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Total InnovationWhy harnessing the hidden innovationin high-technology sectors is crucialto retaining the UK's innovation edgeTotal InnovationWhy harnessing the hidden innovation in high-technologysectors is crucial to retaining the UK's innovation edge
Innovation is vital to the UK's future economic prosperity and quality of life. So it is crucial that weunderstand where innovation comes from, who does it, what stimulates it, and how it benefits oureconomy and society.
In October 2006, we published the first in a series of reports on what we call 'hidden innovation'– the types of innovation that tend to be neglected by traditional indicators. We suggested that an'innovation gap' had opened up between these indicators, the reality of innovation in the UK, andthe policy intended to stimulate and support it.
Much has changed since then: a new UK government department for innovation; a White Paperthat explicitly recognises the importance of hidden innovation; and the announcement of a majornew effort to measure innovation in ways that more accurately reflect the UK's economy andsociety.
But much remains to be done. This report, the third in the series, focuses on high-technologysectors such as aerospace and pharmaceuticals. It reveals the increasing importance of hiddeninnovation in these sectors, and the surprising ways in which our most innovative firms haveadapted to technological change and international competition.
What is clear is that, in this rapidly changing world, more of us need to be prepared to beinnovative. We need, in particular, to rethink some of our most fundamental and long-standingassumptions about innovation, and to consider new, perhaps unfamiliar ways of responding. Thisis as much a challenge for our politicians and policymakers as it is for our firms and entrepreneurs.
We would greatly welcome your views on our proposals, and to hear your own.
Jonathan KestenbaumCEO, NESTA
May, 2008
NESTA is the National Endowment for Science, Technology and the Arts.Our aim is to transform the UK's capacity for innovation. We invest in early-stage companies, inform innovation policy and encourage a culture thathelps innovation to flourish.
3 Executive summary There is both too much pessimism and too much complacency about the UK's high-technology sectors. Too much pessimism because the UK remains strong within major sectors such as aerospace, pharmaceuticals and automotive; too much complacency because the nature of innovation in these sectors is changing rapidly and may overtake UK industry and the policies designed to support it. Innovation is about more than product breakthroughs resulting from scientific and technological research. It can be as much about new ways of doing things, or new business models. Such 'hidden innovation' enables UK firms to change and adapt in the face of rapidly increasing international competition. Just as firms need to harness several different forms of innovation from new technologies to new business models – a process known as 'total innovation' – policy also needs to reflect this broader understanding of what innovation is and where it comes from. Most importantly, the UK needs to develop strategies to stimulate total innovation if it is to remain competitive in today's world.
4Much of this has been achieved by moving and innovation in services. However, thesuccessfully to higher-value-added activities White Paper has less to say about what policyin the face of competition from lower-cost mechanisms are required to stimulate andcountries. support this hidden innovation.
Recently, policy has begun to recognise • Type III hidden innovation comes from thethis hidden innovation. Most importantly, novel combination of existing technologiesInnovation Nation, the White Paper published and processes. Because some of thesein March 2008 by the UK's Department for technologies aren't new-to-the-world, theInnovation, Universities and Skills (DIUS), innovation doesn't get counted in traditionalgives a prominent place to hidden innovation metrics. For example, in software, official
5 definitions of R&D only acknowledge important. Doing so could help to free them software development that represents to engage in new forms of technological a 'scientific and technological advance'. development and to enter new markets. Yet much software development involves the creative use of existing functions and Remaining competitive requires 'total routines to deliver new and sometimes innovation' innovative services. Some leading established firms – including Rolls-Royce, BT, Toyota and GlaxoSmithKline • Type IV hidden innovation takes place – are taking a broader approach to innovation. 'under the radar' of many surveys. In many By seeking to integrate innovation in new areas of engineering, there are small-scale technologies, products and processes with problems and challenges that are dealt with innovation in business models, organisational outside R&D programmes. For example, forms and market positioning, they create the Toyota Production System (TPS) greater profits and protect their market represents a highly successful approach position. This is 'total innovation'. to generating such 'micro-innovations'. TPS organises manufacturing and logistics More UK high-technology firms need to to eliminate waste and inconsistency in develop the capability for total innovation. products through an emphasis on continuous Too many firms are unprepared for the ways improvement, teamwork, and becoming a in which foreign competitors are developing 'learning organisation'. Through this, Toyota wholly new approaches that are not limited to implements one million new ideas each year new technologies. (3,000 each day).
6or to help in the development of new business coming changes in knowledge, technology,models. trade, demographics and industrial structure that have bearing on competitive strategyBetter coordinate the 'non-innovation or socially-desired outcomes. Industrypolicy' that influences innovation and government should then apply thisTypically, what is designated as 'innovation understanding to the UK's current positioningpolicy' does not encompass the wider set and identify a small number of likely routes toof policies that also influence innovation in competitive advantage. Finally, these strategiesbusinesses – from taxation and regulation to should lay out a plan for passive and activepublic procurement, intellectual property rights government support, primarily centred aroundto education and skills. While innovation policy the need for greater coordination of policy.cannot be all-encompassing, these other areasof policy need to be aligned with the objectives These strategies should be led jointly by DIUSof innovation policy – especially given the and the Department for Business, Enterprisebreadth of total innovation. and Regulatory Reform (BERR) – working with HM Treasury, the Technology Strategy Board,The demands of total innovation require devolved administrations and relevant agenciesstronger and broader skills such as regulators and sector skills councilsHigh-technology sectors need a strong supply – and shaped by ongoing engagement withof people skilled in science, technology, industry.engineering and mathematics (STEM). Morestudents need to be inspired to study these Collectively, these strategies should representsubjects, and STEM careers must present an the UK's national mission for innovation.attractive alternative to employment in othersectors. Policy should be informed by new measurements for total innovationHowever, narrow technical skills are not The extent and importance of hiddensufficient for total innovation. Education and innovation in research-intensive sectorstraining must develop the capabilities necessary demonstrates the inadequacy of focusing onfor contemporary innovation, specifically more research-focused indicators.interdisciplinary skills and stronger strategicbusiness skills. In firms, the increasing importance of total innovation makes formal R&D spendThe new UK Commission for Employment and increasingly unhelpful as a guide to innovativeSkills (UKCES) should build on the work of the performance and hence business growth. Insector skills councils to provide government policy, the focus on R&D as a proxy for nationalwith an analysis from the perspective of performance obscures a focus on businessindustry regarding the extent and quality of growth from innovation and the wider set of'innovation-ready' skills in the UK, and advise factors that shape innovation by firms.on how the education, training and skillssystems across the UK might be improved to This will require a new set of broader and moreensure the better development of these skills. meaningful indicators to guide policy. These will be considered as part of NESTA's work onGovernment and industry should develop developing a new Innovation Index for the UK.Total Innovation Strategies for strategicindustriesThe UK needs to invest in its strategicallyimportant industries. These are the UK's currenthigh-value-added industries and those thatare identified as having the realistic potentialto become high-value-added – our 'innovationedge'. 'Investment' in this context meanseconomic and political commitment to theirdevelopment.
7 Acknowledgements This report was written by Dr Michael Harris, Research Director, with Dr Juliet Cox, Research Associate, at NESTA, in partnership with the case study researchers below: • Pharmaceuticals – Margaret Kyle (London Business School) with Chris Shilling
• Electronics and IT hardware – Paul Simmonds, Edward Kitching, Anne-Cecile Olivier (Technopolis)
• Automotive – Peter Wells, Paul Nieuwenhuis (Centre for Automotive Industry Research, Cardiff Business School).
The following firms and organisations were consulted during the research:
Aercap Aviation Solutions, the Association of the British Pharmaceutical Industry, the BioIndustry Association, the Biotechnology and Biological Sciences Research Council, Cogent, the Department for Business, Enterprise & Regulatory Reform (the Aerospace, Marine and Defence Unit, the Automotive Unit, the Bioscience Unit, the Electronics Unit), the Electronics Knowledge Transfer Network, the Electronics Leadership Council, the Engineering and Physical Sciences Research Council, the Engineering and Technology Board, e-skills UK, the Institution of Engineering and Technology, Intellect, the Motorsport Industry Association, the National Microelectronics Institute, Pfizer, Philips, Rolls-Royce, the Royal Aeronautical Society, Science and Technology Policy Research at the University of Sussex, the Society of British Aerospace Companies, Smiths Aerospace (GE Aviation Systems), and the Technology Strategy Board.
The views expressed in this report represent those of NESTA only. References to other organisations, including those consulted in the course of the research, does not imply endorsement by those organisations.
Total Innovation Why harnessing the hidden innovation in high-technologysectors is crucial to retaining the UK's innovation edge
9 4. UK policy for high-technology sectors remains narrowly focused on 26 traditional innovation 4.1 Policy has begun to recognise hidden innovation 26 4.2 However, policy for high-technology sectors still focuses overwhelmingly 26 on R&D and technology development 4.3 Policy neglects the hidden innovation in research-intensive sectors 27 4.4 'Non-innovation policy' also shapes innovation in high-technology sectors 27 4.4.1 Regulation, including environmental and safety regulation, plays 27 a major role in informing innovation activities in many sectors 4.4.2 In some sectors, public procurement shapes innovation 27 4.4.3 Intellectual property rights have a major impact on innovation 28 4.4.4 Skills are a crucial factor in innovation capability 28
Appendix A: Pharmaceuticals 33 Innovation through large-scale investments in research but undergoing radical changes that challenge the traditional 'pipeline' model
Appendix B: Aerospace 46 Innovation through technological development and partnerships with an increasing role for hidden innovation in business processes and services
Appendix C: Telecommunications 57 Innovation through technological disruption and communication convergence leading to a role for hidden innovation via new service provision
Appendix F: Automotive 89 Innovation focused on incremental product development alongside process innovation, but with a resistance to new business models
10Total Innovation 1. As defined by the thenWhy harnessing the hidden innovation in high-technology Department of Tradesectors is crucial to retaining the UK's innovation edge and Industry (DTI), see Department of Trade and Industry (2003) 'Innovation Report, Competing in the Global Economy: The Innovation Challenge.' London: DTI. 2. HM Treasury (2000) 'Productivity in the UK: The Evidence and the Government's Approach.' London: HM Treasury. 3. According to the definition that is used for tax purposes in the UK, R&D is defined as any project to resolve scientific or technological uncertainty aimed at achieving an advance in science or technology, see Department of Trade and Industry (2004), 'Guidelines on the Meaning of Research1. The UK appears to perform poorly in scores highly on numbers of scientific papers and Development for Taxinnovation and the focus of policy has produced and citations per capita.8 Purposes.' London: DTI. This definition is basedbeen on improving this performance on the OECD's Frascati Unsurprisingly, policy has focused on improving Manual, see Organisation for Economic Co-operation and1.1 Innovation is vital to the future of the poor performance in R&D and increasing Development (2002), 'FrascatiUK's economy and society investment in science research (see 4.2). Manual 2002.' Paris: OECD. 4. Organisation for EconomicIn an increasingly competitive global economy, Co-operation andinnovation – the 'successful exploitation of Development (2007) 'OECD Science, Technology andnew ideas' – is regarded as the major source of Industry Scoreboard 2007.'competitive advantage for mature economies 2. The UK remains strong in some Paris:OECD.like the UK.1 As a result, HM Treasury has high-technology areas but is being 5. See Organisation for Economic Co-operation andidentified innovation as one of its five drivers challenged by the changing nature Development (2005) 'OECDof productivity.2 of innovation and rapidly increasing Science, Technology and Industry Scoreboard 2005, international competition Briefing Note for the United1.2 But the UK performs poorly compared to Kingdom.' Paris: OECD. 6. The UK was granted 3 perits competitors 2.1 Focusing on aggregated data neglects cent of triadic patent familiesTraditional innovation indicators, such as public how many UK high-technology sectors have in 2005, far lower than the US (31 per cent) but also lowerand private investment in formal research and moved to become high-value specialists than Germany (11.9 per cent)development (R&D) or the number of patents There is too much pessimism about high- and Japan (28.8 per cent). All data from Organisationregistered, suggest that the UK performs technology sectors in the UK. Aggregated for Economic Co-operationpoorly.3 figures for national investment in R&D ignore and Development (2007) 'OECD Science, Technology the different patterns of specialisation in and Industry ScoreboardThe UK's 'R&D intensity' (total expenditure on different countries, making investment in R&D 2007.' Paris: OECD. A 'patent family' is a set ofR&D as a percentage of national GDP) was 1.8 potentially misleading as a way of capturing patents taken out in variousper cent in 2005, below Japan (3.31 per cent), comparative performance in innovation.9 The countries for the purposes of protecting a single invention.Germany (2.54 per cent), France (2.2 per cent) UK retains strengths in areas of the six sectors Triadic patents are filed atand the United States (2.74 per cent).4 UK that represent the majority of R&D expenditure the European Patent Office, the Japan Patent Office, andbusinesses consistently spend less on R&D than in the UK, from pharmaceuticals to electronics. granted by the US Patent andtheir US, French and German counterparts, Trademark Office.and below the OECD average.5 Given the UK's The UK has the second most significant 7. Organisation for Economic Co-operation andcomparatively low investment in R&D, it is no pharmaceuticals sector in the world, Development (2007) 'OECDsurprise that it also lags behind other leading with globally-renowned firms such as Science, Technology and Industry Scoreboard 2007.'countries on patenting.6 GlaxoSmithKline (GSK) and AstraZeneca, as Paris: OECD. well as major R&D centres for international 8. Ibid.Further, the UK invests comparatively less than firms such as Pfizer. It has the second 9. As argued in National Endowment for Science,many other countries in higher education, at largest aerospace industry in the world, with Technology and the Artsjust 0.7 per cent of GDP, compared to 2.36 per Rolls-Royce being one of only three major (2006) 'The Innovation Gap.' London: NESTA.cent in the US, 0.95 per cent in France, and the manufacturers of civil aeroengines, and withOECD average of 1.42 per cent.7 However, this major development and production sites forrelatively low spending does at least appear one of the two major manufacturers of largeto be highly productive; compared to the US, civil aircraft in Airbus UK. Seven of the globalFrance and Germany, the UK consistently top ten automotive manufacturers operate
11 in the UK, with its acknowledged expertise sectors are moving somewhat successfully to in engine development and manufacture, as higher-value-added activities in the face of well as the world's most successful motorsport increasing global competition. In this sense, the industry. UK is still competing in the 'race to the top'.11
Major UK telecommunications firms, such What the UK does not have, compared to some as BT and Vodafone, have pioneered new other countries, are large home-grown mass network infrastructures, products and services, market manufacturing firms in sectors such as placing the UK at the forefront of the trend electronics (especially consumer electronics), of convergence between telecommunications computing machinery, telecommunications, and other media. There are highly innovative automotive and other transportation UK-based software and IT services firms, such machinery, and chemicals. This lack of scale as Sage, Misys and Autonomy in business in some high- and medium-high technology applications. The UK also hosts some of the sectors contributes to the UK's comparatively most technologically advanced and creative poor showing in aggregated R&D figures. games software developers in firms such as Codemasters and NaturalMotion. Similarly, in 2.2 Innovation is becoming increasingly electronics, the UK is home to world-leading distributed between firms, including global firms such as ARM, CSR and Wolfson, as well as suppliers many major multinationals. 2.2.1 Innovation is becoming more complex Collectively, these sectors generate £80.9 and costly billion in gross value added (GVA) and employ But this should not be a cause for complacency. 1.44 million people in the UK.10 This is around The nature of innovation in high-technology 7 per cent of total UK GVA – more than half sectors is changing rapidly and may overtake 10. GVA measures the of total manufacturing GVA in the UK. Overall, UK industry and the policy designed to support contribution to the economy of each individual producer this suggests that the UK's high-technology it. or sector. 11. As The Sainsbury Review in 2007 argued, the UK needs to engage in a 'race to the top' by concentrating on the development of higher- value-added industries; see Pharmaceuticals Given the expenditures involved, the HM Treasury (2007) 'The Race to the Top, A Review of 'blockbuster model' has been used to Government's Science and The pharmaceutical sector makes a large describe the balance between risk and Innovation Policies.' London: HM Treasury. contribution to the UK economy, with a reward: the development costs for all gross value added (GVA) of £6.5 billion in products are supported by relatively 2004. As the fourth largest pharmaceutical few, very successful products. This is sector in the world in terms of GVA, it why pharmaceuticals represent the most directly employs 73,000 people, exports research-intensive large-scale sector in £13.8 billion worth of goods, and provides the UK economy, with an R&D intensity a trade surplus of £4.3 billion. The UK is of more than 15 per cent; they also second only to the US in global medicines account for 35.5 per cent of R&D in the brought to market; the same is true of UK. Only the US and Japan spend more in biopharmaceuticals (drugs produced using pharmaceuticals research. biotechnology). The UK is also an important centre of bioprocessing (the manufacturing The research-intensive nature of new sub-sector). pharmaceuticals has been reflected by the traditional industrial structure of the Traditional innovation in pharmaceuticals sector. Until the early 1980s, the sector requires very large upfront investments in was characterised by large, vertically R&D. Developing a new medicine takes on integrated commercial firms responsible average 10-15 years and costs more than for the discovery of chemicals, clinical £550 million. Before it is licensed, a drug development, and marketing and has to undergo a long and complex process distribution. Firms required and could afford of testing. Following this, for large-scale large-scale industrial R&D labs, reflecting manufacturing, firms often need to build the magnitude of research opportunities new facilities or reconstruct old ones. and unmet needs.
12Innovation has become more complex with • In software and IT services, large suppliersnew knowledge bases, alongside other cost have become frustrated with the length,pressures on investments in R&D. cost, and quality of the software product development process, not least because• In pharmaceuticals the nature of drug of the relatively short life cycle of some discovery is being radically reshaped by the products and the ability of competitors impact of new biological knowledge derived quickly to launch similar products. from advances in life sciences and genetics, but the resulting biopharmaceuticals are far • In telecommunications, de-regulation more complex to develop and manufacture and technological advances have driven a than traditional chemically-derived drugs rapid convergence between what would (and even then may not be adopted by major have previously been separate sub-sectors purchasers). (voice telephony, data and productivity applications, and video and television)• In aerospace, increasing demands for more opening up the sector to new entrants and efficient and reliable aircraft – with the use new services. This has placed particular of composite materials in aerostructures, and pressure on established providers, who have increased use of electronic systems to replace seen revenues from calls and lines decline hydraulic, mechanical and pneumatic systems from increased competition. – has made developing and integrating these elements more complex for major • In electronics, with advances in knowledge, manufacturers. devices are increasing in complexity with greater range in functionality, the packaging• In automotive, despite a generally of components and devices, and the conservative approach to product design, emergence of new materials (such as plastic modern vehicles are increasingly complex, for electronics) for use in components. These example, in the use of electronic components innovations have the ability to improve to control and monitor functions, making applications in other products (such as their integration increasingly challenging for mobile phones and digital cameras). major manufacturers.
13 2.2.2 These pressures have led to innovation in-house but are to be found in smaller, becoming increasingly distributed and specialised firms. Innovation now increasingly collaborative takes place through cross-disciplinary collaborative partnerships and strategic 188.8.131.52 Firms are drawing on a wider range of alliances, where once it might have been actors largely performed by teams of scientists These pressures on traditional innovation have and engineers within large internal research motivated many firms to seek the greatest laboratories. As in other sectors, it is now possible efficiency from their R&D. This has led commonplace for innovative small and them to work more collaboratively with other medium-sized firms to be acquired by larger firms and organisations to innovate.12 firms following the successful demonstration of a new technology. • In pharmaceuticals, new biological knowledge encouraged a major change in • In aerospace, major manufacturers such as industry structure with the emergence of Airbus and Boeing are increasingly designing small, specialised biotechnology firms in the new aircraft in collaboration with suppliers, 1980s and 1990s. These biotechnology firms rather than designing them in-house and exploited their knowledge of new techniques. passing blueprints for parts or sections to Subsequently, large pharmaceutical firms suppliers. For example, 6,000 engineers have attempted to capture their capabilities around the world are effectively jointly through licensing deals, strategic alliances, designing and engineering the new Boeing and other forms of open collaboration, as 787 aircraft. This has cut the typical four or well as many mergers and acquisitions. five year time from concept to production by a year, and reduced development costs by 20 • In electronics, larger firms often now rely per cent.13 12. This also echoes the idea on capabilities that are no longer located of open innovation, see: Chesbrough, H. (2003) 'Open Innovation: The New Imperative for Creating and Profiting from Technology.' Watertown, MA: Harvard Business School Press; also Chesbrough, H. (2006) Telecommunications lion's share of the sector's annual £1.13 'Open Business Models: billion investment, much of it in software How to Thrive in the New Innovation Landscape.' Telecommunications is an important sector development. BT's R&D intensity of 5.1 Watertown, MA: Harvard in its own right, but is vital to the UK's per cent is much higher than that of the Business School Press. 13. Bartholomew, D. (2007) wider competitiveness as a knowledge- remaining fixed-line firms. The Promise and Peril based economy. The sector includes of PLM PLM: Boeing's Dream, Airbus' Nightmare. fixed-line telephony, mobile and broadband The sector's most visible technological 'Baseline.' 2nd May. services, as well as telecommunications innovation lies in the development of equipment and network supplies. large-scale infrastructures. These long-term projects, some initiated a generation ago, Telecommunications contributed £21.3 enable more recent advances including the billion in GVA in 2004, 2 per cent of the switch from analogue to digital networks, UK total. 8,500 firms employ 56,000 then to mobile and wireless technologies, people directly or indirectly. The sector broadband connectivity, and new internet- includes both large players who provide a based next generation networks (for wide range of products, applications and example BT's '21st Century Network' services, and small firms offering a single programme, in which it is investing £10 product or service. More than 50 per cent billion). Nevertheless, less high-profile of the sector's revenues are generated by incremental innovation accounts for a firms located in London, the South East and significant amount of activity – most East of England. Cambridge is a particularly firms spend up to 90 per cent of their important research centre for a number of development resources enhancing existing multinational firms. products. Operators such as BT also invest heavily in back office operational support Traditionally, network operators have systems to automate, integrate and simplify invested significantly in the development internal IT processes, improve customer of new technologies. BT is the most services and reduce costs. important investor in the fixed-line telecommunications sector. It invests the See Appendix C for further detail.
14• In telecommunications, network operators the internet, are challenging the traditional such as BT work to package products and assumptions of where innovation comes from services developed with hardware and and who does it. software suppliers. Such operators also have to compete directly with some of these 188.8.131.52. Large firms are delegating more suppliers who have entered the market (such responsibility for innovation to their suppliers as Cisco and Microsoft). In turn, operators • In aerospace, the traditionally extensive and have entered the IT services market, complex supplier networks between major exploiting their expertise in developing manufacturers and first tier suppliers have software for their own infrastructures. been accelerating and deepening over recent years, with more responsibility being given to• Software has perhaps the most well-known the suppliers. example of distributed innovation in open source software and Web 2.0 technologies. First and second tier suppliers are being Open source is built on the principle that the given increased responsibility for traditional source code of a program should be readily innovation. They are often taking on R&D, accessible, so that users have the right to engineering and design, tooling, testing, sub- copy, modify, maintain and redistribute it, system integration and pre-assembly (installing without paying royalties or fees. Web 2.0 systems such as hydraulics, electronics and is a general term for web technologies and controls). 80 per cent of the parts in new design – including wiki, video-sharing, Boeing aircraft are made outside the firm blogging and consumer feedback sites – – including by Japanese manufacturers, which aim to facilitate information-sharing, who have for the first time succeeded in collaboration and creativity among users. gaining extensive and advanced work on These highly user-driven and collaborative the technology-rich wing design. Airbus also forms of product development, enabled by intends to outsource around 50 per cent of
15 future work, as part of a long-term trend and China. In recent years, their portfolio of towards globalised production. Sixty per cent services has widened to include more advanced of Rolls-Royce's R&D investment and 40 per technologies such as genomics and high- cent of new product development spending throughput (automated) screening, using over the past five years has been outside the proprietary techniques for which they often UK.14 This globalisation is not just driven by own the intellectual property rights. CROs can cost; often firms hope to gain greater access also offer post-commercialisation services such to foreign markets through distributing as sales and marketing. development and manufacturing activities.15 • In automotive, manufacturers also now • Cost pressures in the pharmaceutical expect their top suppliers to undertake R&D sector have led to increased outsourcing and manage their own supply base. Suppliers of the management of clinical trials and now perform 15-30 per cent of 'design manufacturing. effort' (although this is concentrated in larger suppliers).17 New clinical research management organisations (CROs) now run many of the In some cases, distributed innovation and clinical trials required for regulatory approval. collaboration reaches well beyond working with They account for more than 40 per cent of other firms. annual research spending by firms, compared to just 4 per cent in the early-1990s.16 Many • For example, in telecommunications, BT has CROs are based in Eastern Europe, India been embracing open, user-led innovation.
16BT has opened up its entire network through established. Major manufacturers, particularlyopen protocols and a software development in aerospace, automotive and pharmaceuticals,kit (SDK) that is downloadable by users, are becoming 'systems integrators', pullingentrepreneurs and firms. This appeals both together the components, skill and knowledgeto large established firms who want to of suppliers, users and partners to deliver everintegrate telecommunications services in their more complex products, services and systems.applications, and to users who are inventingnew applications using the internet and 184.108.40.206 Firms are also relying on universities totraditional telecommunications services. conduct research Equally, as a result of this complexity andThese trends have put much more pressure cost pressures on large firms, there have beenon the innovative capacity of suppliers. increased links between firms and universities.The pressure can be too much. Some University research is often playing a greatermanufacturers have overestimated suppliers' direct role in commercial innovation.competencies and underestimated the requiredlevels of expertise and investment required First, universities are increasingly serving(for example, delays in the delivery of the as research centres for firms. In aerospace,Boeing 787 are said to be due to suppliers research-intensive companies have traditionallyfailing to cope with the extent of their new conducted research in-house, but this isresponsibilities).18 As a result, some major changing. Some firms have particularly goodmanufacturers have decided to focus more on links. For example, Rolls-Royce, as part ofthe larger, typically more capable suppliers. an overall policy of 'capability acquisition', has outsourced much R&D to universities,Nonetheless, the trend towards outsourcing establishing 'University Technology Centres' inmore of the responsibility for innovation is the UK and across the world. These universities 18. See Bailey, J. and Clark, N. (2008) Parts Didn't Click Together for Boeing Jet. 'New York Times.' 17th January.
17 tend to be particularly involved in researching predicted to grow to $2.5 billion by 2011.24 emerging technologies, such as radically India exported more than $155 billion in goods different aeroengine designs or the use of new and services in 2008 (up from $63 billion in materials. 2004).25 The Indian government's target is $200 billion in exports by 2020, or 5 per cent Second, university research and knowledge of world trade; a four-fold increase in the next are increasingly being commercialised.19 For 12 years. example, the new biological knowledge in pharmaceuticals has often been advanced by Similarly, China is now the world's top exporter. universities and public laboratories, and later In 2006 it was responsible for 8.2 per cent in spin-out and start-up firms. This process of global exports (up from 5.9 per cent in has been facilitated by changes in intellectual 2003). China is the world's largest electronics property rights and funded by the increased manufacturer, with more than $300 billion 19. See Section 4, in HM availability of venture capital and angel in products in 2006.26 It accounted for 18 Treasury (2007) 'The Race to the Top, A Review of finance. Highly innovative firms have also per cent of global electronics output in Government's Science and emerged from universities in sectors such as 2005, compared to just 4 per cent in 1997. Innovation Policies.' London: HM Treasury. electronics and software. In telecommunications, China's exports 20. NASSCOM (2008) 'Strategic increased by an average annual rate of 37 per Review 2008.' New Delhi: 2.3 The increasing distribution of innovation cent between 2000 and 2006; in automotive NASSCOM. 21. Booz Allen Hamilton (2006) is strengthening international competitors products the equivalent figure was 45 per 'Globalization of Engineering By increasingly being given responsibility cent, and in computer and information services Services - The Next Frontier for India.' McLean, Virginia: for higher-value-added activities (including (including software development) it was 40 per Booz Allen Hamilton. innovation), firms in the supply chain in cent.27 Half of Chinese suppliers of electronic 22. KPMG (2006) 'The Indian countries such as India and China are gaining components, consumer electronics, and Pharmaceutical Industry: Collaboration for Growth.' the capabilities necessary to compete with computer and telecommunications products London: KPMG. Western firms. They can under-cut smaller expect more than 20 per cent growth in export 23. Department of Chemicals and Petrochemicals, Western supply chain firms by operating in sales during 2008; a quarter expect an increase Government of India lower-cost locations, but they also increasingly of 10-20 per cent.28 More than 80 per cent of (2005) 'Draft, National Pharmaceuticals Policy, draw on a larger number of science and suppliers anticipate increasing their production 2006.' New Delhi: engineering graduates. capacity by 20-50 per cent. The EU is the main Department of Chemicals and Petrochemicals, destination for these exports. Government of India. Such countries are using these advantages to 24. Engineering Export develop as increasingly strong challengers in Software illustrates how such competition Promotion Council (2008) 'Annual Supplement 2008 to many high-technology sectors: China, India can develop very rapidly. In the early 1990s, Foreign Trade Policy 2004- and some Eastern European countries in American and European IT and software firms 09.' New Delhi: Engineering Export Promotion Council. pharmaceuticals, automotive and electronics; faced the twin pressures of a need to reduce 25. Ibid. Brazil, Japan and China in aerospace; and India costs and a shortage of qualified software 26. Reed Electronics Research in software and telecommunications. engineers in their own countries. So they began (2006) 'Yearbook of World Electronics Data, Volume to locate some routine tasks and activities 3 - Emerging Countries The Indian software and business process (such as IT help desks and call centres) in 2006/2007.' Wantage: Reed Electronics Research. outsourcing industry is expected to achieve lower-cost locations, especially India. This 27. World Trade Organization $60 billion in exports of software and services helped develop the IT industry in India, and (2007) 'International Trade Statistics 2007.' Geneva: by 2010; the UK is the second largest market led to the rise of home-grown firms such as WTO. for the Indian software sector after the US, at Infosys, Tata and Wipro. Such firms now offer a 28. Global Sources (2008) 'China 18 per cent of total exports.20 Similarly, India is wide range of increasingly high-value services Supplier Survey, 2nd Half 2007.' Singapore: Global predicted to take a $60 billion share of a total at significantly lower prices than their US or Sources. $1.1 trillion global spending on engineering European counterparts. Other competitors are services (including aerospace, automotive and now emerging from Latin America, Eastern telecommunications) by 2020.21 While today Europe and China, which is predicted to only $10-15 billion of engineering services is develop its own software industry even faster off-shored, the market is expected to grow to than India did. $150-225 billion by 2020. In pharmaceuticals, India now represents 13 per cent of the global Such rapid growth is not merely a matter of industry by value and its drug exports have 'market forces'; it is also often due to concerted been growing by 30 per cent a year.22 The and coordinated efforts at building national Indian government estimates that the sector champions in these emerging economies. has the potential to generate revenues of $22.4 billion in drug formulation by 2010.23 In telecommunications, Indian equipment exports are estimated at $1 billion for 2008, but are
183. In the face of increasing international and third sectors have very different forms ofcompetition, UK firms need to harness innovation from the science-based model.32'hidden innovation' But hidden innovation is not just about3.1 We have neglected the 'hidden innovation beyond manufacturing sectors;innovation' that is crucial to the UK's it is about recognising the neglectedeconomy, including in manufacturing innovation across the UK's economy, includingTraditionally, innovation is determined by in manufacturing. Most sectors are likelyresearch and development, making R&D to contain a varying combination of boththe fundamental source of value creation traditional and hidden innovation.33('traditional innovation'). In this linear (or'pipeline') model of innovation, R&D leads From this, seeking to recognise hiddento new discoveries that are incorporated into innovation does not imply that the UK is 'doinga new product or process and then marketed fine' or that 'manufacturing doesn't matter 29. National Endowment for Science, Technology and theto consumers. Because of its presumed anymore'. As The Sainsbury Review in 2007 Arts (2006) 'The Innovationimportance, R&D has been used as a proxy argued, the UK's need to engage in a 'race to Gap.' London: NESTA.for innovative performance between firms and the top' by concentrating on the development 30. National Endowment for Science, Technology andbetween countries. of higher-value-added industries must include the Arts (2007) 'Hidden – but is not limited to – high-technology Innovation.' London: NESTA; National Endowment forHowever, NESTA has argued that traditional manufacturing sectors.34 The UK requires Science, Technology andindicators such as R&D are based on a model both innovative services and high-technology the Arts (2008) 'Creating Innovation, Do theof innovation that is increasingly less relevant.29 manufacturing to remain competitive in the Creative Industries SupportSuch indicators reflect a view that innovation is 21st century. Innovation in the Wider Economy?' London: NESTA.synonymous with scientific and technological 31. National Endowment forinvention, neglecting the many other forms 3.2 Hidden innovation is increasingly Science, Technology and the Arts (2008) 'Taking Servicesof 'hidden innovation' which are crucial to important in high-technology sectors Seriously.' London: NESTA.creating value in the economy.30 32. National Endowment for 3.2.1 Leading high-technology firms are Science, Technology and the Arts (2008) 'Transformers,This is particularly important for the UK increasingly harnessing hidden innovation How Local Areas Innovatebecause of its lower reliance on manufacturing NESTA has previously identified four main to Address Changing Social Needs.' London: NESTA;and greater reliance on services compared to forms of hidden innovation: National Endowment forsome other countries. The innovation that Science, Technology and the Arts (2007) 'In and Outmatters most to services sectors is rarely • technological development that is not of Sync, The Challenge ofscience-based.31 More broadly, the public included under the official definition of R&D; Growing Social Innovations.' London: NESTA. 33. National Endowment for Science, Technology and the Arts (2007) 'Hidden Innovation.' London: NESTA. p.13. Boeing's use of composite materials processes using these materials.35 For 34. HM Treasury (2007) 'The Race to the Top, A Review of example, Boeing engineers discovered that Government's Science and In aerospace, much traditional innovation composites are tougher than they initially Innovation Policies.' London: HM Treasury. is led by continuous, incremental (or imagined, and the firm has been able to 35. Smock, S. (2007) Boeing 'iterative') development rather than by guarantee customers that maintenance 787 Dreamliner Represents Composites Revolution. research; one estimate suggests that the costs will be 30 per cent lower than 'Design News.' 4th June. 'R' represents only 10-15 per cent of R&D. for aluminium aircraft. This potentially 36. BusinessWeek (2005) Hence is it likely that much technological represents a bigger saving for customers Boeing's Plastic Dream Machine. 'BusinessWeek.' innovation is not captured in narrow than the 20 per cent reduction in fuel 20th June. measures of R&D. costs the 787 can deliver compared with other aircraft – savings worth more than The use of composite materials in the new $3 billion over 20 years.36 Such 'practical Boeing 787 – comprising 50 per cent of research' often lies outside formal R&D the aircraft's weight – is based on years of processes. But the development of efficient basic scientific research. But Boeing and production processes for these materials its major suppliers have also had to learn is crucial to realising their potential on the job how to manufacture and tool benefits; in this case, unless composites such materials for the specific requirements can be manufactured properly, they will of aerospace. The benefits of composites not produce the weight gains and fuel cost have grown as Boeing's engineers have savings that airlines demand. gained more experience in production
19 • innovation in organisational forms and because practice has helped to improve business models; effectiveness through improved formulations, a better understanding of how to use drugs and • innovation from combining existing the patient groups that will benefit from them, technologies and processes in new ways; and and how they might be used to treat other diseases. One example is the developments in • 'micro-innovations' that aren't recorded in understanding of how to use existing drugs surveys of innovation.37 in cardiovascular medicine, such as aspirin, streptokinase, and ß-blockers. Such drugs These four types can be seen across high- may still be under-exploited; one study has technology sectors. estimated that 40,000 lives worldwide could be saved each year – 3,000 in the UK alone – from 184.108.40.206 Type I: Hidden innovation from the greater use of aspirin.38 technological development not included under the official definition of R&D More moderate R&D intensities in some Type I hidden innovation comprises research sectors, such as mass market automotive and experimental development with a scientific with its typical focus on incremental product and technological basis (the Frascati Manual development, also suggest a significant definition of R&D), but is excluded from degree of technological innovation that is not measurement for methodological reasons. captured in narrow measures of R&D. This is particularly likely with technologies developed Iterative development can be significant first by competitors and then adopted by other even in highly research-intensive sectors. In manufacturers. Most core product technologies pharmaceuticals, such innovation is often as eventually become standard across all brands important as breakthrough innovation. Later and models, from variable value timing 37. National Endowment for members of a drug product class are better, for engines to satellite navigation. Much Science, Technology and the Arts (2007) 'Hidden Innovation.' London: NESTA. 38. Antithrombotic Trialists' Collaboration (2002) Collaborative Meta-analysis of Randomised Trials of Antiplatelet Therapy for GlaxoSmithKline's (GSK) Centres for biotechnology firm. CEDDs in the UK Prevention of Death, Excellence in Drug Discovery (CEDDs) include Neurology in Harlow, Respiratory, Myocardial Infarction, and Stroke in High Risk Patients. Inflammation and Respiratory Pathogens 'British Medical Journal.' Organisational and business model in Stevenage, and Biopharmaceuticals in 324, pp.71-86. innovation has helped transform the Stevenage. 39. See GlaxoSmithKline (2008) 'Answering the Questions pharmaceuticals industry. The contemporary that Matter, Annual Report growth in scientific understanding has Given the very long lead times for drug 2007.' Brentford: GSK; GlaxoSmithKline (2001) 'It's created a major change in industry structure development, the full impact of these About You, Annual Report in the shape of small new biotechnology organisational innovations is unlikely to be 2000.' Brentford: GSK. firms. These firms have often been less risk- fully realised for many years. Nonetheless, averse in selecting and pursuing research following this innovation, GSK has more – projects. In response, large pharmaceutical and more radical – drugs in development: firms have attempted to capture the indeed it now has as many radical new capabilities held by small firms, through products in development as it had total licensing deals, strategic alliances and other products in development just seven years forms of collaboration, as well as mergers earlier, with 53 per cent more radical and acquisitions. new products.39 The firm now leads other large firms in terms of mid- to late-stage Some large firms have even adopted the development of products. organisational forms of small firms. In 2000, GlaxoSmithKline (GSK) created six new GSK has subsequently taken this model semi-autonomous business units called further with its Centre of Excellence for Centres for Excellence in Drug Discovery External Drug Discovery – a form of 'virtual' (CEDDs). Each CEDD focuses on a specific CEDD that works through a network of therapeutic area but has no more than external alliances. Such approaches may 350 scientists each. This limitation is represent the dominant model for the rest intended to support interaction and reduce of the pharmaceutical sector in a few years' bureaucracy, so that each unit acts with the time. flexibility and responsiveness of a smaller
20innovation is therefore 'catch-up' – new to the Other forms of organisational innovation arefirm but not necessarily new to the sector. focused on improving the efficiency of other processes, such as 'Lean manufacturing' inSimilarly in telecommunications, incremental automotive and aerospace. Lean focuses ontechnological innovation is crucial for firms to the elimination or reduction of waste in variousremain competitive against other providers, forms.42 Output per worker is consistentlybut may not be considered sufficiently cutting- significantly higher in Lean compared toedge or novel, especially if such development non-Lean automotive manufacturers (double,has already been achieved by other firms. in many cases). Toyota, its pioneer, has theThis is also prevalent in areas of electronics, highest consistent output of any majorespecially fast-moving consumer electronics automotive manufacturer, equivalent to agoods. lead in productivity of 5.17 labour hours per vehicle (or about $300 per vehicle) over theFurthermore, most small and medium-sized least productive major manufacturer in North(SME) firms, such as suppliers, may not have America.43 Similarly, Lean has been shownformal (or significant) R&D programmes, to lead to a 20-40 per cent improvement inyet they may be engaged in researching, productivity in aerospace SMEs.developing and refining their products. Lean and 'Agile' development has also spread188.8.131.52 Type II: Hidden innovation in to the software and IT services sector. Agile 40. ARM (2007) 'ARM Holdings Plc Reports Results for theorganisational forms and business models development is an alternative to traditional Fourth Quarter and FullIndicators that focus on research are blind to product development (which emphasise initial Year 31 December 2007.' Cambridge: ARM.innovations in organisational forms or business major planning). Agile promotes development 41. ARM (2007) 'ARM Annualmodels, despite the fact that these have iterations throughout the life-cycle of the Report and Accounts 2006.' Cambridge: ARM.become crucial for business performance in project via feedback through tests and releases 42. Toyota developed thehigh-technology sectors. of the evolving software (consumers and TPS in reaction to what it clients form part of this feedback). One survey perceived as the wasteful overproduction of USSome forms of organisational and business of 1,700 firms across 71 countries found automakers (particularlymodel innovation, such as in GSK, are closely that using Agile processes led to increased Ford), but was also inspired by a visit to an Americanrelated to research: making R&D more efficient; productivity for 55 per cent of respondents; supermarket chain (calleddrawing on and exploiting external knowledge reduced software defects for 54 per cent; and Piggly Wiggly) which only reordered and restockedand expertise; or focusing on R&D to the reduced costs for 28 per cent.44 Other benefits goods once they'd beenexclusion of other activities that traditionally reported were better alignment between IT and bought by customers. 43. Harbour Consulting (2007)firms would also have conducted. business goals and reduced project risk. 'The Harbour Report™ North America 2007.' Troy, Michigan: HarbourExamples of the latter can be seen in the Organisational innovation can also provide Consulting.electronics sector. Following the loss of the new services for customers. For example, 44. VersionOne (2007) 'Thelarge integrated firm in the UK as a result of in aerospace, firms such as Rolls-Royce are State of Agile Development 2nd Annual Survey.'increasing competition, some UK firms have increasingly making the majority of their Alpharetta, GA: VersionOne.adopted innovative new business models. revenues from 'through-life management 45. Rolls-Royce (2008)Chip manufacture has moved offshore to services', in part because competitive pressure 'Preliminary Results 2007.' Derby: Rolls-Royce.lower labour cost regions, resulting in a focus on costs has left little or no profit from originalon higher-value activities such as design and equipment and supplies sales. Customers signlicensing of intellectual property (IP). This has long-term maintenance and support contractsspawned models such as 'chipless' firms that for reliability and predictable costs. In effect,develop and market semiconductor IP such as the manufacturer is selling services, much ofARM but do not manufacture themselves, and the value of which is based on brand qualities'fabless' semiconductor firms such as Wolfson like reliability, permanence and expertise. ForMicroelectronics that use external third parties civil aircraft alone, Rolls-Royce now generatesfor their manufacturing operations. Such more than $2.6 billion in revenues from servicebusiness models can be highly efficient at agreements (63 per cent of its civil aerospacegenerating value. For example, ARM has a revenues), and more than £4.2 billion acrossgrowth rate approximately twice that of the the sectors the firm operates in.45 Rolls-Royce'ssemiconductor industry as a whole.40 The firm investment in developing and maintainingestimates that in 2006, 1.5 billion people – a these services is equal to its investment inquarter of the world's population – bought an research and technology programmes.ARM-powered product, generating more than£263 million in revenues, yet the firm employs Other firms have considered how to exploitfewer than 1,500 people.41 their specialised design and technology expertise outside their own sectors; for
21 example, McLaren Applied Technologies paying users for its 'on-demand' Customer (formed in 2004) works with a diverse range Relationship Management (CRM) software, of industries and develops commercial with revenues around $700 million in 2007. applications for technology developed for Siebel Systems, Microsoft, Oracle and SAP have motorsport within the McLaren Group. also entered the SaaS market. Tata Consultancy Services (TCS), India's largest service provider, In telecommunications, new services and is introducing a hybrid SaaS/services model business models have become crucial to that it calls 'IT-as-a-service', which is being competitive survival for firms, especially in aimed primarily at the local SME market and is the context of deregulation and new market predicted to be worth up to $9 billion a year.48 entrants. Established firms, especially those However, smaller software firms – including that in the past would have relied on revenues in the UK – may struggle to meet customers' from their fixed-line networks, now need expectations in being able to deliver their 46. BT Group plc (2007) 'Annual to think primarily in terms of innovative products in this way. One survey found that Report & Form 20-F2007.' London: BT Group plc. services for customers and how these might around 70 per cent of its small UK firms 47. Desisto, R., Pring, be supported by existing or emerging are continuing with the traditional business B., Lheureux, B. and technologies. For example, BT's Global model.49 One notable exception is Huddle, a Karamouzis, F. (2006) 'SaaS Delivery Challenges On- Services division focuses on networked IT and UK start-up established in November 2006, Premise Software.' Stamford, consultancy services for major corporations, which combines online collaboration, project CT: Gartner. 48. All, A. (2008) 'India's organisations and government. Its revenues management and document sharing using Tata Consultancy Services increased by 4 per cent to £9.1 billion in 2007, social networking principles. Introduces Hybrid SAAS Model.' [online] Available at: while traditional revenues declined.46 http://www.itbusinessedge. 18.104.22.168 Type III: Hidden innovation from com/blogs/sts/?p=324 In software, the development of the combining existing technologies and processes 49. Intellect (2007) 'Software and IT Services Report – The 'Software as a Service' (SaaS) business model in new ways Future.' London: Intellect. is reshaping the sector. In SaaS, software Type III hidden innovation can be created from 50. Previous studies have emphasised the importance applications are supplied online and hosted by largely existing components when they are of this form of innovation, a provider rather than installed on the user's combined in new ways to deliver new products, termed variously the 'recombination and re- premises, and priced on a per usage basis. services or processes.50 Technology often plays use of known practices', This is increasingly overturning the traditional a significant role in this type of innovation, but 'recombinant innovation' and 'architectural 'licence + maintenance' business model; SaaS because this technology often isn't completely innovation.' See respectively: is predicted to capture more than a quarter new it doesn't get counted in traditional David, P., and Foray, D. (1995) Accessing and of the $200 billion business software market indicators. Expanding the Science and by 2011.47 The market leader, Salesforce.com Technology Knowledge Base. 'STI Review.' 16, (a US firm founded in 1999), serves more In software, the Frascati Manual only pp.16-38; Hargadon, A. than 38,000 other firms and has one million acknowledges development that represents a (2003) 'How Breakthroughs Happen: The Surprising Truth About How Companies Innovate.' Watertown, MA: Harvard Business School Press; and Henderson, R. M., and Clark, K. B. (1990) Architectural Innovation: The BT's 'new wave' services caller moves out of range then the call Reconfiguration of Existing is seamlessly transferred to the mobile Product Technologies and the Failure of Established In telecommunications, investments base station of BT's partner (Vodafone) Firms. 'Administrative in developing new technologies and as a mobile call. BT's new internet-based Science Quarterly.' 35, pp.9-30. infrastructure provide the basis for new television service, Vision, connects to the 51. BT Group plc (2007) 'Annual services. Intense competition, regulation same home hub and provides broadband Report & Form 20-F2007.' and technological advances such as mobile video-on-demand via a Freeview digital London: BT Group plc. networks, have led to a decline in revenues terrestrial set-top box. BT is securing from traditional fixed-line networks. content deals with major film and television Established operators have sought to studios for this service. develop innovative new services to drive or renew revenue growth. These innovative products and services are part of what BT calls its 'new wave' BT Fusion is the world's first 'intelligent' activities (primarily networked IT services, mobile phone service. Customers are broadband and mobile). In 2007, these provided with a hub and up to six mobile activities generated revenues of £7.37 handsets. When within range of the hub billion (36 per cent of total revenues), an the call is routed through the hub and increase of 17 per cent on the previous year into the fixed broadband network. If the (while traditional revenues fell 3 per cent).51
22'scientific and technological advance' as R&D 184.108.40.206 Type IV: Micro-innovations that aren'tand hence as innovation.52 Yet much software recorded in surveys of innovationdevelopment is characterised by 'cumulative Type IV hidden innovation comprises thetechnologies', involving the use and re-use of locally-developed, small-scale, incrementalexisting functions and routines which gradually innovation that often goes unnoticed byevolve through incremental innovation. traditional indicators.
For example, Service Oriented Architecture Such micro-innovations are crucial to any(SOA) represents a new approach to 'engineering'-based sector (whether they focusdevelopment, whereby program functions are on the design and development of physicalseparated into distinct units (services) which products, or virtual products such as software,can be distributed over a network and can be or both).combined and reused in more flexible and costefficient ways to create business applications. Finally, such micro-innovations are typically 52. See section 2.4 in Organisation for EconomicOne study estimates that SOA could reduce unsuitable for patenting (another of the Co-operation anddevelopment costs by 25 per cent (about $53 traditional indicators). Even if they were, Development (2002) 'Frascati Manual 2002,billion) over five years across the 2,000 largest smaller firms do not have the expertise or Proposed Standard Practicefirms worldwide.53 Some of this work may not resources to engage in patenting procedures, for Surveys on Research and Experimental Development.'be counted as innovation since it may not or to defend a patent against possible Paris: OECD.fundamentally alter underpinning technological infringement, leaving many inventions invisible 53. Aberdeen Group (2006)standards or make significant advances to such indicators. 'The SOA in IT Benchmark Report.' Boston: Aberdeenin knowledge. The often continual and Group.incremental nature of software development 3.2.2 In the face of increasing competition, 54. Somewhat paradoxically, the costs of such software– and the virtual nature of the products – can there is a danger that established UK might be eligible under theadd to the marginalisation of these forms of firms become 'locked-in' to their existing UK R&D tax credits scheme, but its use would not tendinnovation. technologies and business models to be counted as being part of R&D under Frascati definitions.Furthermore, the use of software and other 188.8.131.52 Traditional innovation can become 55. Toyota (2007) 'Annualsupporting technologies has been valuable in locked into existing 'platforms' Report 2007, Building aimproving quality and efficiency in production Much technological R&D can focus on Platform for Growth.' Toyota City: Toyota. UK data basedin aerospace and automotive. The use of incremental, augmentative innovation to on a study of the top 850software in areas such as 3D design and existing 'platforms' instead of radical redesigns. UK spenders on R&D, see Department for Innovation,product development is making traditional Examples include the internal combustion Universities and Skills/innovation more efficient, but such software engine and steel car body structures in Department for Business, Enterprise and Regulatorymay have been developed first in other firms automotive, the gas turbine engine in Reform (2007) 'The 2007and often in other sectors.54 aerospace, and the mobile phone network R&D Scoreboard.' London: DIUS/BERR. infrastructure in telecommunications. 56. May, M. E. (2007) 'The Elegant Solution: Toyota's Formula for Mastering Innovation.' New York: Free Press. 57. Harbour Consulting (2007) 'The Harbour Report™ Toyota Production System an emphasis on continuous improvement, North America 2007.' teamwork, just-in-time inventory, and Troy, Michigan: Harbour Consulting. In many areas of engineering, there are becoming a 'learning organisation' through small-scale problems and challenges that relentless reflection. are dealt with outside of formal R&D programmes. These efforts may not be One study estimates that through its captured in traditional metrics. Toyota, a inclusive approach to improving production manufacturer with a strong reputation for techniques, Toyota – which has two major new technology development, has a global production plants in the UK – implements R&D intensity of 'only' 3.7 per cent (lower, one million new ideas each year (or 3,000 in fact, than the overall R&D intensity a day).56 Most are small but effective of the UK automotive sector at 4.3 per solutions to real world problems, but their cent).55 However, the Toyota Production cumulative impact can be seen in large System (TPS) represents a highly successful efficiency, quality and productivity gains. approach to generating and enshrining Toyota earns twice as much as any other such 'micro-innovations'. TPS organises carmaker, and in the first quarter of 2007 manufacturing and logistics to eliminate the firm overtook GM in global sales for the waste and inconsistency in products via first time.57
23 This innovation helps in increasing marginal It is insufficiently profitable, lumbered performance or reducing costs, but doesn't with structural problems: over-capacity amount to fundamental change. Yet many firms throughout the value chain; high fixed prefer to focus on it to maximise near-term costs in manufacturing, product design and productivity from investments in R&D, rather distribution; inflexible production systems; than engage in longer-term, more speculative and inflexible product designs.59 Reducing the and riskier 'blue skies' R&D. number of vehicles held as unsold stock would bring an immediate financial benefit to the In this way, firms can become 'locked-in' whole production and distribution chain, and to their own technologies. This lock-in is would be far less environmentally wasteful. often reinforced by a firm's organisational At some point, there is likely to be radical structures, business models and related restructuring of the global automotive sector. investments around its existing platforms. For instance, the large-scale manufacture 220.127.116.11 New firms – including in emerging and distribution systems required by steel economies – can develop radical innovations car body structures in automotive, the more suited to the major changes taking place 'blockbuster' drug development business in high-technology sectors model in pharmaceuticals, and the revenue This lock-in explains why radical innovation charging model for mobile calls and data in often comes from new entrants. Such firms can telecommunications. be less risk-averse in selecting and pursuing projects, because they don't have the same Such lock-in can inhibit firms from investment in existing processes as established exploiting new technological possibilities major firms. New competitors often do things or new ways of serving their customers. For in new ways, because they are organisationally example, in aerospace and automotive, the and conceptually freer to do so. 58. Paine, C. (2006) 'Who Killed emphasis on costs and reducing risk can the Electric Car?' Culver City: Papercut Films. lead to conservatism in product design and For example, in pharmaceuticals, small new 59. For example, of major US manufacture. This can be exacerbated by a biotechnology firms were the first to attempt manufacturers, on each vehicle sold in North traditional focus on product engineering rather to capitalise on the growth in scientific America in 2006, Chrysler than customer needs. Such sectors can be understanding. The impact of the new Group lost $1,072, GM lost $1,436, and Ford surprisingly slow to adopt new engineering knowledge is still being played out, but such lost $5,234; see Harbour techniques and methods, or more flexible technologies are likely to allow a small number Consulting (2007) 'The Harbour Report™ designs. of patients to be treated more effectively with North America 2007.' personalised or specialised therapy. This will Troy, Michigan: Harbour Consulting. The result can be a disconnect between represent a major challenge to the blockbuster manufacturers and customers. For example, model of developing therapies that treat a airlines who are unhappy about aircraft large population, and so to the traditional performance and specifications, and customers business model in large pharmaceuticals. who are not supplied with their desired car models. In the most extreme cases, established In aerospace, a new paradigm for aircraft firms fail to respond quickly or radically enough production may be emerging. Cheaper, more to challenges from new firms. efficient approaches have been demonstrated by smaller innovative firms. For example, US To take one example: large automotive firm Eclipse Aviation has launched its Eclipse manufacturers have tended to resist alternative 500 four-six seater 'air taxi'. Ex-automotive technologies to the internal combustion sector executives founded Eclipse with the engine, such as rechargeable battery electric express aim of producing a highly-reliable, low- vehicles (BEVs) and hybrid electric vehicles weight aircraft for $1 million. The 500 is 50 per (HEVs). Yet these technologies have been cent cheaper to operate than similar aircraft. around for over a century. Electric vehicles Similarly, Toyota and Honda both have small were once common, and the first hybrid motor aircraft at advanced stages of development. was developed in 1901 by Ferdinand Porsche. Major US manufacturers have even been In automotive, the alternatives to the accused of deliberately sabotaging their own internal combustion engine have remained electric vehicle production efforts in order not marginalised technologies, but this may be to threaten their existing business model.58 about to change. Later in 2008, Tesla Motors, a Silicon Valley start-up firm, will deliver its Yet the dominant automotive technology Tesla Roadster, an electric performance sports and business model in automotive is neither car that can accelerate from 0 to 60 mph in financially nor environmentally sustainable. less than four seconds (a similar performance
24to a Lamborghini Murciélago). Another start- approach to innovation. By seeking to integrateup firm, The Project Better Place initiative, innovation in new technologies, products andis working to provide the infrastructure and processes (primarily traditional innovation) withscale necessary to make electric cars a viable innovation in business models, organisationalalternative to fuel-based vehicles, starting in forms and market positioning (hiddenIsrael. Another start-up, Zero Pollution Motors innovation), they create greater profits and(ZPM), expects to produce the world's first protect their market position.air-powered car for the US in early 2010. Tata 60. Ernst, D. (2004) 'Late Innovation Strategies inMotors – the producer of the ultra low-cost Internal strategic management and business Asian Electronics Industries:Nano 'people's car' – will be using the same processes become particularly important in A Conceptual Framework and Illustrative Evidence.'technology in its Air Car for India in 2008. harnessing the various different dimensions East-West Centre WorkingMore generally, the automotive sector is open of innovation, by aligning the full range of Papers Economics Series. No. 66. Honolulu, Hawaii:to challenge from radically new business the firm's resources behind them (including East-West Centre.models, for example, through innovations such leadership, structure, strategy, processes, and 61. Total Innovationas repeated leasing of vehicles through their culture). This combination of traditional and Management (TIM) has been proposedlife cycles, hyper-Lean production with high hidden innovation is 'total innovation'. as a new paradigm oflevels of outsourcing, and direct sales and innovation management by the Research Center fordistribution. Perhaps appropriately, the concept has Innovation & Development emerged from China.61 'Total Innovation (RCID) of Zhejiang University, China. See Xu,In telecommunications, many new services have Management' suggests that the successful Q., Chen, J., Xie, Z., Liu,been developed by new entrants. Start-up firms technology innovation needs to include both J., Zheng, G., Wang, Y. (2007) Total Innovationsuch as Skype have pioneered voice over IP technological and non-technological factors Management, A New(VoIP) based on using broadband connectivity related to innovation. Traditional innovation is Paradigm of Innovation Management in the 21stto by-pass traditional charging models. As no longer sufficient.62 Century. 'The Journal ofof the last quarter of 2007, Skype had 246 Technology Transfer.' 32 (1-2). April, pp.9-25.million customers, and has been acquired by In particular, firms need to develop the 62. This echoes thethe internet auction site eBay. Google also innovative capabilities of their workforces understanding that technological innovation islaunched a similar service with Google Talk. through 'people-oriented' management. only one of the capabilitiesBoth firms had little experience of operating in Based on case studies of major Chinese that a firm may possess for its competitive advantagethe sector until they entered the market. manufacturing firms such as Haier and Lenovo, - and is possibly the least the key to maximising innovative capacity is the distinctive capability, compared to its reputation,In electronics, entrants from China, India, philosophy and practice of regarding 'everyone architecture, and strategicKorea, Taiwan and Singapore are emerging as innovator'. This means that innovation is not assets; see Kay, J. (1993) 'Foundations of Corporateas new sources of innovation and global only the responsibility of the R&D function, Success: How Businessstandards. This includes innovations in but should take place throughout the whole Strategies Add Value.' Oxford: Oxford Universityprocess technology for electronic components value chain – hence the importance of creating Press.(especially semiconductors and displays), and sustaining an all-encompassing culture of 63. Similarly, Henry Chesbroughwhere Korean and Taiwanese firms are among innovation. has emphasised the importance of businessthe industry leaders. This also includes system models in creating valuespecification: Asian firms are now producing According to this school of thought, firms fail from technology: "The value comes from the partyinnovations in the design of complex systems to maximise their innovative capacities when that has a business modelin areas like digital consumer systems, wireless their culture lags behind their technology- to create and capture value from the patent, nottelecommunication systems, and business focused innovation, when such technological from the invention of theprocess software.60 innovation is not linked to operation strategy, patentable technology itself." Chesbrough, H. and when they lack internal mechanisms to (2003) 'Open Innovation:3.3 Remaining competitive demands 'total motivate innovation across the whole firm.63 The New Imperative for Creating and Profiting frominnovation' Technology.' Watertown,For established firms, then, the ability to Following this, it is no longer appropriate MA: Harvard Business School Press. p.162.develop new business models, organisational or accurate to understand innovation as theforms and processes becomes even more 'successful exploitation of new ideas'. Thisimportant, since this can help to free them definition, while apparently broad, implicitlyto engage in new forms of technological continues to privilege research ('new ideas') asdevelopment. This will allow them to enter new the fundamental source and starting-point ofmarkets – or to remain competitive in existing innovation. In finally breaking from the linearones. model of innovation, we need to focus our understanding on the outputs and outcomesIn the face of intensifying competition and of innovation, and then trace back from theseto ensure future growth, leading established outputs to whatever activities contributed tofirms in these sectors – from Rolls-Royce them. We need to understand innovation asto BT, Toyota to GSK – are taking a broader
25 any activities that seek to meet needs in new direction for innovation policy in the UK, ways. encompassing public procurement, regulation, access to finance, and intellectual property. UK high-technology firms need to develop their capability for total innovation. 4.2 However, policy for high-technology Survey evidence suggests that larger sectors still focuses overwhelmingly on R&D UK manufacturing firms in particular and technology development 64. EEF (2007) 'High-value – are increasingly identifying design and In response to the UK's perceived R&D How UK Manufacturing has Changed.' London: EEF. development, and service provision, as their under-performance, policymakers have 65. Ibid. main competitive strengths as their advantages introduced a wide range of initiatives focused 66. Department of Trade and in production and assembly decline versus on science, engineering and technology (SET) Industry (2007) 'Innovation in Services.' Occasional foreign competition.64 (Only 2 per cent of based sectors.69 Mechanisms of support for paper no. 9. London: DTI. firms see research as their main source of technology-focused innovation have included 67. Department for Innovation, competitive advantage65). the Technology Programme, which includes Universities and Skills (2008) 'Innovation Nation.' London: the Collaborative Research & Development The Stationery Office. Development of fuller innovation capabilities is (CR&D) grant, Knowledge Transfer Networks 68. Ibid. p.13. particularly important for developed countries (KTNs), Knowledge Transfer Partnerships 69. For example, Department of Trade and Industry because of the increasing challenge from (KTPs), and R&D tax credits for activities that (2003) 'Innovation Report, emerging economies in these high-technology qualify.70 Further research funding is available Competing in the Global Economy: The Innovation sectors. Too many firms are unprepared for from the relevant research councils, such as The Challenge.' London: DTI; these changes: only by integrating all aspects Engineering and Physical Sciences Research Department of Trade and Industry/HM Treasury/ of innovation can they cope with and exploit Council, Biotechnology and Biological Sciences Department for Education these changes, and so continue to create value Research Council, the Medical Research and Skills (2002) 'Investing in Innovation, A Strategy for for the UK. Council, and the Science and Technology Science, Engineering and Facilities Council. Technology.' London: DTI/ HM Treasury/DfES; and HM Treasury/Department Scotland, Wales and Northern Ireland have of Trade and Industry/ Department for Education 4. UK policy for high-technology sectors reflected a similar emphasis on SET, R&D in and Skills (2004) 'Science remains narrowly focused on traditional advanced technologies, and university-business & Innovation Investment Framework 2004-2014.' innovation collaborations, as have the initiatives of the London: HM Treasury/DTI/ English regions.71 The English regions and DfES. 70. In July 2007, the Technology 4.1 Policy has begun to recognise hidden the devolved administrations all provide local Strategy Board (TSB) innovation businesses with access to funding and support, became operational as an The former Department of Trade and Industry from the Grant for an Innovative Idea (formerly executive Non-Departmental Public Body sponsored by (DTI) commissioned research on innovation SMART) to the Manufacturing Advisory Service DIUS. The TSB promotes in services,66 and NESTA and the Department and regional venture capital funds. In addition and supports research, development and the for Business, Enterprise and Regulatory to the local delivery of national business exploitation of science, Reform (BERR) have been working together to support schemes, there are numerous one- technology and new ideas to benefit business. The investigate innovation in major service sectors off support schemes, from the collaborative TSB funds and coordinates in the UK economy through the Innovation in innovation centres (CICs) in Yorkshire, the Collaborative Research & Development, Knowledge Services project. Emerging Technologies Scheme (ETS) in the Transfer Networks and South East to the Intermediary Technology Knowledge Transfer Partnerships. Most recently, Innovation Nation, the White Institutes (ITIs) in Scotland. These schemes 71. See Appendix B, National Paper published in March 2008 by the have generally targeted several 'strategic' Endowment for Science, Technology and the Arts Department for Innovation, Universities and technologies and sectors. (2006) 'The Innovation Gap.' Skills (DIUS), gives a prominent place to London: NESTA. hidden innovation and innovation in services. Finally, some sectors have explicit, agreed 72. Society of British Aerospace Companies /Department The White Paper presents a broad vision programmes that encapsulate this support. of Trade and Industry/ of innovation and its importance not only For example, the National Aerospace Aerospace Innovation and Growth Team (2004) to manufacturing but also for services, the Technology Strategy (NATS) is a partnership 'National Aerospace creative industries, the public sector and between industry, government and academia, Technology Strategy.' London: SBAC/DTI/AeIGT. the third sector.67 It explicitly recognises the to identify, research and validate 'key' and 73. Ministry of Defence (2005) importance of innovation beyond the invention 'enabling' technologies.72 Research and 'Defence Industrial Strategy, Defence White Paper.' of new technological products, by noting that development partnerships have also been London: HM Stationery the 'changing face of innovation' also includes developed through Aerospace Innovation Office; Ministry of Defence (2006) 'Defence Technology services, business processes and models, Networks (AINs) and Aerospace Technology Strategy.' London: Ministry marketing and enabling technologies.68 In Validation Programmes (ATVPs). Similarly, of Defence. doing so, it takes a significant step beyond the defence sector benefits from the Defence the traditional focus of innovation policy. Industrial Strategy launched in December It provides a valuable and challenging new 2005, and the subsequent Defence Technology
26Strategy.73 These aim to improve how military regulation to public procurement, intellectualequipment, supplies and services are procured property rights to education and skills.and supported. In pharmaceuticals, the speed and efficiency4.3 Policy neglects the hidden innovation in with which drugs pass through regulatoryresearch-intensive sectors stages has a major impact on the returns toBehind these initiatives lies a potentially pharmaceutical firms' investments. Every daydangerous assumption: that improving that a product is delayed reaching the marketinvestments in formal R&D will be sufficient can cost $1-3 million in lost revenue.74 But,to ensure the survival of higher-value-added understandably, regulators tend to focus onindustries in the UK. establishing the safety of new products rather than encouraging investment in new productIn the short- to medium-term, the UK must development.remain attractive and competitive as a placefor major firms to locate their R&D, hence In telecommunications, 20 years of marketpolicymakers have been right to support R&D liberalisation in the UK has nurturedin these sectors and in the economy generally. competition to such an extent that firms from other sectors, often with no previousYet while investments in formal R&D and telecommunications experience, can nowlinkages with the science research base will freely enter the market. The so-called 'superremain important, not enough is being done regulator', Ofcom, reflects the convergence into stimulate or support total innovation to the sector.make the most of the opportunities thatthat research will present. In the near future, In aerospace and automotive, tighter EUthese high-technology sectors will need to regulations require reduced carbon dioxiderespond not just to unexpected or 'disruptive' (CO2) and nitrogen oxide emissions. This 74. PhRMA (2007) 'Drug Discovery and Development,new technologies, but also to new business promotes some forms of innovation: for Understanding the R&Dmodels, processes and services developed by example in aerospace, it has created strong Process.' Washington DC: PhRMA.competitors. demand for lighter aircraft, prompting the increased use of composites in airframes andThis reveals two major weaknesses in current components, and more efficient engines.innovation policy. Similarly, in electronics, UK and EuropeanFirst, generic policies such as R&D tax credits environmental regulation is increasinglyare useful in subsidising existing incremental informing product design and development,research-based innovation, but they do not in with more stringent requirements onthemselves steer firms to focus on longer-term, packaging, recyclability, and the use ofpotentially disruptive research areas. Initiatives hazardous substances such as lead. Thesesuch as Knowledge Transfer Networks (which can act as both a barrier to and driverdo focus on such areas) embrace far fewer firms of innovation; it can limit the scope andthan generic policies. parameters of a new product, but can equally stimulate innovation to find alternative oxides,Second, initiatives focused on potentially alloys and nanocomposites. Furthermore,disruptive technologies don't tend to include as in other sectors, energy use is emerginghidden innovation, such as the new business as a major issue and a likely area for greatermodels and organisational forms that might be regulation; the electronics sector will haveneeded alongside these new technologies. increasingly to focus on minimising the consumption of electrical power by making4.4 'Non-innovation policy' also shapes devices and systems more efficient.innovation in high-technology sectors 4.4.2 In some sectors, public procurement4.4.1 Regulation, including environmental shapes innovationand safety regulation, plays a major role In pharmaceuticals, government is often thein informing innovation activities in many major purchaser. This informs the kinds ofsectors drugs that are developed. The difficulty forThere is a third weakness in current innovation governments is in determining the desiredpolicy. Typically, what is designated as trade-off between efficient public procurement'innovation policy' does not encompass and promoting innovation and growth bythe wider set of policies that also influence pharmaceutical firms.innovation in these sectors – from taxation and
27 Government is also a major customer of First, new scientific knowledge and technical software and electronics hardware. Indeed, skills are required. In pharmaceuticals, growth in the UK software sector is partly due the new nature of drug discovery means to substantial investment over recent years that firms need skills in new fields such as in e-government initiatives such as new IT biopharmaceutical formulation, bioprocessing, systems for the NHS (£30 billion over the last and computational analysis. Firms increasingly ten years), Transport for London's Congestion require interdisciplinary knowledge and skills. Charging and Oyster card projects, and 'Shared In pharmaceuticals, this means life science Services' (sharing back-office resources across graduates with sufficiently strong skills in councils and government departments). mathematics and physical sciences.
28Similarly, in software, development of complex innovation and change, such as in businessproducts and projects requires not only in- models.depth and up-to-date technical skills but alsoa sophisticated set of business-oriented skills There are some exceptions that do embraceand understanding. Integrating technological organisational change. For example, inknowledge with business skills enables firms to automotive the Supply Chain Groupsengage more effectively with clients, develop programme from 2003-2008 (jointly fundedgreater levels of innovation and so ensure by the then Department of Trade and Industry,sustainable competitive advantage. the English RDAs and the devolved regional assemblies) focused largely on processIn electronics, UK firms need to be more improvement through Lean manufacturing, andstrategic in addressing skills to raise facilitated major productivity improvements ofproductivity and compete effectively. up to 40 per cent.78Improvements in management and leadershipskills, technical and engineering skills, general At the same time, a sector-focused approachbusiness skills, procurement and supply chain underlying innovation policy should bemanagement skills are needed. UK universities carefully constructed so as not to inhibithave a role to play in advancing supply chain the potential cross-fertilisation of ideas andmanagement research, and, along with other technologies between different parts of theorganisations, training providers to teach best economy. As NESTA has noted previously, 77. Department of Trade and Industry (2004) 'Electronicspractice. Firms need continually to refresh their sectors often draw on technologies and 2015 – Making a Visibleskills in this area and undertake training for ideas from an 'innovation hinterland' of Difference.' Electronics Innovation and Growththis.77 traditionally-unrelated areas.79 In the case of Team Report. London: The high-technology sectors, this can be seen in Stationery Office. 78. This initiative supported the increasing importance of organisational 62 projects, involving 575 and business model innovation – sometimes suppliers employing 160,000 people; see Department5. Recommendations: The UK needs drawing on innovations developed in services for Business, EnterpriseTotal Innovation Strategies for high- sectors – and in the use of new materials and Regulatory Reform (2008) 'Report on thevalue-added sectors to retain its originally developed in other high-technology Business Environment forcompetitive advantage areas. Japanese Automotive Supply Companies in the UK.' London: BERR.5.1 Innovation policy should be focused 5.3 The changing nature of traditional 79. See section 6.3, Nationalon business growth, embracing total innovation and the demands of total Endowment for Science, Technology and the Artsinnovation innovation require stronger and broader (2007) 'Hidden Innovation.'The focus of innovation policy should shift skills London: NESTA. 80. See National Endowmentfrom supporting research to stimulating wider Of course, the performance of high-technology for Science, Technologyinnovative activities as they contribute to sectors in the UK will be undermined if there and the Arts (2005) 'Real Science, Encouragingbusiness growth. is an undersupply of people skilled in science, Experimentation and technology, engineering and mathematics Investigation in School Science Learning.' London:It is much easier for firms to find support for (STEM). More students need to be inspired to NESTA; and Nationalmore traditional research and technology study these subjects, and STEM careers must Endowment for Science, Technology and the Artsprojects than for innovative business models, present an attractive alternative to employment (2007) 'Science: An Enginenovel services or risk-sharing partnerships. in other sectors. This means developing of Innovation.' London: NESTA.Increasingly, combining these with more more teachers who can teach these subjectstraditional forms of innovation will prove creatively, increasing the use of 'enquiry-basedintegral to winning the 'race to the top', rather learning' (discovery through experimentation),than being additional to it. and continuing to improve how the value and importance of STEM careers is communicated5.2 This will require an extension of sector- to students.80focused innovation policyTotal innovation reinforces the importance But narrow technical skills are not sufficientof sector-focused interventions. Technology for total innovation. Education and trainingroadmaps, support for specific emerging must develop the capabilities necessary fortechnologies and strategic alliances within contemporary innovation, specifically moreindustries can all help to stimulate and support interdisciplinary skills and stronger strategiclonger-term innovation in disruptive areas. business skills.
Such intervention exists in aerospace and As one of its projects, the new UK Commissionelectronics, to some extent, but it rarely for Employment and Skills (UKCES) shouldseeks to stimulate or support wider forms of build on the work of the sector skills councils
29 to provide government with an analysis from automotive, there should be more strategic the perspective of industry regarding the funding in low-carbon technologies. The recent extent and quality of 'innovation-ready' skills King Review of low-carbon cars recommended in the UK, and advise on how the education, bringing existing low-emission technologies training and skills systems across the UK might from 'the shelf to the showroom' as quickly be improved to ensure the better development as possible by: ensuring a market for low of these skills.81 emission vehicles; moving the short-term focus back to automotive technology from biofuels; Further, universities and colleges should developing the UK as a location for high consider how they can provide students technology companies in the field, with good with greater opportunities to develop businesses support mechanisms encouraging interdisciplinary skills and awareness, for inward investment and supporting key areas example drawing on approaches such as of underpinning science and engineering.83 81. The UKCES is intended NESTA's Crucible and Universities United The Technology Strategy Board Low Carbon to play a critical part in securing a highly skilled, initiatives.82 Vehicles Integrated Delivery Programme should productive workforce and provide greater coordination of activities increasing employment levels, particularly for 5.4 Innovation policy needs to prompt firms from university research to future potential those from disadvantaged to anticipate – and benefit from – coming procurement opportunities, speeding up backgrounds. It will: advise government on disruptions in high-technology sectors the time it takes to get low-carbon vehicle strategy and policies As we have seen, many high-technology technologies into the marketplace. relating to employment and skills; assess progress sectors are increasingly experiencing rapid towards achieving national changes, in scientific and technological 5.6 These new demands on innovation employment and skills ambitions for 2020; and knowledge and in their industrial structures. policy require greater coordination have responsibility for the Given the breadth of policies that affect performance of Sector Skills Councils, advising Innovation policy needs to be better informed innovation, there is a need for their better government on re-licensing. by these changes. This is why 'roadmapping' coordination. For example, in pharmaceuticals, 82. Crucible offers early-career can be so valuable. For example, the the better coordination of science funding with researchers in science, technology, engineering Knowledge Transfer Network (KTN) in Digital regulation and procurement would provide a and social sciences an Communications – established in December more informed balance between short-term opportunity to develop new collaborations across 2007 covering the telecommunications, IT and drug price containment and the social and disciplines; Universities broadcasting sectors – aims to identify new economic benefits from radical new approaches United is a pilot project to test an interdisciplinary and emerging technologies and the future to the development of drugs. approach to innovation capabilities needed within the sector to ensure with a particular focus in developing innovations for that competitive advantages are realised for In automotive, as noted, regulation can play social benefit. the UK. a role in stimulating innovation that reduces 83. HM Treasury (2007) 'The King Review Part I: emissions, alongside direct support for The Potential for CO2 Firms should be encouraged to explore new increased research. Yet according to one study Reduction.' London: The Stationery Office; HM business models, organisational forms and ways for government: "Uncertainty as to the likely Treasury (2008) 'The King of working, to prepare for and profit from these strength of long-term policy for CO2 reduction Review of Low-Carbon Cars, Part II: Recommendations changes. in the transport sector means automotive and for Action.' London: The fuel companies are uncertain as to the priority Stationery Office. 5.5 Policy needs to stimulate socially- to attach to carbon reduction/fuel efficiency 84. E4tech (2007) 'A Review of the UK Innovation System desired innovations goals relative to other objectives."84 for Low Carbon Road Innovative approaches are needed to Transport Technologies, A Report for the Department encourage socially desirable innovations that 5.7 Government and industry should of Transport.' London: may not have a direct economic benefit. develop Total Innovation Strategies for E4tech. In pharmaceuticals, the under-supply of strategic industries development in drugs for diseases that The UK needs to invest in its strategically primarily afflict poorer countries could be met important industries. These are the UK's current by 'advance commitments' by governments high-value-added industries and those that and international agencies. This would are identified as having the realistic potential involve promises to purchase a given quantity to become high-value-added – our 'innovation of a treatment for diseases like malaria or edge'. 'Investment' in this context means tuberculosis that otherwise would attract very economic and political commitment to their little investment. development.
Equally, innovation policy and regulation The UK must develop comprehensive strategies in aerospace, automotive and electronics for these industries. These strategies should hardware could be better used to meet be comprised of three main elements. They environmental challenges. For example, in should chart likely changes in the environment
30in which these industries operate: present or -- Reviewing how current funding,coming changes in knowledge, technology, interventions and regulations at UK-trade, demographics and industrial structure wide, national and regional levels arethat have bearing on competitive strategy related – including support for R&D,or socially-desired outcomes.85 Industry university research, business support,and government should then apply this public procurement, skills development,understanding to the UK's current positioning and trade policy and development.and identify a small number of likely routes tocompetitive advantage. Finally, these strategies -- Establishing mechanisms for the bettershould lay out a plan for passive and active coordination of these elements wheregovernment support, primarily centred around there are tensions or contradictions.the need for greater coordination of policy. −−Extending current policy mechanisms:Two sectors have already benefited fromcoordinated strategies. As noted, the National -- Commissioning foresight exercises toAerospace Technology Strategy (NATS) is stimulate thinking on the new businessidentifying, researching and validating 'key' models and organisational forms that areand 'enabling' technologies. But NATS, likely to be required in these industries.however important, is not a national aerospacestrategy, in the sense of a broader vision -- Integrating innovation in businessbeyond technology research and development. models, organisational forms and processes into current mechanisms,More comprehensively, the Defence Industrial such as the TSB's Innovation PlatformsStrategy and the subsequent Defence or regional initiatives that seek toTechnology Strategy lay out a long-term, strengthen supply chain firms.integrated strategy for the sector. The strategy 85. Foundations for this work already exist or areencompasses research and technology -- Engaging public and private finance ongoing in some areas.development, government procurement, to invest in the development of UK Where appropriate, this work should build on theeducation, skills and training needs, improving strengths in these areas. Innovation and Growthinnovation in supply chains, and through-life Teams (IGTs), established by the former DTI. Similarly,capability management. These strategies are These strategies should be led jointly by DIUS government has recentlybased on a detailed analysis of the defence and BERR, but will demand ongoing industry announced a new IGT for the UK automotive industry,industry capabilities we need to retain in the engagement. in particular to exploreUK, with changing needs and increased foreign how it should respond to low-cost competition andcompetition. Collectively, these strategies should represent the move to low-carbon the UK's national mission for innovation. transport; see Department for Business, EnterpriseDIUS, BERR, HM Treasury, the TSB, devolved and Regulatory Reformadministrations and relevant agencies such as 5.8 Policy should be informed by new (2008) 'Business Minister Shriti Vadera Announcesregulators and sector skills councils, should measurements that capture total innovation New Investigation intowork jointly with industry to develop Total The extent and importance of hidden Automotive Industry.' Press release, 7th April. London:Innovation Strategies for each strategic innovation in these research-intensive sectors BERR.industry. These strategies should derive from demonstrates the inadequacy of relying onthe following activities: research-focused indicators alone.
• Charting: Deep analysis of the global threats In firms, the increasing importance of total and opportunities facing each industry, given innovation makes current indicators such as the likely changes in the environment for formal R&D spend increasingly unhelpful these industries. as a guide to innovative performance and hence business growth. This is because much• Relating: Determining how the UK can investment in technological innovation is not respond to maximise its competitive recorded under the official definition of R&D – advantages in these industries, given our excluded activities include more developmental current strengths and our ability to respond. and applied forms of innovation, the innovative re-use of technologies, and 'micro' innovations.• Responding to ensure that the UK is best As we have seen, new organisational forms placed to maximise these advantages, by: and business models are not registered as investments and the contributions of smaller −−Aligning current policy mechanisms: innovative firms are also often excluded.
31 In policy, the focus on R&D as a proxy for • licensing of UK firms' IP in electronics and national performance obscures a focus on of the value added from strategic alliances, business growth from innovation and the wider partnerships and collaborations; and set of factors that shapes innovation by firms. These include regulation, public procurement, • innovations in software development and education and skills policy. processes, such as Agile and Lean approaches, or in how services are delivered This will require a new set of indicators to such as Software as a service. guide policy. These will need to be broader and more meaningful than current indicators. Fourth, there could be greater prominence given to measures of customer satisfaction and First, R&D and other indicators related to how these relate to new products or services. research will remain important, but only as part This is important in product-focused sectors of a broader set of measures, and understood such as aerospace and automotive, where the in terms of their relative significance for quality of the 'final' product delivered can be each sector, which of course varies greatly. below customer expectations. But it may be Research-focused indicators could also be even more critical for service-focused sectors more specific; for example, such measures or sub-sectors; one measure might be the could track progress in selected, strategically degree to which new software and systems important areas for innovation, against agreed have contributed to customers' performance 'technology roadmaps'. in software. (Indeed, there has been a trend in the software sector towards 'value-based Second, more indicators need to be developed pricing' whereby suppliers are rewarded with a for forms of hidden innovation such as services, percentage of client revenues generated as a new organisational forms and business models. result of new software and systems). Cross-sector surveys such as the Community Innovation Survey should record levels of Finally, it would be useful to incorporate social investments in innovation in these activities, and environmental performance outputs as to provide a more accurate and comprehensive measures of innovative performance. For picture. example, in aerospace and automotive, these could include progress against reductions in Third, policy requires more suitable and emissions and fuel consumption. accurate indicators to assess the strength of business performance in higher-value-added Such measures will be considered as part of sectors. Such wider 'health check' indicators NESTA's work on a new Innovation Index for could also provide benchmarks for national the UK. performance.
32Appendix A: PharmaceuticalsInnovation through large-scale investments in research but undergoingradical changes that challenge the traditional 'pipeline' model
The two major UK firms are GlaxoSmithKline 2.1.1 Innovation in pharmaceuticals still(GSK) and AstraZeneca. The US-headquartered requires very large upfront investments inPfizer, the world's largest pharmaceutical firm, research and developmentdiscovered four of its ten best-selling drugs at Developing a new medicine takes on averageits European R&D headquarters in Sandwich, 10-15 years and costs more than £550 millionKent (the only foreign site for R&D established (often more than £120 million for a specificby the firm). The North West and the South drug and more than £400 million in capitalEast are particular centres of drug research and costs and other failed drugs). Furthermore,development. before it is authorised for use, a drug has to undergo a long and complex process of testingIn biopharmaceuticals,91 there are 46 UK (see 2.1.2).companies and five non-UK companiesdeveloping products.92 Again, the UK is second Given the expenditures involved and the veryto the US (although Germany is catching-up low success rate in developing successfulquickly). new drugs, innovation in the sector is very high-risk. The 'blockbuster model' describes
33 the balance between risk and reward: only 'Lead' compounds go through a series a few, very successful products support the of tests to provide an early assessment development costs for all products. So-called of pharmacological activity, in particular 'blockbuster' drugs are those with peak annual pharmacodynamics (the way the compound global sales of more than $1 billion. Even then, affects the body) and pharmacokinetics (the such drugs are likely to have no more than ten way it is processed by the body). The studies years in the market to recoup development are performed in living cells, in animals and costs and become profitable. Once their patent increasingly, using computational models. protection period ends, generic competitors can enter the market with resulting large price In all, the discovery phase takes several years and market share falls for a drug's developer. of intensive work. After starting with between To balance their exposure to risk, large firms 5,000-10,000 compounds, researchers are left typically maintain a portfolio of around 50-100 with between one and five candidate drugs to 95. Based on a study of the top projects for which they continually assess the be studied in clinical trials. 850 UK spenders on R&D. Department for Innovation, scientific, medical and commercial viability of Universities and Skills/ their portfolios. During development, drugs normally undergo Department for Business, Enterprise and Regulatory substantial testing, including clinical trials, Reform (2007) 'The 2007 For these reasons, pharmaceuticals are the manufacturing experiments and outcomes R&D Scoreboard.' London: DIUS/BERR. most research-intensive large-scale sector research, before they can be authorised for use. 96. Department for Innovation, in the UK economy, with an R&D intensity The clinical trials activity typically represents Universities and Skills/ of more than 15 per cent. They account for the largest share of R&D costs (more than 40 Department for Business, Enterprise and Regulatory 35.5 per cent of R&D in the UK, three times per cent), while the discovery and pre-clinical Reform (2007) 'The 2007 as much as aerospace. UK pharmaceutical phase represents only a quarter.100 R&D Scoreboard.' London: DIUS/BERR. and biotechnology firms invested £7.4 billion 97. Pharmaceutical Industry globally in R&D in 2006, equivalent to £20 Pre-clinical testing in animals follows the Competitiveness Task Force (2005) 'Competitiveness million a day (£9 million of it in the UK).95 The discovery phase. If a project is pursued beyond and Performance Indicators biggest global spenders in terms of UK firms this point, costs increase markedly because 2005.' London: PICTF. were GSK (£3.46 billion) and AstraZeneca testing in humans is riskier and far more 98. Department for Innovation, Universities and Skills/ (£1.99 billion); they dominate R&D by UK firms expensive. Only about 20 per cent of drugs Department for Business, in the sector (representing 73 per cent of all that enter the first phase of testing (there Enterprise and Regulatory Reform (2007) 'The 2007 spend).96 are three over several years) are eventually R&D Scoreboard.' London: approved for sale. DIUS/BERR. 99. For more details about this Only the US and Japan have higher R&D process, see US Food and spending in pharmaceuticals; the UK represents Even if a drug makes it through these different Drug Administration, Center for Drug Evaluation and around 9 per cent of world pharmaceutical phases (around a 4 per cent chance) there is Research (1999) 'From Test R&D, more than double the 4 per cent of the no guarantee that it will be approved for sale. Tube to Patient: Improving Health Through Human global market for medicines represented by the The information gathered through the entire Drugs.' Washington, DC: US UK.97 The largest spender on R&D in the world process is compiled in a regulatory dossier Government Printing Office. is the American pharmaceutical firm Pfizer that is submitted to authorities around the 100. The Association of the British Pharmaceutical (£3.88 billion a year).98 world. These bodies consider the evidence Industry (2007) 'Investing presented, listening to opinions and advice in the Future 2007.' London: ABPI. 2.1.2 New drugs progress through a staged from independent experts, patient interest process of discovery, development and groups and other stakeholders before deciding testing whether the drug can be authorised for use. The model of pharmaceutical innovation has traditionally been divided into several stages During the final stages of development, firms of experimentation, information gathering and begin the process of scaling-up manufacturing development (hence the assumption that it capacity to ensure that the new drug can be represents a linear model of innovation).99 produced immediately following approval (by for example building new facilities or In the 'pre-discovery' stage, researchers work reconstructing old ones because the process to understand the mistakes in the complex differs from drug to drug). Given that a drug molecular reactions (chemical pathways) can still fail in late-stage development or which cause diseases. They try to identify and not be approved for sale by regulators, this validate the drug 'target' (the step within the manufacturing development also carries a molecular pathway which when altered would significant investment risk. make a drug effective in treating a condition). They then try to identify the right molecule (candidate drug) for this target.
342.1.3 The research-intensive nature of are made at each stage based on businessinnovation in pharmaceuticals has been projections. 101. Attridge, J. (2006)reflected by the traditional industrial Innovation Models in the Biopharmaceuticals Sector.structure in the sector Second, the linear model fails to take adequate Discussion Paper 2. InUntil the early 1980s, the pharmaceutical account of the final phase of the innovation Atun, R. (ed.) 'Innovation in Life Sciences: Asector was characterised in effect only by process, that of achieving timely market Multidisciplinarylarge, vertically-integrated commercial firms. diffusion and adoption to benefit patients.101 Perspective.' London: Tanaka Business School,These firms were responsible for the discovery Firms such as Wyeth and Novartis are moving Imperial College London.of chemicals, clinical development, and drug to a 'learn and confirm' view of pharmaceutical 102. This is why it is misleading to focus on a simplisticmarketing and distribution. Many firms had research and development, recognising that 'breakthrough' versusroots in the chemical industry and were the key requirement is to provide the evidence 'me-too' distinction, as has been the case in somelocated in countries with historic strengths in needed for regulators to feel confident in studies; for example, it haschemicals, notably Germany, Switzerland, the approving a new drug. This was also inherent been suggested that only 27% of biopharmaceuticalsUS, and the UK. in the blockbuster model; large firms were the provide 'some advance' only ones with the necessary competencies and only 10% of all other drugs, see Arundel,Firms required – and could afford – large- to manage large-scale clinical trials, gain A., and Mintzes, B.scale industrial R&D labs. This reflected the regulatory approval, and market and distribute (2004) 'The Benefits of Biopharmaceuticals.'magnitude of both the research opportunities drugs. Innogen Working Paperand of unmet needs, but also the need for 14. Version 2.0. Edinburgh: Innogen, University ofscale to absorb the risks of drug development. Neglecting these factors helps to privilege Edinburgh.There were many diseases for which no drugs 'breakthrough' over so-called 'me-too' drugs.102 103. Swan, J., Robertson, M.,had previously existed. Faced with a target-rich Yet incremental or 'continuous' innovation Bresnen, M., and Newell, S. (2006) 'The Evolutionenvironment but with little detailed knowledge is as important as breakthrough innovation. of Biomedical Knowledge:of the biological underpinnings of diseases, Later members of a product class are often Interactive Innovation in the UK and US.' Swindon:firms developed an approach now referred the best all-round product, because practice Economic and Socialto as 'random screening', by which natural has helped to improve effectiveness through Research Council. 104. Sheridan, D. (2006)and chemically derived compounds were better formulations, a better understanding of Developmentrandomly screened in test tube experiments how to use drugs and the patient groups that and Innovation in Cardiovascular Medicine.and laboratory animals for potential therapeutic will benefit from them, and how they might be Discussion Paper 3. Inresponses. Strong patent protection in most used to treat other diseases. Such innovations Atun, R. (ed.) 'Innovation in Life Sciences: Amajor world markets, in addition to barriers can emerge long after initial discovery through Multidisciplinaryto entry from regulations, enabled firms to a more interactive innovation process between Perspective.' London: Tanaka Business School,earn favourable returns for their large R&D research scientists, clinicians and experts from Imperial College London.investments. other fields (who can better identify other 105. Antithrombotic Trialists' uses).103 One example is the developments in Collaboration (2002) Collaborative Meta-Meanwhile, non-profit institutions such as understanding of how to use existing drugs in analysis of Randomiseduniversities and public research laboratories cardiovascular medicine; aspirin, streptokinase, Trials of Antiplatelet Therapy for Preventionproduced basic research in chemistry and and ß-blockers were not considered for the of Death, Myocardialthe life sciences. Broadly, these institutions diseases for which they are now associated for Infarction, and Stroke in High Risk Patients. 'Britishengaged in 'open science', with their years or even decades following their initial Medical Journal.' 324,unpatented outputs published in scientific introduction.104 Such drugs may still be under- pp.71-86. 106. Hopkins, M., Martin, P.journals. Such researchers competed for grants exploited; one study has estimated that 40,000 A., Nightingale, P., Kraft,but rarely had commercial interests. The lives could be saved worldwide – 3,000 in the A., and Mahdi, S. (2007) The Myth of the Biotechcommercial and publicly-funded sectors were UK alone – from the greater use of aspirin.105 Revolution: An Assessmentlargely distinct, the former focusing on applied of Technological, Clinical and Organisationalresearch with commercial uses and the latter Similarly, in the biotechnology sector, a more Change. 'Research Policy.'on basic, curiosity-driven research – although accurate understanding of innovation would 36 (4), pp.566-589.there were often significant relationships be as a slow and incremental process of 107. Attridge, J. (2006) Innovation Models in thebetween the two. technology diffusion rather than one of radical Biopharmaceuticals Sector. breakthroughs.106 Such issues are not merely of Discussion Paper 2. In Atun, R. (ed.) 'Innovation2.1.4 However, 'traditional' innovation in academic interest; they can play a critical role in Life Sciences: Apharmaceuticals is changing rapidly as a in shaping the policies of large state purchasers Multidisciplinary Perspective.' London:result of new knowledge, technologies and who use such classifications to determine Tanaka Business School,approaches whether or not they will reimburse a new Imperial College London. product and at what price.107 (See 6.3).220.127.116.11 Despite its highly research-intensivenature, the linearity of pharmaceutical 126.96.36.199 Biological approaches represent a newinnovation has often been overstated paradigm for drug discoveryFirst, innovation in pharmaceuticals is cyclical This new paradigm is the result of advances inand business-driven. Investment decisions life sciences and genetics. Most important are
35 the development of techniques to analyse and 'Rational drug design' (also known as manipulate genetic materials, and the impact 'structure-based drug design') rather of the revolution in molecular biology. This than random screening has now become has led to an increasing convergence between the dominant approach to research in the traditional medicinal chemistry and the new commercial sector. This approach targets a biological knowledge. specific biological activity and identifies or creates a molecule involved in that activity. Biopharmaceuticals are medical drugs produced This requires greater understanding of biology using biotechnology (that is, technology that and fundamental mechanisms. Firms build uses biological systems or living organisms computer models of design targets and then to make or modify products or processes), analyse the shape and other characteristics that as opposed to traditional chemically derived likely drug molecules should have in order to drugs. Biopharmaceuticals fall into a number interact with the target. of different product classes. These include recombinant human proteins (the largest 22.214.171.124 Understanding human genetics is now a group), recombinant human antibodies, major part of drug discovery vaccines, gene therapies, and cell and tissue We now know that many diseases can be linked therapies. to genetics. The information gathered through the successful mapping and sequencing of the Biopharmaceuticals represent an increasingly human genome is playing a vital role in the significant proportion of drugs in development. discovery process, helping to identify areas for They account for more than 10 per cent of scientific exploration and potentially allowing current pharmaceutical sales worldwide but medicines to be customised to groups of more than a third of drugs in development.108 people or even individuals. Pharmacogenetics A number of biopharmaceuticals are now can help to identify whether an individual's 108. bioProcessUK (2007) classed as 'blockbuster' drugs. In 2005, Epogen genetic make-up could prevent them from 'bioProcessUK Annual Review 2007.' London: (recombinant human erythropoietin) was the benefiting from a drug. But this also adds bioProcessUK. biggest selling biopharmaceutical with sales complexity to existing development. over $3 billion, while Humira became the first UK discovered antibody product to achieve 18.104.22.168 Manufacturing many drugs has become blockbuster status with sales of $1.4 billion (in much more complex 2007 sales had risen to $3.1 billion). Although bioprocessing (or biomanufacturing) was already applied to the manufacture of Biopharmaceuticals are far more complex to medicines like penicillin and other antibiotics develop and synthesise, as they require the derived from naturally occurring bacteria, the integration of different disciplines, research breakthrough necessary for its systematic areas and techniques. At the same time, this application was the development of makes them attractive to pharmaceutical firms, recombinant DNA. This makes it possible to as it is harder for generic competitors to copy insert DNA encoding for a particular protein the technologies. into a bacterium or mammalian cell line and induce it to produce the desired product. 18.104.22.168 There is increasing use of automation The first product based on such genetic and other process innovations engineering, human insulin or Humulin, was The industry is as much concerned with launched in 1981. establishing the methods by which new drugs can be industrialised as with the drugs Since then, genetic engineering of bacterial, themselves. Finding the optimal formulation viral, yeast and mammalian cells has given continues to be a key part of every R&D rise to a broad range of biopharmaceuticals. project. Manufacturing even the least sophisticated biopharmaceutical is fundamentally different Increasing automation has already replaced and far more complex than manufacturing laborious or time-consuming manual processes, conventional (small molecule) drugs. reducing costs and greatly improving Environmental factors such as temperature, throughput. In the past, a chemist might have pressure and growth medium must be tightly been able to produce between 50 and 100 controlled and consistent to ensure the same new chemical compounds a year. Using new product is produced each time. This is why one- techniques and computer-controlled robots, he fifth of the value of a biopharmaceutical drug or she can produce nearly half a million a week. derives from the wider supply chain (including raw materials, production and distribution).
36 109. Coombs, R., and Metcalfe,188.8.131.52 University research and knowledge are 2.2 Organisational and business model J. S. (2002) Innovationincreasingly being commercialised innovation have become integral to in Pharmaceuticals: Perspectives on theThese new approaches have often been led innovation in pharmaceuticals Coordination, Combinationby universities, public laboratories, spin-out and Creation of Capabilities. 'Technologyand start-up firms (see 2.2.1), facilitated by 2.2.1 The growth in scientific understanding Analysis & Strategicchanges in intellectual property rights (3.5), encouraged a major change in industry Management.' 14 (3), pp.261-271.funded by the increased availability of venture structure in the shape of small new firms 110. Pharmaceutical patentcapital (3.6), and supported by firms in other A new business model emerged in the 1980s systems in OECD countries offer twenty yearsareas such as information technology and and 1990s: the specialised biotechnology firm. protection from imitators.advanced materials.109 This has been mirrored As in many other sectors, innovation was first However, patents must be secured at the time ofby the creation of incentives for scientists in pursued not by large incumbents but by much invention, and hence thethe non-profit sector to patent their work, smaller, new companies.114 These firms were less intervening years needed for the development ofand has changed the world of open science risk-averse in selecting and pursuing research innovations normallyrelated to pharmaceutical research. The result projects.115 reduce the effective period of protection to 10-12is a much higher rate of collaboration and years.knowledge transfer between the non-profit and Most were university spin-offs, usually formed 111. Cockburn, I. (2006) Is thecommercial sectors, and a greater similarity of through collaborations between scientists Pharmaceutical Industry in a Productivity Crisis? Inresearch style. and professional managers, and backed by Jaffe, A., Lerner, J., and venture capital. Their specific skills resided in Stern, S. (eds.) 'Innovation Policy and the Economy.'2.1.5 Despite these developments, there knowledge of the new techniques and in the 7, pp. 1-32.have been increasing concerns about research capabilities in their specific areas. 112. Cockburn, I. (2006) Is the Pharmaceutical Industrydeclining productivity in a Productivity Crisis?As more drugs are developed, the remaining Choosing the most appropriate business model In Jaffe, A., Lerner, J., and Stern, S. (eds.)diseases are those that are most difficult to has been crucial for biotechnology firms.116 'Innovation Policy and theunderstand and attack. They are also those for Although many firms were founded with the Economy.' 7, pp. 1-32; also Charles River Associateswhich it is more difficult to develop new drugs. long-term aim of becoming large integrated (2004) 'Innovation in theAt the turn of the millennium, despite the pharmaceutical producers (the vertical model), Pharmaceutical Sector.' London: Charles Riveroverall growth in the pharmaceutical market, they often experienced organisational and Associates; Messinis,many top-selling drugs were coming to the end financial constraints (for example, a lack of G. (2004) 'R&D Price Inflation, Real BERDof their patent periods and faced competition experience and capacity to manage clinical and Innovation:from generics.110 (Between 2001 and 2005, testing or marketing), and many have Pharmaceuticals, OECD 1980-2000.' Workingbranded drugs with total annual sales of $35 subsequently become specialised suppliers of Paper 18. Melbourne:billion lost patent protection.) In addition, specific techniques and research projects. This Centre for Strategic Economic Studies, Victoriapharmaceutical firms have faced increased has created a kind of 'feeder' system of new University of Technology.pressure on prices due to growing demands knowledge and techniques for the sector. 113. Charles River Associatesfrom governments, insurers and consumers to (2004) 'Innovation in the Pharmaceutical Sector.'lower the costs of drugs. 2.2.2 Large pharmaceutical firms now London: Charles River approach small, specialised suppliers Associates. 114. The first newMany of these concerns have been based on as a further source of development biotechnology start-up,an output measure of new drug launches, opportunities Genentech, was founded in 1976 by Herbert Boyer,but it has been suggested that much of the The industry has seen a large number of one of the scientists whoobserved downturn in productivity is related to mergers and acquisitions in the last 20 years, developed the recombinant DNA technique, andflaws in this measure.111 Current performance with little increased productivity. Whilst these Robert Swanson, a ventureis not particularly low by historical standards, still occur, there has been a significant increase capitalist. Genentech constituted the model forfactoring in a normal amount of volatility.112 in licensing deals, strategic alliances, and other most of the new firms.Productivity measures have declined mostly forms of collaboration between firms of various 115. Guedj, I., and Scharfstein,because of an increase in R&D spending that sizes in the commercial sector as an alternative D. (2004) 'Organizational Scope and Investment:appears to be driven by escalating costs of to outright acquisition. Similarly, firms have Evidence from the Drugdrug development, particularly the need for sought to work more closely with the non- Development Strategies and Performance oflarge scale clinical trials. According to one profit sector (see 3.4). Biopharmaceutical Firms.'study, from 1995-2005 there was a five-fold NBER Working Paper 10933. Cambridge,increase in the costs of clinical development However, absorbing new knowledge and MA: National Bureauand a 60 per cent increase in the real costs of approaches has sometimes proved difficult of Economic Research; also Styhre, A. (2006)preclinical development.113 The 'crisis' therefore for existing large pharmaceutical firms. It Science-based Innovationamounts to a failure to increase the number could only be fully exploited through the as Systematic Risk-taking, The Case of New Drugof new products whilst overall resources being development of in-house capabilities, which Development. 'Europeaninvested globally have risen dramatically. made it possible to absorb and complement Journal of Innovation Management.' 9 (3), pp. the knowledge supplied by small firms and 300-311. universities. This has required radical changes 116. Lim, L. (2003) Bio- Business Models. in research procedures, a redefinition of the 'Cambridge Manufacturing Review.' Winter, pp.7.
37 disciplinary boundaries within large firm firms, and have remained more closely linked laboratories and some changes in divisional for longer to the cognitive and organisational structures.117 For example, Pfizer has recently procedures that governed research when announced the creation of a new biological chemistry constituted the main knowledge unit that will operate outside of its main R&D base.118 This may have produced a vicious organisation, although partnering with it. circle, since new biotechnology firms have sometimes lacked an essential source of Large European firms have been slower to survival and growth through collaborative adopt molecular biology compared to US agreements with larger firms.
382.2.3 Some large firms have adopted the more able than most firms to conduct studiesorganisational forms of small firms on a multinational and multi-centre basis.GSK has subsequently taken this model further.Its Centre of Excellence for External Drug In recent years, the portfolio of servicesDiscovery (CEEDD), created in 2005, is a small offered by CROs has widened to include R&Dexecutive team accountable for delivering enabling technologies such as genomics, highproof of concept molecules into late-stage throughput screening, and combinatorialdevelopment through a network of external chemistry, using proprietary techniquesalliances. CEEDD in effect 'virtualises' a portion for which they often own the intellectualof the drug discovery pipeline by acting as property rights. CROs can also offer post-an 'external' CEDD. It is also responsible for commercialisation services such as sales andaccessing innovative approaches to drug marketing.discovery, that is, for developing processand organisational innovation, not just new 2.2.5 Open innovation is changing theproducts. concept of a firm's innovation capacity Finally, the internet has enabled new means ofThis approach may represent the dominant sourcing innovation. Firms like Innocentive andmodel for the rest of the sector in a few years' Nine Sigma offer innovation brokering services,time. By 2015, large pharmaceutical firms are giving pharmaceutical firms access to tens oflikely to focus more on core competencies thousands of creative minds in the search for 122. Business Insights (2005) 'The Pharmaceuticalsuch as sales and marketing, supported by a solutions to the challenges of drug discovery. Market Outlook to 2015,network of R&D organisations including long- Similarly, Imaginatik (a UK firm) is a leading Implementing Innovative, Long-term Strategiesterm relationships with biotechnology firms.122 provider of innovation and collaborative for Sustainable FutureAn alternative vision is that firms diversify problem-solving software and processes; Pfizer Growth.' London: Business Insights.into selling not just products but 'healthcare has recently invested in the further expansion 123. IBM (2002) 'Pharmapackages' including diagnostic tests, drugs of the firm. 2010: The Threshold of Innovation.' Somers, Newand monitoring devices, offering personalised York: IBM.'targeted treatment solutions' for patients (a The impact of this change is evident in the 124. Milne, C.-P., and Paquette,reflection of the new biological foundations for approach taken by Procter & Gamble, who sold C. (2004) 'Meeting the Challenge of the Evolvingdrug discovery and development).123 off the research arm of their pharmaceutical R&D Paradigm: What Role business with the intention of sourcing for CROs?' Boston: Tuft Center for the Study of2.2.4 Cost pressures in the sector have led development opportunities externally. Chorus, Drug Development.to increased outsourcing of research and a firm set up by Eli Lilly to run high-speed 125. Business Insights (2006) 'Pharmaceuticalmanufacturing proof of concept programmes on parts of Lilly's Outsourcing Strategies,Few firms still have large teams of in-house portfolio, manages its projects through a large Market Expansion, Offshoring and Strategicclinical researchers. Most rely on clinical network of external suppliers. The ability to Management in the CROresearch management organisations (CROs) coordinate the various contributions across and CMO Marketplace.' London: Business Insights.to run the clinical trials required for regulatory this network and provide strong knowledgeapproval.124 CROs now account for more than leadership is central to success in this new40 per cent of annual research spending by model.firms, compared to just 4 per cent in theearly-1990s.125 Many of the leading CROs havetheir European headquarters in the UK andthe UK has a number of world-class CROs of 3. Pharmaceutical innovation isits own, but Eastern Europe also has a well- determined by many inter-relateddeveloped infrastructure for outsourcing, and government policies that interact withIndia and China are expected to account for a the innovation capacities of firmssignificantly greater proportion of such workover the next five years. 3.1 Regulation and public procurement play a major role in shaping the conditions forThe role of CROs has grown rapidly as a result innovationof the increasing pressure on pharmaceutical Access to quality, affordable healthcare isfirms to bring drugs to market more quickly increasing regarded as a human right. Medicaland the increased complexity of clinical trials knowledge is therefore seen as a 'publicand regulatory submissions. The ability of good'. At the same time, pharmaceuticals areCROs to cut clinical trial times by as much as a private, for-profit sector. As a consequence,30 per cent has become critical to large firms, government is heavily involved in shaping theespecially given their concerns over R&D environment for innovation in pharmaceuticals,productivity and generic competition. CROs are through regulation and procurement, but also research funding and infrastructure (3.4)
39 and intellectual property rights (3.5). The and promoting innovation. Such agencies can challenge of providing an attractive investment have different and often conflicting goals. opportunity in a managed 'public service' market is one that is of increasing concern to The voice of the patient is also becoming a pharmaceutical firms. more significant factor in the provision of drugs, as evidenced by the public debate The speed and efficiency with which drugs over the availability of Herceptin in 2006. An pass through regulatory stages has a major apparently inconsistent policy of providing the impact on the returns to pharmaceutical firms' drug led to major protests, even though it had investments. Every day that a product is not at that point been fully approved for use. delayed reaching the market can result in $1-3 million in lost revenue.126 3.2 Firms invest in R&D in areas with the greatest expected profits 126. PhRMA (2007) Government is not only a regulator; it is Firms' decisions are informed by market 'Drug Discovery and Development, also the major purchaser in many countries, potential, which is in turn affected by Understanding the R&D including the UK through the National regulation and public procurement, the Process.' Washington DC: PhRMA. Health Service (NHS). Both regulation and prevalence of a particular disease, the quality 127. The PPRS was created procurement are major factors in shaping of existing treatments, and expectations about by negotiation between the incentives for further investment in drug competing treatments and pricing. A 10 per the government and the pharmaceutical industry development. cent increase in demand for care in a particular in 1957. It is normally therapeutic area is associated with a 5-8 renegotiated every five years; the current scheme In the UK, under the terms of the current per cent increase in R&D spending.129 Firms dates from 2005. However, Pharmaceutical Price Regulation Scheme also take into account technical feasibility, the UK government recently announced that it (PPRS), pharmaceutical firms have the freedom according to their investments in related is renegotiating the PPRS to set launch prices of new drugs within an areas, their skills and knowledge, as well as early. 128. Pharmaceutical Industry overall cap on the rate of return they can earn the knowledge and skills of organisations Competitiveness Task Force from all of their branded sales to the NHS.127 they can work with. Private R&D investment (2005) 'Competitiveness and Performance Indicators This makes the UK a more attractive market can also follow non-profit investment, that is, 2005.' London: PICTF. than countries where launch prices have to be the supply of knowledge from basic science 129. Ward, M., and Dranove, agreed in advance. However, UK expenditure research. D. (1995) The Vertical Chain of Research and on new drugs remains comparatively low.128 Development in the In 2004, 17 per cent of UK drug expenditure The imperative of showing a profit for investors Pharmaceutical Industry. 'Economic Inquiry.' 33 (1), went on products launched during the previous means that, whilst firms do develop 'orphan pp.70-87. five years, a lower share than in all other drugs' (treatments for rare diseases) some 130. This is particularly pertinent given the comparator countries except Japan (16 per drugs may not be developed due to limited increase in clinical trials cent), and well below the 27 per cent in the potential returns. This has sometimes translated taking place in poorer countries for drugs that US. to a lack of focus on diseases that primarily are aimed primarily at affect people in poorer countries,130 a difficult Western markets, see Shah, S. (2006) 'Body Hunters, Governments must achieve a trade-off between issue for an industry that is charged with both How the Drug Industry efficiency in public procurement and promoting shareholder return and public good. Tests Its Products on the World's Poorest Patients.' innovation and growth by pharmaceutical New York: The New Press. firms. The benefits from new drugs are often 3.3 Skills gaps may inhibit innovation 131. The Association of British very difficult to quantify and can accrue over In the UK, there are skills gaps amongst Pharmaceutical Industry (2005) 'Sustaining the a long period, despite the public pressure that graduates in a range of technical respects: Skills Pipeline in the can build up to provide certain new drugs. adequate grounding in higher level Pharmaceutical and Biopharmaceutical Regulators also tend to focus on establishing mathematics amongst science graduates; Industries.' London: ABPI. the safety and efficacy (relative to the cost inadequate practical experience, particularly 132. SEMTA (2007) 'Bioscience Sector Skills Agreement of purchase) of new products rather than in chemistry, in vivo disciplines, pathology, Stage 3: Gap Analysis – encouraging investment in new product toxicology and engineering; chemistry and UK.' Watford: SEMTA. development, despite a general acceptance the specialisations which build upon it; and by many health agencies (including the UK computational analysis skills.131 Skills shortages National Institute for Health and Clinical and gaps are particularly high in the bioscience Excellence, NICE) that innovation should be area: the number of universities offering rewarded with higher prices. bioscience-related subjects is declining; the number of first degrees gained in bioscience- In addition, in most countries at least two related subjects has declined over the last six different public agencies are charged with the years, by 27 per cent in Biological Sciences separate tasks of providing healthcare to a and 23 per cent in Chemistry; and only a small country's population, approving new products, minority of the graduates in these subjects enter the bioscience industry or go onto
40higher degrees in the subject.132 There are industry; inflated expectations of the value ofalso related skills shortages in specific areas intellectual property rights (IPR) by academics 133. bioProcessUK (2006)such as bioprocessing and biopharmaceutical or universities;138 a lack of administrative 'bioProcessUK Annual Review 2006.' London:formulation.133 support for academics; and excessive university bioProcessUK. bureaucracy.139 134. Cogent (2007) 'A Sector Skills Agreement forIn addition, the UK sector has skills shortages the Cogent Sector UK.'in non-technical respects: innovation and 3.5 Retaining intellectual property rights is Warrington: Cogent. Cogent is the Sector Skillsbusiness improvement techniques; change and crucial to ensuring returns on investment Council for the chemicals,project management; health and safety; and for pharmaceutical firms pharmaceuticals, oil and gas, nuclear, petroleummanagement and leadership.134 Leaders and Two related issues that have been the subject and polymer sectors; thesemanagers need to be able to adopt a complete of considerable debate are intellectual property skills gaps run across these sectors.value chain perspective of biopharmaceutical rights (IPR) in developing countries, and the 135. See bioProcessUK (2005)commercialisation, and be committed to impact of expanding IPR on open science. 'Developing Bioprocesscontinuous improvement in bio-processing.135 Leaders Workshop.' London: bioProcessUK. First, several developing countries have 136. Furman, J., Kyle, M.,Furthermore, given the rapidly changing nature decided to ignore IPR on major products. For Cockburn, I., and Henderson, R. (2006)of innovation in the sector, there is a lack of example, in 2007 Brazil moved to compulsory 'Public & Privatestrong interdisciplinary skills, for example, life licensing of Efavirenz, an AIDS drug produced Spillovers, Location and the Productivity ofscience graduates with sufficiently strong skills by Merck, after negotiations to lower the price Pharmaceutical Researchin mathematics and physical sciences. failed. Knowledge.' NBER Working Paper 12509. Cambridge, MA: National3.4 Universities, the research base Second, the expansion of patent protection Bureau of Economic Research.and research clusters are increasingly to include areas such as the genome, research 137. Zucker, L. G., andsupporting innovation tools, and other forms of scientific knowledge Darby, M. R. (1996) StarAs collaborations have grown, innovation in the has facilitated 'markets for technology' and Scientists and Institutional Transformation: Patterns ofcommercial sector has increasingly depended thus made possible small firms that specialise Invention and Innovationon the research strengths of academic in one aspect of the drug development process. in the Formation of the Biotechnologyinstitutions, especially following advances in However, there are concerns that science is Industry. 'Proceedingsmolecular biology. becoming increasingly commercialised and that of the National Academy of Sciences.' 93, this may inhibit further research.140 Although pp.12709-12716.Despite the global nature of the industry, some of these concerns might be overdone, 138. Jensen, R. A., Thursby, J. G., and Thursby, M. C.geography remains important. For example, the potential exists for exclusionary behaviour (2003) Disclosure andcommercial research labs located near to become more prevalent as the potential Licensing of University Inventions: 'The Best Weuniversities tend to be more productive, commercial returns to scientists increase. Can Do with the S**tsuggesting that these labs benefit from We Get to Work With.' 'International Journal ofknowledge spillovers from their academic 3.6 Venture capital has helped to create Industrial Organization.'neighbours.136 Some large European firms many new firms but with mixed success 21 (9), pp.1271-1300; Thursby, J. G, and Thursby,have chosen to locate research facilities in As we have seen, venture capital has been an M. C. (2003) Industry/areas close to major academic institutions, increasingly important driver of R&D in the University Licensing: Characteristics, Concernssuch as GSK in Research Triangle Park, North sector since the 1980s, particularly in the US and Issues from theCarolina, near three major research universities, but also in the UK. However, attrition rates – Perspective of the Buyer. 'The Journal of Technologyand Novartis in Cambridge, Massachusetts, through bankruptcy or merger and acquisition Transfer.' 28 (3-4),near Harvard and MIT. Similarly, commercial – have often been high. The relatively short- pp.207-13.biotechnology has grown fastest in the Bay term view in the standard venture capital 139. Kleyn, D., Atun, R., and Kitney, R. (2006)Area of California, where Stanford and two markets means that biotechnology firms which Partnerships andmajor University of California campuses are focus on new products now tend to rely on Innovation in the Life Sciences. Discussionlocated, and Boston/Cambridge. large pharmaceutical firms to take drugs into Paper 8. In Atun, clinical development. However, firms that have R. (ed.) 'Innovation in Life Sciences: AThe development of biotechnology firms in the 'platform technologies' rely on a broader range MultidisciplinaryUS has been aided by two other advantages: of relationships which can be less secure; they Perspective.' London: Tanaka Business School,legislation that facilitated the transfer of have often sold their technologies to major Imperial College London.technology out of universities to commercial pharmaceutical firms at an early-stage of 140. Andrews, L., Paradise, J., Holbrook, T., andenterprises (the 1980 Bayh-Dole Act)137 and development. Bochneak, D. (2006),a particularly well-developed venture capital When Patents Threaten Science. 'Science.' 314,industry (see 3.6). pp.1395-1396.
41 such as R&D and patents, given the complex and overlapping network of collaborations and 4. Innovation is hidden because R&D alliances. There can at once be both double- and patents do not capture broader counting and under-counting of inputs and investments in innovation, especially in outputs. At present, there is little research on a rapidly changing industry how the new industry structure compares to the old model of vertical integration in terms of 4.1 Raw R&D counts do not translate total productivity.141 directly to firm productivity or success In general, there is a positive relationship Furthermore, traditional R&D and patenting between the number of patents owned by surveys can overlook the innovation taking a pharmaceutical firm and the number of place in smaller and newer biotechnology firms, drugs it ultimately launches. However, firms especially if they do not conduct much R&D.142 141. However, firms that are vary in their efficacy at drug development; active in a broader range of diseases appear to for instance, a firm may generate numerous 4.3 R&D indicators do not include have higher productivity patents (because it provides incentives for therapeutic and social benefit than focused firms, see Cockburn, I., and researchers to patent as much as possible, or Henderson, R. (2001) because they are located in countries that tend An additional problem with raw counts of R&D Scale and Scope in Drug Development: Unpacking to grant high levels of patents), but may not and patents is that they do not incorporate the Advantages of launch many new drugs as a result of poor measures of therapeutic and social benefit. Size in Pharmaceutical Research. 'Journal of management of clinical trials. (Productivity is As a result, they are problematic if used by Health Economics.' 20 (6), also challenging to measure in a sector where policymakers to evaluate existing policy. The pp.1033-1057; Larger and more experienced firms regulatory bodies have significant influence on difficulty is in identifying the marginal impact seem best positioned to which products reach the market and the price of policy on the quality and social usefulness of advance their projects particularly in phase 3 that can be charged for them.) the outputs of drug development, and not just clinical trials. on levels of R&D investment. 142. Lhuillery, S., Raffo, Investments in stronger capabilities in these J., and Carpentier, C. (2006) 'Investigating areas are an example of a Type I hidden As the payers (the NHS in the UK) have looked Data Sources for Biotech innovation – a complementary investment for more evidence of a drug's social benefit, so Firms Identification.' OECD Workshop on in technological innovation. It is why narrow the discipline of Health Economics has become Biotechnology Outputs measures such as levels of R&D investment, or more important to the sector. Assessing the and Impacts. Paris 11th December. Lausanne/ equally the number of patents generated, are impact that a new drug can have on society as Paris/Paris: EPFL, CEMI/ often insufficient in capturing a firm's capacity a whole has become as important as its clinical CEPN, Université Paris Nord/INPI, Paris. for innovation. efficacy in securing reimbursement. 143. PICTF was a joint government and industry task force established Given that the innovation process in in 2000 to look at pharmaceuticals is actually far less linear than ways of ensuring that the UK remained an is often supposed, it is unwise to focus on one 5. Innovation could be better measured attractive location for the year's count of R&D investment compared by more detailed surveys pharmaceutical industry. See Pharmaceutical to another to compare innovative capacity. Industry Competitiveness Knowledge and assets investments from the 5.1 A broader range of indicators can be Task Force (2006) 'Competitiveness and past – or developed through strategic alliances used to evaluate sector-wide performance Performance Indicators and other collaborations – may assist a firm in The Pharmaceutical Industry Competitiveness 2005.' London: PICTF. Similarly, for the developing new products and bringing them Task Force (PICTF) developed a set of biopharmaceutical sub- successfully to the market. This can also be indicators for sector-wide competitiveness sector, see bioProcessUK (2006) 'bioProcessUK seen to represent a Type III hidden innovation – and performance.143 These cover a diverse Annual Review 2006.' the exploitation of largely existing technologies range of areas, from 'supply conditions' (such London: bioProcessUK. to support other forms of innovation. as the number of graduates with relevant science degrees, total hourly labour costs 4.2 The changing industry structure versus comparator countries, and of course confuses traditional metrics R&D spend), through 'demand and regulatory Innovations in organisational forms and conditions' (including pharmaceutical sales as a business models represent a Type II hidden proportion of GDP, time for regulatory approval innovation. As suggested, these have been and from approval to launch), to 'industry important for large firms in particular in outputs' (patents, UK firms' share in major adjusting to the changing nature of innovation markets, the trade balance and employment in the pharmaceutical sector. levels).
Changes in industry structure have also made Similarly, a framework has been developed it more difficult to rely on inputs and outputs for comparing the performance of national
42'biomedical innovation systems', covering a Developing countries are increasingly beingrange of indicators in 'knowledge generation' used for R&D activities, especially through(such as patents), 'knowledge diffusion' the use of contract research organisations(including the number of biomedical (CROs), particularly in Eastern Europe. Thesetechnology alliances), and 'knowledge use', CROs benefit from more than low-cost patientfrom early-stage (the market value of listed reimbursement. For example, patients in thebiomedical firms), to pre-product and post- region tend to be less medicated, reducing theproduct development (the number of drugs risk of patients using competing medicationsapproved).144 Such a scorecard of measures and compromising the integrity of data.helps to produce a more rounded picture ofnational sector performance. Some rapidly developing countries are emerging as major centres of R&D. The Indian pharmaceuticals sector is developing strongly,5.2 Individual firm performance in drug through greater involvement by multinationalsdevelopment can also be tracked as well as the growth of indigenous firms.For many years, performance in drug India now represents 13 per cent of the globaldevelopment at firm level has been assessed industry by value and its drug exports haveprimarily by tracking the speed and success at been growing by 30 per cent a year.147 Thewhich a firm is able to advance drug candidates Indian government estimates that the sectorthrough each phase of development. The key has the potential to generate revenues of 144. Rasmussen, B. (2005) 'Developing theindicators have been the numbers of drugs $22.4 billion in drug formulation by 2010.148 Biomedical Industries inentering and exiting each phase, with a focus Some countries have a highly focused approach Canada and Australia: An Innovation Systemson ensuring that there is a large enough supply to developing strengths, for example, the Approach.' Working Paperto ensure some success based on standard biomedical sciences sector in Singapore. 24. Melbourne: Centre for Strategic Economicindustry attrition rates. More recently, this has Studies, Victoria Universitybeen joined by estimations of the potential of Technology. 145. For example, Dranove, D.,value of a firm's portfolio. 6.2 Policy has focused on supporting and Meltzer, D. (1994) Do research in new fields Important Drugs Reach the Market Sooner? 'RANDIn assessing inputs, finer measures of resources Clearly, then, public support for research is Journal of Economics.' 25,committed to R&D may be preferable to the important. However, in the UK, specific support pp.402-422.R&D number reported by firms for accounting has been relatively narrowly focused. 146. Charles River Associates (2004) 'Innovation in thepurposes, such as the number of PhD scientists Pharmaceutical Sector.'on staff or hours spent on research activity. A national strategy for the bioscience sector London: Charles River Associates. was published at the end of 2003 based 147. KPMG (2006) 'The IndianIn measuring outputs, simply counting new on the work of the Bioscience Innovation Pharmaceutical Industry: Collaboration for Growth.'drug launches neglects the clinical performance and Growth Team (BIGT).149 One of its main London: KPMG.or commercial success of different drugs. recommendations was to develop a public 148. Department of ChemicalsDespite the best efforts of many researchers, and regulatory environment supportive of and Petrochemicals, Government of Indiait has been difficult to find agreed measures of innovation, as well as attract and retain a high (2005) 'Draft, Nationaldrug quality.145 Furthermore, new drug counts quality scientific and managerial talent base, Pharmaceuticals Policy, 2006.' New Delhi:ignore the incremental innovation to existing through two new programmes to support the Department of Chemicalsdeveloped drugs, such as simplified dosing, interdisciplinary education essential to the and Petrochemicals, Government of India.improved delivery methods, or the discovery of bioscience sector. The BIGT also recommendednew uses. This is an area requiring more work: the creation of a National Clinical Trials Agencythese measurements can directly shape health (NCTA) to support excellence in clinicalpolicy (not least decisions about the purchase trials and clinical research within the NHS,of a new drug). and establishing a network of bioprocessing centres of excellence. Subsequently – though not as a result of the BIGT recommendations – two world-class Bio-processing Centres of6. Innovation could be improved by Excellence have been established in Liverpoolgoing beyond research funding to and Edinburgh. The BIGT report also led to theensure a coordinated innovation policy establishment of bioProcessUK, a Knowledgefor pharmaceuticals Transfer Network.
43 149. The Bioscience Innovation and Growth Team (BIGT) Sciences Research Council, and the UK This requires the better coordination of science was established in 2003 biopharmaceutical industry, awarded £5 million funding with regulation and procurement. by the then Department of Trade and Industry to nine projects in 2006 and £3.5 million to For example, healthcare policymakers (DTI), the Department eight projects at seven universities in 2007, to understandably focus on short-term cost of Health and the BIA. The BIGT consisted of support faster and more efficient development containment, but in doing so they risk leading figures from and manufacturing techniques. undermining the widespread social and the bioscience industry, financial institutions, economic benefits that have long been universities, research There has also been strong support at the predicted from the radical changes in scientific bodies and government. See Bioscience Innovation regional level from local authorities, Regional understanding. In particular, new technologies and Growth Team (2003) Development Agencies (RDAs) in England and are likely to allow a small number of patients to 'BioScience 2015 – Improving National the Scottish Executive and Welsh Assembly be treated more effectively with personalised or Health, Increasing Government. The Welsh Development Agency specialised therapy, a very different approach National Wealth.' London: BioIndustry Association/ encourages technology transfer through the from the blockbuster model of developing Department of Trade and Wales Innovation Relay Centre, which runs therapies that treat a large population – and Industry/Department of Health. a Bioscience Brokerage Event that brings from existing regulatory models of assessing 150. The review led by Sir David together academic institutions with commercial the 'value' and safety of drugs. Cooksey was established in March 2006 to examine partners. Similarly, the RDAs have supported the best institutional the growth of bioscience, and specific bodies The industry is concerned that Health arrangements for the new single fund for health such as the Eastern Region Biotechnology Technology Assessment (HTA) methodologies research announced in Initiative and the London Biotechnology might fail adequately to recognise the value of the Budget. Cooksey, D. (2006) 'A Review of UK Network, which support bioscience clusters. incremental advances, for example, so-called Health Research Funding.' 'me-too' drugs. In the UK, NICE commissions London: HM Treasury. Finally, the Cooksey report in 2006 HTA reports that evaluate 'technologies' (not 151. Sheridan, D. (2006) Development recommended that the Medical Research only drugs but medical devices, procedures, and Innovation in Council should continue to support screening and settings for care) through the Cardiovascular Medicine. Discussion Paper 3. In fundamental science, but that new government synthesis or systematic review of scientific Atun, R. (ed.) 'Innovation funding should go mainly to translational evidence. It is important that HTA is based in Life Sciences: A Multidisciplinary research aimed at developing treatments and on appropriate methods to establish a drug's Perspective.' London: creating wealth.150 This was based on the view broader value, so that further incentives for Tanaka Business School, Imperial College London. that there had been insufficient emphasis on innovation are not undermined.155 This is 152. Attridge, J. (2006) turning achievements into new therapies and particularly important in the context of the Innovation Models in the Biopharmaceuticals Sector. making these commercially successful. debate over the reform of the Pharmaceutical Discussion Paper 2. In Price Regulation Scheme (PPRS), which the UK Atun, R. (ed.) 'Innovation in Life Sciences: A 6.3 Supporting incremental and continuous government has announced it is renegotiating Multidisciplinary as well as radical innovation should be part earlier than its previously scheduled date for Perspective.' London: Tanaka Business School, of a more holistic policy for innovation in renewal in 2010.156 Imperial College London. pharmaceuticals 153. Attridge, J. (2006) However, the continued success of the UK 6.4 The UK also needs to do more to Innovation Models in the Biopharmaceuticals Sector. pharmaceutical sector requires more than develop interdisciplinary skills Discussion Paper 2. In support for research. Given that incremental Given how the sector is changing, stronger Atun, R. (ed.) 'Innovation in Life Sciences: A and continuous innovation is as important as and more widespread interdisciplinary skills Multidisciplinary breakthrough innovation, policy should try and knowledge are crucial. Pharmaceutical Perspective.' London: Tanaka Business School, to ensure that it encourages and facilitates workers need an understanding across the Imperial College London. this broader innovation.151 In particular, there manufacturing chain, 'from the gene to the 154. As argued by Messinis, G. (2004) 'R&D Price needs to be a greater recognition of the product'. They must also understand the Inflation, Real BERD importance of diffusion and adoption, which relationship between a range of scientific and Innovation: Pharmaceuticals, OECD ultimately generate the returns to fund further disciplines and the business implications of the 1980-2000.' Working investments in innovation.152 interplay between those disciplines. In addition, Paper 18. Melbourne: Centre for Strategic the ability of physicians to work across a wide Economic Studies, Victoria This suggests the need to shift away from a range of scientific fields at 'the bench and University of Technology. narrow emphasis on inputs such as the science bedside' is critical to continuous innovation.157 155. Von der Schulenburg. J.-M. G. (2006) The base and outputs such as breakthrough Regulatory Environment products, toward a more balanced support For example, it would be pointless to develop for Pharmaceutical Innovation in Europe. for incremental innovation, adoption and a therapy that was not amenable to large-scale Discussion Paper 6. In diffusion.153 Another way of putting this is manufacturing or where the manufacturing Atun, R. (ed.) 'Innovation in Life Sciences: A that the focus of policy should shift from R&D or formulation costs were prohibitive. And Multidisciplinary inputs towards R&D productivity and returns to yet, the formulation of biopharmaceuticals is Perspective.' London: Tanaka Business School, R&D, or from science funding towards business not usually covered specifically in mainstream Imperial College London. performance.154 education (university pharmacy departments still tend to focus on small molecule
44pharmaceuticals). There is also very limitedpostgraduate research activity using industriallyrelevant models; as a consequence, it is rare tofind anyone with specific qualifications or skillsin the formulation of biopharmaceuticals at anylevel of a firm.158
New and emerging fields are very likely to 156. In February 2007, the Office of Fair Tradingincrease the demand for a cross-disciplinary (OFT) recommended thatapproach. For example, 'Systems Biology' the PPRS be replaced with a 'patient-focusedshould have a profound effect on drug value-based' pricingdevelopment.159 This groundbreaking scientific scheme, in which the prices paid for drugs reflectsapproach seeks to understand how all the the therapeutic benefitsindividual components of a biological system for patients. See Office of Fair Trading (2007)interact in time and space to determine the 'The Pharmaceutical Pricesystem's functioning. It allows insight into the Regulation Scheme.' London: OFT.large amount of data from molecular biology 157. Sheridan, D. (2006)and genomic research, integrated with an Developmentunderstanding of physiology, to model the and Innovation in Cardiovascular Medicine.complex function of cells, organs and whole Discussion Paper 3. Inorganisms, bringing with it the potential to Atun, R. (ed.) 'Innovation in Life Sciences: Aimprove our knowledge of health and disease. MultidisciplinaryYet in general, universities have been slow Perspective.' London: Tanaka Business School,to respond to such changes in the traditional Imperial College London.boundaries of subjects.160 158. BioIndustry Association/ bioProcessUK (2005) 'The ChallengesIt might also be that universities should include of Improving the Formulation and Deliveryofficially accredited courses on Pharmaceutical of Biopharmaceuticals.'R&D project management and alliance London: BIA/ bioProcessUK.management as part of a healthcare curriculum. 159. Academy of MedicalThis might also be achieved through an Sciences/Royal Academyinternationally recognised additional module of Engineering (2007) 'Systems Biology: Ato a PRINCE2 or similar project management Vision for Engineeringqualification. and Medicine.' London: Academy of Medical Sciences/Royal Academy6.5 Internationally, there should be of Engineering.innovative policy for neglected diseases 160. The Engineering and Physical Sciences ResearchThe under-supply of development in drugs Council's Life Sciencesfor diseases that primarily afflict poorer Interface programme has established 12 Doctoralcountries has led to a novel and high profile Training Centres thatpolicy proposal by Michael Kremer of Harvard offer an interdisciplinary approach to postgraduateUniversity. Kremer proposes 'advance training. Given that ascommitments', or promises to purchase a given noted modern medicine and biology presentquantity of a treatment for diseases like malaria challenges that requireor tuberculosis that otherwise attract very little input from mathematicians, physicists, chemists andinvestment.161 This policy is an example of a engineers, these Centres,'pull' approach to innovation, which contrasts based at universities, seek to supply appropriatelywith the 'push' of sponsoring or subsidising trained people who canR&D costs in targeted areas. 'Pull' refers to the work at the interface between engineering andexpected payoff from an innovation; 'push' the physical sciences andaffects the cost of research. Expected returns the life sciences. However, each Centre has beento R&D depend on both the payoffs and the funded to support only upcosts. The advance commitments, which would to five annual cohorts of up to ten students.be made by governments of relatively wealthy 161. Kremer, M., Glennerster,countries or philanthropic organisations, would R., and Williams, H. (2006) Creating Markets forguarantee profits to firms that successfully Vaccines. 'Innovations.' 1innovate. (1), pp.67-79.
45 Appendix B: Aerospace 162. Although the two main European aerospace Innovation through technological development and partnerships with an industries in the UK and France are of roughly increasing role for hidden innovation in business processes and services similar size in terms of turnover; see House of Commons Trade and Industry Committee (2005) 'The UK Aerospace Industry, Fifteenth Report of Session 2004–05.' London: The Stationery Office. 163. Society of British Aerospace Companies (2007) 'UK Aerospace Industry Survey 2007.' London: SBAC. 164. House of Commons Trade and Industry Committee (2005) 'The UK Aerospace Industry, Fifteenth Report of Session 2004–05.' London: The Stationery Office. 165. According to SBAC, 1. Aerospace is a comparatively small In some regions, aerospace forms the centre recorded in House of but very high-value-added part of the of high-technology clusters of design and Commons Trade and Industry Committee UK economy manufacture, with a large number of SMEs (2005) 'The UK Aerospace clustered around major manufacturer- Industry, Fifteenth Report of Session 2004–05.' The aerospace industry involves the assemblers (called 'primes') and larger London: The Stationery manufacture of aircraft and their components suppliers. Examples include the aerospace Office. as well as their maintenance, repair and industry based around Airbus UK (North 166. Department of Trade and Industry (2004) 'National overhaul (MRO). Wales), BAE Systems and Rolls-Royce in the Aerospace Technology North West of England, which accounts for Strategy, Implementation Report.' London: DTI. The UK has the second largest aerospace 54 per cent of the high-technology jobs in 167. Society of British industry in the world in terms of value the region.170 The Midlands has a significant Aerospace Companies (2007) 'UK Aerospace added.162 Turnover was £19.81 billion in aerospace cluster which directly generates more Industry Survey 2007.' 2006.163 The sector accounts for 0.6 per cent than 45,000 jobs, including Rolls-Royce in London: SBAC. of UK gross value added (GVA) or £5.5 billion Derby, Smiths in Wolverhampton and Goodrich 168. House of Commons Trade and Industry Committee – around 4 per cent of the value added of the in Birmingham and Wolverhampton.171 There is (2005) 'The UK Aerospace UK's manufacturing industry as a whole.164 also a significant aerospace cluster in the South Industry, Fifteenth Report of Session 2004–05.' The indirect contribution made through the West with Rolls-Royce and Airbus UK in Bristol, London: The Stationery sector's wider supply chains raises its overall and AgustaWestlands in Yeovil; the South West Office. 169. Society of British contribution to 1.2 per cent of GVA.165 Regional Development Agency is also the lead Aerospace Companies region for aerospace. (2007) 'UK Aerospace Industry Survey 2007.' The UK sector has increased its global market London: SBAC. share from 9 per cent to 13 per cent since There are currently two prime manufacturers 170. House of Commons Trade 1995.166 The industry is one of the UK's largest of large civil aircraft (LCAs): Boeing (which and Industry Committee (2005) 'The UK Aerospace exporters; it exports 63 per cent of its total is American) and Airbus (which is European). Industry, Fifteenth Report sales, with over £12.43 billion of export sales Airbus UK has sites in Filton, near Bristol, and of Session 2004–05.' London: The Stationery in 2006, contributing £1.54 billion surplus Broughton, North Wales.172 Office. to the balance of trade.167 There has been a 171. Midlands Aerospace Alliance/East Midlands consistently positive aerospace trade balance in Worldwide, there are three prime manufacturers Development Agency/ the past two decades. of civil aeroengines: General Electric (GE), Pratt Advantage West Midlands (2003) & Whitney (both American) and Rolls-Royce 'Midlands Aerospace The UK sector comprises over 700 companies (British), all of which manufacture engines Cluster Strategy.' Melton Mowbray/Nottingham/ including 400 MRO sites. It directly employs for both civil and military aircraft. Rolls-Royce Birmingham: Midlands over 124,000 people (an increase of more than is the world's second largest commercial Aerospace Alliance/East Midlands Development a quarter since 1995), and supports a total aeroengine manufacturer, with its main plants Agency/Advantage West of 276,000 jobs across the UK economy.168 in the UK in Derby, Bristol, Barnoldswick in Midlands. Over half of all establishments employ fewer Lancashire, and Ansty in Leicestershire. 172. GKN has been selected by Airbus as the preferred than five people, but over two-thirds of total partner for the acquisition employment is found on sites with more than There are also a number of manufacturers of the Filton site. 500 people. It is estimated that there may be of airframes and engines for smaller regional up to 2,500 aerospace SMEs in the UK.169 aircraft. The Canadian company Bombardier has a plant in Belfast (formerly Short Brothers). Bombardier Aerospace, Belfast products include
46aircraft components and engine nacelles for its Traditional innovation in aerospace is typicallyparent company and for Boeing, Rolls-Royce centred on high-cost and high-risk research-Deutschland, GE and Pratt & Whitney based product development programmes, with long development and payback cycles.174 ThisMajor suppliers include Smiths and GKN. innovation results in a change in the physicalSmiths Group is a world leader in electronic structure of an aircraft or the componentssystems for civil and military aircraft. It employs within it. These cycles are often determined5,500 people in 18 sites around the UK. Smiths by the relatively rare opportunities offeredAerospace was acquired by GE Aviation in 2007 by major new large civil aircraft developmentand is now named GE Aviation Systems. GKN programmes, such as the Airbus A380 and theis a large global first tier supplier, including Boeing 787.in aerospace, with technology leadership inadvanced aerostructures including composite Aerospace invests heavily in R&D. Businessstructures.173 GKN Aerospace has design expenditure on R&D (including defence) 173. Composites are combined materials which can ensurecentres with over 600 design engineers in was £2.54 billion in 2006 (an R&D intensity lower-weight but higherWeston-Super-Mare and Cowes in the UK, and of 12.7 per cent), the second largest after strength and stiffness structures compared toNashville, Tennessee, and Melbourne, Australia. pharmaceuticals.175 R&D in aerospace has traditional materials (in more than doubled in real terms since 1997, the case of aerospace in particular, carbon fibre compared with a rise of 12 per cent in reinforced plastics in manufacturing as a whole. The sector spends place of aluminium and titanium).2. Innovation in aerospace is 11.4 per cent of all R&D in the UK.176 Rolls- 174. For example, Jackson,increasingly distributed via complex Royce's R&D intensity in 2006 was 5.7 per I. (2004) The Future ofrisk-sharing partnerships but is also cent, Smiths 5.1 per cent, and GKN 2.1 per the Defence Firm: The Case of the UK Aerospaceembracing new business models and cent.177 Industry. 'Defence andprocesses Peace Economics.' 15 (6). pp.519-534. Even so, the innovation process is not linear. 175. Society of British2.1 Traditional innovation – mainly iterative Rather, it is cyclical and interactive, and Aerospace Companies (2007) 'UK Aerospacedevelopment – remains crucial but is involves a series of more modest gains made Industry Survey 2007.'becoming increasingly distributed primarily through incremental improvements London: SBAC. dictated by the manufacturing cycle, not the 176. Based on a study of the top 850 UK spenders on2.1.1 Traditional innovation is a mix of 'big breakthrough' of science-push models.178 R&D, Department forapplied research and iterative development In combination, however, incremental Innovation, Universities and Skills/Department for Business, Enterprise and Regulatory Reform (2007) 'The 2007 R&D Scoreboard.' London: DIUS/BERR. 177. Ibid. 178. Royal Aeronautical Rolls-Royce Trent 1000 engine The three-shaft design of the RB211 Society (2007) 'Trade was an ideal basis for the new family, as and Industry Committee, Creating a Higher-value- The Rolls-Royce Trent 1000 is the launch it provided flexibility. The three-shaft Added Economy, A engine for all three versions of the new system means that the large diameter fan Submission from the Royal Aeronautical Society 24th Boeing 787 aircraft. It represents the is isolated on its own shaft. This allows the October 2007.' London: latest in a comparatively low-risk policy of rest of the engine to be scaled in a variety RAS. 179. Rolls-Royce (2006) 'Rolls- continuously building on proven advanced of proportions to give different bypass and Royce Runs First Trent technology, in this case the Trent turbofan pressure ratios to suit the specific aircraft 1000 on Schedule.' Derby: Rolls-Royce. 'family' of engines.179 on which the engine is installed.
The Trent family are all derived from the The first Trent in service was the Trent RB211 engine, originally developed for the 700, which began commercial flights Lockheed L-1011 (TriStar), which entered on the Airbus A330 in 1995. Trent 1000 service in 1972. In the late-1980s, Rolls- innovations include power extraction from Royce decided that to succeed in the large the intermediate pressure system to produce engine market of the future, it would have the required electricity via a gearbox- to offer engines for every large civil aircraft. mounted generator. This solution, unique to In view of the enormous development costs three-shaft engines, will result in lower fuel required to bring a new engine to market, burn. The Trent 1000 also features the latest the only way to do this would be to have a 'intelligent engine controls' – including family of engines based on a common core. new-generation predictive maintenance tools (see section 220.127.116.11).
47 innovation has resulted in significant changes 2.1.2 Traditional innovation is becoming in the industry and its products. increasingly distributed between firms, suppliers and universities The timescale for the research and implementation of new products can be twenty 184.108.40.206 Suppliers are being given an increasing years. For example, Rolls-Royce's R&D 'Vision' role in innovation programme has three broad time bands: up Every prime manufacturer obtains components to five years (technologies available 'off- from across the world; all have collaborative the-shelf'); around ten years (technologies arrangements with firms in other countries. currently at the validation stage); and up Aerospace has extensive and complex supplier to twenty years and beyond (technologies networks, especially between airframe emerging or as yet unproven, the focus for the manufacturers and first-tier suppliers who firm's research base). Similarly, Airbus began often share the risk of innovation. talks with major international carriers about requirements for a 'super-jumbo' passenger While these supplier networks are not new, aircraft in 1991, but the first A380 plane these processes have been accelerating and entered service only at the end of 2007. deepening over recent years. Boeing now outsources 80 per cent of work.180 Airbus's Some of the most important recent and intention is to outsource around 50 per cent of ongoing traditional innovation has been in the aerostructure work for the new A350 XWB, areas such as the development of aeroengines up from its current rate of 25 per cent.181 capable of increased fuel efficiency and reduced emissions, the use of composite This is part of a long-term trend towards materials in aerostructures, and increased use globalised production. A major driver of this of electronic systems to replace hydraulic, trend is gaining access to markets, particularly 180. House of Commons mechanical and pneumatic systems. in Asia.183 In addition, aircraft are traded Trade and Industry Committee (2007) 'Recent in US dollars, a major advantage for US Developments with Airbus, manufacturers. European firms have been Ninth Report of Session 2006–07, Volume I.' moving to globalised production to reduce their London: The Stationery Office. 181. Ibid. 182. Ibid.
48disadvantage (a process called 'dollarisation'). company jointly owned by Pratt & Whitney,For example, for the first time, Rolls-Royce Rolls-Royce, Japanese Aeroenginesis to assemble some of its engines for wide- Corporation, and MTU Aeroengines (frombody passenger aircraft outside of the UK, by Germany). Each partner contributes anbuilding test and assembly plants in Singapore individual module to the V2500 engine, anand in the US. arrangement that enables each partner's engineers to focus their attention onThis globalisation is also reflected in the continuously refining that module. 183. In terms of aircraft delivery value (as opposed tolocation of R&D. In 2006 R&D spent overseas numbers of aircraft),by UK aerospace firms grew by 5.5 per cent Such extended innovation has been facilitated Asia/Pacific is forecast to become comfortablyand accounted for 16 per cent of total UK by using Product Lifecycle Management the largest market, with aaerospace R&D.184 There has been an increase (PLM) software and 'Innovation Technology' value of nearly $1 trillion, due to the large quantityin overseas R&D from £140 million in 1996 (IvT). PLM software manages every aspect of twin-aisle airlinersto £470 million in 2006.185 Sixty per cent of of a product's life cycle, from concept and expected to be delivered into the region comparedRolls-Royce's R&D investment and 40 per cent design, to manufacturing, maintenance once to the North Americanof new product development spending over the product is sold, and through to its eventual and European markets. See Rolls-Royce (2006)the past five years has been outside the UK.186 retirement. IvT includes eScience (computer- 'Market Outlook 2006-But these headline figures do not provide the intensive science that is conducted through 2025.' Derby: Rolls-Royce.whole picture of how innovation is increasingly highly distributed networks), virtual reality, 184. Society of British Aerospace Companiesdistributed. simulation and modelling techniques, and rapid (2007) 'UK Aerospace prototyping.190 Industry Survey 2007.' London: SBAC.For a start, innovation is increasingly being 185. Ibid.pushed down supply chains. First and second For the 787, Boeing is using PLM software 186. Rolls-Royce (2006)tier suppliers are being given increasing to reduce the four-five year time frame from 'Introduction, Rolls-Royce is a Global Companyresponsibility for traditional innovation, in areas concept to production by one year, or about Providing Power for Usesuch as R&D, engineering and design, tooling, 20-25 per cent, and reduce development on Land, at Sea and in the Air.' Derby: Rolls-Royce.testing, sub-system integration and pre- costs by 20 per cent, or from $12 billion to 187. Partners include Aleniaassembly (installing systems such as hydraulics, $10 billion.191 Its distributed approach to Aeronautica of Italyelectronics and controls). innovation relies on a 16 terabyte data master (main fuselage), Japan's Mitsubishi Heavy data repository for all design and engineering Industries (wings), FujiThis is most prominent in the case of the information located in Bellevue, Washington Heavy Industries (centre wingbox) and KawasakiBoeing 787. In the past, Boeing has designed state. Heavy Industries (partaircraft in-house, then passed blueprints for of the fuselage as well as the wings and landingparts or whole sections to manufacturing However, a greater reliance on PLM and virtual gear), and Goodrichpartners. For its new aircraft, Boeing is turning models and tests (as opposed to costly real- Aerostructures of Chula Vista, California (nacellesthis process on its head, designing the 787 world mock-ups or trials) can cause problems. and thrust reversers).in collaboration with partners. In effect, The delay to the production of the Airbus 188. Smith, D. J. and Tranfield, D. (2005) Talented6,000 engineers around the world are jointly A380 has been attributed to incompatibilities Suppliers? Strategicdesigning and engineering the aircraft.187 in the design software being used by teams in Change and Innovation in the UK Aerospace Industry. different countries. This has cost the company 'R&D Management.' 35This trend puts more pressure on the an estimated $6 billion.192 (1), pp.37-49.innovative capacity of suppliers, and has 189. See Bailey, J., and Clark, N. (2008) Parts Didn't Clickencouraged a rationalisation of supply chains 188.8.131.52 Universities are increasingly serving as Together for Boeing Jet.and a movement towards larger suppliers, with research centres for firms 'New York Times.' 17th January.primes focusing on procuring from far fewer, Traditionally, research-intensive companies 190. Gann, D. and Dodgson,more capable 'talented suppliers'.188 Even have conducted research in-house, using their M. (2007) 'Innovation Technology: How Newthen, some suppliers are said to be struggling own facilities and regularly recruiting graduates Technologies are Changingwith the new demands of the more delegated and PhDs. University-industry collaboration the Way We Innovate.' London: NESTA.innovation process. Delays in the delivery of is not new in aerospace, but some companies 191. Bartholomew, D. (2007)the Boeing 787 are said to be due to suppliers have been particularly active in establishing The Promise and Perilfailing to cope with the extent of their new links. For example, Rolls-Royce, as part of of PLM PLM: Boeing's Dream, Airbus' Nightmare.responsibilities.189 In one case, Boeing has had an overall policy of 'capability acquisition', 'Baseline.' 2nd May.to buy out a major 787 structures partner, has outsourced much R&D to universities, 192. Ibid.Vought, in the US because of the impacts that in particular by establishing (currently 29)Vought's underperformance was having on the University Technology Centres (UTCs) in the UK787 programme overall. and across the world.
Second, there are complex and overlapping Similarly, the Advanced Manufacturingcollaborations between firms. For example, Research Centre (AMRC) at the UniversityInternational Aeroengines is a multinational of Sheffield is a £45 million partnership with
49 Boeing that builds on the research within the lost through the very outsourcing that puts a University's faculty of engineering. The Centre greater emphasis on systems integration in the received initial government funding of nearly first place.195 £6 million from the then DTI and additional support from Yorkshire Forward RDA and the 2.2.2 Lean manufacturing European Union regional development fund. More generally, Lean manufacturing is probably the most important organisational 193. These are to achieve Universities tend to be particularly involved innovation for aerospace firm competitiveness. by 2020: a 50 per cent cut in CO2 emissions in emerging technologies. For example, the Efficiency and competitiveness in production per passenger-km, Environmentally Friendly Engine (EFE) is a processes have become as crucial to aerospace associated with a 50 per cent reduction in fuel collaborative programme for a new generation firms' survival as technology and product consumption; an 80 per of gas turbine engines, to contribute to the performance. The importance of Lean is cent reduction in NOx (nitrogen oxide) emissions; performance targets set by the Advisory strongly related to an increasing pressure on a reduction in perceived Council for Aeronautics Research in Europe costs (see 3.1). noise levels to half their current average value; (ACARE).193 The programme involves 11 and a reduction in engine partners, five from industry and six from Lean was first introduced in the automotive weight. academia (and is one of the Aerospace industry (see Appendix F) and subsequently 194. Partners in the research consortium are: Technology Validation Programmes under the extended to aerospace as well as other Rolls-Royce; Goodrich National Aerospace Technology Strategy, see manufacturing sectors. It focuses on the Corporation; Bombardier Aerospace (Belfast); 3.5).194 elimination or reduction of waste in various HS Marston Aerospace forms, and involves, inter alia, through-life (Wolverhampton); Unison Engine Components 18.104.22.168 Aerospace also benefits from management, inventory, cycle and lead time (Burnley); and the technology transfer from other sectors reductions, and quality management.196 following universities: Birmingham; Cambridge; Given the complexity of aircraft systems, Loughborough; Oxford; there are significant technology flows to and Lean can lead to a 20-40 per cent improvement Sheffield; and Queen's Belfast. from other sectors, including defence, marine, in productivity in aerospace SMEs, but UK 195. A point made in energy, ICT and software, and materials firms have lagged behind their US rivals in Newhouse, J. (2007) 'Boeing Versus Airbus.' sciences. In particular, there are many examples implementing Lean processes.197 To address New York: Knopf. of technology transfer between civil and these performance challenges, a UK Lean 196. Lean has been summarised defence aerospace. For example, Boeing has Aerospace Initiative (UK-LAI) was initiated in in five principles: precise valuation of specific benefited from research into composite wings 1998, jointly funded by the EPSRC and SBAC, products; identification by NASA, and advances in composite fuselages and involves Warwick, Nottingham, Bath and of the value stream for each product; ensuring are derived from Boeing's military programmes Cranfield Universities.198 In addition, the sector that value flows without including the B2 stealth bomber and the V22 has developed SC21, the Supply Chains of the interruptions; ensuring that that value is pulled Osprey joint service tiltrotor aircraft. 21st Century programme. from the producer; and that perfection is pursued. See Womack, J. P., and 2.2 'New' forms of organisational and 2.2.3 Through-life management services Jones, D. T. (1996) 'Lean business process innovation are becoming Pressure on costs in both the civil and military Thinking, Banish Waste and Create Wealth in Your more important in aerospace markets has left little or no profit from original Corporation.' London: equipment and parts sales (see 3.1).199 This Simon and Schuster. 197. Aerospace Innovation 2.2.1 Major firms are moving to become has led to new business models focussing on and Growth Team (2003) systems integrators aftermarket and long-term service contracts. 'An Independent Report Hidden innovation in aerospace focuses on on the Future of the UK Aerospace Industry.' changes in organisation or service delivery London: Department of (Type II hidden innovation). Trade and Industry. 198. A US precursor was 3. Aerospace innovation is launched in 1993 as a One prominent example is systems integration. determined by pressures on costs and partnership between the US Air Force, This refers to integrating components, skill environmental impact Massachusetts Institute of and knowledge from other firms, including Technology, labour unions, and aerospace businesses. suppliers, to deliver ever more complex 3.1 Costs and efficiency are the main drivers 199. Ward, Y. and Graves, products, services and systems. of innovation A. (2005) 'Through- The aerospace and air travel industries can Life Management: The Provision of Integrated Boeing and Airbus have become systems be highly cyclical, depending on the global Customer Solutions by integrators as they have outsourced more economy. Before 2001, the civil aerospace Aerospace manufacturers.' University of Bath School work. Their strategy is to retain their position sector was operating at full capacity with of Management Working at the highest value-generating point in the record production levels. Since 2001, a number Paper Series, 2005.15. supply chain, with close relationships with of events had caused a slowdown in passenger their customers. But this strategy carries air travel: the impact of the global economic some risk: the technical skills and intelligence slowdown; the terrorist attacks on the US on necessary for integrating systems effectively is 11th September 2001; continued uncertainty
50in the Middle East, including the conflicts in engineering rather than customer needs.Afghanistan and Iraq; and the SARS crisis in For example, it can be slow to adopt newAsia. engineering techniques, easily replicable designs or more flexible aircraft for customers.These cycles exacerbated the already often Low-cost airlines in particular require simplicity,brutal economics of the air travel industry. lower costs and lower environmental impact.Several major airlines have aging fleets andhave lost over $10 billion each year for the past This disconnect between manufacturers andfive years, making it difficult to invest in new customers can also occur at a macro-level. Overaircraft. This has driven the growth of leasing; the last two decades, Airbus and Boeing havenow more than 35 per cent of aircraft are persisted in building larger, longer-range, moreleased rather than owned by operators, making technically advanced aircraft, as opposed toleasing companies very important customers developing a smaller more flexible aircraft forfor aircraft. higher volume single aisle markets. Yet neither Airbus nor Boeing has designed a new 200These conditions can drive innovation. seat single aisle aircraft for over twenty fiveIncentives to reduce costs are particularly years, despite the fact that this type of aircraftstrong. For airlines, this means more efficient accounts for nearly 50 per cent of all civil(cheaper to run) aircraft. For manufacturers, aircraft sold. This may present an opening forit means Lean manufacturing, increased new competition from Asia.outsourcing, risk-sharing partnerships, supplychain management, and new business models 3.3 Reducing environmental impact hassuch as extended services. become increasingly important With the upward trend in fuel prices and3.2 Innovation is often inhibited by risk environmental concerns, there is strongreduction and conservatism demand for lighter aircraft, prompting the 200. Rolls-Royce (2008) 'Preliminary Results 2007.'At the same time, the emphasis on costs and increased use of composites in airframes and Derby: Rolls-Royce.reducing risk can lead to an understandable components, and more efficient engines. Theconservatism in product design and industry states that it has delivered a 50 permanufacture. This is a sector already quite cent improvement in fuel efficiency in the lastconservative in its dominance by product 30 years, and a 75 per cent reduction in noise
51 nuisance.202 But the issue of the environmental AeIGT also recommended the establishment impact of air travel is receiving increased public of a National Aerospace Technology Strategy and media attention. (NATS) as a partnership between industry, government and academia, to identify, Tighter EU regulations and the proposal to research and validate 'key' and 'enabling' include aviation CO2 emissions in the European technologies.205 More partnerships have been Emissions Trading Scheme (ETS) mean that developed through Aerospace Innovation there is an ongoing need to reduce CO2 and Networks (AINs) and Aerospace Technology NOx emissions. Research on lower-emission Validation Programmes (ATVPs). AINs aeroengine design is progressing in several comprise networked research institutes and directions, but continued reliance on fossil firms covering core research themes. ATVPs fuels seems inevitable for the foreseeable for the civil sector include powered wing, the future (alternative potential sources are ruled environmentally friendly engine, and more 201. Rolls-Royce (2006) out on energy intensity grounds). Greater electric aircraft. 'Market Outlook 2006-2025.' Derby: Rolls- environmental sustainability will also demand Royce. more 'technology insertion', reducing the 3.6 Workforce skills are crucial 202. Society of British environmental impact of older but still Aerospace is a particularly skill-intensive Aerospace Companies (2007) 'UK Aerospace operating aircraft. industry. However, there are identified skills Industry Survey 2007.' gaps in both technical areas and in wider London: SBAC. 203. See http://silentaircraft. However, the current evolution of existing skills. The latter include systems thinking org technologies is reaching its limit, and more and engineering skills, project management, 204. Aerospace Innovation radical designs of aeroengines will be process excellence, teamwork, problem-solving and Growth Team (2003) 'An Independent Report needed to achieve environmental goals. techniques, Lean thinking and application, risk on the Future of the There is research underway exploring how management, knowledge management, and UK Aerospace Industry.' London: Department of to reduce aircraft noise, from aircraft design business understanding and strategy.206 Such Trade and Industry. (shielding engines within the structure) to skills would better support the implementation 205. Society of British Aerospace Companies / new operations. A transatlantic collaboration of process excellence throughout the Department of Trade between Cambridge University and MIT is value chain, and faster and Leaner product and Industry/Aerospace Innovation and Growth working on a silent aircraft project, which has development processes. Team (2004) 'National already suggested significant improvements.203 Aerospace Technology Strategy.' London: SBAC/ DTI/AeIGT. 3.4 Safety and reliability have always been 206. As identified in the key concerns 4. Innovation is hidden because iterative Sector Skills Agreement for the Aerospace, A relatively unusual aspect of aerospace development is not part of formal R&D Automotive and Electronics innovation is the huge costs at the later stages and because organisational forms of sectors, completed in January 2006; see of development for validation and safety innovation are not well captured in Sector Skills Council for testing. The long-term operation of engines traditional indicators Science, Engineering and Manufacturing adds to the importance of this development Technologies (2006) stage; maintenance firms continue to service 4.1 Much traditional innovation in 'SEMTA Sector Skills Agreement, Electronics, engines that were originally designed and aerospace is iterative development rather Automotive and Aerospace manufactured decades ago. than research Industries.' London: SEMTA. Much traditional innovation in aerospace is 207. Royal Aeronautical 3.5 Publicly-supported strategic research iterative development rather than research; Society (2007) 'Trade and Industry Committee, initiatives are important for long-term one estimate suggests that the 'R' represents Creating a Higher-value- technological innovation only 10-15 per cent on R&D.207 Hence is it Added Economy, A Submission from the Royal Strategic aerospace R&D and innovation likely that much technological innovation is not Aeronautical Society 24th in the UK has been strongly influenced by captured in narrow measures of R&D (Type I October 2007.' London: RAS. the Aerospace Innovation and Growth Team hidden innovation). 208. Smock, S. (2007) 'Boeing (AeIGT), established in 2002 by the then DTI. 787 Dreamliner Represents The team comprised representatives from For example, the use of composite materials in Composites Revolution.' Design News. 4th June. industry, government, academia and trade the Boeing 787 – comprising 50 per cent of the unions, with an overall remit of determining aircraft's weight – is based on years of basic how to retain and improve the global scientific research into such materials.208 But competitiveness of the industry. Its subsequent Boeing and its major suppliers have also had to report recommended a re-focusing of R&D learn on the job how to manufacture and tool on technologies in which the UK can lead the such materials. The benefits of composites have world, and strengthening project management grown as Boeing's engineers have gained more and business processes in the sector.204 experience in production processes using these materials, sometimes in unexpected directions, even opening up new design possibilities. For
52example, Boeing engineers discovered that 5. Innovation could be better measuredcomposites are tougher than they initially by investigating its contribution toimagined, and the firm has been able to productivity and to environmentalguarantee customers that maintenance costs performancewill be 30 per cent lower than for aluminiumaircraft. This is a potentially bigger saving for 5.1 New measures should investigatecustomers than the 20 per cent reduction in the relationship between innovation andfuel costs the 787 can deliver compared with productivity, including hidden innovationother aircraft. The savings could be worth more Some measures combine the effects ofthan $3 billion over 20 years.209 traditional and hidden innovations. Productivity measures, such as GVA per worker or totalSuch 'practical research' often lies outside of factor productivity are probably the mostformal R&D processes. But the development useful.of efficient production processes for thesematerials is crucial to realising their potential Labour productivity (GVA per worker) in thebenefits; in this case, unless composites can be aerospace industry in the UK was estimatedmanufactured properly, they will not produce to be ahead of Japan and Spain in 2001, butthe weight gains and so savings in fuel costs behind its major competitors (US, Canada,that airlines demand. France, Italy and Germany).211 However, the UK may be catching up.212 209. BusinessWeek (2005) Boeing's Plastic Dream4.2 Organisational and business model Machine. 'BusinessWeek.'forms of innovation are not currently Interestingly, UK R&D has increased, but not 20th June. 210. Wang, C. I., and Ahmed,captured well in traditional metrics as fast as productivity. One explanation for the P. K. (2003), 'Innovation,Innovation and learning is a whole organisation rapid growth in productivity in the late 1990s Knowledge Management and Learning: A Case Studycapacity, which even highly technologically is that it was prompted by hidden innovations. of GKN.' Working Paperadvanced firms can struggle with.210 Firms need This was indeed the period when organisational Series. Telford: University of Wolverhampton.to design effective organisational forms that changes were becoming more common , 211. House of Commons Tradeensure the rapid and widespread circulation of including widespread merger and acquisition and Industry Committeeinformation (Type II hidden innovation). activity, greater supply-chain efficiency (2005) 'The UK Aerospace Industry, Fifteenth Report (including reductions in numbers of suppliers of Session 2004–05.'Furthermore, levels of investment to develop and increasing roles for those remaining), and London: The Stationery Office.service innovations such as Rolls-Royce's increased use of outsourcing. This requires 212. Braddon, D. and Hartley,TotalCare and similar services are not recorded further investigation. K. 'The Competitiveness of the UK Aerospacein surveys such as the Community Innovation Industry', AppliedSurvey, or often in R&D metrics. 5.2 Other business performance outputs Economics, Vol. 39, Issue 6, April 2007. could also be used to track the impact of 213. Society of British4.3 Aerospace also demonstrates the forms of hidden innovation Aerospace Companiesexploitation of largely existing technologies The UK Lean Aerospace Initiative (UK-LAI) has (undated) 'Aerospace Metrics Measures forto support other forms of innovation proposed the following metrics for improved Improved Competitiveness.'This can be seen in the way that advances in competitiveness in aerospace: London: SBAC.monitoring technologies have enabled real-time monitoring services such as that provided • Customer acceptance/rejection rate (quality)by Rolls-Royce's TotalCare, or the exploitationof PLM software to enable new, extended • Achievement of delivery schedules (customerforms of collaboration. These are forms of Type satisfaction)III hidden innovation. • Increased value added through waste4.4 Small-scale and localised innovation is eliminationalso importantAs in other areas of engineering, there are • Employee training and developmentsmall-scale problems in aerospace that aredealt with outside of formal R&D programmes; • Stock turnover rate (inventory reduction)these efforts may not be captured intraditional metrics (Type IV hidden innovation). • Floor space utilisation (smoother flows)213These could include day-to-day creativeimprovements in practice, use and adaptation These measures have yet to be applied.of materials and tools or collaborative workingarrangements.
53 214. Gindy, N., Hodgson, A., and Johnston, S. (2006) 5.3 Topic-specific research programme But the longer-term issue is with higher- 'Research Opportunities in outputs could also be tracked value-added activities. The cumulative stock Aerospace Manufacture.' National Advisory In addition to measuring inputs to innovation, of knowledge of leading aerospace firms Committee for Aerospace it would be useful to capture progress in represents a major barrier to entry for potential Manufacturing. NACAM was sponsored by the then selected, strategically important areas for competitors, as do the huge investments that DTI through the National innovation, perhaps against agreed 'technology are required for significant developments in Advisory Committees Knowledge Transfer roadmaps'. aircraft hardware. Network, reporting to the Aerospace Technology Steering Group (ATSG) For example, the National Advisory Committee Yet competition from emerging economies is and the National Defence for Aerospace Manufacturing (NACAM) growing.217 Some countries, such as Taiwan, Industries Council (NDIC) R&T committees. Its identified six priority research topics in its 2006 Indonesia and Brazil, have established their purpose is to advise the UK report.214 These were: surface engineering own aerospace industries. Regional aircraft on the future direction of aerospace manufacturing and coatings; net shape titanium; affordable producers such as Bombardier of Canada and research and technology. It composites; ultra low-cost tooling; digital Embraer of Brazil could move into producing consists of representatives from UK industry, manufacture; and assembly integration. larger aircraft. India and China are leveraging academia, DTI, EPSRC, NACAM suggested through its road mapping market access in return for investment and and MoD. 215. Royal Aeronautical exercise that the UK was falling behind the rest collaboration. China and Russia are making Society (2007) 'Trade of the world in the development of advanced efforts to develop regional jet programmes, and Industry Committee, Creating a Higher-value- manufacturing technology for aerospace with support from Western manufacturers Added Economy, A applications. anxious to get better market access. Both Submission from the Royal Aeronautical Society 24th could eventually become significant players October 2007.' London: 5.4 Social and environmental performance in partnership with Western firms, especially RAS. outputs should also be taken as a measure with well-funded, highly motivated state-led 216. Rose-Anderssen, C., Baldwin, J.S., Ridgway, of innovative performance investment strategies. K., Strathern, M., For traditional innovations, a list of measures Varga, L., and Allen, P.M. (2007) 'Learning reflecting current objectives and concerns The extent of Japan's involvement in the and Development in would include: emissions; noise; fuel development and production of the Boeing 787 Commercial Aerospace Supply Chains.' Irish consumption; engine efficiency; aircraft weight. could also represent a major opportunity for Academy of Management These indications are regularly monitored, and the Japanese sector to advance. Thirty-five per conference, 3rd–5th September. EU targets have been set for some of them. cent of the 787 will be manufactured in Japan. 217. House of Commons Trade The country's aerospace sector has succeeded and Industry Committee (2005) 'The UK Aerospace in gaining extensive and advanced work on Industry, Fifteenth Report the technology-rich wing design (and not just of Session 2004–05.' London: The Stationery 6. Innovation could be improved by its manufacture).218 Boeing has never before Office. developing support programmes that handed this kind of work to a subcontractor.219 218. McGuire, S. (2006) 'The embrace hidden innovation, to respond Japan has now developed expertise in most United States, Japan and the Aerospace Industry: to the long-term challenge posed by aspects of aerospace manufacture and has a Technological Change in new competitors declared intent to increase its share of the civil the Shaping of a Political Relationship.' Working aerospace market to 15 per cent by 2025.220 Paper. Bath: University 6.1 The UK will increasingly need to Mitsubishi and Kawasaki have announced plans of Bath. 219. One analysis also compete with new entrants as the global for short-range and regional aircraft. emphasises that Boeing balance of power begins to shift gains access to cheaper finance through this The UK must retain high level systems In addition, a new paradigm for aerospace approach, since the first integration capability. This is where the production may be emerging. Cheaper, more tier suppliers help to finance the programme; greatest value is created.215 The assumption efficient approaches to production have been see Newhouse, J. (2007) that this 'total capability' can be maintained in demonstrated by smaller innovative firms. 'Boeing Versus Airbus.' New York: Knopf. leading countries while distributing ever more For example, US firm Eclipse Aviation has 220. As noted in Gindy, capabilities to other countries needs to be launched its Eclipse 500 four-six seat 'air taxi'. N., Hodgson, A., and examined more critically. Ex-automotive sector executives founded Johnston, S. (2006) 'Research Opportunities in Eclipse with the expressed aim of producing a Aerospace Manufacture.' As in so many other areas of manufacturing, highly-reliable, low-weight aircraft selling for National Advisory Committee for Aerospace increased competition from low-cost $1 million. The 500 is 50 per cent cheaper to Manufacturing. economies has increased pressure at the operate than similar aircraft.221 221. For example, the Warwick Innovative Manufacturing lower value-added end of the UK aerospace Research Centre at the supply chain. Small, lower-technology firms Toyota and Honda both have small aircraft University of Warwick has begun to investigate often lack the capacity to make the kinds of at advanced stages of development. The opportunities for organisational and process changes required to announcements from Honda and Toyota simplifying aircraft design through manufacturing stay competitive.216 on their prototype small executive aircraft excellence. suggested that, taking account of their history, the emergence of a new paradigm is highly
54possible. The longer-term critical question is What is most crucial is that such supportthen whether UK aerospace firms can remain includes a focus on disruptive technology. Forcompetitive against the emerging threat from example, Rolls-Royce's core technology andsuch new entrants. capability is centred on the gas turbine, across all of the sectors in which it operates (civil6.2 Programmes of support should embrace and defence aerospace, marine and energy).hidden innovation as well as anticipate The relatively rapid emergence of a disruptivedisruptive technologies new technology could seriously challenge its 222. For example, the Materials KTN supports – and many other firms' – existing knowledge, activities such as the6.2.1 Existing policy interventions focus on expertise, and business models. WINGNet network, aimed at identifying thenew products, as opposed to business or critical materials sciencecommercial innovations 6.2.2 Strategic support programmes should required to improve the UK's performance in theIn the short- to medium-term, the UK has to be widened to include hidden innovation, sustainable use of materialsremain attractive to major firms as a place to possibly as part of a national policy for in the aerospace sector. Similarly, the Nationallocate their innovation activities including R&D. aerospace Composites Network is aSuch competitive pressures demonstrate the In the longer-term, the UK aerospace sector will KTN that embraces the entire UK compositesimportance of government R&D support in need to respond not just to new technologies, industry and its supplyaerospace. but to new business models, processes and chain. It is establishing Regional Centres of services developed by competitors. Excellence where firms canThe aerospace sector can apply for support obtain hands-on support and expert advice, suchfor R&D under the Technology Programme, First, the developing challenge from emerging as the Airbus Compositewhich includes the Collaborative Research & competitors needs to be formally assessed, Structures Development Centre at Filton, andDevelopment (CR&D) grant and Knowledge including a review of their national strategies the GKN AerospaceTransfer Networks (KTNs), and of course for aerospace.225 Composites Research Centre at Cowes on the IsleR&D tax credits for activities that qualify.222 of Wight.Aerospace was granted around £153 million Second, NATS, however important, is not a 223. Subsidies such as RLIthrough the Technology Programme between national aerospace strategy, in the sense of a have been a long-running matter of dispute betweenApril 2004 and April 2007 (£110 million from broader vision beyond technology research and the US and Europe oncentral funds – more than a quarter of total development. Government should consider the behalf of Boeing and Airbus. The EU has claimedTechnology Programme funding – and £43 need for such a national strategy in response to that US subsidies formillion from the regions), an estimated £60- the analysis of emerging global competitors. Boeing have cost Airbus $27 billion in losses, while£80 million each year through R&D tax credits, the US Government hasSelective Finance for Investment/Regional Third, such a strategy (or failing that, a revised argued that Airbus has wrongly enjoyed subsidiesSelective Assistance of more than £33 million NATS) should encompass forms of innovation of up to $205 billionin 2006, as well as support for overseas sales beyond scientific and technological research. over the past decades; BBC News online (2007)campaigns. For the UK industry to remain competitive, 'Boeing's US Aid 'Hurting the AeIGT considered that it must exceed US, Airbus.' 26th September. 224. Paragraph 37, HouseRepayable launch investment (RLI) – commonly French and German productivity levels by of Commons Trade andreferred to as 'launch aid' – is also available. 2022.226 Industry Committee (2007) 'Recent Developments withThis is justified on the basis that aerospace Airbus, Ninth Report ofprojects are characterised by high costs and This will require increased performance in Session 2006–07, Volume I.' London: The Stationerylong payback periods. RLI payments are all forms of innovation. AeIGT argued in Office.made for eligible development costs to firms 2003: "Key to driving a step change in UK 225. The House of Commonsin the early years of a project. Repayments performance is recognition that Process Trade and Industry Committee recommendedto government are usually based on a per- Excellence Implementation is equally as in 2005 that governmentaircraft or per-engine basis, with a target rate important as Technology Demonstration."227 should conduct an official study into the threat fromof interest and specified time period. The emerging competitors.provision of RLI is entirely discretionary; there This is why initiatives that focus on developing 226. Aerospace Innovationis no formal scheme, promotion or budget.223 expertise within supply chains are important. and Growth Team (2003) 'An Independent ReportAround £1 billion of RLI has been provided For example, in 2006, the North West on the Future of thesince 1997. Aerospace Alliance launched its Aerospace UK Aerospace Industry.' London: Department of Supply Chain Excellence Programme in Trade and Industry.In total, the former DTI estimated that annual partnership with Airbus, BAE Systems and 227. Aerospace Innovation and Growth Team (2003)funding for the sector has risen to £45 million Rolls-Royce and with support from the 'An Independent Reporta year (now around £50 million) – more than Northwest Regional Development Agency. on the Future of the UK Aerospace Industry.'twice the level of public support provided This aims to equip firms with the knowledge London: Department ofunder the previous funding system, but not yet and skills to manage innovation, at the Trade and Industry: p.91.at the level of the 'required' £70 million per operational and strategic levels. Specifically, itannum set out in NATS.224 aims to integrate the management of market, technological and organisational factors to
55 improve the competitiveness of the North West's aerospace firms.
56Appendix C: Telecommunications 228. This includes: terminal equipment (fixed line phones, PBXs and mobileInnovation through technological disruption and communication handsets); cables and infrastructure (broadcast,convergence leading to a role for hidden innovation via new service provision fixed, and radio/mobile); switching components and associated installation services (infrastructure technologies, offered as hardware or software modules and associated with delivering peer2peer, push2talk, ad-hoc and mesh networks, and SMS-to-voice conversion, as well as radio frequency technologies such as Bluetooth, Sensor Area Networks (Zigbee), VoiP and Ultra Wide Band). See UK Trade and Investment (2007) 'ICT Marketing Strategies: Evidence Base' [CD-Rom] London: UK Trade and Investment. 229. Ofcom estimates the sector to have a turnover1. Telecommunications is an important sector, with the remaining 28,000 people of around £47 billion. Theeconomic sector in its own right, employed in other industries).232 discrepancies in the figures are because ONS estimatesvital to the UK's competitiveness as a include revenues fromknowledge-based economy The sector includes large players who services such as network hardware provision and provide a wide range of infrastructure, maintenance (whichThe telecommunications sector involves: products, applications, and services through Ofcom do not regulate). Office of Communications(i) telecommunication services (fixed-line to small firms that have a single product or (Ofcom) (2007) 'Thetelephony services, mobile services and service offering. In the UK, BT continues Communications Market 2007'. London: Ofcom,broadband) and (ii) telecommunications to be the largest fixed-line provider, with Chapter 4: pp.271-272.equipment and network supplies.228 an estimated overall UK turnover of £17.2 230. The Office for National billion and accounting for 37 per cent of Statistics (2006) 'Input Output Analyses 2006These two main groupings of activities have total telecommunications turnover.233 Other Edition.' London: ONS.a number of important sub-segments, which smaller fixed-line providers in the UK are 231. Inter Departmental Business Registercomprise the supply chain: Vanco, Eircom, and Kingston Communications (2004-2007) 'Analysis (KCOM). These firms have varied business of UK Local Units in VAT based Enterprises' [online]• Network operators (such as BT, Cable & portfolios: Vanco is a virtual operator focusing Available from http:// Wireless, Vodafone, O2, Thus, Orange – who on communications services for enterprise www.statistics.gov.uk/ idbr/idbr.asp are fixed line and/or mobile operators); clients, IT outsourcers and carriers. Eircom is 232. e-skills UK (2008) mainly a fixed line operator, but also has a 'Technology Counts - IT &• Systems and networking software mobile business. Kingston Communications Telecoms Insights 2008.' London: e-skills UK. (providers of technology such as Convergys, (known as KCOM) sells integrated IT and 233. However, internationally, LogicaCMG); communications services to businesses, and BT's revenues are lower than those of comparable internet and telecommunications services to European firms, partly• Data and networking equipment (suppliers of selected consumer markets within the UK (see because it doesn't own a mobile network equipment such as Alcatel-Lucent, Siemens- Section 2.1.1 for further detail.) business. In 2006 BT's Nokia, Motorola, Avaya, Oracle, Ericsson, global turnover was £20.1 billion while Deutsche Cisco Systems); and There are five mobile network operators in Telekom and France the UK (Vodafone, O2, T-Mobile, Orange and Telecom reported revenues of £42 billion and £36• End-user communications equipment (for 3), and together with independent service billion respectively. Office example, D-Link, Siemens, Telsey). providers and mobile virtual network operators of Communications (Ofcom) (2007) 'The (MVNOs) – such as Virgin Mobile and Tesco Communications MarketTotal industry revenue was estimated at £56.7 Mobile – contribute around 35 per cent of total 2007'. London: Ofcom. Chapter 4: p.272.billion in 2006.229 The UK sector continues UK telecommunications turnover.234 234. These new entrants toto make a significant contribution to the UK the sector are discussedeconomy, with £21.3 billion in GVA in 2004, The telecommunications equipment in Section 2.2.1. Office of Communicationsequating to 2 per cent of total gross value sector has a small number of large global (Ofcom) (2007) 'Theadded for the UK.230 players.235 Equipment manufacturers aim to Communications Market 2007'. London: Ofcom. develop products for the next generation Chapter 4: pp.271-272.There are around 8,500 firms in the UK sector of telecommunications networks. A numberand 56,000 people are employed either of firms have expanded their R&D activitiesdirectly or indirectly in the sector231 (28,000 in key telecoms technologies: Motorola,professionals are employed directly in the Nortel Networks, Ericsson and Alcatel-Lucent
57 235. Telecommunications is a scale economy business, Technologies have established Centres of enabler and transformer in the information, and so operators looked to Excellence in advanced technologies and communication and technological revolution buy technology from firms who could supply industry- have significant R&D facilities in the UK. For More technological innovation took place wide solutions. This led example, Lucent and Motorola have their world in the telecommunications sector in the last to the emergence of national champions within headquarters for UMTS (Universal Mobile two decades of the 20th century than in the the network equipment Telecommunications System) in the UK because preceding 150 years.240 provider community – GEC and Plessey in the UK, of the UK's strengths in wireless technologies. Alcatel in France, Siemens In addition, Alcatel has its key manufacturing The sector has recently experienced a hugely in Germany, Ericsson in Sweden, and Lucent in the operation for the submarine cable sector in the innovative phase, with technologies emerging US. These firms became UK and Nokia and Siemens have significant that have considerably impacted the evolution the primary source of new technology and innovation research centres for third-generation (3G) of modern communications, from distribution used by operators. mobile in the UK.236 technologies (for example, digital, broadband 236. UK Trade and Investment (2007) 'ICT Marketing and mobile) to consumer devices (for example, Strategies: Evidence Base.' Over 50 per cent of the sectors' revenues are MP3 players, Blackberries and the iPhone).241 [CD-Rom] London: UK Trade and Investment. generated by firms located in London, the 237. Department for South East and East of England and this total Traditionally, network operators have invested Business Enterprise and exceeds 75 per cent when the North West, significantly in the research and development Regulatory Reform (2001) 'Competitiveness in the Yorkshire & Humberside and the West Midlands of new technology. BT regularly reported UK Electronics Sector.' are included.237 Regional clusters can be found annual investments of around £300 million in London: BERR. Chapter 2. 238. UK Trade and Investment near Cambridge, around Bristol and Edinburgh. R&D.242 This resulted in the filing of patents (2007) 'ICT Marketing Cambridge hosts research centres for a number (for example, BT developed early fibre optics, Strategies: Evidence Base' [CD-Rom] London: UK of communications multinationals (such as and registered World Wide Web hyperlink Trade and Investment. ARM, AT&T, Broadcom, Cambridge Silicon patents) and the deployment of proprietary 239. Ibid. Radio, Nokia, Nortel, Qualcomm, Symbian, systems – BT's proprietary Customer Services 240. The first technical innovation in the and Toshiba) building on a long academic and System (CSS) is a good example. Introduced in sector - the telegraph industry tradition in wireless technology. Virtual 1986, CSS provided BT with all the information (messaging using Morse code down wires) - was groupings such as the Institute of Advanced to support its core customer activities, from patented in 1836. Voice Telecommunications have also developed, billing and order taking to sales support and communications followed in the late 19th century concentrated around key universities and fault recording. By 1999 it was the biggest – (Alexander Graham Bell the international research centres of many civilian computer system in Europe.243 Today, invented the telephone in 1876) and this quickly of the largest global firms.238 A number of BT's R&D agenda focuses on wireless data became established international firms have established their services, software development to facilitate as the main form of communicating. European headquarters in the UK (for example, telecommunications networks and upgrading 241. Fairbairn, C. (2006) Serving the Japanese NTT DoCoMo and, more recently, parts of the copper wire networks to higher the Public Good in the all the Chinese operators). capacity optical fibre networks.244 Digital Age: Implications for UK Media Regulation. In Richards, E., Foster, R. The UK is a centre of excellence in niches of Total expenditure on R&D in the fixed- and Kiedrowski, T. (2006) 'Communications - The the sector, particularly in the development of line sector in 2006 was £1.127 billion. BT Next Decade: A collection advanced 3G mobile products and services, accounted for virtually all of this: a total of of essays prepared for the UK Office of as well as short-range wireless technologies, £1.119 billion with an R&D intensity of 5.1 Communications.' London: such as Bluetooth. The UK also has a strong per cent.245 Excluding BT, R&D intensity is The Stationery Office. Chapter 2. communications R&D skills base; in particular relatively low for the remaining fixed-line 242. Ten years ago, BT spent in RF and mixed signal design (analogue and telecommunications: with Vanco at 2.8 per £307 million on R&D. Many of BT's peers digital).239 cent, Eirco at 0.1 per cent and KCOM at 0.1 did the same: in 1999, per cent. Sales in the fixed-line sector grew France Telecom invested €593 million in R&D and by only 4 per cent during 2006 but BT, in Deutsche Telekom spent particular, chose significantly to increase R&D €700 million on R&D. 2. Innovation in telecommunications investment (by 54 per cent). The fixed-line 243. Harrison, P. F. (1997) Customer Service Systems has delivered profound technological telcommunications' ratio of R&D investment – Past, Present and Future. changes in recent years, which in to sales has risen sharply over the last five 'BT Technology Journal' 15 (1), pp.29-45. turn, is enabling new forms of service years – and is unique in doing so; this matches 244. Department for Innovation, innovation and business models the sector's growth in R&D investment (up Universities and Skills/ 54 per cent in 2006 and 94 per cent over the Department for Business, Enterprise and Regulatory 2.1 Traditional innovation is technologically average R&D in the four prior years). This is Reform (2007) 'The 2007 focused, and is a mix of radical and because the sector has had to invest heavily R&D Scoreboard – Fixed- Line Telecommunications incremental development into Internet Protocol (IP) networks (see Sector Summary.' London: Section 126.96.36.199). IP networks are expected to DIUS/BERR. 2.1.1 Innovations in technological significantly lower future operating costs and connectivity, provided by the deliver returns on current investments.246 telecommunications sector, have been a key
58The types of technological innovation created Switched Telephony Network (PSTN) andby the sector – some created a generation ago telex (messaging) were the primary meansbut which have enabled more recent advances of communication between two fixed points.– include: Significant migration of domestic internet connectivity from dial-up to broadband started184.108.40.206 The switch from analogue to digital in 2000 and has continued annually.248 WithBy the end of the 1960s, the technology for PSTN only voice calls, faxing or making dial-upswitching from analogue (sound waves) to internet calls were possible. Broadband offers 245. Consisting of £741 million of capitalised softwaredigital had been tried and proven. The Post a far faster and richer 'triple-play' experience development – a re-Office (the national monopoly operator at (with voice, fast internet access and video focusing of its business mix towards IT servicesthat time) was ready to transform Britain's all available simultaneously), but also the - and £378 million oftelephone network from analogue into potential for the communications operator to R&D operating costs. See Department for Innovation,digital based on electronics and binary data offer far more services than it has in the past Universities and Skills/transmission. This would make Britain's network (see Section 2.2.2). Department for Business, Enterprise and Regulatoryone of the most advanced in the world. Reform (2007) 'The 2007 126.96.36.199 Internet protocol and next generation R&D Scoreboard.' London: DIUS/BERR.System X was conceived by the Advisory Group networks 246. Department for Innovation,on System Definitions, an alliance involving Most networks have been designed to deal Universities and Skills/the Post Office and industry groups, and with narrowband (PSTN) communications Department for Business, Enterprise and Regulatoryset up in 1968 to define the shape of the traffic, with most data traffic handled in Reform (2007) 'The 2007future telephone network and how it could overlay networks of various types. With the R&D Scoreboard.' London: DIUS/BERR.be achieved. Collaborative development advent of Internet Protocol (IP),249 voice (both 247. In 1975, a new R&D centrebetween the Post Office and its three principal fixed and mobile), data, and video traffic can opened at Martlesham Heath in Suffolk. Todayequipment suppliers – GEC, Plessey and STC – be transported in the same way (as packets of it is one of the mostculminated in the first of the British-designed data) and on the same network. There have advanced centres for telecommunicationsdigital switching systems called 'System X'. been a number of next generation network research in Europe. It has (NGN) programmes in the sector designed supported many 'leading edge' developments,The development of System X exchanges to collapse the overlay networks into one.250 including BT's pioneeringwas the cornerstone of modernisation of This move to all-IP networks is only possible work on optical fibre technology and submarinethe existing network, by replacing analogue because of the move from analogue to digital cable transmission systems.exchanges with digital switching centres a decade earlier. Moving to all-IP networks Now called Adastral Park, it is host to a science parkinterconnected with digital transmission also enables operators to extend their network and is one of BT's fivelinks. It enabled an increased variety of reach beyond the network termination point satellite earth stations.facilities and services to be made available (NTP, that is, the socket on the wall) into the 248. Fairbairn, C. (2006) Serving the Public Good in theto the telecommunications user, resulting in home and office and to offer new services (see Digital Age: ImplicationsISDN (Integrated Services Digital Network) Section 2.2.2). for UK Media Regulation. In Richards, E., Foster, R.,and ISDN 2. The System X family of digital and Kiedrowski, T. (2006)exchanges marked a leap forward into the era Next generation networks are a significant 'Communications - The Next Decade: A Collectionof microprocessors. focus of R&D investment for the sector and of Essays Prepared for the UK; IP networks are expected to for the UK Office of Communications.' London:The change from the old-style technology to significantly lower operating costs and provide The Stationery Office.modern digital switching was a lengthy process, a more flexible platform for new services (for Chapter 2.involving collaboration, research, development example, consumers will be able to access 249. First developed in the US in the 1970s, Vintand testing.247 voice and data from any device). Whilst the Cerf was co-designer fixed-line sector has had disappointing growth (along with Bob Kahn) of the mechanisms knownBut the switchover changed the underlying and profitability over the last few years, such as transmission controlcommunications technology and enabled new investments are expected to deliver high protocol (TCP) and the internet protocol (IP).far more fundamental change a generation returns in the future. The most prominent The protocol freed uplater. Digital network technology increased NGN is BT's 21st Century Network programme the amount of traffic the internet could carrythe bandwidths available and increased data (21CN), with BT investing £10 billion and Cable and the new bandwidthtransference rates dramatically to speed up & Wireless and Colt are also investing heavily opened the doors to all the content available todaydata communications, making the innovative in NGNs. and enabled the internet'soffering of broadband possible. capability to be used by everybody. 126.96.36.199 Mobile and wireless technologies184.108.40.206 The development of broadband The technologies used for communicationDuring the late 1990s and early 2000s, are changing. Fixed phones and desktops arebroadband became the successor to connected to the fixed network infrastructurenarrowband (public switched telephony service) using either narrowband (PSTN) or broadbandconnectivity in the home and workplace. For (usually asynchronous digital subscriber linemost of the 20th century the voice Public – ADSL – technology). Mobile connectivity to
59 wireless networks uses different technologies, an important part of the innovation process, most typically UMTS (universal mobile ensuring firms remain competitive with their telephony service, or third generation mobile service or product offering and retain market – 3G), GSM (global service mobile, or second share. Indeed, it has been estimated that up generation mobile – 2G), or WiFi, as used with to 90 per cent of firms' development resources laptops. are being used to support the introduction of service line extensions and feature The pace of change in mobile technologies enhancements on products.252 For example, is unrelenting.251 Just as GSM succeeded whilst the underlying technology (2G or 3G) analogue, UMTS/3G mobile technology remains the same, handsets have continuously is replacing GSM. The promise of 3G is to improved in terms of functionality (voice, SMS, deliver broadband-like speeds to mobile MMS, MP3, photos), specification (battery life, devices, opening the internet to mobile-users. photo resolution, storage capacity), and design UMTS is in turn being superseded by HSDPA (from tablet to clam shell, and the current (high speed digital packet access) with the slider-phones). The effect of this incremental development of 4G predicted as the next new innovation is that it has transformed the wave of mobile technology. mobile from being a communications-only device (voice plus text) into one that also Wireless technologies have also emerged: WiFi caters for entertainment (music and TV) and 250. Department for Innovation, is the most prevalent (offering broadband photography. Universities and Skills/ Department for Business, connectivity within enabled buildings and Enterprise and Regulatory public hotspots) for laptops, and WiMax (which 2.1.3 Process innovation Reform (2007) 'The 2007 R&D Scoreboard.' London: offers broadband wireless access for laptops to European operators such as BT, France Telecom DIUS/BERR. towns and districts). Bluetooth technology is and Deutsche Telekom are all investing heavily 251. Although, the time it takes to develop and deploy now widely used for hands-free connectivity in 'internal IT processing factories'. These back technology is far longer and technologies such as NFC (Near-Field office operational support systems are intended than may be realised. For example, the deployment Communications) which is used on applications to automate, integrate and simplify internal IT of third generation (3G) such as the Oyster cards on London transport. processes, radically improving customer service wireless technology was four years behind initial and reducing costs. This type of innovation expectations. 2.1.2 Incremental innovation is central to the long-term viability of the 252. Innovaro (2005) In addition to the more radical innovation that traditional communications service providers. 'Innovation Briefing: Teleco Innovation.' London: has taken place within the sector over recent Operators will need to become efficient at data Innovaro Ltd. years, incremental innovation also counts for processing, where the lowest cost will ensure 253. Put simply, a process of understanding how radio a significant amount of activity, and remains competitive advantage.255 waves travelled across geographical environments and where mast antennas should be located to receive mobile signals. 254. Spufford, F. (2003) 'Backroom Boys. The Secret Return of the British Vodafone achieved the licence requirement of 90 Boffin.' London: Faber and Faber. per cent coverage of the UK population Vodafone started life in Racal (a military by 1987 (two and a half years early). electronics company). Along with its US Vodafone and Cellnet competed, but also partner Millicom (and the other licensee co-operated, in areas such as advertising BT's Cellnet), it was the first to get a licence and price, in order to sell the idea of mobile for public mobile telephone services in communications and to protect revenue, to 1982 (beating companies such as Ferranti, the benefit of both. As Vodafone became Plessey and GEC). Racal's system for voice an increasingly large contributor to Racal's and data would be called Vodafone. Over income, a decision was taken in 1988 to a two year period, a small team of Racal turn Vodafone into a company in its own engineers designed and planned a detailed right. In 1989, the Department of Trade and innovative approach to a cellular and Industry issued new licences to develop network.253 Radio planning was to be new networks and increase competition Vodafone's technical core competency with enabling Orange and One2One to enter the which it would compete with its rivals. mobile market. Vodafone has developed into a global player, with a turnover of Accepted by early adopters, there were £1.209 billion, and 8.8 million customers 19,000 people signed to Vodafone mobile in 25 countries in Europe, the Middle East, services by 1985 and Vodafone had Asia Pacific and the US.254
602.2 Technological innovations in companies (Vodafone, T-Mobile, Orange, andtelecommunications are enabling a range O2), and Sky257 have been able to provideof new service innovations, provided services to customers (such as broadbandby 'traditional' operators but also new services at a retail level) stimulating greatersuppliers, and new ways of collaborating competition and innovation.
2.2.1 Innovation within the supply chain is 2.2.2 New service innovations and businesschanging, as new suppliers enter the sector models 255. Ofcom (2005) 'Final Statements on theMarket liberalisation has nurtured competition New technology enables new services; this Strategic Review ofto such an extent that firms from other sectors, has been evident since the foundation of Telecommunications.' London: Ofcom.often with no previous sector experience, can the telecommunications industry.258 With 256. During the last quarternow freely enter the market. Technological technological advances, traditional revenues of 2007, Skype had 246convergence is also driving this trend (see from calls and lines have declined. For million customers. 257. Financial institutions (forSection 3.3). example, mobile telecommunications services example, Fidelity at Colt) revenues are expected to plateau across and also private equity (for example, the CarlyleTraditionally, network operators (such as BT) Europe. Mobile penetration in most developed group) are also enteringprovided services to customers based on the countries now exceeds 100 per cent, and the market; see Ovum (2007) 'Private Equitytechnology and equipment purchased from revenues are expected to continue to grow and Telecoms: Why Nowequipment suppliers (for example, Oracle, slowly as operators offer more services over and What Next.' London: Ovum Plc.Cisco and Ericsson), who in turn purchased 3G networks. Fixed voice telecommunications 258. However, Edquist arguescomponents from sub-contractors: a 'bottom- services revenues are declining rapidly but that service innovationsup' supply chain. Now, operators no longer fixed line data services (broadband) continue and technological innovations in thehave a monopoly on providing innovative to grow, and the UK has the second highest telecommunicationsproducts and services to customers. New total of broadband connections in Europe after sector are converging and becoming criticallyentrants, from outside the sector, have entered Germany.259 interdependent, seethe market. Suppliers (such as Cisco and Edquist, C. (2003) 'The Internet and MobileMicrosoft) also deal directly with the customer. Consequently, operators have sought to use TelecommunicationsConsumers are also feeding into the process innovative new services to drive or renew System of Innovation.' London: Edward Elgar(see Section 2.2.3). The supply chain is no revenue growth.260 Examples of mobile Publishing.longer purely linear and one-way. phone services include voice and messaging 259. UK Trade and Investment (SMS) and MMS (multi-media messaging (2007) 'ICT Marketing Strategies: Evidence Base'Started in 2003, Skype, for example, launched using photos and video clips) with recent [CD-Rom] London: UKvoice over IP (VoIP) based on using broadband developments including TV services being Trade and Investment. 260. Fairbairn, C. (2006) Servingconnectivity to by-pass PSTN interconnection picked up on mobiles – a service developed the Public Good in thetolls and access the 'free' internet256 and was so in Korea but being trialled in the UK by O2 Digital Age: Implications for UK Media Regulation.successful that it was acquired by the internet and Vodafone.261 However, take up of this has In Richards, E., Foster,auction site eBay. Google also launched a been somewhat poor. Mobile broadcasting is R., and Kiedrowski, T. (2006) 'Communicationssimilar service with Google Talk. Both firms had the least developed of the digital platforms: - The Next Decade: Alittle experience of operating in the sector until it does not yet exist in a number of countries. Collection of Essays Prepared for the UK Officethey entered the market. However, it is estimated that by 2010, most of Communications.' developed countries will have at least one London: The Stationery Office. Chapter 2; Cleevely,By collaborating with network operators mobile broadcast network enabling 'live' M. (2006) 'The Role of(through wholesale services) and the traditional television channels to be broadcast to Ofcom in Encouraging Innovation'. London:technology suppliers, firms such as Tesco, mobile phones and other portable devices Ofcom.Sainsbury's, the Post Office, Carphone (complementing other mobile services, and 261. Op cit.Warehouse, the UK's four major mobile distributed over 3G networks). 262. Graham-Rowe, D. (2008) Why Every Home Should Have One. 'New Scientist' 8 March 2008, pp.24-25.
61 Broadband has been able to offer consumers The next generation of innovation in mobile a far faster and richer 'triple-play' experience, service provision will be in connection with (with voice, fast internet access and video 'concept of presence' (or location-based all available simultaneously). 'Quadruple- services). The vision many operators and play' (fixed-line, mobile, internet and TV) are their suppliers envisage is that of 'unified also now being offered to consumers. BT's communications' (UC). Unified communication current focus is on its 'new wave' services: is about being able to communicate from predominantly broadband, mobility and IT any device, to any device, using whichever services. BT Fusion (FMC) and BT Vision (IPTV) technology as appropriate. UC solutions are are examples of this. now being offered (or at least promised) by operators, and also by suppliers. This means As a consequence of the provision of new that UC technology will detect where an services, new business models are emerging. individual is, and then deliver relevant content For example, some services are sold as bundles (for example, rail or bus timetables, nearest (for example, broadband line plus IT support) bookshops) depending on where the individual or a service may be delivered in a different is located. Presence information264 can also (technologically-enabled) format, such as, inform others where the recipient is located over a line rather than physically (for example, (for example, a train journey delay, or a parent digital photo vaults from BT), or advertising looking for a child). Presence information is services delivered by a provider via the internet an important component of UC – delivering to a mobile phone. Service innovation and communications in the right format depending resultant new business models are set to upon the receiver's situation. proliferate. One survey found that 69 per cent of providers worldwide expect business model 2.2.3 Open innovation and collaboration as transformation to be the primary source of a business model 263. IBM Institute for Business value over the next five years; 72 per cent BT has been embracing open, user-led Value (2007) 'Telecoms Switches Emphasis. expect collaboration with external partners innovation and has opened up its entire Preliminary Analysis of the will be critical as new business models are telecommunications network through open 2007 Telecoms Industry Survey.' New York: IBM structured and implemented.263 protocols and a software development Global Business Services. 264. These solutions use a mix of GPS (to identify where the individual is located), 3G (to link to relevant websites) and intelligent systems to provide BT's 'new wave' services broadband video on demand via a Freeview information of relevance to the individual situated in a digital terrestrial TV set-top box, and has location. BT Fusion is a fixed-mobile convergence increased its subscriber base to 150,000 265. BT Group plc (2007) (FMC) phone service. Fusion was a world in just over a year. BT's revenue comes 'Annual Report & Form 20-F2007.' London: BT first when launched by BT in 2005. When from enhanced services, such as a VoIP Group plc. ordering the service from BT, the customer facility to dial up family and friends while is provided with a hub and up to six mobile watching TV, or the ability to build personal handsets. To make a call with the mobile, schedules, use picture-in-picture channel the customer dials the number in the usual surfing, and to see caller ID on TV sets. way. When within range of the hub the BT recently secured a content deal with call is routed through the hub and into the Paramount, giving access to over 150 new fixed broadband network for delivery. If films. It recently entered into a similar deal the caller moves out of range of the hub with Disney, for major US television series then the call is seamlessly transferred to including Desperate Housewives and Lost. the mobile base station of BT's partner (Vodafone) for routing as a normal mobile For BT, in 2007, these activities generated call. When outside of the home, the Fusion revenues of £7.37 billion (36 per cent of mobile acts just as any normal mobile total revenues), an increase of 17 per cent phone. When within range of a BT WiFi on the previous year (while traditional hotspot Fusion phones also connect directly revenues fell 3 per cent).265 However, into BT's network in the same way. these new services may initially have lower margins than traditional sources of revenue, BT's new IPTV service (Vision) also require more complex delivery mechanisms, connects to the same home hub. Developed and often need partners to support them in partnership with Microsoft, BT Vision (such as IT support). – an example of quad-play – provides
62kit (SDK) that is downloadable by users, is a 'super regulator', founded from theentrepreneurs and firms. No other Communications Act 2003, from which it drawstelecommunications firm in the world has its statutory duties and responsibilities. Itsembraced this level of openness and access to formation reflected the need for an effectiveusers. As a result, BT has gained a competitive regulator to deal with the convergence ofadvantage in the sector by utilising user the communications markets in the UK.innovation in its advanced communications It was formed of five previous regulators:infrastructure. Office of Telecommunications (Oftel); Radiocommunications Agency (RA); RadioA major element of BT's strategy of opening Authority; Independent Television Commissionup to user-led innovation is Web21C SDK. (ITC); and Broadcasting Standards CommissionThis software tool allows users unprecedented (BSC).access to BT's telecommunicationsinfrastructure, and enables innovation Regulation takes place under the Europeanby BT customers. It appeals to both large Regulatory Framework and is incorporatedestablished firms who want fully to integrate into UK law through the Communications Acttelecommunications services in applications (2003). The Communications Act gave a highand to users inventing new applications priority to the promotion of competition inthat 'mash-up' the internet and traditional the market, whilst also citing innovation as atelecommunications services.266 France Telecom key priority.269 In addition, Ofcom carried outand Vodafone267 have also set up versions a Telecommunications Strategic Review (TSR)of open innovation programmes. However, during 2004-2005. The TSR was undertakencritics have questioned whether these because: (i) regulators considered that thereopen innovation programmes are sufficient was not enough competition to allow sector-(when compared with other sectors, such specific regulation to be withdrawn. Thoughas life sciences and consumer electronics) the review considered some specific issues 266. Lakhani, K. personal correspondence, 29thand whether programmes are a core part of relating to mobile networks, the main focus February 2008.innovation and growth strategies.268 was on fixed telecoms networks. This was 267. Vodafone's ßetavine programme is using the because most existing regulation related to internet as a platform for fixed networks, and it was in fixed networks research, innovation and collaboration. that the most complex competition problems 268. Innovaro (2007)3. Innovation in the telecommunications were evident; (ii) fundamental changes in 'Innovation in thesector has been determined technology and consumer behaviour were Telecommunications Maelstrom.' London:significantly by regulatory reform, underway, which may have rendered existing Innovaro Ltd.intensified competition, technological regulatory approaches obsolete; (iii) other 269. Cleevely, M. (2006) 'The Role of Ofcom inconvergence and consumer adoption of countries and markets were adopting different Encouraging Innovation'.new forms of communication regulatory approaches, and Ofcom needed London: Ofcom. to consider international and sectoral best 270. Ofcom (2005) 'Final Statements on the3.1 Regulatory reform provided the catalyst practice.270 Strategic Review offor a more competitive, innovative sector Telecommunications.' London: Ofcom.Until 1984 the telecommunications industry The TSR led to a recognition that regulationin the UK was characterised by a state-owned should not inhibit innovation in a highlynational monopoly. However, in 1982, the UK competitive sector and that Ofcom should begovernment decided to privatise and open a 'light touch' regulator. The TSR intendedup the sector to market liberalisation and that Ofcom should regulate and create ancompetition. Consequently, in 1984 British environment to stimulate competition andTelecommunications was privatised. In parallel, innovation and to implement this approachAT&T in the US was broken up into one long within the framework of the Communicationsdistance and several regional Bell operating Act. Outcomes of the TSR included ensuringcompanies (RBOCS), enabling competition that firms allowed consumers to switchin both long-distance and local markets. The providers easily, as well as highlighting largederegulation of telecommunications in the UK scale innovations such as next generationand US acted as models for other countries and networks as a priority. Subsequently BT, Cablebecame catalysts for the gradual deregulation & Wireless and Colt were able to invest inof the sector and the creation of the NGNs, following completion of the TSR, with acompetitive and innovative communications degree of certainty regarding regulation.271markets seen today.
63 3.2 Consequently, competition has increased slowing growth in European markets by buying significantly mobile businesses in developing countries).276 Competition erodes the value of current products, therefore increasing the incentives 3.3 Technological convergence is radically for companies to find new sources of revenue altering the sector through innovation.272 Before the liberalisation Convergence refers to the increasing ability of fixed telecommunications in the UK, BT had of one specialist device to undertake several 271. Cleevely, M. (2006) one competitor – Mercury Communications. activities (for example, mobile phones playing 'The Role of Ofcom in Encouraging Innovation'. Competition between the fixed-line suppliers music files).277 This has been a major change London: Ofcom. has developed rapidly since the early 1990s. from previous decades, when communications 272. Ibid. Although BT's share of telephone lines is and content were specific to particular devices. 273. Department for Innovation, Universities and Skills/ static (around 80 per cent), its overall share By the late 1990s, the nature of content Department for Business, of total fixed telephony revenues has fallen and services provision, over established and Enterprise and Regulatory Reform (2007) 'The 2007 (to around 70 per cent).273 Households can developing technologies, had changed and R&D Scoreboard.' London: now choose their fixed link telephone supplier, converged significantly with, for example: DIUS/BERR. where there was virtually no choice a decade videos on the internet; television content 274. Many new operators offer 'indirect access' connection ago. Business users in metropolitan areas now distributed (to some extent) over mobile to their networks. By have an extremely wide choice of supplier, phones; and voice transmitted through the simply dialling a four-digit prefix immediately before and competition has driven prices down and internet (VoIP).278 For the telecommunications the number dialled, calls quality up. An increasing number of indirect sector, telephony networks – enabled by can be directed over the most cost-efficient route. access services274 are now available, offering greater bandwidths – are now able to carry Normally this prefix is consumers very low prices for calls. music and video as well as text and voice. dialled for you using a simple plug-in dialler, or by reprogramming the PBX. Competition has not only increased nationally, Technological convergence is leading to In both cases this service is usually provided free by but also internationally, with firms from sectoral convergence, with a blurring of the operator. other countries penetrating the UK market. the boundaries between the media and 275. Engineering Export Throughout the 1980s and 1990s, national telecommunication sectors.279 With converged Promotion Council (2008) 'Annual Supplement monopolies and national networks collaborated communications, devices and online media, 2008 to Foreign Trade and worked together to provide international successful firms will be those able to manage Policy 2004-09.' New Delhi: Engineering Export calls and services, with many foreign markets many types of content and application across Promotion Council. being largely closed to foreign operators. Since several technological platforms. Technologies, 276. Parker, A. (2008) Upwardly Mobile - Emerging Markets deregulation of national telecommunications services and content will also have to be Shake Up the Old Order in networks in a number of countries, markets delivered so that they appear to consumers Telecoms. 'The Financial Times.' 11th February have opened up to competition from domestic as integrated, easy-to-use offerings.280 2008, Analysis: p.9. and international operators, with firms Telecommunication firms are also entering the 277. Christensen, C., Raynor, M. incentivised to expand abroad to increase media industry in a search for new revenue and Verlinden, M. (2001) Skate to Where the Money revenue and growth. For example, BT now sources, as pure telecommunications revenues will be. 'Harvard Business operates in a number of countries worldwide, are squeezed by increased price pressures. Review.' November, p.72. 278. Cleevely, M. (2006) through internationalisation strategies For example, BT has entered the digital 'The Role of Ofcom in developed during the 1990s, which included television market (IPTV) which combines free Encouraging Innovation'. London: Ofcom. direct investments, strategic alliances and digital television with on-demand video and 279. Fairbairn, C. (2006) Serving mergers and acquisitions. personal video recording. Mobile operators the Public Good in the such as Vodafone, O2 and 3 are developing Digital Age: Implications for UK Media Regulation. In the mobile sector, 'developing world' increasingly rich mobile video and music In Richards, E., Foster, R., operators are increasing in number and in services.281 Currently, fixed/mobile convergence and Kiedrowski, T. (2006) 'Communications - The their scale of operation; operators such as (or the integration of wireless and wireline Next Decade: A Collection China Mobile and America Movil (Mexican) technologies) is one of the key strategic of Essays Prepared for the UK Office of and Bharti Mittal (Indian), MTN (African). issues for telecommunications firms. If this is Communications.' London: Such operators are not only leaders in their managed successfully, operators and carriers The Stationery Office. Chapter 2. own countries but are increasingly active will be able to provide services that deliver user 280. UK Trade and Investment in western markets, with the advantage of benefits irrespective of their location, access (2007) 'ICT Marketing Strategies: Evidence Base' lower cost products and services. In India, technology, and terminal.282 [CD-Rom] London: UK telecommunication equipment exports are Trade and Investment. estimated at $1 billion for 2008, but are 3.4 Consumer acceptance and adoption is 281. Ibid. 282. Ibid. predicted to grow to $2.5 billion by 2011.275 helping to drive innovation For Western operators, with domestic markets The advances in technology have been saturated, the risk is 'second-tier' status if embraced by consumers of communications emerging markets are not part of expansion services at work, at home, and on the move. plans (for example, Vodafone is coping with The profound shift in consumer behaviour – in how we communicate (voice, text, video), with
64whom (family, friends, communities of interest, future telecoms workforce and the skills thatstrangers), and with what (fixed phone, mobile, will be needed. New technologies such as VoIP,the PC, laptop, PDA, PSP) – continues. For WiMax, 3G and NGNs enable new applicationsexample: but demand new and up-graded skills of IT and telecommunications workers.• Mobile penetration is now over 100 per cent in the UK283 More broadly, business and innovation specific skills are also needed in order to 283. Office of Communications (Ofcom) (2007) 'The• 57 billion text messages were sent during leverage technical innovation into business Communications Market 2007 in the UK284 innovation. Telecommunications professionals 2007'. London: Ofcom. Chapter 4: pp.271-272. will need to obtain new business-oriented 284. Mobile Data Association• 23 per cent of 8-9 year olds in the UK skills to play a key role in the analysis, design (2008) 'Press Release now have mobile phones, and by the time and development phases of technological Facts and Figures.' [online] Available from: children are 13 this proportion has increased development along with skills to manage http://www.themda.org/ to 70 per cent285 increasingly global supplier relationships.291 PressReleases/Page_Press. asp 285. Mellor, P. (2006) EU• The 16-24 age group spends proportionally Investigates Mobile Phone Danger, Protecting our more time online than using radio or TV286 Children. [online] 'PC and over 70 per cent of the 16-24 age group 4. Innovation is hidden because of Advisor.' London: PC use social networking web sites287 incremental development, new service Advisor, July 2006. 286. UK Trade and Investment offerings and the introduction of new (2007) 'ICT Marketing• There were 50 million blogs in 2006 with forms of organisation and collaboration Strategies: Evidence Base' [CD-Rom] London: UK around 175,000 new blogs created each Trade and Investment. day288 4.1 Significant levels of traditional 287. Ibid. innovation in telecommunications is 288. Cyber Journalist (2008) 'How Many Blogs areThese technological changes have led to incremental in nature There? 50 Million andexpanded choice for the consumer (for Although radical changes have taken place Counting.' [online] Available from: http://example, new TV channels, easy access to within the sector over the last few years, a www.cyberjournalist.net/information on the internet); the consumer significant amount of incremental development news/003674.phptaking control of content choices (for to refine existing products and services is 289. Fairbairn, C. (2006) Serving the Public Good in theexample, audiences are no longer dictated also undertaken by firms within the sector in Digital Age: Implicationsto by 'authorities' and professionals with the order to remain competitive in the market. for UK Media Regulation. In Richards, E., Foster, R.,advent of the personal video recorder and However, incremental improvements, such and Kiedrowski, T. (2006)internet libraries for example); and individuals as a new pricing structure or a technological 'Communications - The Next Decade: A Collectioncontributing user-generated content in an development that improved functionality on of Essays Preparedinteractive and iterative way. Sites such as a mobile phone, would not be counted within for the UK Office of Communications.' London:MySpace, YouTube, Bebo and Facebook, traditional measures of R&D as they are not The Stationery Office.and Second Life have given individuals the considered as significant advances. Such Chapter 2; Leadbeater, C. (2006) The Genie is Out ofopportunity to connect in new ways, create narrowly focused metrics may mean that some the Bottle. In Richards, E.,communities of interest and social networks, forms of innovation and value creation are not Foster, R., and Kiedrowski, T. (2006) 'Communicationsshare information and views and produce own- being adequately captured. - The Next Decade: Agenerated material and content.289 Collection of Essays Prepared for the UK Office 4.2 Organisational and business model of Communications.'3.5 Skills weaknesses are a potential barrier forms of innovation are not sufficiently London: The Stationery Office. Chapter 5.to innovation captured by traditional metrics 290. e-skills UK (2008)A potential barrier to the development of New organisational forms and collaborative 'Technology Counts IT and Telecoms Insights 2008.'the sector and innovation in general, is arrangements have been adopted by firms in London: e-skills UK.that of skills weaknesses and shortages. the sector and have enabled new, and more 291. Ibid.Against a wider backdrop of a decline in IT- open, ways of operating with other firms,related education and gender imbalances in suppliers, consumers and technologies in therecruitment, for the IT and telecommunications innovation process. However, such Type IIsectors, firms have reported difficulties in forms of hidden innovation are not recordedattracting individuals with the right skills.290 in traditional measures of innovation, despiteIn a recent survey for e-skills UK, 22 per cent the potential of such forms to contributeof the IT and telecommunications firms who significantly to innovation and performance.were trying to recruit staff reported difficultiesin attracting applicants with the right skills. 4.3 Exploitation of existing technologies toFor the telecommunications sector specifically, support service innovationrapid technological changes and convergence A significant source of opportunity hasare expected to impact on the existing and opened up for the sector via technological
65 convergence. There is great potential to exploit 5.2 Organisational and business model converging telecommunication technologies innovation could be better measured by to support new services (such as triple play the rate of adoption and the effect of such and TV services on mobile phones). Deploying forms on an individual firm level and across technologies for new service provision (a Type the sector III form of hidden innovation) is not currently As new organisational forms, more collaborative captured in traditional metrics despite the arrangements (such as open and user-led potential contribution this can make to a firm's innovation) and new business models have revenue and innovation portfolio. started to be adopted by some firms in the sector, this Type II hidden innovation could 4.4 Firm-level and localised innovation is be better measured at the firm-level by important but is unmeasured assessing the contribution and impact of such At the firm-level, telecommunication firms may forms to firms' innovation performance and be innovating on localised, individual projects working practices. Assessments of sector-wide through sharing experience and knowledge or adoption rates of new organisational forms and working creatively in practice to solve small- innovative practices could also be added into scale problems. However, this form of hidden analyses of innovation within the sector. innovation (Type IV) may not be captured in a formal way by the firm or recorded in R&D 5.3 Levels of investment in services could be metrics. Conversely, firms may have formal measured to better capture this important measures in place for capturing innovative contribution to innovation and efficient processes in an effort to increase The technologies that have developed in the effectiveness, but this may still be unmeasured sector have enabled new service provision by by formal and official metrics for innovation. firms (a Type III form of hidden innovation). Levels of investment that firms make in service 292. Such as e-skills UK's innovation, and returns on such investments, regular IT and Telecoms insight reports. should be accounted for and recorded in 293. Ovum (2007) 'BT and its 5. Innovation could be better measured analyses of the sector to give a more accurate ICT- Two Case Studies.' London: Ovum Plc.; Ovum by sector-specific surveys to capture and fuller picture of innovation. (2006) 'New Metrics for a innovation at a firm level and by New Age.' London: Ovum Plc. including new forms of organisational 5.4 Firm-level estimates of innovation and business model innovation Some firms in the sector have begun to put in place more formal measures for capturing 5.1 Sector-specific surveys could provide innovative and efficient practices and processes a more detailed source for capturing in an effort to increase effectiveness and incremental and localised forms of performance; such metrics could be more innovation formally recorded in traditional measurements. Type I (incremental) and Type IV (localised) For example, BT uses 'RFT' (Right First Time forms of innovation could be better captured – meaning no repeat faults); 'RCT' (Reduced in surveys specific to the sector. Some surveys Cycle Time – reduced costs); and 'L2C' (Lead already exist292 and examine the productivity to Cash – the time it takes to convert a sale to and competitiveness of the sector and its links revenue) measures to assess the effectiveness with strategic management and leadership of some business processes.293 Although, BT skills. Conceivably this type of survey could has yet to publish data on these metrics, and be expanded to include insights on innovative assuming these measures continue, they could processes and practices within the sector. The potentially be reasonable measures of Type IV Institute of Telecommunications Professionals hidden innovation. As a way to incentivise and (ITP) aims to improve working practices reward innovative behaviour and practices with within the sector through information and its employees and suppliers, BT also has just networking activities; more importantly, it aims set up (in 2007) 'Innovation Awards'. Such a to inspire broader thinking and promotion of practice could be encouraged across the sector. best practice within the sector. Surveying ITP Internal measures other firms use within the members could be an initial way more formally sector to measure efficiency and performance, to capture the innovative ideas and practices of and the impact this can have on the innovation individuals working within the sector (see also process, should be investigated further. section 5.4).
666. Existing government policy has to experience more 'light touch' regulation,focused largely on regulatory activity, with part of Ofcom's remit to stimulate andcentred around creating a competitive encourage innovation.297 However, withenvironment, but policy could do more technological and sectoral convergence,to support forms of hidden innovation Ofcom needs to ensure that regulation keeps pace with new and emerging digital6.1 Existing policy has focused on the technologies and their development and howregulatory environment, which is centred such technologies need to be regulated. It ison stimulating competition and promoting possible that new regulatory models may beavailability of technologies for economic needed in the future to fit with convergedand social benefit communication technologies.298In order to ensure that the UK remains acompetitive place to live, work and conduct 6.2 Broad-scale support to ensurebusiness, existing government policy (through appropriate regulation and infrastructure of 294. Government policy has also focused on healththe former DTI and now through BERR and the sector is necessary, but policy needs to and environmental issuesthe sector regulator, Ofcom) has been targeted take a more holistic approach to realise the regarding mobile phones.around promoting an appropriate environment full value of the sector 295. For example, the UK was the first in Europefor the telecommunications sector. Given the sector's social and economic to enter the 3G market, pervasiveness, and its comparative importance stimulating competition from other operators. 3GStarted by the deregulation process in the as an enabler to other sectors, the sector is offers the opportunity ofearly 1980s, BERR's responsibilities continue to somewhat neglected in grand-scale support greater capability in data transmission and newfocus on ensuring that framework conditions strategies compared with the aerospace and services such as video-clipsfor a competitive environment for fixed line automotive sectors. However, a recent useful and photo-messaging. 296. Cabinet Office Primeand mobile telecommunications are in place.294 development has been the Knowledge Transfer Minister's Strategy UnitCreating a more competitive environment has Network (KTN) in Digital Communications299 and the Department of Trade and Industry (2005)undoubtedly resulted in, for example, greater covering the telecommunications, IT and 'Connecting the UK: thechoice for the consumer of operator or network broadcasting sectors established in December Digital Strategy.' London: HM Stationery Office.provider, lower prices for calls and new business 2007. Industry-led, with members from 297. Cleevely, M. (2006)entrants to the market who have brought new across the value chain, academia, the 'The Role of Ofcom intechnological innovations (such as 3G) to the regional development agencies and devolved Encouraging Innovation'. London: Ofcom.sector and wider society and economy.295 administrations, and formed with funding 298. New regulatory models from the Technology Strategy Board (TSB), may be needed to deal with broadcast andWith the advent of broadband, government the Digital Communications KTN aims to focus telecommunicationspolicy has focused on supporting the on facilitating knowledge transfer across the convergence, for example; see Fairbairn, C. (2006)development of appropriate infrastructure sector, to act as a 'network of networks' and to Serving the Publicfor the widespread expansion and utilisation promote innovation. Good in the Digital Age: Implications for UK Mediaof broadband through telecommunication Regulation. In Richards, E.,next generation networks – a part of the First, the KTN aims to establish technological Foster, R., and Kiedrowski, T. (2006) 'Communicationsgovernment's 'digital strategy' – to ensure and capability 'roadmaps' to identify new and - The Next Decade: Athat the UK remains competitive with other emerging technologies and the capabilities that Collection of Essays Prepared for the UK Officecountries (such as Korea, Japan, the US and will be needed within the sector in the future of Communications.'France) who are well advanced in investing to ensure effective implementation and that London: The Stationery Office. Chapter 2.in new fibre-based infrastructures. Initially, a competitive advantages are realised for the 299. The term 'digitalpart of the 1998 Knowledge Economy White UK. Issues that will also be covered include: communications' reflectsPaper, the strategy aimed to make the UK barriers to innovation and development; the the changing nature of the underpinning technologies'digitally rich' (as it lagged behind European use and role of venture capital; skills needs (which are no longerand developed world counterparts) by and recruitment issues; and adjacent sector separate and distinct) and that the sectors areimproving access and utilisation of digital TV, requirements. Second, such road maps will be converging.broadband, and creating a competitive and benchmarked against other countries, withinnovative deregulated mobile and fixed-line the aim to develop an overarching strategy forphone market. Deregulation also facilitated the digital communications in the UK.use of WiFi by operators, facilitating mobilityin communications. Now the digital strategy The Digital Communications KTN is a usefulis carried on through the work of BERR and first step in developing a coherent and currentthrough the Information Age Partnership.296 understanding of the sector, the changes that have been occurring and the role thatWith the creation of the 'super' regulator innovation plays in those changes. The KTNOfcom in 2003 and the Telecommunications should provide a coordinated, holistic andStrategy Review in 2005, the sector began industry-led voice for the sector.
67 Policy should also consider the broader forms of hidden innovation and the value that this creates for the sector. Organisational innovations can provide firms with new opportunities for revenue and growth and can be just as important as technical innovations for successful commercial exploitation and operation. Firms should be encouraged to explore new business models and ways of working if this brings commercial value and increases sector performance. However, this places an important emphasis on their having the right skills.
68Appendix D: Software and IT Services 301. Related activities ofInnovation through technological disruption, facilitating a role for hidden the sector include:innovation in new organisational forms, business models and the provision of facilities management, consulting and training,services supply of contract staff, office software and equipment, software maintenance, hardware design, manufacture and maintenance, information supply and distribution, communications services, research and development. See The Work Foundation (2007) 'Staying Ahead: The Economic Performance of the UK's Creative Industries.' London: Department for Culture, Media and Sport. 302. Ibid. 303. Office for National Statistics Labour Force Survey Jan-Mar 2007; Inter-Departmental1. Software and IT services is a vitally a GVA of £23 billion304 with exports of £4.7 Business Register (IDBR)important sector for the UK, as an billion.305 The UK market for software products '2004-2007 Analysis of UK Local Units in VAT basedenabler of other sectors and activities and services is the largest in the EU306 and Enterprises.' Newport:and in underpinning the knowledge growth is expected to continue in the medium ONS. 304. 2006 figures. Forecastseconomy term through to 2012.307 predict growth at an annual rate of 4-6 per cent until 2011In the UK, the software and IT services There are a number of significant clusters in (this includes supportsector involves: the development of system the UK: in England, software and IT firms are services, project services, and IT outsourcing,software; contract/bespoke software; systems based around Cambridge, the Thames Valley but excludes businessintegration; systems analysis and design; area, Manchester and the Midlands; in Scotland process outsourcing). See Holway@Ovum (2007)software architecture and design; project there are clusters around Silicon Glen and 'UK S/ITS Market Trendsmanagement and infrastructure design.301 Dundee (which has a significant concentration Report' (August). London: Ovum Plc. of software games firms). Northern Ireland and 305. Export figures from 2004.Specifically, the sector can be broken Wales also have small but growing sectors of IT The global software and ITdown into three stages of activity. First, and software activity. services sector generated revenues of $698 billion indevelopment: software is developed either 2006. A third of the totalfor bespoke use (designed to fit the particular Key consumers of software in the UK are the ($228 billion) was related to software products andneeds of a customer) or for off-the-shelf use financial services sector, the health services $470 billion on IT Services.(such as Microsoft's Office package). Software sector and the communications sector.308 The Ibid. 306. European Informationdevelopment is closely linked to the computer UK's growth is also partly due to substantial Technology Observatoryhardware industry, as software must be investment over recent years in e-Government (EITO) (2007) 'European Information Technologydesigned specifically to the hardware on which initiatives such as new IT systems for the NHS Observatory Yearbook.'it will be installed. (£30 billion over the last ten years); Transport Autumn 2007. Brussels: EITO. for London's Congestion Charging and Oyster 307. Ovum (2007) 'OvumSecond, systems design: designing large Card projects; and 'Shared Services' (a process Global Software Forecastsand complex business IT systems requires of sharing back-office resources across Councils (March).' London: Ovum Plc.; Datamonitor (2007)expertise; consequently a consultancy and Departments).309 'Global IT Servicesindustry has arisen around this need. Large Forecasts (September).' London: Datamonitor.international consultancies like Accenture The sector comprises some very large, global 308. Department for Innovation,specialise in providing IT solutions and players and a significant number of smaller, Universities and Skills/ Department for Business,advice on information management to large specialist software firms in the UK. Almost Enterprise and Regulatoryorganisations. all the world's major software players have a Reform (2007) 'The 2007 R&D Scoreboard.' London: substantial UK presence, whether as an R&D DIUS/BERR.Third, retail and implementation: computing operation, a logistics distribution network, or 309. UK Trade and Investmentcustomers will draw on a range of sources to sales and marketing operation, and include (2007) 'ICT Marketing Strategies: Evidence Base'complete their overall package – acquiring Accenture, EDS, Google, IBM, Infosys, [CD-Rom] London: UKhardware and software through retailers, Microsoft, Oracle, SAP, HP, EDS, CSC and Tata. Trade and Investment. 310. Ibid.resellers or via IT consultancies.302 Indigenous UK firms include Asidua, Autonomy, Capita, Lagan Technologies, LogicaCMG, Misys,The UK sector employs around 600,000 people nCipher, Northgate, RM, Sage, and Xansa.310 (with around half employed in software andhalf in IT services) in 100,000 firms,303 with
69 The UK has established strengths in the The sector is also composed of a significant software and IT services sector in: accounting number of small firms, particularly in the UK314 and finance software (such as Sage); asset and the R&D Scoreboard for 2007 (based on management (for example, Misys); content 2006 data) demonstrates that R&D expenditure management software (for example, by the sector amounted to £1.2 billion, making Autonomy). Particular strengths are in software it joint third (with the electronics and IT security (where the UK has the second largest hardware sector) behind the pharmaceuticals market in Europe, accounting for 22 per cent and aerospace sectors. The top four UK firms of the total market).311 The games software in the software and IT services sector (Telent, market is another: three of the best-selling Sage, Misys, and NDS) accounted for 40.6 per games in the world were created in the UK. cent of R&D investment for the sector.315 The UK is the largest market in Europe and the third largest market in the world.312 The size of Large, global technology suppliers, which the UK games sales market in 2006, on sales dominate the sector, have research and of console, PC and handheld games software, development facilities increasingly located close console hardware, and console and PC gaming to key skills sources (as in India), to partners peripherals in the UK, totalled £2.18 billion. (such as Accenture's Centre of Excellence There is a significant cluster of games software at SAP's headquarters in Waldorf, Germany) firms in and around Dundee in Scotland. or close to clients. Many of these suppliers, 311. European Information including IBM, Microsoft, Nortel, Northgate Technology Observatory (2007) 'European Information Systems, Sage, and Toshiba, Information Technology maintain research laboratories in the UK. Observatory Yearbook.' Autumn 2007. Brussels: 2. Innovation in the software and IT EITO. services sector has enabled radical R&D resources are used to: (i) investigate 312. Entertainment Leisure Software Publishers and emerging technologies which are radically new and emerging areas of knowledge Association (2006) facilitating new organisational forms (over the medium to long term) and to develop 'Frontier Economics Comparative Analysis and business models the next wave of disruptive technologies (such of the UK's Creative as SOA and virtualisation – see Section 2.3); Industries.' London: ELSPA. 2.1 Traditional innovation in the software (ii) undertake incremental improvements in 313. IBM (2006) 'Annual Report 2006.' New York: IBM; and IT services sector is a mixture of radical existing software products, over a shorter time Hewlett-Packard (2006) and incremental innovation developed by frame, to maintain competitive advantage. 'Annual Report 2006.' Palo Alto, CA: Hewlett-Packard. large and small suppliers Large suppliers may have technology offices 314. Most of the sector's firms for this purpose, which draw on and codify are listed on AIM and other small exchanges or are 2.1.1 R&D is used primarily for product improvements and repeatable good practice. unlisted, see Department development by large and small scale for Innovation, Universities and Skills/Department software suppliers Small firms are also important to innovation, for Business, Enterprise For firms in the software segment of the sector, as they can be more agile and dynamic and Regulatory Reform (2007) 'The 2007 R&D product innovation is a main focus area of than large firms and respond more quickly Scoreboard.' London: R&D, and R&D budgets can be a significant to changes in the market place. Such firms DIUS/BERR. proportion of costs for large companies. For can often be at the forefront of research 315. Ibid. 316. NaturalMotion (2005) example, IBM spent $6.5 billion (6 per cent and development, generating new products, 'Dynamic Motion of revenues) on R&D in 2006, while HP spent services and technologies. Consequently, large, Synthesis'. White Paper. $3.6 billion (or 4 per cent of revenues).313 global suppliers engage with small firms in their Oxford: NaturalMotion.
70supply chains by buying products or services, or defects for 54 per cent; and reduced costs foraugmenting in-house skills and competencies. 28 per cent.317 Other benefits reported wereLarge firms may go further by 'buying-in R&D' better alignment between IT and businessthrough acquiring small, innovative firms as goals and reduced project risk.a way to attain access to the next wave ofnew generation technologies and to maintain Fujitsu IT Services' 'Sense and Respond'competitive advantage. methodology for IT Service management, and its 'Triole' methodology, is an example2.1.2 UK universities have a role to play in of a process innovation. The process aims tothe innovation process incentivise continuous improvement in serviceA number of UK universities have world-class delivery. Fujitsu's Sense and Respond approachresearch groups specialising in ICT-related is grounded on the Lean and continuousresearch. Specialist software research groups improvement principles, with the aim ofexist at Southampton, Edinburgh, Nottingham, capturing, improving and measuring elementsNewcastle, Imperial College, Surrey, Bath, of service provision that create value to clients.Oxford, University College, Cambridge,Manchester, and Warwick Universities. 2.2 Innovation is changing in the sector, asResearch carried out in such institutions technology suppliers realise the limitationsmay ultimately be developed by firms in the of R&D, and process innovation becomessoftware and IT sector, or commercialised via commoditiseduniversity spin-outs. This form of R&D can be Many suppliers of technology and IT servicesof crucial importance in making technological are increasingly faced with the limitationsadvances in the sector, which can radically alter of R&D-driven product innovation. Largeand shape the future market place for software suppliers have become frustrated with theand IT. length, cost, and quality of the product development process. For example, Microsoft 317. VersionOne (2007) 'The State of Agile2.1.4 Process innovation is a focus for IT took five years and billions of dollars to Development 2nd Annualservices develop Vista (the latest version of its Survey.' Alpharetta, GA: VersionOne.While product innovation is the primary operating system software).318 318. Booz Allen Hamiltonfocus for the software segment of the sector, (2007) 'Money Isn't Everything. A Surveyprocess innovation is more a focus for IT The relatively short life cycle of software of 1000 Global Largestservices, where the process, together with an IT products exacerbates this issue, and is one Spenders on R&D.' Virginia: Booz Allen Hamilton.professional's expertise, forms the service that reason why some large scale suppliers acquire 319. Department for Innovation,is provided to clients. R&D budgets are also start-ups with innovative products and services Universities and Skills/used for process innovation in global firms. For – a process of buying-in R&D (see Section Department for Business, Enterprise and Regulatoryexample, Accenture is investing $450 million 3.2). A second reason is that product or service Reform (2007) 'The 2007in developing products and services around innovations (for example, virtualisation, SOA) R&D Scoreboard.' London: DIUS/BERR.Service Oriented Architecture (SOA). are relatively rapidly matched by competitors 320. Ovum (2006) 'Productised who quickly launch similar products, eroding Business Process Services: Redefining Software andSOA is one example of process innovation competitive advantage.319 Services.' London: Ovumin the sector, as an innovative new way of Plc.building and managing business applications. Process innovation in the software and ITOther approaches such as 'Agile' and 'Lean' services industry continues to be stronglysoftware development are also examples driven by intense competition, and price andof process innovation. Lean is a generic margin pressures (see Section 3.4). Thesestreamlining approach for all production factors are forcing suppliers to gradually, butsystems, but Agile is specific to product relentlessly, move away from a 'craftsmanshipdevelopment environments. model' where a highly skilled (and highly paid) developer or consultant develops or deliversAgile development is an alternative to the software/service to a more industrialisedtraditional product development (which and commoditised 'factory model', where lessemphasise initial major planning). Agile skilled (and lower cost) resources can deliverpromotes development iterations throughout equal or better quality with predeterminedthe life-cycle of the project via feedback process templates, industry maps or creativethrough tests and releases of the evolving work packaging.320software (consumers and clients form partof this feedback). One survey of 1,700 firmsacross 71 countries found that using Agileprocesses led to increased productivity for 55per cent of respondents; reduced software
71 2.3 New services, organisational processes, Service Oriented Architecture (SOA) is a business models and new ways of new approach to building and managing collaborating are increasingly important business applications by breaking them into within the sector loosely coupled units (such as Enterprise Resource Planning (ERP) along with Customer 2.3.1 The emergence of disruptive Relationship Management (CRM) applications). technologies is changing the nature of SOA is not only reshaping the packaged software and IT services provision and is software applications market segment, but facilitating the development of new services is providing new opportunities for IT services Disruptive new technologies which have projects, as companies move to integrate emerged from within and outside of the sector legacy custom applications using SOA – technologies such as virtualisation software, principles.321 One study estimates that SOA Service Oriented Architecture (SOA) and Web could reduce development costs by 25 per cent 2.0 – are significantly changing the dynamics (about $53 billion) over five years across the of the software and IT services sector and are 2,000 largest firms worldwide.322 enabling the development of new services. 2.3.2 New technologies are also enabling Virtualisation software (a technology enabling the development of new business models a single physical machine to run multiple and new forms of business practice 321. Ovum (2007) 'SOA Vendor instances of software in parallel) is not only The software sector has traditionally relied Strategies.' London: Ovum Plc. opening a new and growing market segment on the dominant 'licence + maintenance' 322. Aberdeen Group (2006) in software, but is reshaping the hardware business model. This has been disrupted by 'The SOA in IT Benchmark Report.' Boston: Aberdeen and outsourcing markets. Virtualisation the emergence of the internet which has Group. software enables client organisations to use enabled the development of the 'Software as 323. Ovum (2007) 'SaaS: fewer physical machines to deliver the same a Service' (SaaS) business model. This is, in Opportunity or Threat for IT Services Vendors?' computing loads by using computing spare turn, causing disruptions in the organisation London: Ovum Plc. capacity. This puts pressure on hardware and implementation of IT service processes, as 324. Desisto, R. Pring, B. Lheureux, B., and sales, and reduces outsourcing revenues of IT software development for large on-premises Karamouzis, F. (2006) services companies (who are paid by number of implementations are being reduced and 'SaaS Delivery Challenges On-Premise Software.' machines managed). altered.323 Stamford, CT: Gartner. 325. All, A. (2008) 'India's Tata Consultancy Services Introduces Hybrid SAAS Model.' [online] Software as a Service Siebel Systems, Microsoft, Oracle and SAP Available at: http://www. itbusinessedge.com/blogs/ have also entered the SaaS market. Tata sts/?p=324 Software as a Service (SaaS) is where Consultancy Services (TCS), India's largest 326. Intellect (2007) 'Software software applications (such as customer service provider, is introducing a hybrid and IT Services Report – The Future.' London: relationship management, human resources, SaaS/services model that it calls 'IT-as-a- Intellect. accounting and email) are hosted by a service', which is being aimed primarily at provider online, rather than installed on the the local SME market and is predicted to be user's premises, and priced on a per usage worth up to $9 billion a year.325 basis. Access to the web and a broadband connection are the only IT infrastructure However, in the UK, SaaS does not yet needed. The model makes it easier to share appear to be challenging the dominant data with third parties, enables backup data licence and maintenance model; its centres for disaster recovery, and crucially, adoption amongst small UK firms appears to for smaller businesses, offers access to be limited. For example, one survey found enterprise level application services that that around 70 per cent of small software would be difficult to achieve in-house. firms were continuing with the traditional business model (licence sales, maintenance, SaaS is predicted to capture more than advice and integration). This may become a quarter of the $200 billion business increasingly outmoded, as awareness software market by 2011.324 The market amongst potential users increases and the leader, Salesforce.com (a US firm founded future predicted growth of SaaS occurs.326 in 1999), serves more than 38,000 other One notable exception is Huddle, a UK firms and has one million paying users for start-up established in November 2006, its 'on-demand' Customer Relationship which combines online collaboration, Management (CRM) software, with project management and document sharing revenues around $700 million in 2007. using social networking principles.
72Value-based pricing models represent both a Open source software (OSS) is built on thebusiness model innovation in the IT services principle that the source code of a programindustry, and an enabler for collaborative should be readily accessible, so that usersinnovation between suppliers and clients have the right to copy, modify, maintain andin improving efficiencies and effectiveness. redistribute, without paying royalties or fees.Value-based pricing is a commercial model in Examples include Linux, Firefox and Wikipedia.an IT services contract where the supplier ispaid depending on the business outcomes it Open source software can facilitate innovation.delivers for the client (for example, transactions Open standards in OSS can be the basisprocessed) rather than on the more traditional for collaborative innovation as sourcecontractual arrangement of fixed price or codes are openly documented, publishedtime and materials. For example, IBM has without restriction and so freely available forcontracted with India's Bharti Telecom to adoption. Subsequently, standards can evolvemanage their whole IT and telecommunications through collaboration with organisationsinfrastructure and applications in return for and communities and create and add value.a percentage fee of Bharti's revenues. Driven This could potentially enable breakthroughsby competitive pricing, and scarcity of skills in in innovation by fostering and generating acertain localities, IT services firms see value- broader range of ideas and creativity from abased pricing as a tool for driving 'non linear' wider ecosystem of contributors: collaboratingrevenue growth, that is, not directly related with partners, clients and individuals forto the number of people or costs they incur. innovation can help solve real businessValue-based pricing is also seen by suppliers as challenges.a key incentive for collaborative innovation327(see section 5.4). IBM, Sun and Novell have endorsed and contributed to open source software by2.3.3 New forms of collaboration and releasing industry code to be augmented by 327. Ovum (2007) 'Innovation in IT: Vendor Strategies.'sources of innovation are emerging individuals and academics; adopting open London: Ovum Plc.Facilitated by the internet, new forms of source applications for enterprise use; and 328. Cohn, O. (2005) 'Value Creation throughcollaboration are occurring, which is leading sharing intellectual assets. IBM has also Collaborative Innovation.'to the development of new and more open developed a 'patent commons' initiative by Haifa Research Lab: IBM Corporation.practices in the innovation process. Open pledging 500 patents to the open sourcesource software (OSS) has facilitated this form community. IBM maintains that using OSS hasof collaboration. Web 2.0 technologies are indirectly created more value than by limitingalso enabling collaboration and participation the use to inventors.328and are changing the dynamics between thesoftware and service provider and the end-user. Web 2.0 technologies, using the internet for new forms of collaboration and participation,
73 are changing the collaboration software Oracle, SAP, HP and EDS). These firms have market, as well as opening new project services been undertaking acquisitions of both small opportunities for IT services firms.329 players with promising products and also medium-sized competitors (as with Oracle's Traditionally, most software applications have acquisition of Siebel, Retek and PeopleSoft), been developed by major suppliers, such as leading to continued industry concentration.332 Microsoft, SAP, Oracle or IBM. With broadband Yet, start-ups with innovative products in new connectivity now common, a firm can now areas (like VMware in virtualisation) continue choose to buy from existing large suppliers to mushroom and challenge global giants. or from the increasing independent software Conversely, many of the successful start-ups sector. By amalgamating software from these end up being swallowed by one of the global various sources (a process referred to as 'mash- players – a large firm strategy of buying-in ups'), the internet is facilitating innovative innovative R&D. 329. Carter, S. (2006) 'SOA and approaches. Web 2.0: The Language of Business.' Palo Alto: IBM 3.3 Convergence of technology is increasing Press. Web 2.0 will become increasingly prevalent competition from within and outside the 330. Intellect (2007) 'Software in the business-to-business environment – sector and IT Services Report – The Future.' London: the dawning of 'Enterprise 2.0' services and SOA and SaaS are driving convergence between Intellect. applications – with an emphasis on open and the software and IT services sub-sectors, firms, 331. Based on the NASDAQ share price of $693 on collaborative ways of working with the end- products and services. New sector entrants, 30th November 2007; see user. Rather than software being delivered in a such as telecommunications companies (BT, also Vise, D. (2005) 'The Google Story.' London: 'discontinuous and periodic update' approach, Deutsche Telekom, France Telecom and AT&T) Macmillan. as is currently used, the availability and use of are also entering the IT services market, 332. Intellect (2007) 'Software software is likely to become more fluid with particularly in the infrastructure management and IT Services Report – The Future.' London: applications constantly updated and fine-tuned area. Online brands such as Google are Intellect. on a rolling basis. End-users will become an entering software markets via the SaaS model, 333. The term 'red oceans' of highly contested integral part of the development process.330 enabled by telecommunications firms with market spaces for highly their hosting and high bandwidth connectivity competitive markets, and 'blue oceans' for emerging services. Furthermore, pure business process niche areas where outsourcing (BPO) providers such as Capita competition is low or non existent has been used 3. Software and IT services innovation are increasingly competing with IT outsourcing to identify uncontested is determined by global competitors, firms as business process outsourcing contracts market spaces; see Chan Kim, W., and Mauborgne, concentration and convergence within often include management of both the R. (2005) 'Blue Ocean and outside the sector and education technology and the process. The combination Strategy: How to Create Uncontested Market and skills weaknesses of slowing growth, intense competition and Spaces and Make the new entrants from multiple directions are Competition Irrelevant.' Boston, MA: Harvard 3.1 Success and survival are key… all cutting prices and margins, and rapidly Business School Press. Commercial success and survival are the key commoditising existing software products and drivers for innovation in the software and IT service offerings.333 IT services sector. Successful innovators, particularly small start-ups, can earn millions or 3.4 Globalisation, off-shoring and the even billions of dollars. Google, which was only rise of emerging markets offer both formed in 1996 on the basis of an innovative opportunities and threats to the UK sector search technology, is today the largest In the early 1990s, driven by globalisation, technology firm with a market capitalisation competition and cost considerations, American of $219 billion.331 For large IT suppliers, the and European software and IT firms began motivation to innovate is continued market to locate some routine tasks and activities relevance. The sector is moving at such a rapid (IT help desks and call centres) 'off-shore' in pace that the risk of changes in demand, low-cost locations. India was the favourite competitive pressures, and technology choice; it was English-speaking, numerate and obsolescence are very real. Combined, these had comparatively cheaper labour. This began factors drive the continued acquisition of the development of a fledgling IT industry in promising start-ups by dominant companies in India, facilitated by the liberalisation of the the sector. telecommunications sector in the late 1990s, which led to declining bandwidth costs. 3.2 …which is driving industry concentration More recently, in the lead up to the year The software and IT services sector is 2000, US and European firms, experiencing dominated by a number of very large global a shortage of qualified software engineers suppliers (such as Accenture, IBM, Microsoft, in their own markets to address the IT issues
74predicted with the 'Y2K' threat, combined with 3.5 Educational, recruitment and skillsescalating costs of in-house IT, were forced weaknesses are of critical importance forto look for developers and IT professionals the sectorin emerging (and cheaper) markets such as In addition to the issues of offshoreIndia.334 relocation,339 the UK software and IT services sector also faces major educational, recruitmentDuring this time, India had nurtured a highly and skills weaknesses, which has the potentialeducated pool of skilled software and IT to significantly impact not only innovationexperts, leading to the development of within the sector, but its future development.home-grown firms such as Infosys, Tata andWipro. Such firms offer principally custom and First, there has been a decline in the number ofpackaged application development, testing and people choosing to study the subject at schoolmaintenance services (but also IT consulting, and university, and of those that do studyinfrastructure outsourcing and business process IT-related subjects, fewer are choosing to enter 334. It has been estimated that net savings to the USoutsourcing services) at significantly lower and work in the sector. It has been estimated economy, brought aboutprices than their US or European counterparts. that employment in the UK's IT industry is by off-shoring, could result in $390 billion saved byThis (labour) cost advantage has enabled set to grow around five times the national 2010.these firms to grow into multi-billion dollar average, and that approximately 150,000 new 335. Ovum (2006) 'The Impactorganisations (for example, Wipro is worth entrants to the IT workforce are needed each of Global Sourcing on the UK Software and Services$25 billion) and become powerful competitors year. However, there is a severe mismatch in Industry. A Study for thein the software and IT industry to US and the future workforce. Each year, fewer young Department of Trade and Industry.' London: OvumEuropean counterparts.335 The Indian software people choose to study technology-related Plc.; Nasscom (2007)and business process outsourcing industry is subjects at school and university. Between 'Strategic Review 2007: the IT Services Industryexpected to achieve $60 billion in exports of 2001 and 2006, 43 per cent fewer students in India.' New Delhi:software and services by 2010; the UK is the took A-levels in computing and the number Nasscom. 336. NASSCOM (2008)second largest market for the Indian software of individuals taking IT-related degrees almost 'Strategic Review 2008.'sector after the US, at 18 per cent of total halved between 2001 and 2005 (from 27,000 New Delhi: NASSCOM.exports.336 to 14,700). Few technology graduates choose 337. Ernst, S. (2007) China to Catch Up with UK in Five to enter the IT sector and embark on a career Years. In Dialogic (2007)Other competitors are also emerging from in IT (estimated at only three out of ten 'Developing the Future: A Report on the ChallengesLatin America, Eastern Europe and China. graduates).340 and OpportunitiesChina is predicted to be a particularly strong Facing the UK Software Development Industry.'future competitor, potentially even replacing Second, there are questions over the nature London: Microsoft.India as the choice location for off-shoring and quality of educational provision and 338. World Trade Organization (2007) 'International Tradesoftware and IT activities. Costs of off-shoring concerns that the educational system fails Statistics 2007.' Geneva:development to India have risen 15-20 per to 'pull through' young people from school WTO.cent each year. Off-shoring in China is rising to university to the work place. For example: 339. Ovum (2006) 'The Impact of Global Sourcing onat an annual growth rate of 8 per cent in the GCSE in ICT is heavily focused on the the UK Software and2003 to 11 per cent in 2006. Even Indian acquisition of user skills rather than deeper Services Industry - A Study for the Departmentsoftware development firms now have large study of computing and software technology; of Trade and Industry.'hubs in China, or plans to develop them.337 there is also a need to increase the number of London: Ovum Plc.; Confederation of BritishChina is predicted to develop its own software young people studying STEM subjects, as these Industry and LogicaCMGindustry even faster than India did. Issues of subjects are often required for a career in the (2006) 'Building a Globally Competitive IT Services.'literacy are being addressed, and 35 national sector; at the university level, concerns are that London: CBI.training schools are aiming to train 800,000 degrees do not keep pace with how quickly 340. Price, K. (2007) To Succeed in the Globalsoftware engineers. In China, exports increased the sector, and the required skills for this, is economy the UK Mustby an average annual rate of 37 per cent evolving (for example, the current software Commit to Technology Skills. In Dialogic (2007)between 2000 and 2006; and in computer language did not exist three years ago) and 'Developing the Future: Aand information services (including software that graduates and new recruits do not always Report on the Challenges and Opportunitiesdevelopment) it was 40 per cent.338 have the necessary 'work-ready skills'.341 Facing the UK Software Development Industry.' London: Microsoft.Off-shoring has undoubtedly provided UK Third, for the existing workforce, issues offirms with cost advantages. However, against re-skilling and up-skilling will need to bea global backdrop of emerging markets, UK addressed, given the rapidly changing naturesoftware and IT services firms must continue of the sector. This may mean that there is anto harness and combine creativity, skills and increasing need for IT professionals to becomeinnovative capability to remain competitive on 'lifelong learners' and to undertake continualthe global stage. professional development to update skills requirements. However, for some employers – particularly SMEs – this may prove difficult,
75 as they may not have the resources to provide 4. Innovation is hidden because of such training.342 incremental development within the sector and because new services, Lastly, skills shortages – the greatest gaps are business models and forms of in high-level technical skills such as computing collaboration are not captured by and software engineering – are often filled traditional metrics by overseas developers and engineers (in 2005, around 21,000 software specialists from 4.1 Some traditional innovation in software overseas came into the UK compared with and IT services is incremental, iterative around 2,000 in 1995). Whilst this undoubtedly development, which goes unrecorded by brings its advantages – job gaps are filled, skills formal measurements of innovation needs are met, new and different sources of The Frascati Manual only acknowledges knowledge and international experience are software development that represents a brought into the sector – it also highlights the 'scientific and technological advance' as very real skills gaps for the UK sector. R&D and hence as innovation.344 Therefore, innovation that is iterative and incremental Together, these factors are creating a future (Type I hidden innovation) in nature – whether skills challenge for the software and IT services improving an existing software programme, sector in the UK in general, and specifically, or enhancing the efficiency of an operating 341. Bowkis, M. (2007) for innovation. Skills, education and training system – may not be counted as innovation, 'Software Industry Summit 2007.' London: develop the knowledge and flexibility to despite the benefits incremental improvements Department for Culture, adapt and respond to market trends, act may make to a firm. Media and Sport. 342. e-skills UK (2008) competitively and to drive innovation. Without 'Technology Counts IT and individuals with the right skills sets – both 4.2 Innovation in organisational forms and Telecoms Insights 2008.' London: e-skills UK. technical and business-oriented – innovation, business models are not well captured by 343. Business Software and the sector, will not flourish. traditional metrics Alliance/IDC (2007) New, and more open, forms of collaboration via 'Global Software Piracy Study.' Washington, DC/ 3.6 The issue of software piracy is a major Web 2.0 and OSS can facilitate the innovation Framingham, MA: BSA/ concern to software suppliers and can limit process. New business models can enable IDC. 344. Organisation for Economic resources for innovation software and IT firms to improve revenue, Co-operation and It is estimated that globally, 35 per cent of sustain competitive advantage or increase Development (2002) 'Frascati Manual 2002, software on all computers has been obtained performance. But new organisational and Proposed Standard illegally, equating to £20 billion of lost business models (Type II hidden innovation) Practice for Surveys on Research and Experimental revenues as a result of piracy in 2006 (for the are not sufficiently captured by traditional Development.' Paris: UK, the figures are 27 per cent of software measurements. OECD. obtained illegally and around £840 million of lost revenues).343 The scale of intellectual 4.3 The novel combination of existing property (IP) infringement and the loss of technologies and processes to deliver new revenues have an effect on resource availability service innovations in the sector does not and, arguably subsequently, resources for get counted in traditional indicators innovation as firms have less financial capacity The use of existing technology or software for to invest in research and development. a new application or purpose is not considered to be an investment in innovation. This means To a lesser extent, IP also acts as a barrier for that combining existing technologies to deliver collaborative innovation between a technology an innovative new service, such as Software as supplier and a client in the IT services industry. a Service (Type III hidden innovation) would The issue often concerns ownership of IP not be considered 'innovative' by traditional developed during an IT project. For example, a metrics, despite the benefits and enhancements considerable number of process maps, software this may bring to firms developing such modules and industry maps are created during innovative services, and their recipients. SOA implementation, and a lack of clarity regarding who owns the IP, and how the 4.4 Locally-developed, small-scale benefits are shared from it, can cause friction innovations that take place 'under the in the supplier and client relationship and the radar' of traditional indicators level of collaborative innovation generated. As the sector comprises a large number of small Protection and clarity on IP is central to firms, innovation could be hidden primarily innovation in any market, and infringement because it occurs informally, in the day-to-day can substantially reduce the incentives for learning practices and processes undertaken innovation. within SMEs to solve client needs. Very small firms are also unlikely to have formalised R&D
76budgets. This Type IV hidden innovation will a Service – Type III hidden innovation). Levelstherefore not be measured formally. of investment that firms make in these services and the return on such investment should beWhen working collaboratively with a client, large- recorded by new metrics. Other wider impactsscale suppliers may also deliver improvements and that new service provision has within the sectorefficiencies to its customers when implementing (for example, impact on other firms) shouldsoftware and IT solutions. Innovative also be measured.approaches developed during a supplier-client engagement, through informal working 5.4 Firms are developing their own metricspractices and collaborative processes (Type IV for innovative practices, which could behidden innovation) will also be unrecorded by used to measure localised innovationformal measurements of innovation. Whilst small-scale, localised innovations are difficult to observe and measure (Type IV hidden innovation) at a firm-level, some suppliers are developing their own metrics for5. Innovation could be better measured measuring innovation. These take the form of:by analyses that are sector-specific number of ideas generated, developed, refinedand which capture innovation at the and delivered, and return on these; number offirm level and encompass new forms of patents; and revenues from new or innovativeorganisational practice service lines. Infosys, for example, uses revenues from services launched in the last five years as a5.1 Sector surveys could be used to capture key metric. Other firms, such as Atos Origin andand evaluate incremental and localised LogicaCMG, also track innovation by assessingforms of innovation the revenues associated with new services.345Sector-specific surveys could be used tocapture more accurately wider measures Innovative approaches, delivered through 345. Ovum (2007) 'Innovation in IT: Vendor Strategies.'of performance, efficiency and innovation. a supplier-client engagement can also be London: Ovum Plc.Surveys such as IBM's Global CEO study and measured in a number of ways. For example, 346. Examples include number of service calls answered,the Economist Intelligence Unit benchmarking one emerging approach is to derive a servers managed,survey of the IT sector could be adapted 'balanced scorecard'. Typically, these involve percentage of time an application was available.and expanded to include a specific focus on a combination of quantitative (for example, 347. Ovum (2007) 'Innovationmeasurement of incremental and localised service level agreements targets, shareholder in IT: Client Perspectives.'innovations and the importance of this type value delivered) and qualitative measures London: Ovum Plc.
77 services sector are focused on pure research markets to ensure that opportunities are not conducted at universities intended to produce missed.350 the next generation of software and IT technologies. More recent forms of support are While the UK has around 100,000 small attempting to link industry more closely with software firms, it lacks 'gorillas' – firms such as academic research in the exploitation of that Microsoft and Google – which grow very fast research. from start-up into major global enterprises.351 348. Technology Strategy In the UK, the sector is dominated by foreign Board (2007) 'Technology Strategy Developing UK A number of UK universities have world-class firms; only four of the top 20 software firms Capability Key Technology research groups specialising in ICT-related and seven of the top 20 computer services Area – Information and Communication research (for example, software research groups providers are British. Whilst this phenomenon is Technologies.' Swindon: exist at Southampton, Edinburgh, Nottingham, not unique to the software sector, and reflects TSB. Newcastle and Imperial College universities) the comparatively small local market size of 349. Intellect (2007) 'Software and IT Services Report and such groups have each received grants of the UK, this lack of home-grown 'gorillas' can – The Future.' London: £3 million from the Engineering and Physical restrict market growth and encourage high exit Intellect. 350. Ernst, S. (2007) China to Sciences Research Council (EPSRC) for carrying rates (successful firms in the software sector Catch Up with UK in Five out R&D work for the ICT sector. have often been bought out, for example, Years. In Dialogic (2007) 'Developing the Future: A Lionhead Studios by Microsoft). Poor contract Report on the Challenges More recently, Knowledge Transfer Networks enforcement of collaborative relationships and and Opportunities Facing the UK Software (KTNs) are helping link industry more closely partnerships and lack or management training Development Industry.' with academic researchers. A number of for growing firms are also factors which mean London: Microsoft. KTNs are directly relevant to the software/ that firms in the UK often remain small.352 351. Owen, G. (2004) 'Where are the Big Gorillas? computer services sector: Cyber Security, High-technology Digital Communications, Displays, and GRID 6.2 Programmes of support should ensure Entrepreneurship in the UK and the Role Computing.348 that, along with technical skills, business- of Government Policy.' oriented skills are developed in the sector, Working Paper. London: Inter-Disciplinary Institute This form of government support is valuable as this has the power to release wider forms of Management, London and necessary and has a role to play in the of innovation, crucial to the sector's future School of Economics. 352. National Endowment for innovation process but there is also a strong Science, Technology and argument for new policy, supporting broader 6.2.1 Address educational, recruitment and the Arts (2008) 'Unlocking forms of innovation. skills weaknesses within the sector the Potential of Innovative Firms.' Policy Briefing. Innovation in the software and IT sector will London: NESTA. Whilst UK software and IT services firms benefit be improved if education, recruitment and 353. Price, K. (2007) To Succeed in the Global from cheaper skills and labour in their back- skills weaknesses are addressed. A number Economy the UK Must office operations in India and China, these of proposals put forward by the sector skills Commit to Technology Skills. In Dialogic (2007) countries are rapidly developing their own council (e-skills UK) and other interested 'Developing the Future: A software and IT services sectors. They are now bodies (such as Intellect and the British Report on the Challenges and Opportunities competing with UK firms on the world stage. Computer Society) to address these issues, Facing the UK Software With the increasing growth and prominence of have suggested that the first step is to improve Development Industry.' London: Microsoft. these markets, the UK must continue to ensure the sector's image as a vibrant and exciting 354. At the school-level, an that firms compete more fiercely and develop industry in which to work.353 The sector needs example of a pilot scheme strengths in higher-value activities. Creativity, to transform the attitudes of young people run by e-skills UK and the South East England skills and innovation must be combined and (and particularly women) in order to counteract Development Agency harnessed to develop competitive advantages recruitment difficulties.354 (SEEDA), and in particular to target the gender in a global economy (see Section 6.2). imbalance that exists Educational courses have to become more within the sector, is CC4G – after school clubs aimed As users of software and IT services, SMEs relevant to employers' needs, and can be to provide compelling, fun are benefiting from global sourcing through achieved by working more closely with and educational activities for 10-14 year old girls, reduced prices of software and greater choice employers. This is beginning to happen. For accessing around 7,000 of standardised, cheaper IT products and example, the Diploma in IT aimed at the 14-19 young women in the region. services. However, smaller software and IT age range, has been developed in conjunction services suppliers are less able to exploit the with the sector skills council (e-skills) and global sourcing trend, due to the prohibitive employers.355 University courses should costs in setting up off-shore centres relative combine technical IT knowledge with business to their size, and the challenge of identifying know-how, and could offer more work-based and creating appropriate partnerships.349 This learning during degree programmes. The issue is essential to address, and policy should e-skills UK-developed Information Technology encourage and support those SMEs who want Management for Business degree course to establish off-shore operations in emerging also demonstrates how this can be achieved. Designed in conjunction with employers,
78and incorporating business, technology, already have training curricula addressinginterpersonal skills and project work and the development of these high-level skills,'Business Guru' lectures from IT firms and and the UK must do so too, if it is to remainextensive project within businesses, the course competitive and thrive.361 The proposalshas been available since 2005 and runs at 22 suggested by the sector skills agency go someuniversities (including Reading, Greenwich, way to addressing this issue, but more must beCentral England and Northumbria) and has done to ensure that the UK does not get leftaround 1,000 enrolled students.356 (See also behind. 355. Price, K. (2008) How the IT Sector Helped tosection 6.2.2). Shape Diplomas. In Ryan, 6.3 Ensure that greater systems of control C. (2008) 'Staying the Course: Changes to theIn turn, employers could develop, enhance and are enacted to counter the effects of Participation Age andinvest more in existing education and training software piracy Qualifications.' London: The Social Marketprogrammes for employees and managers, and Software piracy needs to be addressed within Foundation. Chapter 9.work more closely with schools and higher the sector by more stringent systems of 356. e-skills UK (2005) 'Theeducation institutions.357 For small firms, control. Software theft can harm technology Sector Skills Agreement for IT 2005-2008 Summary.'greater collaboration and co-operation with suppliers and affect consumers (both London: e-skills UK.large firms and academia could assist with individuals and enterprises) who may be at 357. Intellect (2007) 'Software and IT Services Reporttraining and education (through increased risk from unwittingly purchasing defective, – The Future.' London:use of knowledge transfer partnerships, for counterfeit products leaving them unprotected Intellect. p.14.example).358 and unsupported. Software piracy has a 358. Dialogic (2007) 'Developing the Future: A significant impact beyond the sector itself in Report on the Challenges6.2.2 Need for deeper business-oriented lost tax revenues, wages and jobs.362 Ultimately, and Opportunities Facing the UK Softwareskills this impacts on levels of innovation within the Development Industry.'To enable greater development and utilisation sector too. London: Microsoft.of broader forms of innovation within the 359. Price, K. (2007) To Succeed in the Globalsector, a wider understanding and knowledge In response to software piracy, governments Economy the UK Mustof business-oriented skills will be needed by IT must combat copyright theft by first, increasing Commit to Technology Skills. In Dialogic (2007)and software professionals. public awareness and education of the issue 'Developing the Future: A and second, by instigating a more robust Report on the Challenges and OpportunitiesUtilising new technologies with business approach to intellectual property law and Facing the UK Softwareknow-how can enable the development of enforcement.363 Development Industry.' London: Microsoft.new products, services and processes and 360. Dialogic (2007)improve working practices for companies in the 'Developing the Future: A Report on the Challengessoftware and IT services sector. These forms of and Opportunitiesinnovation are likely to be crucial to the sector Facing the UK Software Development Industry.'in the future. London: Microsoft. 361. The Economist IntelligenceThe novel application of technology across the Unit (2007) 'The Means to Compete. Benchmarking ITsector will not only require in-depth and up- Industry Competitiveness.'to-date technical skills, but also a sophisticated London: The Economist Intelligence Unit.set of business-oriented and management 362. It has been estimatedskills and understanding encompassing that over a four year period, the UK could misscommunication, team working, project out on £1 billion in lostmanagement skills and a broad knowledge of taxes, the creation of over 13,000 new jobs and anIT and business practices.359 IT and software extra £4.46 billion to theprofessionals need to be encouraged and economy unless software piracy is taken moresupported to develop these skills. Combining seriously and a reductionknowledge of technology with business skills in counterfeit software takes place, see Businessand applying such integrated higher skills Software Alliance/IDCcan give a firm an opportunity to engage (2007) 'Global Software Piracy Study.' Washington,more effectively with clients, develop greater DC/Framingham, MA:levels of innovation and achieve sustainable BSA/IDC.competitive advantage.360 363. Business Software Alliance (2007) 'White Paper: Necessary Elements forHowever, the UK software and IT services Technology Growth.' Washington, DC: Businesssector needs rapidly to develop and improve Software Alliance.employees' integrated technical and businessskills so that the UK has the IT professionalsit needs to succeed across all sectors of theeconomy. The US, Singapore and Australia
79 Appendix E: Electronics and IT hardware Innovation through technological development but with an increasing role for hidden innovation through adoption of new business models and a focus on high-value activities
The sector, once dominated by large national 2.1 Traditional innovation continues to be a champions such as ICL, GEC and INMOS, research-intensive activity, with both radical
80and incremental forms evident in the sector technical expertise; the complexity of theUK electronics continues to be a research- standard was a potentially serious inhibitor tointensive undertaking, with R&D expenditure the widespread take-up of Bluetooth. CSR isin 2006 at around £1.5 billion or 4 per cent of now the biggest global designer and suppliersales.370 This annual investment is equivalent of single chip wireless devices for mobileto around 7 per cent of total business applications, with approximately 50 per centexpenditure on R&D in the UK and involves market share and over 900 Bluetooth consumeraround 140 individual firms, or 16 per cent products using CSR chips. The firm has usedof all of the UK's research-active firms (those externally owned foundries for its waferspending more than £100,000 a year). This fabrication operations (the 'fabless' model)broad grouping of electronics firms ranks and has worked closely with major equipmentthird equal behind the two dominant sectors, manufacturers such as Intel, Nokia and Sharp inpharmaceuticals and aerospace. the development of award winning Bluetooth, GPS and WiFi products.372UK electronic equipment businesses areincreasing their research intensity. Although 2.1.2 Market pull and incrementaltheir sales have dropped by 20 per cent between innovation2002 and 2006, their R&D spending only fell The sector also relies heavily on incrementalby 11 per cent over the same period, producing innovations to remain competitive. Asrelative growth in R&D spend. By contrast, consumer electronics have grown in importance 370. These figures are taken from the 2007 R&Dthe smaller and more research-intensive and international competition has become more Scoreboard and encompasshardware sector registered good sales growth intense, the UK sector has been exposed to a two broad product groups, 'Electronic &of 12 per cent in this period, but reduced R&D highly dynamic and free flowing environment Electrical Equipment' andexpenditure by almost 10 per cent. However, the dictated by marketing and consumer wants. 'Technology Hardware & Equipment'; see2006 figures show an increase in annual R&D To remain responsive to market changes, Department for Innovation,expenditure for the first time in several years, electronics firms are constantly improving their Universities and Skills/ Department for Business,suggesting more positive R&D expenditure products incrementally whilst looking ahead Enterprise and Regulatorygrowth for the hardware sub-sector. to the next technological cycle. This enables Reform (2007) 'The 2007 R&D Scoreboard.' London: firms both to maintain their market share and DIUS/BERR.Electronics equipment and hardware firms are to avoid competition from low-cost economies 371. Ibid.among the top 15 most research-intensive UK- that mass-produce past innovations. 372. Janson, E. (2006) Single Chip Success. 'Igenia.' 27,owned firms, with four firms in the top seven, June 2006, pp.20-23.including ARM, CSR, Renishaw and Spirent An example is the development of personalCommunications.371 music players. These have advanced considerably from the Sony Walkman cassette2.1.1 Radical innovation and the importance player to the more advanced MP3 players.of the university spin-out Each technology was developed and evolvedSeveral new advances within the industry through incremental improvements within theirhave resulted from the commercialisation cycle before being eventually superseded byof university research. These innovations demand for the next generation, which wouldemerged from academic research and were again follow improvements in size, battery lifecommercialised through spinouts to local and features. The latest cycle is characterisedscience parks. It is through this route that by improvements in the capacity, size, andmany radical innovations have been brought to screen of MP3 players such as the Apple iPodmarket, some of which have changed the shape or Microsoft Zune player.of the marketplace. 2.2 Significant changes in the electronicsA good example is Cambridge Silicon Radio supply chain have led to new forms(CSR), which evolved out of Cambridge of organisational and business modelConsultants in 1998. CSR initially developed innovation becoming increasingly importantBluetooth systems to provide wireless for the sectortechnology for laptops and mobile phones,based on the founding team's university 2.2.1 The UK has seen a shift in the valueresearch. CSR's product was considered a chain from carrying out the majority ofradical and disruptive breakthrough, as it functions towards an emphasis on service,married the traditionally separate technical design and support roles, resulting inworlds of semiconductors, computing, fundamental changes to the sectorconsumer electronics, software, radio The electronics sector was once a highlytransmission and cellular telephony. In the late vertically integrated industry with large firms1990s, few manufacturers had all the necessary dominating the market and carrying out the full
81 array of functions. Innovation was insular and British firm and the increase in overseas 373. China alone is predicted closed. Following increased globalisation, these competition, UK electronics firms have adopted to produce $326 billion functions have been dispersed to economies innovative new business models. While chip (£155 billion) of electronic equipment by 2009, and firms best suited to dealing with each manufacture has moved to lower labour cost growing at a compound aspect of the chain. regions, there has been a rise in the number annual growth rate of 9.4 per cent since 2004. Other of higher-value activities such as design and key players include Taiwan, Raw material supply and component intellectual property (IP) licensing. This has Japan, Korea, USA and Germany. manufacture has shifted to low-cost or high spawned models such as 'chipless' – companies 374. Eighty per cent skill/capital-intensive environments such as that develop and market semiconductor IP of semiconductor manufacture cost is Eastern Europe and the Far East.373 The UK and 'fabless' – semiconductor firms that use incurred during the design has repositioned itself to perform higher-value externally owned foundries for their entire phase, see Electronics Knowledge Transfer functions such as design374 and low-volume, wafer fabrication operations. Network [online] Available high-value-added products and prototyping. from: http://www. electronics-ktn.com/ A leader in Europe, the UK is now home to These models fit into one or more global virtual Default.aspx over 150 independent design houses. Recent organisations.375 Firms can vary in size, though 375. A group of individual firms, growth in this market reflects over 20 years many remain small as there is little need to usually geographically dispersed, working of experience, much of which stemmed from grow to compete. Design can be carried out together towards a original national champion firms. by a few flexible professionals without a large common goal, carrying out functions traditionally organisational structure.376 These models can carried out within one Innovative new firms such as ARM, CSR and enable a 24-hour global operation by having physical, or heavily vertically integrated entity. Digico now lead the way in this truly global different firms operating in different time 376. For example, Frontier environment. Many international equipment zones. Silicon develop and design semiconductors for manufacturers such as Fujitsu, Sharp, Philips, digital radio, television, and Analog also have design operations located These flexible business models particularly and mobile television from bases in the UK and in the UK. Many UK-based firms and business helped innovative start-ups, as they no longer Ireland, then have these units fill supporting functions such as testing need to develop capabilities, or incur the costs manufactured in Korea and China for leading brands and validation services and consultancy (Austin of additional functions. They can concentrate such as Sony and Philips. Semiconductors Europe, for example, operates on their primary expertise within the supply 377. For example, there are now an integrated circuit test facility in Hampshire). chain. This is especially important in electronics only a few global firms that could singularly bear the as the cost of investigating and developing costs of establishing a new 2.2.2 Innovation in electronics is much new technologies has increased year on year.377 chip fabrication facility (around £3 billion). broader than technological change Users of these business models include ARM, 378. The firm originally alone. New forms of innovation – from ARC, Wolfson and Xilinx. By focusing on high- identified the market for its processors through a novel business models to novel business value activities, firms have been able to remain collaborative risk sharing partnerships and supply chains – are competitive by adopting new sustainable partnership with a mobile phone manufacturer with increasingly evident in the sector models and joining together in wider virtual the requirement to produce organisations. low power consumption microprocessors. Prior to 184.108.40.206 New business models this, processor design was Following the disappearance of the large carried out within large firm R&D facilities striving for greater speeds and capabilities for stationary computing applications. Following the rise in mobile devices such as walkmans, phones, and ARM were produced based on the firm's designs. digital cameras there was a ARM has adopted the chipless model need to produce chips that could run off mobile power ARM is a British technology firm founded in order to remain flexible and avoid sources. in 1990 following a spinout from Acorn competing in markets where costs can be 379. ARM (2007) 'ARM Computers. Its technology is based on driven down by lower cost regions. Holdings Plc Reports Results for the Fourth 32-bit microprocessors and can be found in Quarter and Full Year almost all modern mobile devices.378 They This business model has been highly 31 December 2007.' Cambridge: ARM. account for over 75 per cent of all 32-bit efficient at delivering value. For example, 380. ARM (2007) 'ARM Annual embedded Central Processing Units in the ARM has a growth rate approximately twice Report and Accounts 2006.' Cambridge: ARM. market today. However, ARM does not that of the semiconductor industry as a produce physical chips. Instead it licenses whole.379 The firm estimates that in 2006, its technology to other chip manufacturers 1.5 billion people – a quarter of the world's such as Intel, AMD, and Samsung under population – bought an ARM-powered the chipless model. ARM generates its product, generating more than £263 million revenue by charging royalties from chip in revenues, yet the firm employs fewer manufacturers; in 2005, 1.7 billion chips than 1,500 people.380
8184.108.40.206 The rise of collaborative partnerships – for this customised service.381 Specialistchanging research and development practice electronics firms in the UK produce a numberIn traditional electronics manufacturing, R&D of products for international markets includingoften took place within large internal facilities. mixing desks for the creative industries, controlLarge teams of scientists and engineers were systems for mineral exploration and medicalemployed to explore and exploit commercial monitoring systems for health services.and technological opportunities. Today,innovation increasingly takes place throughcollaborative partnerships and strategicalliances. These often cross disciplines and 3. Innovation in the electronics sectornational boundaries. R&D will typically involve is determined by competition, cost andengineers, marketing and sales people, as well risk which can be both barriers andas external stakeholders such as suppliers and driversend-users. 3.1 Competition is increasingly global inThere are two main reasons why this happened. natureThe first is that the electronics sector has Innovation in the UK electronics sector isbeen keen to share the risk and costs of new largely driven by global pressures. The costtechnologies. But the second reflects an competitiveness of developing nations andoverall structural shift. As the supply chain has their ability to commoditise products has led to 381. Von Hippel, E. (2005) 'Democratizing Innovation.'become less vertically integrated, it has become a decline in UK electronics manufacturing. For Cambridge, Massachusetts:increasingly necessary to involve external example, China is the world's largest electronics The MIT Press. 382. Reed Electronics Researchfirms, and even sectors, to exploit capabilities manufacturer, with more than $300 billion in (2006), 'Yearbook of Worldthat are no longer located in-house. A current products in 2006.382 It accounted for 18 per Electronics Data, Volume 3 - Emerging Countriesexample is Apple's iPhone, which incorporates cent of global electronics output in 2005, 2006/2007.' Wantage:technology from more than 15 separate firms compared to just 4 per cent in 1997. Half of Reed Electronics Research.including CSR and Wolfson. Chinese suppliers of electronic components, 383. Global Sources (2008) 'China Supplier Survey, consumer electronics, and computer and 2nd Half 2007.' Singapore:22.214.171.124 High-value, low-volume markets and telecommunications products expect more Global Sources. 384. Unico/Universitiesthe importance of end-users than 20 per cent growth in export sales UK/Research CouncilsFirms are now accessing new niche markets during 2008; a quarter expect an increase of UK (2007) 'Impacts: Successes from UKwhere they compete on quality and function, 10-20 per cent.383 More than 80 per cent of Research.' Cambridge/rather than simply on price. Central to this suppliers anticipate increasing their production London/Swindon: Unico/ Universities UK/Researchenvironment is an understanding of customer capacity by 20-50 per cent. The EU is the main Councils UK.needs. Innovative arrangements see firms destination for these exports.working closely with potential owners to ensurethat strict specifications are met. This 'user- In a sector dominated by small firms,led innovation' is a recognition that end-users businesses have to make continuousare not all the same, they will have individual improvements to existing products or discoverpreferences and are willing to pay a premium new technologies to remain ahead. By
83 moving into more specialised, higher-value physical sciences, particularly chemistry, on the 385. In the last two UK functions such as design, and adopting new decline.387 A Select Committee report388 found Community Innovation organisational models, the UK electronics that universities view the greatest difficulty Surveys, cost and risk factors have ranked sector has avoided exposure to many of the for recruitment of new entrants was in the highest amongst perceived competitive pressures from both low-cost and computer departments, closely followed by barriers to innovation within the electronics high-technology economies. electronics. This trend is reflected in A-level sector. This is particularly choices too, and while non-nationals appear acute for SMEs, where funds are limited and 3.2 The pressures of cost and risk can act as to be filling the gaps presently in the public available venture capital barriers for innovation and private sectors, there is a potential risk (between proof of concept and full launch) can be The cost and associated risks of pursuing of future skills shortages in key areas, such as difficult to acquire. See advances within the sector can act as a materials science. This could impact negatively Department for Business, Enterprise and Regulatory major barrier to technological innovation.385 on the UK electronics industry through Reform (2001; 2005) 'UK But paradoxically, cost and risk have driven capacity constraints and act as a barrier to Community Innovation Survey.' Division 4 organisational innovation in electronics, innovation. Statistics SIC 30 and 33. as firms turn to partnerships and strategic London: BERR. 386. The idea that alliances to spread the cost and risk of 3.4 Users and consumers as drivers of disequilibrium in the innovation. A key facilitator has been improved innovation market, brought about by a new innovation resulting telecommunications, which has enabled There growth of consumer electronics has in a temporary monopoly, networked organisations and partnerships that changed the focus of the electronics market. stimulates innovation within other firms in an no longer need to co-locate. It has become more dynamic as marketing and attempt to capture or brand image have become more important. recapture a lead position; see Schumpeter, J. (1943) Through their radical innovations, spinouts and This environment drives incremental innovation 'Capitalism, Socialism and very small firms not only provide the necessary given the need to enhance and adapt existing Democracy.' London: Allen & Unwin. churn and disequilibrium to drive innovative products to differentiate from competitors and 387. Department for Education activity,386 they can reduce the costs and risks appeal to consumer requirements.389 Such a and Skills (2006) 'The associated with pursing innovation; they can setting requires manufacturers continually to Supply and Demand for STEM Skills in the UK also enhance the capability of larger firms. anticipate emerging technologies, capabilities Economy - Research Indeed, innovative SMEs are often incorporated and designs whilst developing existing product Report.' London: The Stationery Office; into firms following a successful demonstration lines. This drives open innovation and presents Department for Education of a new technology. CSR's recent acquisition opportunities for start-ups and incumbent and Skills (2003) 'Skills Strategy White Paper "21st of Cambridge Positioning Systems to increase firms. It also prompts new alliances and Century Skills - Realising its GPS capabilities is one example. ARM also leads some firms to grow quickly. However, our Potential".' London: The Stationery Office. follows an 'innovation by acquisition' process these market characteristics mean that such 388. House of Lords Select by acquiring innovative SMEs to increase their alliances can be short-lived unless firms can Committee of Science and Technology (2002-3) capabilities. keep up with the pace required by the major 'Chips for Everything: manufacturers and consumers. Britain's Opportunities in a Key Global Market.' Conversely, large firms may be reluctant to deal Session 2002-3 (2nd with small firms as they may have concerns The consumer electronics market has led to a Report). London: The Stationery Office. about the long-term financial viability and growing number of UK-based design houses. 389. A good example is the capacity of a single small scale supplier. They Design is clearly important in a market based way that mobile phones may prefer to deal with a similar sized firm on brand and consumer emotion. The UK has a or laptops become smaller or lighter in response to to protect against losing their main source of strong international reputation and image for demand, but retain the knowledge or a key firm going out of business. electronic and semiconductor design.390 Sharp's same basic features. 390. Department of Trade The fragmented composition of the sector may UK design unit is investigating advancement and Industry (2006/7) be a barrier to small-firm development and in liquid crystal display (LCD) technologies 'Electronics Systems Design – A Guide to UK innovation. Building trust and collaborations such as 3D displays for mobile phones. The UK Capability.' London: The within the sector could start to spread some of is now home to 31.9 per cent of the chipless, Stationery Office. this risk. fabless and integrated circuit design firms in 391. Future Horizons (2007) 'Annual Semi-conductor Europe391 and contributes approximately 15 per Report.' Sevenoaks: Future 3.3 Potential skills shortages could inhibit cent of the world's ASIC (Application Specific Horizons. 392. Moor, J. (2006) 'UK the sector's future Integrated Circuit) semiconductor design Semiconductor Design The available labour market within the starts.392 Expert opinion is divided on whether Evolves and Grows Stronger.' 7th August. UK will have a major impact on the future design will eventually follow other functions National Microelectronics success of the electronics market. The UK's and be outsourced overseas. Institute [online] Available from: http://www.nmi.org. stock of science and engineering graduates uk/press_releases compares well internationally, and the stock 3.5 Regulation can be both a driver and of graduate scientists in the UK labour force barrier to innovation has been growing steadily. However, there are UK and European environmental regulation evident challenges, with the number of British is a major consideration for electronics. New students opting to study engineering and EU directives393 have implications for both
84manufacturers and designers, bringing more fostered further innovative practices suchstringent requirements on packaging, recyclability, as collaborative networks, strategic alliancesand the control of hazardous substances. and cross-disciplinary operations to address the requirements of the modern electronicsRegulation can both hinder and drive environment.innovation. In the first instance it can limitthe scope and parameters of a product, in the 4.3 The sectoral composition of the sector,second it can act as a reason to innovate to with many small firms, may mean thatfind new solutions and alternative options. innovation is going unmeasuredOne example has been the pursuit of lead-free electronics production, with a variety of 4.3.1 Day to day problem-solvinglead-free solder alloys having been trialled within SMEsand released, but often with significant Much electronics innovation could be hiddencompromise on cost, process efficiency or primarily because it occurs on a day-to-day 393. WEEE Regulations 2006 - SI 2006 No. 3289 – Thejoint reliability; and more recently through basis within SMEs, with little or no declarable Waste Electrical andthe development of novel oxides and alloys R&D budget. This Type IV hidden innovation Electronic Equipment Regulations 2006, basedand nano-composites.394 Another is a project is widespread given the composition of the on Directive 2002/96/ECcalled 'Reflated' (a collaborative research sector, and often takes the form of informal of 27th January 2003 (OJ No. L173, 13/2/2003) andpartnership)395 which is investigating ways of learning and the development of internal Directive 2003/108/EC ofrecycling and reusing liquid crystal displays processes to tackle customer needs on a 8th December 2003 (OJ No. L345, 31/12/2003)(such as those found in watches, phones case-by-case basis. Often an SME's primary – affecting design for end-and laptops). Over three billion devices with concern is survival: R&D and innovative activity of-life disposal. The EuP Directive 2005/32/EC,LCD displays were manufactured in 2006 and may only occur when needed, rather than as a establishes a frameworktheir environmentally acceptable disposal is formal function. for setting of eco-design requirements for energy-a growing problem. At this early-stage of the using products, aiming toproject a number of innovative processes have Further, as previously highlighted, the overall improve the environmental performance at a veryalready been developed. These are being scaled electronics industry is mainly comprised of early-stage in the productup and market tested.396 micro SMEs which are not fully represented in design (examples include lighting and on standby the Community Innovation Survey, which only power). RoHS Directive considers firms with more than ten employees. – 2002/95/EC covers the restriction of the The survey includes various indicators such use of certain hazardous4. Innovation is hidden because of as type, source of information, and modes of substances in electrical and electronic equipment.incremental innovation, the adoption innovation, but will leave the majority of the 394. Novel oxides is one ofof new organisational forms and sector invisible to measure. eight streams beingcomposition of the sector investigated in the Science City Bid 2 collaborative 4.3.2 Patenting issues package between4.1 The importance of incremental Smaller firms can struggle to meet the costs Warwick and Birmingham universities.innovation to the sector and, sometimes, the requirements of patenting 395. The partners include: theElectronics firms rely heavily on incremental procedures. This leaves many inventions Technology Strategy Board, recyclers, technologyproduct innovation to remain competitive. invisible to measurement. Fears of piracy in developers, a specialistThe pressure to enhance and adapt existing emerging economies cause many firms to rely chemical processor and an engineering equipmentproducts requires speedy reaction to changes on secrecy as their main IP protection, rather manufacturer.in the market and the incremental development than declaring and codifying them through 396. Department for Innovation,and refinement of products. Similarly, firms a patent. This can leave much of the sector's Universities and Skills (2008) 'Innovation Nation.'may use existing electronic technologies in new technological innovation hidden. The defence London: The Stationeryor novel ways, contributing to the innovation of a patent infringement is beyond the means Office.
process. This Type I hidden innovation is not of many SMEs, especially if the infringementrecorded in narrow measures of R&D. occurs overseas.
85 5. Innovation could be better measured distinguish 'innovative' acquisitions from all by adapting existing tools and acquisitions, and the impact on the acquiring indicators, by incorporating the value business is not elaborated. Additional data of new organisational forms and by on value-added and productivity might be tracking small-firm activity necessary to create a useful indicator.
5.1 New measures that better capture 5.3 New measures of innovation could track UK strengths and levels of incremental small-firm activity innovation should be developed Given the importance of the small-firm to the Type I hidden innovation could be measured electronics sector, the number of start-ups and through new indices combining existing data spin-outs created at a sectoral level could be sets or by including new questions within measured. New businesses have been critical to established business surveys. For example, the renaissance of the UK electronics industry the UK is strong in electronics design, which it and they continue to be a potential source of then licenses to other firms and manufacturers. important new technologies and successful Capturing this would require the measurement business models.398 However, existing data of this flow of knowledge within the UK and on start-ups do not lend themselves easily to internationally to manufacturing economies. analysis of innovators by sector, as only basic Currently this data is not collected; however, characterisation and operational statistics, such 397. Work being undertaken the Office for National Statistics (ONS) annual as address and turnover, are gathered. Better by Jonathan Haskel and a team at the Centre for survey of R&D expenditure might prove a sample sizes and more specific data on the Research into Business suitable vehicle for such an enquiry, and should innovativeness of companies might be explored Activity at Queen Mary, University of London are aim to represent smaller firms within its sample. with ONS and others. attempting to measure Similarly, given the positive perception of UK intangible assets (including brand value) and assess design internationally, it might be possible Equally, existing statistics on survivability their contribution to measure the brand value of design house appear to correlate well with dynamism, where to innovation and productivity. contributions to give an indication of their the innovativeness of an industry might be 398. A new 'best way' of success.397 Given that firms in the sector rely measured by the number of new firms starting organisation within a specific sector and context, heavily on incremental product innovation to up and entering the sector indexed against rendering previous models remain competitive, sector-specific surveys survival rates.399 Firm growth rates can be a obsolete. could be the best way to capture the extent good indicator of innovations past and present, 399. BERR VAT statistics can be used to identify the and value of this form of innovation. so identification of the fastest growing firms number of start-ups each in the UK might highlight high growth areas year. 400. Deloitte Technology 5.2 Organisational and business model within the sector.400 The ONS is also reporting Fast 500 EMEA ranking innovation could be better measured by the aggregate data on high-growth firms, which is published every year to identify the fastest rate of adoption within the sector and the could be disaggregated. Additionally, the BERR growing high-technology effect of such organisational forms on firms value-added scoreboard offers potential for companies in the EMEA region. Strategic alliances and partnerships now take further analyses at a sectoral and firm level. place across the sector. These collaborative These data could be matched with several arrangements (Type II hidden innovation) other innovation indicators to develop a useful highlight a fundamental shift to open index of total innovation effort and outcomes. innovation, one that is central to the sector's innovation potential. However surveys do Firms could be surveyed more formally to not investigate this issue directly: number, measure innovative and efficiency practices type and 'value-added'/achieved outcomes and processes within SMEs (Type IV hidden could potentially be recorded as measures innovation) and the innovation that goes on of effectiveness of such arrangements to 'below the radar'. individual firms. A measure for the sector as a whole might be the rates at which such alliances are formed. 6. Innovation could be improved by As we have seen with ARM and CSR, new greater support for hidden innovation organisational models have allowed firms to and small firms within the sector and by become more flexible to their environments increasing skills capabilities and absorb new capabilities by internalising innovative new start-ups. The ONS aggregates 6.1 Existing UK measures focus on statistics on the number and value of deals in 'traditional' innovation the UK (mergers and acquisitions); it may be possible to develop this further at the sectoral 6.1.1 Strong broad national approaches… level. However, the data do not automatically Broad domestic national measures range from
86R&D tax credits to support for collaboration 6.2 Increase support for 'non-traditional'with the university/research institute sector to innovationsupport for clusters/networks in strategic and It is clear that support and policy measuresemerging fields.401 Given the pervasiveness of have a somewhat technological characterelectronic components and the difficulties with which suits certain types of firm better thandelimiting the sector, electronics has suffered others. Potentially, it is easier for firms tofrom a lack of visibility, fragmentation and find support for more traditional research andsupport.402 Sector-specific attempts to redress technology projects than it is to find supportthese issues have occurred recently with the for innovative business models or risk-sharingcreation of the BERR Innovation and Growth partnerships. Export credit guarantees, launchTeam, the development of the Electronics aid in aerospace, or government procurementLeadership Council and the Photonics of technology can help small firms to reduceLeadership Group, and specific electronics risk and nurture critical, new and novelKnowledge Transfer Networks. Electronics applications.is now increasingly better supported thanmany other sectors in the UK, aside from Helping firms and entrepreneurs to explorepharmaceuticals, biotech and aerospace. and experiment with new business models or commercial strategies could be hugely6.1.2 …but regional approaches must be important, as the growing concentration on IPstrengthened and better coordinated and design could present longer-term risks, as 401. For example, BERR continues to sponsor theThere are a plethora of innovation support other European and international electronics electronics industries inschemes available in the regions, with plentiful firms are aggressively challenging the UK's the form of networking and advice, and addressingopportunities for electronics companies to strength in higher-value activities. information failures. Thesecure business-development advice, coaching Technology Strategy Board (TSB) has the ICT fieldand financial assistance. The English regions 6.3 There is a need to improve sector- as a major focus, withand the devolved administrations all seek specific SME support measures the sector accounting for 15-30 per cent a yearto support prospective innovators, through The small size and knowledge-based nature of of its spending. It hasmeasures such as the grant for R&D (formerly many UK electronics firms also seems to be a six Knowledge Transfer Networks which operateSMART), the Manufacturing Advisory Service complicating factor, since targeted innovation primarily in the electronicsand regional venture capital funds. ICT firms programmes can often favour larger, more area, which aim to assist with information servicescan access all these schemes. There are established firms with a national brand and and networking activitiesalso numerous one-off innovation support a substantial physical presence. Given the when building supply chains. The Engineeringschemes, from the collaborative innovation importance of young and small firms within the and Physical Sciencescentres (CICs) in Yorkshire to the Emerging innovation landscape, there could be a case Research Council (EPSRC) spends as much as £300Technologies scheme (ETS) in the South East for more sector-specific policies to alert firms million a year on grants toto the Intermediary Technology Institutes (ITIs) to opportunities for support and to help them the academic partners of its collaborative researchin Scotland. In almost all cases, they have access and make good use of what can be projects and networks,targeted strategic technologies and industries; complex and costly schemes. which operate across its broad remit, and engagemost encompass one aspect or another of with, amongst others, UKelectronics and are actively engaged with The balance of support could be modified electronics firms. 402. Department of Tradelocal electronics firms. There are numerous too, with greater support for new firms and and Industry (2004)general business support schemes too, such as their faster maturation (success or failure). 'Electronics 2015 – Making a Visible Difference.'Electronics Yorkshire, open to electronics firms. There should also be more support for Electronics Innovation commercialisation activities such as proof of and Growth Team Report. London: The StationeryHowever, these schemes tend to be smaller, concept schemes, tactical and legal advice, to Office. Chapter 3;more particular and often shorter lived than help innovative firms choose the best strategy Department of Trade and Industry (2005)their national equivalents. User surveys to protect their IP. Promising technologies 'Competitiveness in thesuggest this 'fluidity' reduces their visibility could be nurtured and their owners mentored UK Electronics Sector.' Sector Competitivenessand attractiveness, leaving most schemes to help them locate sufficient funding and Studies No. 1. London: Thepatronised by a rather small proportion of the target the most relevant markets. Stationery Office.total business population, while most of theirpeers proceed without any meaningful support. 6.4 Maintain and develop skills for theThe current business support simplification sector's futureprocess is expected to reduce fragmentation By moving into more specialised, higher-and confusion, while improving efficiency and value functions, the UK electronics sectoreffectiveness of delivery. It should increase has been able to avoid exposure to manyeffective support. of the competitive pressures from low-cost economies. However, with the increasing output of highly skilled engineers and designers in these countries, the UK will have
87 to continue innovating and producing skilled an area of high risk/high reward and the individuals to avoid becoming priced out of its UK holds a leading position in this area, new market. with a strong research base (for example, at the Centre for Advanced Photonics and The Electronics and Innovation Growth Team Electronics at the University of Cambridge (EIGT) has made a series of recommendations and Cavendish laboratories). Around 30 UK designed to overcome issues concerned with firms have benchmarked world-class R&D in leadership, diversity, skills shortages, image, plastic electronics and hold much of the IP lack of visibility403 and sectoral evolution (which and knowledge of this field. Home-grown have shifted industry skill needs).404 BERR is companies such as Plastic Logic and Xaar have working closely with various stakeholders to leading positions in developing and marketing tackle the anticipated skills gap in electronics early products. The key challenge for policy with industry placements, recruitment will be to ensure that the UK builds upon 403. Department of Trade incentives, and support for schools seeking this world-leading position and that firms are and Industry (2004) 'Electronics 2015 – Making to stimulate interest in electronics. Failure to supported to develop and grow to capitalise on a Visible Difference.' recruit suitably qualified individuals will act as a this market for the overall benefit of the UK. Electronics Innovation and Growth Team Report. barrier to innovation. London: The Stationery One final issue is the imperative for using less Office. Chapter 3; Department of Trade 6.5 The sector will have to innovate to cope electrical power and energy against the wider and Industry (2005) with coming technological disruptions backdrop of reducing carbon emissions and 'Competitiveness in the UK Electronics Sector.' A number of emerging technologies are set sustainable development. The sector will need Sector Competitiveness to lead to new market opportunities in the to find ways to minimise the consumption of Studies No. 1. London: The Stationery Office. electronics sector over the coming decade. electrical power through innovative approaches 404. For example, the EIGT in device efficiency and system design. recognise that the Electronic devices will expand their electronics sector is perceived as short- functionality: chips with moving parts termist in its recruitment are already becoming the basis for new policies, expanding in line with industry cycles technologies, such as acceleration sensors in and reducing numbers the automotive market and electronic and in downturns. Despite a number of sectors photonic nano-devices in data processing employing this flexible and storage. The increased functionality workforce model, it has led to negative press and of individual devices will be accompanied has had an impact on the by innovations in their packaging (such as attractiveness of a career in the electronics sector. bonding chips together into a 3D array), which 405. In 1965, the founder of could affect and improve applications such as Intel, GE Moore predicted that the number of mobile phone cameras and medical devices. transistors which could Because of Moore's Law,405 miniaturisation be placed on a transistor would keep growing is not thought to be sustainable. After exponentially, doubling 2015, there are likely to be opportunities for every couple of years. According to sector disruptive technologies such as carbon-based experts, Moore's Law semiconductor devices (for example, nanotubes is likely to have at least another decade to run, and polymer transistors) and quantum before silicon-based electronics (quantum dots and wires). The hardware begins to reach its physical limits. UK electronics sector currently has strengths 406. The Economist Technology in device and system-level design and must Quarterly (2007) 'Crystal ensure that it is well placed to continue Clear.' 8th December, p10. building on its strengths to exploit new and novel innovations.
88Appendix F: AutomotiveInnovation focused on incremental product development alongside processinnovation, but with a resistance to new business models
89 with vehicle manufacturers from around the commercial applications for technology world and offers a full spectrum of services developed within the McLaren Group. from concept design to limited-series vehicle production. This includes vehicle and engine test facilities, design engineering consultancies, specialised new technology R&D companies 2. Innovation in automotive focuses on and university research centres. In addition, incremental product development with 414. Motorsport Valley is Nissan chose London as the location for its some major process changes but limited typically characterised by a 100-mile crescent European design centre (see 2.1.4). innovation in business models from Surrey up through the Northamptonshire/ Oxfordshire heartland The UK has specific and under-recognised 2.1 Traditional innovation in mass across the south midlands areas of leadership. For example, Smith Electric market automotive is focused mainly on and over to East Anglia; see Motorsport Research Vehicles, based in Washington, Tyne and Wear, incremental product development with long Associates (2003) 'A Study is the world's largest manufacturer of road- lead times into the UK Motorsport and Performance going electric vans and trucks. Engineering Cluster, 2.1.1 Core product technology is the main Final Report.' Motorsport Research Associates. Finally, 'Motorsport Valley' is the premier site focus for innovation 415. Motorsport Research in world motorsport production.414 It is one The car has not greatly changed as a piece Associates (2003) 'A Study of the few globally dominant UK regional of technology since the onset of mass into the UK Motorsport and Performance clusters in any sector. The UK motorsport production in the 1920s. It is comprised of Engineering Cluster, industry employs over 40,000 people, of two core technologies: an all-steel body that is Final Report.' Motorsport Research Associates. whom 25,000 are engineers, in more than pressed, welded and painted; and an internal 416. The total turnover the 3,000 firms.415 The engineering sector of the combustion engine (petrol or diesel) that motorsport sector, that is, including events, industry has a turnover of £2.9 billion (with is cast and machined. Alternatives to these television viewing, and so motorsport-related services earning a further two core technologies have so far remained on, is estimated at 5 per cent of GDP (£6 billion) £1.7 billion).416 More than 50 per cent of marginal to an industry largely concerned with in the UK – the highest this is in export sales. Of the 22 constructors economies of scale. in the world; see Henry, N., Angus, T., Jenkins, who provide cars to the four global series in M., and Aylett, C. (2007) 2006, eleven were based within the UK.417 For Traditional innovation focuses on continuous 'Motorsport Going Global, The Challenges Facing the 2008 season, seven of the 11 Formula 1 incremental improvement to core product the World's Motorsport teams are based in the UK. Moreover, some technologies, with an essentially conservative Industry.' London: Palgrave Macmillan. motorsport firms have sought to exploit their product design, due to product complexity, 417. Henry, N., Angus, T., specialised design and technology expertise high capital costs, and market competition. Jenkins, M., and Aylett, outside the sector; for example, McLaren Suppliers of components and materials are C. (2007) 'Motorsport Going Global, The Applied Technologies (formed in 2004) works often responsible for important innovations, Challenges Facing the with a diverse range of industries and develops while manufacturers often focus on process World's Motorsport Industry.' London: Palgrave innovations. Macmillan. 418. In 2005 GM announced a $2.5 million, three-year research programme with Stanford University and Bosch to investigate HCCI technologies with respect to sensors, controls Homogenous charge compression need for a spark plug. Overall, the greater and actuators. Ford has a similar programme ignition engines efficiency of the combustion process and underway with MIT. the relatively low temperatures inside the Jaguar Land Rover has also conducted extensive An emerging example of incremental cylinder result in low nitrogen oxide (NOx) research into HCCI with innovation is the homogenous charge emissions compared with spark-ignition Birmingham University and other partners. compression ignition (HCCI) engine. Honda petrol and direct injection diesel engines. 419. A lean mixture has a high has been leading its development.418 Moreover, HCCI can be scaled to almost ratio of air to fuel. 420. Based on a study of the any size or application from motorbikes to top 850 UK spenders on The idea of an HCCI engine is hardly new as large ships, and need not be tied to the R&D, see Department for a technical concept, and is often described traditional fuels of petrol and diesel. Innovation, Universities and Skills/Department as combining the advantages of diesel for Business, Enterprise and petrol. With the homogenous charge, An attractive aspect of this technology and Regulatory Reform (2007) 'The 2007 R&D fuel and air are mixed before combustion, is that the engines could draw on Scoreboard.' London: thereby allowing a more uniform burn and modifications to existing designs, and DIUS/BERR. reducing particulate formation. With high could in theory be produced at low-cost in compression, the very 'lean' mixture419 existing facilities. ignites within the cylinder without the
90 421. Toyota (2007) 'AnnualEven so, R&D in automotive can be moderately The development of a car – from design to Report 2007, Buildinghigh. The sector spends 5.2 per cent of all production logistics – takes up to five years. a Platform for Growth.' Toyota City: Toyota.R&D in the UK, or just over £1 billion each The product cycle (the time a model is kept 422. European Commissionyear, equivalent to an R&D intensity of 4.3 in production) can be up to seven years. (2005) 'CARS 21, A Competitive Automotiveper cent.420 Even a manufacturer with a strong The concept phase and production cycles Regulatory System forreputation for long-term R&D investments of engines and transmissions can be longer, the 21st Century, Final Report.' Brussels: Europeansuch as Toyota has a global R&D intensity of between seven and ten years. Manufacturers Commission.'only' 3.7 per cent.421 As might be expected, and their suppliers plan and allocate production 423. Department for Innovation,high performance engineering areas such as capacity well in advance to accommodate Universities and Skills/ Department for Business,motorsport have much higher R&D intensities, production and renewal of their ranges. As a Enterprise and Regulatoryoften exceeding 30 per cent (in part because consequence, 60 per cent of the cars that will Reform (2007) 'The 2007 R&D Scoreboard.'of their comparatively low sales). Because of be on sale in 2012 are already in production London: DIUS/BERR.its scale, the automotive sector is the largest today, while another 30 per cent are in This differs from the 80% that has sometimes beenR&D investor in Europe (20 per cent of total advanced stages of development.426 This gives suggested, see paragraphEuropean manufacturing R&D) with an annual the sector an almost in-built innovation cycle 9, House of Commons Trade and Industryinvestment of around €20 billion.422 centred on model renewal programmes. It is Committee (2007) 'Success difficult and expensive for the manufacturers and Failure in the UK Car Manufacturing Industry:The majority of R&D spend is undertaken by to change designs and specifications once a Government Responsevehicle manufacturers rather than supply chain model is in production. to the Committee's Fourth Report of Sessionfirms. By far the biggest spender is Ford, with 2006–07, Third Special£584 million, 54 per cent of all automotive Given this conservatism and incrementalism, Report of Session 2006–07.' London: TheR&D in the UK.423 The importance of locating the sector has fewer links with universities than Stationery Office.R&D activities near to assembly operations some other sectors. Where they exist, they 424. Automotive Innovation and Growth Team (2002)varies with type of R&D; vehicle assemblers focus on three areas: engineering, including 'Design, Developmentconsider it important in near-to-market stages concurrent engineering; design, including and Manufacture Report.' London: AIGT.of vehicle development, but far less important rapid prototyping and tooling; and materials, 425. National Institute offor 'basic' R&D.424 including new manufacturing materials and Standards and Technology processes.427 Major assemblers including Nissan (2005) 'Understanding Private-Sector DecisionBy far the largest component of manufacturers' UK, Ford and others are active sponsors of Making for Early-StageR&D expenditure is on new vehicle model research. Beyond these, few tier 1 firms are Technology Development.' Gaithersburg: NIST.development rather than longer-term engaged in research activities in the UK.428 426. European Automobileinnovation; one study suggests that 93 per Manufacturers' Association (undated) 'Lead-time iscent of R&D expenditure is devoted to product 2.1.2 Process technology is the other main Essential and Will Notdevelopment, with only 3 per cent for early- area of automotive innovation Prevent Emissions from Going Down.' Brussels:stage technology development, 3 per cent for Many important innovations have occurred ACEA.the invention of new concepts, and 1 per cent in process technology or new materials, even 427. Automotive Innovationon basic research.425 around core technologies such as the all-steel and Growth Team (2002) 'Design, Development and Manufacture Report.' London: AIGT. 428. Automotive Innovation and Growth Team (2002) 'Design, Development and Manufacture Report, Issue 8: Lean Manufacturing Ultra Light Steel Auto Body (ULSAB) The project reduced the weight of car Knowledge & Lean Production Dissemination consortium bodies by up to 35 per cent. It cut costs by in the UK.' London: AIGT. 14 per cent and improved rigidity. ULSAB 429. The results of Phase 1 of ULSAB was designed to demonstrate relied on innovative processes and materials ULSAB, which sought to demonstrate technological the ability of steel to deliver a significant including: sandwich (laminate) steel potential, were announced weight reduction in vehicle bodies with which comprises two sheets of CR steel; in September 1995. The entire design process was reduced cost without compromising safety hydroforming which involves the three conducted on computer. and performance.429 It was undertaken dimensional forming of hollow tubes or Phase 2, which sought to develop actual vehicles, by vehicle designers and thirty-five sheets to make parts with complex shapes started in 1996, with steelmakers from around the world. and varying wall thickness; and laser seam actual bodies constructed by 1998. Alongside this, ULSAB was not about researching new welding which offers single side access Phase 2 developed more technologies or materials; rather it was a to the weld, greater vehicle dimensional detailed cost models of the ULSAB vehicle, a platform which allowed the steel industry accuracy, and greater stiffness. Various computer-based styling to demonstrate best practice materials and aspects of the ULSAB approach are already exercise to show how a completed body and processes within one vehicle and a holistic in production, but major investments in closures might look, and design. new process technologies will have to be a crash analysis. Phase 3 will see the transition of made if ULSAB is to be delivered fully. the design approach into volume vehicle production.
91 body, leading to productivity gains and cost For example, hybrid electric vehicles (HEVs) savings. combine a conventional propulsion system with an on-board rechargeable energy storage A recent study of emerging product system to achieve better fuel economy than technologies reinforces the impression of conventional vehicles without being restricted largely incremental development in core to short journeys like battery electric cars. technologies.430 The 33 predicted 'blockbuster' The first hybrid motor was developed in technologies (with the potential to earn 1901 by Ferdinand Porsche. There was some revenues of €1 billion a year or 100 per cent development through the 1960s and 1970s, market penetration by 2015) include active but HEVs only became commercially successful power steering, battery energy management, in the late 1990s when the Toyota Prius and electromechanical braking, electronically then the Honda Insight were launched. In controlled air suspension, and NOx catalytic 2005, Toyota announced its intention to reduction and storage. Suppliers are behind produce 600,000 hybrid cars by 2010 (and the greatest number of these innovations, more recently, a million hybrids a year within a but the biggest single innovators are vehicle decade). manufacturers. Another firm, Zero Pollution Motors (ZPM), 2.1.3 Disruptive technologies have emerged expects to produce the world's first air-powered 430. Diem, W. (2007) 'Wyman but remain at the margins car for the US in early 2010 (see also 6.1).431 Study Identifies 33 'Blockbuster' Technologies.' Alternative ways to run vehicles are being ZPM is the US licensee for Luxembourg- AutomotiveWorld.com, 1st developed. Fuel cells may be the best long- based MDI, which developed the Air Car August. 431. Sullivan, M. (2008) Air- term solution because they do not use fossil as a compression-based alternative to the Powered Car Coming to fuels (a fuel cell is an electrochemical device internal combustion engine. The New York- U.S. in 2009 to 2010 at Sub-$18,000, Could Hit that combines hydrogen and oxygen to based start-up is aiming to produce a 75-hp 1000-Mile Range. 'Popular produce electricity, with water and heat as its equivalent, six-seat modified version of MDI's Mechanics.' 22nd February. by-products). However, they are many years CityCAT that could travel 1,000 miles at up to 432. BEVs actually predate gasoline and diesel from being realised. Other technologies are 96 mph on each fill-up (one tank of air and vehicles. Between 1832 already available. approximately 8 gallons of conventional petrol, and 1839, Scottish businessman Robert ethanol or biofuel). MDI's dual-energy engine Anderson invented the first crude electric carriage. In 1835, Professor Sibrandus Stratingh of Groningen, the Netherlands, designed a small-scale electric car. 433. Paine, C. (2006) 'Who Killed the Electric Car?' Culver City: Papercut Films. Battery electric vehicles accused of deliberately sabotaging their own electric vehicle production efforts so Battery electric vehicles (BEVs) – or electric as not to threaten their existing business cars – work from chemical energy stored model.433 in rechargeable battery packs. They use electric motors and motor controllers Yet, the next few years may see a instead of internal combustion engines. resurgence in BEVs, especially using the BEVs produce no exhaust fumes (though latest lithium-ion batteries (replacing of course the original electricity generation nickel-metal hydride batteries, previously may have produced greenhouse gases) the cheaper option). In 2008, Tesla and can be cheaper to make and maintain Motors, a Silicon Valley start-up company than internal combustion engine vehicles producing high performance, consumer- because they have many fewer parts. oriented electric vehicles, will deliver its Tesla Roadster. The Roadster (based on the Historically, plug-in BEVs have been limited Lotus Elise) is a performance sports car that by high battery costs, limited travel distance can accelerate from 0 to 60 mph in less between battery recharging, charging time, than four seconds (a similar performance and battery lifespan.432 Advancements in to a Lamborghini Murciélago) with a top battery technology have addressed many of speed of 125 mph (limited for safety) and these problems. Toyota, Honda, Ford and a range of 245 miles. Lotus will assemble GM produced BEVs in the 1990s to comply the Roadster in the UK. Tesla claims that with the California Air Resources Board's the Roadster offers double the efficiency of Zero Emission Vehicle Mandate. However, popular hybrid cars, while generating only a the major US manufacturers have also been third of the carbon dioxide.
92uses compressed air fed from Airbus-built tanks 2.2 Organisational and business processto run its pistons. The Air Car variant has a innovation has played a significant role insupplemental energy source for speeds above improving productivity, with new business35 mph: a custom heating chamber heats the models emerging at the marginsair to increase volume and so the car's rangeand speed. The Air Car is expected to sell for 2.2.1 Organisational and business process$17,800. innovation has been crucial in improving productivity in the sector2.1.4 Software is making traditional Despite the focus on product development,innovation more efficient automotive has long been at the forefront ofInnovations in process organisation can apply strategic and organisational innovation. Itsto other areas of the business, notably R&D. practices have subsequently been adoptedThe automotive sector has adopted many of by other sectors, among them: the massthese practices, for example the use of Product production assembly line; component andLifecycle Management (PLM) software and material standardisation; the integration of'Innovation Technology' (IvT).434 PLM software all stages of manufacturing from raw materialmanages every aspect of a product's life cycle, to finished product; the de-skilled division offrom concept and design, to manufacturing, labour into short-cycle repetitive tasks; and themaintenance once the product is sold, and use of financial packages (consumer financing)through to its eventual retirement. IvT includes to enhance product demand. 434. Waurzyniak, P. (2007) Enter the VirtualeScience (computer-intensive science that World. 'Manufacturingis conducted through highly distributed 220.127.116.11 Lean production has been the most Engineering.' 139 (4), pp.67-76.networks), virtual reality, simulation and important contemporary non-technological 435. Gann, D. and Dodgson,modelling techniques, and rapid prototyping.435 innovation M. (2007) 'Innovation Technology: How New Many of these practices have been popularised Technologies are ChangingSuch software tools can greatly reduce vehicle in the West as 'Lean production',436 and have the Way We Innovate.' London: NESTA.development times, a vital metric with volatile extended well beyond the automotive sector 436. Womak, J. T., Jones, D. T.,markets and rapidly changing consumer tastes. (see for example Appendix B on the aerospace and Roos, D. (1990) 'The sector). Process improvements, particularly Machine That Changed the World.' New York: Rawson. Lean manufacturing, have been the largest 437. McKinsey Global Institute contributor to productivity growth in the (2005) 'Increasing Global Competition and Labor sector.437 Productivity: Lessons from the US Automotive Industry.' New York: McKinsey Global Institute. 438. MCAD (2007) Managing Tolerances at Nissan. 'MCAD.' June, pp.36-39.
93 184.108.40.206 Effective supply chain management by 22.214.171.124 There is an increasing but variable role vehicle manufacturers is crucial for suppliers in product innovation Generally, vehicle manufacturers provide Manufacturers now also expect this smaller suppliers with a specification for their parts in group of suppliers to undertake R&D and terms of performance, the space dimension manage their own supply base, though within which the part has to fit, and anticipated this trend has been more limited than has cost. The vehicle manufacturer's main task is to sometimes been suggested.439 439. Prior to this the general integrate these components. practice was for vehicle manufacturers to design Many vehicle manufacturers and tier 1 all of the car and its Given the increased complexity of modern suppliers have overestimated their suppliers' constituent components, and to ask suppliers to vehicles, integration has become more competencies and underestimated the quote a price for the challenging. Vehicles need repeated testing required levels of expertise and investment production of those components against an and redevelopment to ensure that the vehicle required. This has meant that expected savings anticipated volume. as a whole works and that it can be built in from devolving design and development to 440. Automotive Innovation a logical and cost-effective manner. Vehicle suppliers have not yet materialised. Suppliers and Growth Team (2002) 'Design, Development manufacturers take many steps to reduce still perform only 15-30 per cent of 'design and Manufacture Report.' this burden. Many parts are transferred from effort'.440 Of this, tier 2 suppliers or lower London: AIGT. 441. Wells, P. (2005) Nissan one model to the next. 'Platform strategies' account for very small amounts of design effort Sunderland's 'Plant Within allow parts and vehicle architectures to be (5-10 per cent). a Plant. 'World Vehicle Manufacturers Analyst.' 84, shared across multiple brands: one example pp.23-24. is Volkswagen's MLP (Modular Longitudinal As a result, many vehicle manufacturers 442. Barton, H., and Delbridge, Platform); the Volkswagen group has four are now bringing activities back in-house. R. (2006) Delivering the "Learning Factory"?, volume brands in Audi, Seat, Skoda and VW, Manufacturers are now more careful to whom Evidence on HR roles and MLP is being used increasingly across they devolve work and what kind of work in Contemporary Manufacturing. 'Journal these brands. they devolve; careful assessments are made of European Industrial of each supplier, their track record and level Training.' 30 (5), pp.385-395. As a result, supply chain management has been of competence. Most product innovation 443. Further analysis of Toyota's a prominent area for innovation. Procurement is trusted with a small number of so-called approaches has also has developed from the traditional model 'tier 0.5' suppliers; firms with a credible level highlighted the Toyota Product Development (a large number of suppliers chosen on of expertise and competence at managing System, which coordinates price from a local cluster), through Lean (as integrated projects. GM has announced that the activities of a large number of people to above), towards the 'extended enterprise' it will no longer outsource major systems to enable work to progress approach (a few select suppliers with whom the suppliers, while Nissan has embraced a more simultaneously instead of serially, hence making the manufacturer works very closely to optimise innovative approach with its 'plant within a firm one of the quickest the whole supply chain). plant' system whereby the build of the Micra in the world in product development. Toyota calls CC has been outsourced to Karmann inside the this 'Value Innovation.' See Nissan Sunderland plant.441 Liker, J. K., and Morgan, J. M. (2006) 'The Toyota Product Development System.' Shelton: Productivity Press. 444. According to an analysis of units per employee per year based on Toyota Production System in Lean manufacturers (double that of data collected by the others, in many cases), and Toyota has the automotive analysts Ward, see Vaghefi, M. R., Van Since the late 1980s, a second wave of highest consistent output of any major Deusen, C., and Woods, transformation in the industry emerged as Lean automotive manufacturer.444 In North L. (2007) Motor Drive. 'Business Strategy Review.' vehicle manufacturers and others sought America, the difference between the most Autumn, pp.28–32. to emulate the Toyota Production System productive major automotive manufacturer 445. Harbour Consulting (2007) (TPS). (Toyota) and the least productive represents 'The Harbour Report™ North America 2007.' 5.17 labour hours per vehicle (or about Troy, Michigan: Harbour TPS organises manufacturing and logistics $300).445 In the first quarter of 2007 Toyota Consulting. 446. Piggly Wiggly was also to eliminate waste and inconsistency overtook GM in global sales for the first time. the first true self-service in products by emphasising continuous grocery store. improvement, teamwork, just-in-time Toyota developed the TPS as a reaction inventory, and becoming a 'learning to what it perceived as the wasteful organisation' through relentless overproduction of US automakers reflection.442 This has helped Toyota (particularly Ford), but was also inspired by greatly to reduce lead-time and costs visiting the Piggly Wiggly supermarket chain, while improving quality.443 Output per which only reordered and restocked goods worker is consistently significantly higher once they'd been bought by customers.446
942.2.2 New business models are emerging in-car features such as satellite navigation thatfrom new firms differentiate products in less significant andAs is often the case, new technologies require less risky ways.organisational and business model innovationto complement them. For example, the The high barriers to market entry for radicalProject Better Place initiative (another start- new entrants make it difficult for disruptiveup) focuses on the integration of existing business models to emerge that cantechnologies and systems to provide the challenge the entrenched positions of majorinfrastructure and scale necessary to make manufacturers. Yet the sector's relativelyelectric cars a viable alternative to fuel-based narrow approach to innovation appears unablevehicles. Its business model is adapted from to restore profitability, hence the need formobile phone operators; Project Better Place radical alternatives.intends to establish a network of chargingspots and battery exchange stations to provide 3.2 The sector has been resistant to new 447. See www. projectbetterplace.comubiquitous access to electricity, starting in business models 448. For example, of major USIsrael. Project Better Place will offer consumers Despite the conditions prevailing in the manufacturers, on eachseveral subscription-based ownership models, industry, new business models are resisted vehicle sold in North America in 2006, Chryslerby sourcing the electric cars and batteries by the current infrastructure (existing Group lost $1,072, GMthat will be compatible with the charging manufacturing plants, dealership networks, lost $1,436, and Ford lost $5,234; see Harbournetwork, and subsidising vehicle costs through and suppliers). For example, suppliers Consulting (2007)leases and credits.447 Prototype vehicles are might hesitate in taking on risky product 'The Harbour Report™ North America 2007.'intended to be introduced in early 2008 and development for an untried new entrant, or at Troy, Michigan: Harbourthe company hopes to begin commercial sales least be unwilling to do so at reasonable cost. Consulting. 449. More than half of alland service by 2010. Renault has announced cars purchased in thethat it will supply cars for this network, using Yet, the sector has a large number of marginal, UK are provided with funding at the pointlithium-ion batteries developed by NEC Corp. experimental and innovative businesses. Some, of sale (so, excludingand Nissan. such as TH!NK from Norway, have a long and personal loans or direct loans). The involvement convoluted history trying to introduce a highly of manufacturer 'captive' innovative product to the market (in this case, finance companies has led the marketing of finance a battery electric vehicle made of lightweight to become intertwined3. Automotive innovation is inhibited materials).450 Aside from a few high-value with that of new cars, with offers of low or zeroby structural issues in the industry but vehicles it is very difficult for a new entrant interest rate deals usedenvironmental regulation has become with limited geographic market coverage and as a means to promote models. See Automotiveincreasingly important an unknown brand to persuade consumers of Innovation and Growth the merit of purchasing a high-cost product. Team (2002) 'Distribution, Competition and Consumer3.1 Conservatism due to high capital Group Report.' London:intensity and low margins Equally, no vehicle manufacturer has yet tried AIGT.The automotive sector is a mature industry; to realise a business model that would threaten 450. Orsato, R., Wassenove, L., and Wells, P. (2008) 'Theit has a relatively concentrated structure its own existing business, however weak that Bumpy Ride of TH!NK.'characterised by high capital intensity. It business may be. Perhaps the nearest example INSEAD Case Study. Fontainebleau: INSEAD.is also insufficiently profitable, lumbered is that of the MCC Smart project (or fortwo as 451. Automotive Innovationwith structural problems: over-capacity it is now known), where over time the more and Growth Team (2002) 'Environment Report.'throughout the value chain; high fixed radical aspects of the business plan have been London: AIGT.costs in manufacturing, product design and diluted.distribution; inflexible production systems;and inflexible product designs.448 In effect, the 3.3 Environmental and safety regulation hasmass market production model is being kept become increasingly importantalive by discounting and incentives, paid for Twenty-two per cent of the world's greenhouseby lucrative financial services and aftermarket gas emissions result from the transportationsales (maintenance, repair and parts supply).449 sector; an even higher proportion of urban emissions in large cities are attributable toThese factors, together with the need to vehicle emissions. There are approximately 700protect brand reputations, contribute to a million cars on the world's roads which emitprevailing conservatism. And this conservatism more than 2.8 billion tons of CO2 per year. Anis reinforced by the high price of the product average car produces four tons of CO2 everythat results in customer caution. The result year, which stays in the atmosphere for 45is that innovation tends to be channelled years after it leaves the car's tailpipe. In thetowards reducing per-unit costs, or increasing UK, vehicles are responsible for over a quarterper-unit revenues and margins. This has led to of particulate emissions and almost half ofprocess innovations that reduce costs or new total nitrogen dioxide emissions. These have
95 been linked to damage to both air quality and 4. Innovation is hidden because health. Although average emissions per car are there are significant levels of more falling due to engine and fuel improvements, incremental product and process these reductions will largely be offset by development increases in traffic.451 4.1 Non-cutting-edge product development Yet according to one study for government, is prominent in the sector which examined the 'innovation system' for The moderate R&D intensity in the mass low carbon transportation: "Uncertainty as market sector compared to some other to the likely strength of long-term policy for advanced engineering sectors, yet a sector CO2 reduction in the transport sector means that is focused on incremental product automotive and fuel firms are uncertain as to development, implies a significant degree of the priority to attach to carbon reduction/fuel technological innovation that is not captured efficiency goals relative to other objectives."452 in narrow measures of R&D (Type I hidden This is exacerbated by insufficient coordination innovation). of the R&D efforts in all of the technology areas required. This is likely to be particularly true of technologies that are developed first by Furthermore, the production and disposal of competitors before being adopted by other vehicles have environmental impacts, even manufacturers. Most core product technologies though manufacturers have made production eventually become standard across all brands processes less harmful by phasing out mercury and models, from variable value timing for and CFCs. Manufacturing itself of course engines, through process technologies, contributes to greenhouse gas emissions to 'surprise and delight' features such as and results in a number of waste products satnav. Much innovation is therefore 'catch- 452. E4tech (2007) 'A Review of (water, volatile compounds and solid waste). up innovation' – new to the firm but not the UK Innovation System for Low Carbon Road Additionally, once vehicles reach the end of necessarily new to the sector. Transport Technologies, A their life, though most of the material can Report for the Department of Transport.' London: be recycled, 25 per cent typically ends up as Furthermore, most SME suppliers may not have E4tech. waste.453 formal or significant R&D programmes, but 453. Automotive Innovation and Growth Team (2002) they still develop and refine their products. 'Environment Report.' Regulation by national governments and London: AIGT. international bodies has been an important 4.2 Organisational and business process driver of incremental innovation in this area. innovations are not sufficiently recorded in Regulations have covered safety, exhaust traditional metrics emissions and recycling; they will in the future Lean manufacturing is an obvious example limit CO2 output. For example, the recent EU of both a process and an organisational End of Life Vehicles Directive requires re-use innovation (Type II hidden innovation). Yet and recovery of materials to rise to 95 per cent investments in developing such practices by 2015. are not regarded as innovation. Similarly, innovations in supply chain management, Regional policy is becoming more influential, despite their importance to vehicle for example, Transport for London's congestion manufacturers. charging zone and intended emissions regulation in US states such as California. 4.3 The use of software and other supporting technologies has been valuable However, there have been significant political in improving quality and efficiency and lobbying battles over the content of The use of software in areas such as 3D design regulations (such as the question of whether and product development is making traditional there should be voluntary agreements or innovation more efficient. But such software legislation in the EU). The industry is pushing may have been developed first in other firms for alternative measures, such as better traffic and often in other sectors (in this case, the management, smoother roads, and teaching aerospace sector). This then represents an drivers the benefits of fuel-efficient driving. example of Type III hidden innovation; the exploitation of software in automotive would not be typically recorded as innovative by traditional metrics.
964.4 Localised generated innovations are real world problems.455 But their cumulativeincredibly important for some firms impact can of course be seen in the largeAs in other areas of engineering, the emphasis efficiency and productivity gains made by suchon continuous improvement, especially manufacturers.through Toyota's approaches, can cumulativelyimprove production techniques, efficiency and 5.4 Tracking outcomes would also be aproductivity. Yet such 'micro-innovations' are meaningful way of measuring innovationnot captured in traditional metrics (Type IV Given the increased social and environmentalhidden innovation). demands on vehicle manufacturers, there could be a greater emphasis on performance data linking innovation activities to improved outcomes. For example, in terms of sustainable5. Innovation could be better measured production, one trade association survey tracksby drawing on industry surveys, better inputs into production such as: total combinedincorporating organisational innovation energy use; energy used per vehicle produced;and tracking outcomes total combined water use; and water use per vehicle produced.4565.1 Industry surveys are a more detailedsource for Type I hidden innovation Similarly, recording 'customer fulfilment' in aThere is a huge wealth of very specific industry standardised way could be the focus for the 454. Experian (2007) 'Motorsport 100 Researchdata, collected internationally, on everything sector's improvement and innovation efforts.457 Findings.' London:from engine manufacture to inventory, the use Such a measure would represent a fundamental Experian. 455. May, M. E. (2007) 'Theof materials and development programmes, change in perspective, in that it asks: 'Did the Elegant Solution: Toyota'swhich could be used to analyse innovation customer get the right car, in the right place, at Formula for Mastering Innovation.' New York:capacity and performance. the right time?' It has been estimated that half Free Press. of all cars in the UK do not arrive 'right first 456. The Society of MotorFor example, a regular survey of the motorsport time on time' into the hands of the customer Manufacturers and Traders (2006) 'UK Automotivesub-sector captures technological and non- (though there are significant variations Sector Sustainabilitytechnological business trends, such as levels of between manufacturers).458 Report, Production, Consumption and Disposalinvestment in technologies beyond R&D, areas Eighth Report.' London:of specific focus for innovation, and linkages SMMT. 457. Roberts-Dear, R. (2007)with other sectors.454 'The Consumer Experience 6. Innovation could be improved by of Buying New Cars.' Solihull: International Car5.2 Organisational and business process strengthening design capabilities but Distribution Programme.innovations could be better recorded by the also organisational and business process 458. Automotive Innovationadoption of specific organisational forms innovation to respond to the sector's and Growth Team (2002) 'Distribution, CompetitionGiven the importance of organisational major challenges and Consumer Groupinnovations such as Lean (Type II hidden Report.' London: AIGT.innovation), the adoption of such structural 6.1 Retaining high-value-added activities 459. Automotive Innovation and Growth Team (2002)changes (and their impact) could be requires improving R&D and design 'Executive Summary.'incorporated into analyses of innovation in the capabilities London: AIGT. 460. Paragraph 2, House ofsector. The extent has already been recorded More basic and labour-intensive aspects of the Commons Trade andin studies of the automotive supply chain. production process have shifted to emerging Industry Committee (2005) 'UK Automotive Industry:Similarly, industry surveys can record how much nations including Eastern Europe because of Government Responsemore efficient and effective technologies such lower labour costs. It has been estimated that to the Committee's Eighth Report of Sessionas the latest design software are being used. UK-based assemblers source well below 50 per 2003–04. First Special cent of their components in the UK. Where Report of Session 2004–05.' London: The5.3 Localised innovation can be estimated at UK-based suppliers retain work, it is often only Stationery Office.the firm level by transferring their own purchases abroad.Micro-innovations (Type IV hidden innovation) UK-based suppliers are not just losing work toare by definition difficult to count, but lower wage countries; much business has goneindividual firms can certainly evaluate to firms elsewhere in Western Europe.459their effectiveness on their own efforts atcontinuous improvement. This is why it may not be sensible to assume that the industry's current preference forOne study estimates that Toyota, through its building close to market means that significantinclusive approach to improving production vehicle production is unlikely to shift from thetechniques, implements one million new UK to lower-cost countries.460ideas each year (3,000 each day). Most areinevitably small but effective solutions to
97 In this context, retaining and enhancing R&D 6.3 More broadly, the current dominant and technology development in the UK is technology and business model in obviously important. The UK is already weaker automotive is not sustainable, financially or as a result of the absence of indigenously- environmentally owned mass manufacturers. Given the foreign To cite one example, two-thirds of new ownership of the major vehicle manufacturers car buyers in the UK have their vehicles and many tier 1 suppliers, many of their supplied from stock – from the pool of cars 461. Ricardo UK/Skills4Auto design and engineering centres are outside already manufactured and located either (2006) 'Vision for the UK Automotive Industry of the UK. This makes it more difficult for at dealerships or manufacturer distribution in 2020, Focusing on many UK suppliers to become involved in centres.466 Reducing the number of vehicles Supply Chain and Skills & Technology.' Shoreham-by- early parts of the R&D process, and to access held as unsold stock would bring an immediate Sea/Birmingham: Ricardo foreign manufacturers generally.461 Following financial benefit to the whole production UK/Skills4Auto. production activities, many European and US and distribution chain, and would be far 462. Automotive Innovation and Growth Team (2002) firms are relocating R&D activities to emerging less environmentally wasteful. To this end, 'Design, Development locations (such as central and eastern Europe, the sector needs to shift from its traditional and Manufacture Report.' London: AIGT. More India and China). reliance on 'pushing' stocks of cars down the recently, see Department distribution chain to customers to building for Business, Enterprise and Regulatory Reform Increasing levels of design devolution from a system where cars are customised to the (2008) 'Report on the assemblers to the supply chain mean that customer's preferences and the process is Business Environment for Japanese Automotive the ability to design new products is growing geared to meeting them.467 Supply Companies in the in importance. Increasing the dependency UK.' London: BERR. 463. Ricardo UK/Skills4Auto between assemblers and 'design capable' Given that the industry suffers from global (2006) 'Vision for the suppliers would therefore generate a reluctance over-capacity and with manufacturing best UK Automotive Industry in 2020, Focusing on to switch sources of supply. More UK suppliers practice rapidly diffused around the world, Supply Chain and Skills & need to be able to position themselves in this being Lean will not be enough. At some point, Technology.' Shoreham-by- Sea/Birmingham: Ricardo way. there is likely to be a radical realignment of the UK/Skills4Auto. Similarly, global automotive sector. see Automotive Innovation and Growth Team (2002) 6.2 This means that supply chain 'Design, Development weaknesses need to be addressed Alternative business models have already been and Manufacture Report.' London: AIGT. Some parts of the UK automotive sector developed. One is the Indego concept, which 464. As identified in the are undoubtedly world class. In part, this is re-imagines the industry without its existing Sector Skills Agreement because of the UK's openness to foreign direct encumbrances.468 This anticipates almost 22 for the Aerospace, Automotive and Electronics investment, which has also helped to transfer per cent operating margins (when 5 per cent sectors, completed world class practices here. is considered good by industry standards), in January 2006; see Sector Skills Council for through innovations such as: repeated leasing Science, Engineering But for major vehicle assemblers, the primary of the vehicle through the life cycle; other and Manufacturing Technologies (2006) issue remains the quality and management consumer costs such as periodic maintenance 'SEMTA Sector Skills practices at the first and second tier already bundled into the package offered; a Agreement, Electronics, Automotive and Aerospace suppliers.462 The UK automotive supply chain hyper-Lean production system with high levels Industries.' London: has been regarded as poor in areas such as of outsourcing in development and production; SEMTA. 465. Automotive Innovation strategy and planning, leadership, programme product minimalism with 'good enough' and Growth Team (2002) management, process engineering, continuous quality; and direct sales and distribution.469 'Design, Development improvement and Lean, and customer care.463 and Manufacture Report.' London: AIGT. Thirty per cent of supply chain firms have no Such a model might appeal to an established 466. As noted in Cardiff business plan, and fewer than 50 per cent have vehicle manufacturer wanting to introduce a University/The University of Bath/The International workforce training plans. new brand or enter a new market, an emerging Car Distribution vehicle manufacturer or contract assembler (for Programme (undated) 'Towards a Customer Skills weaknesses have been identified in: team example, in China), or even a new entrant from Driven System, A Summary leadership; Lean; top and senior organisational outside the sector. The existing industry could of the 3DayCar Research Programme.' Cardiff/ management; and Level 3, 4 and 5 be threatened if an emerging manufacturer Bath/Solihull: Cardiff occupational skills.464 Vehicle assemblers predict or new entrant successfully introduced such University/The University of Bath/The International that advanced engineering systems will become a model in a relatively short period of time, Car Distribution increasingly more integrated (and virtual) and having a major disruptive impact (much as low- Programme. 467. Automotive Innovation that this will require the development of new cost airlines have had in their sector). and Growth Team (2002) engineering management competence in the 'Distribution, Competition UK to assist vehicle assemblers.465 The recent launch of the Nano, the 'people's and Consumer Group Report.' London: AIGT. car' in India, by Tata Motors at a cost equivalent to £1,277 demonstrates the likelihood of this happening.470 The Nano is the world's lowest-priced passenger car,
98 468. Indego was developed byundercutting by half the former lowest cost viable candidates for commercialisation over the consultants ATKearneycar available in India. Tata initially plans to the next five to seven years. The next step in conjunction with ex-Ford of Europe boardbuild 250,000 Nanos annually, rising to one is the TSB's launch of a Low Carbon Vehicles member Martin Leachmillion units a year. In addition, Tata will Integrated Delivery Programme with an initial (later at Maserati, then at LDV), see Dunne, P., andstart producing the world's first commercial investment of £40 million jointly supported Young, S. (2004) Thinkingair-powered vehicle, the Air Car, for India in by the TSB, DfT and the Engineering and Beyond 4,000 Pounds of Metal. 'Executive2008.471 Developed by ex-Formula 1 engineer Physical Sciences Research Council (EPSRC). Agenda.' VII (4), pp.25-31.Guy Nègre for MDI, this uses compressed air It will provide greater coordination of activities It was based on the concept of 'micro factoryas opposed to the gas-and-oxygen explosions from university research to future potential retailing', see Wells, P. andof internal-combustion models to push the procurement opportunities, speeding up Nieuwenhuis, P. (1999) Micro Factory Retailing: Aengine's pistons. the time it takes to get low-carbon vehicle Radical Business Concept technologies into the market place. for the Automotive Industry. 'SewellsTesla Motors and their ilk show that Silicon Automotive MarketingValley is emerging as a source of small Yet the development and introduction of a Review.' 5, pp.3-7. 469. Similarly, the '3DayCar'pioneering ventures that might induce low-carbon transport system still requires a concept. The largestinnovation in automotive, by commercialising long-term government-led strategy. The recent overall time saving in this approach would benew technologies, products and business King Review of low-carbon cars recommended achieved by switchingmodels that could eventually reshape the bringing existing low emission technologies to a system of direct order input to assemblysector. In contrast, the (British) Morgan LifeCar from 'the shelf to the showroom' as quickly line 'slots'. See Cardiff– a lightweight zero emission performance as possible by: ensuring a market for low University/The University of Bath/The Internationalvehicle using a radically small fuel cell – will emission vehicles; moving the short-term focus Car Distributionremain only a demonstration concept car.472 back to automotive technology from biofuels; Programme (undated) 'Towards a Customer developing the UK as a location for high Driven System, A Summary6.4 The UK needs to develop a broader technology companies in the field, with good of the 3DayCar Research Programme.' Cardiff/Bath/programme of support to help retain businesses support mechanisms encouraging Solihull: Cardiff University/higher-value-added activities and anticipate inward investment and supporting key areas of The University of Bath/ The International Carcoming changes in the industry underpinning science and engineering.475 Distribution Programme. The project was supported through the Design and6.4.1 More strategic funding of new 6.4.2 New business models, business Manufacturing Processestechnologies, especially low-carbon practices and approaches are crucial, strand of Foresight Vehicle.technologies, is important especially across the whole supply chain 470. In 2008, Tata also bought Jaguar and Land RoverThe Foresight Vehicle Steering Group was Focusing on technology alone is not enough. from Ford.set up to guide and support UK R&D in the Innovation also requires the right business 471. Sullivan, M. (2007) World's First Air-Powered Car: Zerosupplier sector to help it meet forthcoming practices and business models. Emissions by Next Summer.environmental and business challenges.473 The 'Popular Mechanics.' June.Foresight Vehicle programme brings together The Automotive Innovation and Growth 472. The LifeCar is a join project between RiverSimple,universities and vehicle manufacturers in Team (AIGT) in 2002 suggested that Cranfield University,new collaborative relationships.474 Five key additional assistance is needed to improve the QinetiQ, Oxford University, Linde AG and Morgansub-sectors have been targeted: engine performance of domestic suppliers through Motor Company, supportedpowertrain; hybrid, electric and alternative fuel local initiatives and assembler-focused by a then DTI grant. 473. Foresight Vehicle (2004)vehicles; software, sensors, electronics and programmes of improvement.476 The AIGT also 'Foresight Vehicletelematics; advanced structures and materials; argued that the sector would benefit from a Technology Roadmap.' London: The Society ofand design and manufacturing processes. The new approach to the training of management Motor Manufacturers andlatter Thematic Group has been established grades in order to redesign and implement Traders. The Foresight Vehicle programme wasto promote the research, development and changes to the automotive supply chain that launched in Novemberadoption of efficient, world-class design and will enhance the performance of the sector.477 1997 as the flagship automotive R&Dmanufacturing processes. As the name implies, programme intended tothe Design and Manufactoring Process strand is There has been some progress, but more fund pre-competitive research. All projects areprocess-oriented, whereas the other Thematic could be done. Following the AIGT reports, collaborative undertakingsGroups are primarily product-based. the Supply Chain Groups programme was between business and academia; the great established in 2003, jointly funded by the majority of them are led byIn addition, the Low Carbon Vehicles then Department of Trade and Industry, the industry.Innovation Platform was launched by the English RDAs and the devolved regional 474. The Foresight Vehicle Initiative is the primeTechnology Strategy Board (TSB) in 2007 assemblies.478 This programme, focused knowledge transferto accelerate the market introduction of low largely on process improvement through Lean network for the automotive industry. Itcarbon road vehicles. Its first activity was a manufacturing, came to an end in March 2008, is now administered bycollaborative R&D programme with £20 million after having supported 62 projects, involving The Society of Motor Manufacturers and Tradersof support from the Department for Transport 575 suppliers employing 160,000 people, and (SMMT), formerly by the(DfT) and the TSB, focused on bringing facilitated major productivity improvements then DTI.forward vehicle technologies that could be of up to 40 per cent.479 The New Automotive
99 Innovation and Growth Team (NAIGT), as part 475. HM Treasury (2007) of its wider strategic review of the challenges 'The King Review Part facing the sector in the future, will examine I: The Potential for CO2 Reduction.' London: and make recommendations to government Her Majesty's Stationery regarding future programmes by March Office; HM Treasury (2008) 'The King Review 2009.480 In particular, it has been charged with of Low-Carbon Cars, Part investigating how the UK industry should II: Recommendations for Action.' London: Her respond to low-cost competition and the move Majesty's Stationery Office. to low-carbon transport. 476. The Automotive Innovation and Growth Team (AIGT) was the first of several 6.4.3 A broad approach to improving skills in IGTs to be initiated by the then DTI. Sir Ian Gibson, the sector is required former Chief Executive UK government has accepted the of Nissan's UK and European operations, was recommendations of the most recent House appointed as its Chairman. of Commons report on the sector, that The primary role of the AIGT was to identify the industry and government should put extra key drivers which would effort into improving skills throughout the determine competitiveness over the next 5-15 years sector, increasing the commitment to R&D, and to develop a vision for adopting Lean manufacturing techniques and the sector in the UK. strengthening local supply chains.481 These 477. Automotive Innovation and Growth Team (2002) are the same areas identified by the AIGT in 'Design, Development 2002.482 and Manufacture Report.' London: AIGT. 478. In addition, there has been The Automotive Academy was opened in 2004. significant regional funding available to the sector. In The Automotive Academy system was a new 2000–2006, £100 million approach to providing skills and training for was offered in regional grants under the Regional the UK automotive industry workforce with Selective Assistance core funding provided by UK government (£12 (RSA) and Selective Financial Investment in million). The Automotive Academy is now being England (SFIE) schemes to merged into a new body, the National Skills automotive manufacturers and suppliers in England. Academy for Manufacturing (NSAM). In the same period, nearly £150 million was paid out, including stage payments The sector needs to equip graduates with on offers made prior to the technical skills of engineering whilst also 2000. developing the necessary managerial and inter- 479. Department for Business, Enterprise and Regulatory personal skills. It needs 'business engineers', Reform (2008) 'Report on with the continuing professional development the Business Environment for Japanese Automotive to take a systems view of the industry and its Supply Companies in the processes, whilst developing their technical UK.' London: BERR. 480. Department for and managerial capabilities. BERR is currently Business, Enterprise working with the National Skills Academy and Regulatory Reform (2008) 'Business Minister for Manufacturing and the SMMT Industry Shriti Vadera Announces Forum to develop a new approach which will New Investigation into Automotive Industry.' Press use the focus of supply chain improvement release, 7th April. London: programmes to enhance leadership and BERR. management skills, in addition to the previous 481. House of Commons Trade and Industry Committee emphasis on process improvement. (2007) 'Success and Failure in the UK Car Manufacturing Industry: Another skills issue is the need to give Government Response much greater responsibility to frontline to the Committee's Fourth Report of Session teams for technical problem-solving, which 2006–07, Third Special helps to identify the real quality issues with Report of Session 2006–07.' London: The manufacturing processes and to release Stationery Office. engineers' time to engage in project activities. 482. Automotive Innovation and Growth Team (2002) This is known as Total Productive Maintenance 'Executive Summary.' (TPM) and is another concept that originated London: AIGT. in Japanese manufacturing, especially at Toyota and Denso. TPM approaches the engineering skills issue from the bottom-up rather than a purely 'graduate elitist' approach.
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