READ STORY ORIGINALLY PUBLISHED AT SLOANREVIEW.MIT.EDU
Satish Nambisan and Yadong Luo
February 23, 2022
Digitization and globalization are converging to transform innovation in multinationals across industries. Companies such as Bayer Crop Science, John Deere, Johnson Controls, Philips, and Unilever are pursuing the promise of what we call digital globalization. They are finding that digitally infused innovation assets, such as data, content, product components, tools, and processes, are not only readily portable across national borders but also amenable to mixing and matching. This digitally enabled innovation generates new offerings, business models, and operations to suit specific country markets — at a faster pace and lower cost than previously.
Fashion brand Tommy Hilfiger has deployed a fully digital design workflow across all of its global apparel design teams. Designers catering to the demands of different markets around the world can create, store, share, and reuse digital design assets.1 Transforming traditional design and sample production steps into such digital-infused processes enables the label to not only accelerate its innovation but also diversify its offerings.
As promising as digital globalization sounds, however, it is facing headwinds that are driving deglobalization (or localization), including trade restrictions and uncertainties fueled by geopolitical tensions and nationalism. China, for instance, recently passed a host of protectionist laws and regulations aimed at controlling the internet and cross-border data flows. As companies such as Apple, Morgan Stanley, and Oracle have discovered, there is ambiguity around what constitutes personal data and what should be localized in China. This is significantly limiting the portability of multinational companies’ digital innovation assets and raising the level of innovation uncertainty and risk.2 Geopolitical tensions can also result in more closed and less trusting stances when companies pursue collaborative innovation ventures.
Thus, for multinationals, the coexistence of globalization and localization creates a challenging context for innovation. How, then, can they pursue innovation to take advantage of the forces driving digital globalization while also adapting to the forces driving localization?
Our research suggests that multinationals can achieve this by calibrating the degree of connectivity among their innovation sources and among their innovation assets based on the forces of globalization and localization within specific geographies. (See “Evaluating the Intensity of Globalization and Localization Forces.”) This calibration results in a tight or loose coupling of innovation sources and assets, with tight coupling creating higher levels of innovation source and asset dependencies, and loose coupling minimizing such dependencies.3
Evaluating the Intensity of Globalization and Localization Forces
The checklist below can be used to evaluate the intensity of globalization and localization forces in a foreign market based on policies and regulations, infrastructure, and culture. An average score across the 12 elements above 3.5 implies the presence of strong localization forces in a national or regional market, while an average score below 2.5 implies strong globalization forces.
Tapping Global Innovation Sources
Multinational companies across industries have found that tapping sources of innovation in all corners of the world is critical for continued growth. Digital platforms and technologies play a powerful role in enabling companies to cast such a wide net for innovation, enhancing their ability to connect with diverse, globally dispersed innovation sources and partners in flexible ways.
Eighty-five percent of the top global brands and more than 75% of the world’s high-performing multinational enterprises have used their own or third-party digital platforms to crowdsource ideas from customers and partners in foreign markets.4 Digital innovation analytics platforms that combine the ability to conduct rapid, rigorous large-scale experiments with the power and capabilities of AI-based analytics have emerged as powerful tools to help companies reduce uncertainty at various stages of the innovation process.5 And new digital technologies such as blockchain enable the authentication of digital asset ownership across the world and enhance trust among diverse global innovation sources.
Despite all these digital capabilities, multinational companies must temper the degree to which they embrace innovation sources in a foreign market based on the prevailing business environment. Depending on the balance of globalization and localization forces within the market, companies can pursue one of two approaches: digital innovation partnerships and digital innovation hubs. (See “Tight Versus Loose Coupling.”)
Tight Versus Loose Coupling
Multinational companies engaging with global innovation sources can use digital technologies to support either close partnerships or more arm’s-length relationships.
Digital innovation partnerships are appropriate in more globalized markets, where factors ranging from intellectual property (IP) laws to cross-border data-flow policies make innovation more predictable and congruent with corporate expectations and hence more favorable to tight coupling. This model uses the digitization of innovation processes to establish highly secure virtual spaces where foreign partners can share innovation data and assets; simulate and test virtual prototypes that inform critical design and scaling issues; and, more broadly, create a shared environment that enhances the transparency of cross-border innovation activities.
Philips Healthcare, a division of the Dutch conglomerate Philips, offers an example of how the digital partnership model can work. The company’s HealthSuite platform provides a host of cloud-based capabilities to connect medical devices, collect electronic health data, aggregate and securely analyze data, and create products and services. In globalized markets, such as the U.S., Canada, and South Korea, the company entered long-term innovation partnerships around the platform with health care providers such as Phoenix Children’s Hospital and Banner Health in the U.S. and Mackenzie Health in Canada.
Similarly, Philips has forged close partnerships with several technology companies to further enhance the value delivered by the ecosystem. For example, it partnered with Validic, a U.S.-based digital health platform, to provide consumer-generated data from wearables and health apps, which is integrated and analyzed with electronic medical records and other clinical data sources in HealthSuite. In South Korea, Philips partnered with Samsung to integrate the latter’s Artik Smart IoT Platform with HealthSuite and create interoperable, connected health solutions, such as advanced health analytics.6
All these partnerships involve a close vetting process, considerable sharing of data and other platform-specific assets, and extensive collaboration around innovation. The tight coupling between the company and its foreign partners is predicated not only on shared innovation goals, but also on adherence to global standards related to trade, infrastructure, and business practices.
In China, however, Philips pursued a different approach — one marked by a narrower set of engagements with innovation sources because of strong localization forces. It set up an R&D center that serves as a digital innovation hub in Shanghai, and its partnerships with leading Chinese technology companies are all primarily related to the use of digital infrastructure rather than new product development. For example, Philips partnered with Huawei to deploy offerings using Huawei’s cloud AI platform. It also partnered with Baidu, Alibaba, Tuya, and Tencent to use their digital infrastructures to extend the reach and scope of Philips’s offerings in China. The company is pursuing a few product development projects with these and other Chinese companies, but they are limited in scope and largely aimed at the Chinese market. Importantly, they also involve very limited sharing of digital assets and other IP.
The digital innovation hub model assumes relevance when there is a widening gap between a company’s expectations about innovation and business practices and the prevailing trade and IP policies and related factors in a foreign market. It establishes digitally enabled loose coupling with global innovation sources featuring levels of data and asset sharing that are calibrated based on the extent of localization forces.
The Unilever Foundry, Unilever’s platform for sourcing innovation from startups worldwide, provides another example of this model. The Foundry, which operates in multiple countries, including Poland, the U.S., Brazil, Nigeria, India, China, and Singapore, offers both virtual and physical forums for engaging with startups and partners and sharing data and other assets. But it supports loose coupling: The degree of connectivity is based on the fit of partners’ solutions with Unilever’s innovation priorities and the needs of individual brands in specific regions and markets. The boundaries of the interaction are determined by the nature of the engagement and conditions such as the geopolitical landscape and digital infrastructure in the region where the partnership is located. The level of connectivity can range from mentorship, expertise, and guidance from Unilever’s executives and its partner, to access to the company’s internal market data and its customers.
The global innovation hub model allows multinationals to specify the nature of engagement with innovation sources and the extent of their sharing of digital assets, by region, market, and/or individual partner. Further, recent advances in digital infrastructures and systems allow companies to establish such innovation hubs with API-based connectivity, open-standard data models, and principles for digital asset sharing.7 This flexibility enables companies to continually calibrate, experiment with, and adapt the nature of their innovation engagements as the balance of globalization and localization forces change across their foreign markets.
Connecting With Global Innovation Assets Digitally
Digital innovation assets include a diverse range of resources: digitized product components and operational processes, data from operations and market transactions, and digitized content, such as design documents and marketing materials. These assets are generative in nature; that is, they can be easily modified and reconfigured or recombined to unlock novel value-creation opportunities in different markets. The range and number of digital innovation assets accumulating daily at large corporations promise many more such opportunities.8
To realize this promise, digital innovation assets must be easily discoverable and accessible across the organization. Cloud-based digital asset management solutions enable companies to store, find, share, adapt, and deploy innovation assets with speed and agility. AI-based algorithms and techniques use metadata (contextual data about digital assets) to identify and analyze promising value-creation opportunities in foreign markets.
As with digital innovation sources, however, the ability to monetize digital innovation assets depends on the forces of globalization and localization at play in various geographies. Digital innovation assets may be created and reside locally in a foreign market, but regional and local laws and regulations can constrain a company’s ability to redeploy them elsewhere. (For example, the right to use data across national borders may be restricted.) Further, these laws and regulations are continually changing based on ongoing geopolitical tensions.
To adapt their innovation efforts to the ever-changing mix of globalization and localization forces and maximize the value generated from their digital innovation assets, companies need to fashion appropriate strategies for the tight or loose coupling of these assets in different foreign markets. Toward this end, multinationals can consider one of two approaches: global innovation asset portals and regional innovation asset portals.
In highly globalized foreign markets, digital infrastructures, data, and IP policies are likely to adhere closely to global standards and expectations. This allows multinationals to maintain a shared portfolio of digital assets — a global innovation asset portal — that enables tight coupling across geographies via a common framework or platform and reduces the overall friction in asset reconfiguration and recombination, thereby generating greater value from innovation.
In more localized foreign markets, multinationals may need a regional innovation asset portal that is primarily shaped by local business goals and only loosely coupled with the company’s other digital innovation assets. Such a portal takes a walled approach to innovation, reflecting the need to adhere to local rules and constraints, as well as a greater focus on regional/local digital asset reuse versus global reuse.
Johnson Controls, a $32 billion multinational in the building technologies market, illustrates how to selectively pursue both global and regional innovation portals. In the early 2010s, after a period of declining fortunes, the company returned to its roots in automation and control and started reinventing itself and its offerings digitally in an effort to become a pure-play intelligent building management company.
To support this strategy, Johnson Controls aimed to develop and maintain a rapidly growing portfolio of versatile digital assets that could be used in different combinations to cater to various regional and country markets. In 2020, it launched OpenBlue, a global innovation asset portal. OpenBlue uses common, structured data depositories and an AI-based suite of services from which innovative applications for specific customer needs can be built at scale by mixing and matching digital assets.
For instance, in the Asia-Pacific region, where unplanned downtime and equipment failures are the two biggest customer problems, Johnson Controls is developing digital solutions that continually monitor and analyze asset health and performance. In the European Union, where there is an emphasis on decarbonization, it is focused on energy-efficient technologies. By maintaining a global set of digital assets that can be easily mapped onto one another, the company is able to create novel services that can cater to these and other evolving demands in different geographical markets.
Johnson Controls’ recently announced partnership with the Singapore Economic Development Board to establish a digital innovation lab showcases the global innovation asset portal approach in that country’s highly globalized business environment. The initiative will leverage local research organizations and other technology partners in Singapore, but the key focus will be on developing digital assets for global markets that blend building, spatial, and behavioral data with internet-of-things technology, edge computing, AI, and machine learning to optimize building sustainability.
While Johnson Controls uses a common set of technologies and standards across its different units that allow digital assets to be easily moved and combined, it also takes into consideration regional factors that are likely to shape the risks and benefits of the use and reuse of those assets. For example, the company quickly learned from its early efforts in China that much of the digital asset development work would need to be tightly embedded in the local digital/data infrastructure and market context. As a result, it emphasized digital asset reuse and recombinations within the region rather than globally — in effect, following a regional asset portal approach.
For instance, building smart hospitals, a key Johnson Controls focus in China, required the company to partner with local health care organizations and leverage data and other local digital assets. This limited the portability and relevance of the resulting solutions for the global market. Similarly, another early project involved enhancing the efficiency of the company’s sales and marketing operations in China by developing extensive digital marketing repositories and employing AI to guide their use in different local contexts. Again, though some of the ideas behind the digital innovation initiative had broader relevance, the company soon realized that the digital assets developed in China could not be easily ported and reused outside the country.
Unilever’s Shanghai-based AI hub, which is exclusively focused on developing innovation assets in China and for China, offers another example of the regional asset portal approach. Livestreaming has become a huge sensation in e-commerce in China, and the AI hub will tap data from these streams to capture and predict market trends and guide the design, development, and testing of new product concepts. At the same time, given the peculiarity of the e-commerce data streams and the foundational digital infrastructure in China, the machine learning algorithms and other virtual modeling assets developed to assist in this effort will also be localized, limiting their reuse and recombination to the regional context.
Even when constrained by localization forces and pursuing a regional portal approach in a foreign market, companies should try to include flexible pathways to their global asset portals. At a minimum, there may be key insights that are portable across borders, even though the immediate digital assets are not. For instance, although Johnson Controls’ digital innovation initiatives in China did not directly contribute to its global asset portfolio, the company did derive some important lessons on digital innovation and digital asset management. It was able to apply them to similar initiatives in Belgium, starting with business process optimization through digital technologies. Further, elements of the regional asset portal architecture may be portable, especially when the technologies involved or the application domains are newly developed and still emerging.
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The dueling narratives of digital globalization and localization bring to the fore new and unique challenges for multinational companies seeking to optimize their digital innovation efforts. The key takeaway from our research is the need for the leaders of multinationals to carefully (re)calibrate their innovation approaches and adjust the tight or loose coupling of their innovation sources and assets based on the extent and balance of those forces in their various foreign markets.
This is particularly important because the COVID-19 pandemic has dramatically shaped both narratives. On the one hand, the pandemic has accelerated the adoption of digital technologies by both businesses and consumers the world over, thereby strengthening digital globalization.9 On the other hand, it also has fueled nationalistic and protective tendencies. The successful pursuit of innovation across borders in the post-pandemic world will increasingly depend on multinationals’ ability to master the nuances of tight and loose coupling.
ABOUT THE AUTHORS
Satish Nambisan (@satishnambisan) is the Nancy and Joseph Keithley Professor of Technology Management and professor of design and innovation at the Weatherhead School of Management at Case Western Reserve University. Yadong Luo is the Emery M. Findley Distinguished Chair and professor of management at the University of Miami’s Herbert Business School. They are coauthors of The Digital Multinational: Navigating the New Normal in Global Business (MIT Press, 2022), from which this article is adapted.
REFERENCES (9)
1. “Tommy Hilfiger Commits to 3D Design to Realize Ambitious Digitalization Journey,” Business Wire, Nov. 7, 2019, www.businesswire.com.
2. “Inside China’s Cyber, Financial Regulatory Changes and Challenges,” Pymnts.com, Feb. 24, 2020, www.pymnts.com; and J. Kynge and M. Ruehl, “Foreign Companies in China Face Cyber Security Crackdown,” Financial Times, May 15, 2019, www.ft.com.
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TAGS:
Digital Innovation, Global Business, Innovation Management, International Business