, with around 79 000 in 2003. The UK in the same year followed with some 25 000.

ICT continued to spread, despite the slowdown in parts of the sector. In Germany, Sweden, Denmark, and Switzerland some two-thirds of households had access to a home computer in 2002. In many OECD countries 80% or more of commercial enterprises with ten or more employees use the Internet – and this includes countries like the Czech Republic and Spain. Broadband access is more varied and widely diffused in the US, Korea, Canada, Sweden, Denmark and Belgium. In Sweden and Denmark, 20% of commercial companies have access to the Internet through a connection faster than 2Mbps. The integration of the Internet into everyday life continues at a rapid pace. In the US, almost 40% of Internet users buy online. The share of electronic sales in total US sales grew by 70% between 2000 and 2002, reaching 1.5% of retail sales. In Sweden and Portugal about half of all Internet users play games online and/or download games and music. In Sweden and Denmark, more than 50% of Internet users undertake e-banking.

Knowledge is Power: Productivity and Economic Structure

The growing knowledge intensity of the OECD economies has been accompanied by rapid economic globalization. The trade to GDP ratio increased by about two percentage points over the 1990s in the US and EU, although it remained stable in Japan. Trade in high technology goods, such as aircraft, computers, pharmaceuticals and scientific instruments, accounted in the early 2000s for over 25% of total trade, up from less than 20% in the early 1990s. A significant fraction of this trade was between different affiliates of multinational enterprises. The share of intra-firm exports in total exports of manufacturing affiliates under foreign control ranged between 35% and 60% in OECD countries at the beginning of the twenty-first century.

The amount of manufacturing R&D expenditure under foreign control grew by nearly 90% between 1993 and 1999 (at current 2003 prices) with the US being the destination for nearly half of this investment, accounting for about 18% of all US manufacturing R&D in 1999. For many countries, including the UK, the Netherlands, Spain, Sweden, Canada, Ireland and Hungary, foreign affiliates account for 30%, or more, of manufacturing R&D. In Ireland the figure is 70%.

Some OECD countries, thanks to a combination of factors, increased growth during the 1990s. These factors included higher labour utilization, capital deepening – notably in ICT, and more rapid multifactor productivity (MFP) growth. Over the second half of the 1990s, MFP growth accounted for a considerable part of overall growth of GDP, particularly in Finland, Greece, Ireland and Portugal. By 2000, services accounted for 70% of OECD GDP; manufactures accounted for about 18%. In many OECD countries, business services currently account for the bulk of labour productivity growth. Part of the increase in the service sector's contribution to value added reflects the manufacturing sector's greater demand for services, some of which is due to the outsourcing of activities previously undertaken in-house. Unsurprisingly, estimates of the amount of services embodied in one unit of final demand for manufactured goods show that it was significantly higher in the mid-1990s than in the early 1970s.

Investment in knowledge in the OECD is defined as the sum of R&D expenditure, expenditure for higher education (public and private) and investment in software. In 2000 investment in knowledge amounted to 4.8% of GDP in the OECD area, and would be around 10% if expenditure for all levels of education were included in the definition. The ratio of investment in knowledge to GDP is 2.8 percentage points higher in the US than in the EU. In Sweden (7.2%), the US (6.8%) and Finland (6.2%) investment in knowledge exceeds 6% of GDP. In contrast, it is less than 2.5% of GDP in southern and central European countries and in Mexico.

In the early 2000s most OECD countries were increasing investment in their knowledge base. During the 1990s, investment increased by more than 7.5% annually in Ireland, Sweden, Finland and Denmark – far above the increase in gross fixed capital formation. The amount of investment in knowledge was still low in Greece, Iceland and Portugal, although growth of GDP was similar to that of most of the knowledge-based economies (such as Sweden and Finland). In the US, Australia and Canada, gross fixed capital formation grew more rapidly than investment in knowledge.

For most countries, increases in software expenditure proved to be the major source of increased investment in knowledge. Notable exceptions were Finland (where R&D was the main source of increase – taking Finland to the second position in the R&D-intensity table published by the OECD, behind Sweden) and Sweden (where all three components grew). Gross fixed capital formation also covers investment in structures and machinery and equipment, which is a channel for diffusing new technology, especially to manufacturing industries. Gross fixed capital formation accounts for around 21.3% of OECD-wide GDP, of which machinery and equipment accounts for around 8.4%. The ratio of investment in machinery and equipment to GDP varies from 6% (Finland) to 14.6% (Czech Republic).

OECD-area R&D expenditure continued to increase steadily in recent years, rising by 4.7% annually between 1995 and 2001. Since 1995, growth in the US (5.4% a year) outpaced growth in the EU (3.7%) and Japan (2.8%). In 2001, R&D expenditure in the US accounted for approximately 44% of the OECD total, close to the combined total of the EU (28%) and Japan (17%). Below-average growth in R&D expenditure in the EU was mainly due to slow and declining growth of the major European economies. Compared to average growth in the OECD area over 1995-2001 (4.7%), R&D expenditure increased by only 3.2% a year in Germany and by less than 3% in France, Italy and the UK.

In the three main OECD regions – the US, Japan and the EU, R&D expenditure relative to GDP (R&D intensity) continued to increase steadily over the first three years of the twenty-first century. In Japan, this was due more to the stagnation in GDP since 1997 than to significant increase in R&D expenditure. In the US, however, the rise was mainly due to significant increases in R&D expenditure, as GDP also grew rapidly. In 2001, R&D intensity in the EU exceeded 1.9% for the first time in a decade. In 2001, Sweden, Finland, Japan and Iceland were the only four OECD countries in which the R&D-to-GDP ratio exceeded 3%, well above the OECD average of 2.3%.

Knowledge is Power: New Entrants in the Global Knowledge Stakes

The somewhat dry statistics in the preceding section show the concern and the determination of the wealthy nations to compete in the global knowledge marketplace. But powerful new competitors are emerging to challenge the dominance of the OECD nations – a state of affairs that allows intriguing new possibilities for buyers of knowledge and knowledge-based services. Mighty US combine General Electric (GE) is today leveraging the global skills base. Until the year 2000 almost all of GE's spending on research, as opposed to product and process development, took place in the US. But following a corporate decision to become less focused on the US, GE has opened important new research facilities in Bangalore, Shanghai and Munich. In taking this decision, GE followed a trend set by Siemens of Germany, Philips of the Netherlands and IBM – the latter widely considered to be the leader in global research, with some eight laboratories, of which just three are in the US.

By spreading their research base these corporate giants hope to access a wider range of technological competencies than may be available (at an affordable price) in their home countries. GE's vice president in charge of R&D, Scott Donnelly, was tasked in 2000 with overseeing the investment of $280 million to build new research facilities globally. Donnelly's philosophy is that, thanks to GE's remarkable breadth of activities (power stations to X-ray scanners, consumer products to financial services) a number of critical research technologies can be 'leveraged' across GE's eleven main business divisions. His four main research business units were organized into globally transparent cross-functional teams. Different people work on the same technologies in different parts of the world, connected by e-mail and in frequent contact. The research teams focus on a dozen 'core' or 'enabling' technologies, covering areas such as solid state physics, organic chemistry, electronics and imaging, metallurgy and bio sciences. GE's advantage, according to Donnelly, is that it can often use the same idea in a core/enabling technology in many ways. A further challenge is to keep the research teams connected closely to the development teams within the business units. New knowledge can then be delivered rapidly in products to the market.

Whilst many companies are now establishing research and other knowledge-focused operations around the globe, even more are beginning to take advantage of the growing pools of talent that can be found and nurtured in far-flung places in the world. Research collaborations have for decades been a valuable mechanism for stimulating the development of new knowledge. But the emerging markets are also becoming emerging knowledge powerhouses. India is perhaps the prime example. The idea that all that India has to offer is cheap labour and a telecommunications link – the two factors that have made it a favourite destination for outsourcing of operations – is now out of date. Today India's knowledge workers are involved at the high end of technological and scientific research and development.

India has not yet sought to draw attention to its growing technological competencies. Conscious of Western fears of the migration of ever more technically demanding jobs, some have concluded it is best not to draw attention to themselves for fear of the growing resentment and determination of Western labour, unions and businesses to preserve capabilities at home. A veil of discretion currently masks some of India's R&D achievements. Some multinationals such as IBM are loath to discuss the subject at all. Others, such as Texas Instruments, boast that they have 'increased design resources around the world' but add that this has been achieved without transferring significant numbers of jobs abroad. Some Indians are themselves sceptical about their ability to compete in the truly big league, noting not only a lack of an in-depth scientific and technological infrastructure, but also weaknesses in the ability to create and protect intellectual property. Yet by crude measure of patents filed, India does indeed have strengths that should be of interest to knowledge buyers. In recent years major Western names such as Intel, Oracle, Texas Instruments, Cisco, GE, ICI, Whirlpool and SAP have together filed something in excess of 800 patents in India.

Made in Japan: A Knowledge Economy Adjusts to Low-Cost Rivals

In the late 1990s and early 2000s Japan's manufacturing moved steadily overseas. The principle reasons were to exploit lower wage economies – especially China – where wages can be 20 or 30 times less than in Japan. Concerned about the long-term implications of this shift, however, many manufacturing firms are devising strategies to fend off low-cost competition from overseas. Household names such as Canon and Toyota have developed integrated manufacturing systems that are more complex and sophisticated than low-cost, low-tech rivals can achieve. In other sectors, companies are learning how to protect skills and trade secrets that have for many years been key to their success. Others are even bringing back to Japan (so-called 'insourcing') activities that might otherwise be lost through knowledge leakage to rivals. These moves have received some encouragement from the Japanese Ministry of Economy, Trade and Industry (METI) which actively negotiates with Japanese manufacturers in an attempt to stem the leakage of jobs and technologies overseas.

Cheap labour may not be the sole reason for moving to other counties. Carmakers and machinery constructors have set up overseas simply to follow customer demand. Japan's second car maker, Honda, has commented that by building factories close to their markets, it can shorten production times, reduce exposure to currency fluctuations and lower distribution costs. Overseas R&D facilities can help to tailor vehicles to local market needs, such as sports-utility vehicles in America with extra towing capacity, a feature rarely needed in Japan.

Some manufacturers respond to competition by keeping secret their core technologies and core skills, whilst still shifting low value-added assembly and production activities to lower-cost destinations. Toshiba, Japan's biggest chip maker, is today moving ahead fast on developments of very advanced microchips and is avoiding past mistakes, where in cooperating with South Korean chip makers on basic chip technology, it effectively 'sold the family silver' only to find that former partners became tomorrow's competitors. Other manufacturers are finding that insourcing (bringing tasks that have been outsourced back in-house) can raise revenues and profits. This has highlighted three key advantages to the Japanese approach to manufacturing:

• well-trained, multiskilled employees
• low defect rates
• lean manufacturing processes that boost production flexibility and reduce inventory costs.

A 'white goods' manufacturer, Kenwood, has noted that its Malaysian workers, who have a high turnover, do not match up to its domestic Japanese workers, who remain employees for longer and so master a number of tasks – four or five per employee as opposed to one per employee on the Malaysian production lines. Consequently defect rates are anything up to 80% lower in Japan, and production times for equivalent products are markedly shorter. In the first few years of the twenty-first century the survival strategy of Japanese manufacturers revolves around industry's ability to identify, maintain and improve their inherent strengths. Professor Takahiro Fujimato of Tokyo University, in an influential article 'A twenty-first century strategy for Japanese manufacturing' (Bungei Shunju, November 2003), commented that it is overly simplistic to suggest that Japan should concentrate on high value-added production. He argued that what Japanese manufacturers really excel at is 'products whose functions require many components to be designed in careful detail and mutually adjusted for optimal performance'. Building such products required close teamwork, as well as cooperation with suppliers. Both elements reflect the need to manage knowledge components – the knowledge of workers as well as the knowledge and skills of suppliers that are bought in to client organizations.

The ability to combine different technologies and skills remains a key feature of Japanese manufacturing. As will be discussed in Chapter 5 (in the section Is external technology acquisition increasing?) companies and organizations generally are progressively becoming 'multitechnology' and their products are mul-tech (for multitechnology) as much as high-tech. For example, successful photocopier companies, such as Ricoh and Canon, combine advanced chemical processing for toner inks, precision mechanics and excellent servicing skills. Automobiles also require the synthesis of many technologies and knowledge-based skills. Nowadays it is difficult to think in terms of core technologies in autos, where there are a range of different technologies working together – ceramics, hydraulic, mechanical engineering, combustion engineering, metallurgy, electrical, computing and environmental, to name a few.

The rapid transfer of manufacturing by Japanese firms to South Korea, Taiwan and latterly mainland China, at the turn of the twenty-first century, forced many Japanese firms, as well as their government advisors, to consider at a strategic level which knowledge-based skills and technologies to protect, and which should remain based in Japan itself. As much of Japan's technological 'edge' depends on closely guarded trade secrets, this is becoming ever more complex in the early years of the new century. Often specialist suppliers will work with rival firms, and in south east Asia there is some clear evidence that low-cost rivals frequently 'reverse engineer' (the posh word for copy) their rivals' technologies and skills. Television manufacturer Sharp responded to this danger by trying to maintain specialist manufacturing equipment using in-house teams rather than utilizing the machinery's own manufacturer, simply to keep such manufacturers ignorant of potential defects in machines they may also have sold to direct competitors.

Knowledge is Power: Towards a Strategy for Increasing Innovation

Organizations base much of their strategy planning on the not unreasonable premise that innovation is an absolute basic requirement in the modern economy, and in modern society: innovation is an essential element in the constant struggle for competitive advantage for companies. Innovation enables society at large to enjoy greater benefits in public service delivery. But what is innovation? The Oxford English Dictionary describes innovation as 'making changes to something established'. Invention, by contrast, is defined as 'coming upon or finding: discovery'. Innovators work to change the status quo whereas inventors create (or stumble across) new things. In terms of buying new knowledge, both activities are potentially buyable, but it is naturally in the area of innovation – of making existing assets work more effectively -that most knowledge buying will be concentrated.

Whereas the benefits of invention may be immediately obvious, the advantages brought by innovation can often require greater management support. Changing the status quo is always uncomfortable. A certain household name PC manufacturer set out to imitate Dell Computer's world-famous 'build-to-order' system of computer assembly. The company found that its attempts were frustrated not just by its head of marketing, who did not want to disturb existing retail arrangements, but also by the head of manufacturing, who feared the innovation would lead to the outsourcing of most of his department's activity – and probably his own job. Both managers fought a powerful rearguard: at the time of writing this book Dell's dominance of this type of manufacturing continues without serious challenge.

The Gillette company utilized the advertising strap-line 'Innovation is Gillette' in the early 2000s, and most large companies would like to think of themselves as natural innovators. To such organizations innovation can seem like a silver bullet. Inject innovation into the right corporate/organizational areas and success will surely follow. It is rarely so simple, however. Blockbuster inventions are more and more difficult to create. Big companies can derive greater benefit from making lots of small improvements in existing products and processes – the essence of innovation. Even in the highly inventive business of pharmaceuticals, genuine new products are harder to find. Global spending on pharmaceutical research doubled in the decade to 2004, but the number of new drugs approved by the world's regulatory health agencies halved in the same period. 'Big Pharma' live in the hope – and often direct their efforts towards – finding a dramatic new drug, but many new and promising developments are bottled up and stored away in the laboratories because they cannot be profitably produced (and that means, in essence, passing all the essential regulatory hurdles).

'Disruptive innovation' – simpler, cheaper, better or more convenient products that seriously upset the status quo, can lead to the ending of the dominance of market-dominating players. The Dyson vacuum cleaner is a well-known example. Others are IBM's exposure once the PC had been invented, and the emergence of low-cost carriers in the airline business. Most organizations today grow through sustaining and directing innovation. So how do organizations stimulate innovation? And should this emerge from within or be purchased from externals?

Big companies have learned hard lessons from the history of innovation. Many have cut back and redirected investment in research. The old idea of ranks of white-coated boffins dreaming the future of the organization is now largely obsolete, although 'Big Pharma' and Microsoft are exceptions to the rule. In some industries reductions in R&D spending reflect changes in the way products travel down the invention pipeline. During the late 1990s, for example, Cisco systems of the US maintained its technological dominance of the high-tech Internet/server business by buying a succession creative start-up companies that had originally been financed by venture capital. The company's R&D was, it might be argued, outsourced to California's venture capital market, who combined the innovative flair of small corporations with the marketing know-how of large ones. We have already noted there are serious moves to 'outsource' research to emerging economies. Acquiring controlling stakes, or simply buying-up innovative firms, is another aspect of the same general move. This might be characterized as a fundamental change in the supply chain of invention. For example, in the biotech industry many firms act as intermediaries between universities and 'Big Pharma', sometimes with personnel moving between these firms as innovations come to maturity. Universities once licensed inventions direct to the big manufacturers, but small intermediaries can make the whole process more efficient.

Market fragmentation leads towards greater development of niches with the overriding requirement to customize products for smaller groups of consumers. This is true not only in commerce but in the delivery of public services, where the idea of 'choice' has become a (Western) politicians' mantra. So how do organizations gear up to improve and increase innovation? The following are key lessons:

• Reward and thereby encourage innovation among employees.
• Monitor market and other developments, whether technological or social.
• Monitor competitors or peer-group organizations.
• When buying new knowledge assess whether such knowledge will support innovation along with other organizational objectives.
• Companies should avoid the idea it is not worth investing unless the rewards are enormous. A series of smaller innovations might collectively lead to great rewards.
• Companies need to innovate constantly to defeat the 'commoditization' of products and services. They still need to find a unique selling point that encourages consumers/customers to recognize their product over their rivals'.
• Big manufacturers should consider hiving-off promising new products into independent business units, away from the smothering influence of the status quo.
• Big organizations should themselves attempt to become disruptive innovators.