Innovation and Efficiency - the clash between practice and theory MTC 2007

1. Innovation and Efficiency - the clash between practice and theoryMTC 2007 Alexandra Waluszewski Uppsala University Uppsala STS Centre for Science and Technology Studies

2. What is particular with these things called innovation and efficiency – in theory and in policy? The mainstream market theory and policy makers’ common dream: • A market characterized by intense competition and a rich flow of innovations, in particular from high-tech based knowledge production. • Two phenomena in focus: Innovation systems and clusters. Used to characterize practice and as role models for how to reach a competitive market with a high flow of innovations. “The strength of product market competitions plays an important role in economic growth and affects economic efficiency, the allocation of resources, and can also lead to improved labor market performance.” (www.oect.org/eco.structural/competition)

3. What is particular with these things called innovation and efficiency – in practice?An illustration from Ducati(Bocconcelli, 2007) The 1990s: Ducati faces a crisis • The Users: A bike for the connoisseurs – but which demands a certain skill in repair. • The Producers: Quality problems – and increasing costs. Demands on efficiency and innovation. ”…to transform progressively Ducati into an entertainment company offering a complete motor experience…”

4. The Ducati Turnover:Some visible measures An engagement in the entertainment business meant among other things: • Increased engagement in the motor cycle as a sport • Increased engagement in motor cycles as a life style: i.e. development of Ducati clothes and accessories, establishment of the Ducati Museum …based on a discussion where and how customer value is created…

5. But what happened “backstage”? Where to start in order to become innovative and efficient? If: • 80 percent of the product value stems from components delivered by external suppliers • 20 percent of the product value stems from internally produced components No real choice: (Integrate – a theoretical idea) In practice - start to interact

6. Some jobs done in interaction with suppliers: • From traditional purchasing, to include suppliers in efficiency and innovation issues. • From purchase of individual products to product groups based on user functions. • From traditional purchase to include issues like quality control and logistics. • Systematic review of outsourcing possibilities. • Systematic reduction of the amount of suppliers – from 380 to 170. • Systematic change of the importance of individual suppliers; 9 big represent 40 percent of external supply, 36 suppliers represent 80 percent of external supply. ,

7. Close interaction prioritized • Systematic favoring of suppliers which allows a close interaction – and which interact closely with other counterparts. 60 % located in the same district as Ducati 80 % located in Italy 14 % located outside Italy, within EU 6 % located outside EU • Innovation and efficiency projects in relation to key suppliers. Projects include cost analysis, process analysis, product simplifications. 15 projects already concluded. • Logistic projects in relation to key suppliers. 12 suppliers were engaged in the development of JIT solutions. Result: The turnover was tripled. High and stable profitability was achieved.

8. Is there anything particular with Ducati’s way of handling efficiency and innovation issues? Not if we look at business in practice: • Companies like IKEA, Benetton, Dell, among others, are also handling efficiency and innovation issues through combining resources across organizational borders. • For example, IKEA’s table Lack have had the same price, US $ 9.90 for since mid 1980s. • Behind Lack are about - 100 efficiency and innovation projects. - 20 companies involved, stretching over different industries, using experiences from different products for different customers.

9. A silent break with the mainstream market theory In silence these companies are breaking with the dominant theories about efficiency and innovation. The traditional recipe for an efficient and innovative market: • Create a market with a “market mechanism”, i.e. ruled by price competition (rests on the assumption that resources are homogeneous – everything we need to know is the price). • Companies are forced to be efficient. • Companies will automatically absorb inventions which are assumed to be developed outside of the market. These assumptions colors the contemporary market, the strategy, and the innovation literature. i (“Homo economicus” Yngve Rådberg, 2003)

10. But what would have happened if Ducati would had followed the market theory advice? • Efficiency according to the market model implies: a) a standardization of components – a possibility to switch among suppliers. b) no unique components – all given by the market, all suppliers gives all producers the same solution. The only possibility to develop unique efficient solutions are among the 20% produced internally.

11. Innovations according to the market model implies: a) All information available to all actors. b) If there is “information stickiness”, interact with external knowledge producers. • Demands on new knowledge: a) New solutions have to be radically better than existing solutions. b) New solutions have to be possible to combine with the 80% of components bought externally. The space for innovations is very particular: All innovations have to fulfill the demands of being radically new and to fit with all related components.

12. What is missing? Something in the business landscape or in the market map? Acting according to the market model gives restricted space for efficiency and innovations, and consequently for unique products. • Historically, and increasingly among contemporary companies, interdependencies across company borders are utilized to increase efficiency and innovations. • Increased utilization of interdependencies across company borders underlines the importance of: a) decentralized interactions across company borders b) development of connected relationships c) emergence of network-like structures Need for a new market map? From a producer to an interactive perspective?