Master’s Thesis
Incumbents in Disruptive Environments:
The Role of Basic Research
Katharina Anders
S3301559
MSc Business Administration – Strategic Innovation Management
University of Groningen
18th of June 2019
Final version
Supervisor: Dr. Philip J. Steinberg
Co-assessor: Prof. Dr. Pedro de Faria
Abstract
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1. Introduction
Recent literature widely discusses if and how incumbents can maintain their competitive advantage under different environmental conditions, as for example an environmental disruption (Bergek et al., 2013; Christensen and Overdorf, 2000; Danneels, 2004; Eggers and Park, 2018). The literature claims that the protective effect of incumbency rapidly diminishes under disruptions, induced for example by innovations, since core capabilities in stable environments are likely to become core rigidities under turbulence (Bergek et al., 2013; Hamel, 2001). Incumbents are likely to have problems to adapt to extensive changes because of lacking flexibility, inertia and an underperformance in R&D (Ahuja and Lampert, 2001; Lourdes Sosa, 2013). This is very relevant today as many industries face increasing threats of disruption due to major developments towards globalization and digitalization (Skog et al., 2018). Even the long-term stable food and automotive industries experience turbulences these days (Rigby, 2017; Teece, 2018). What can companies from affected industries do if they do not want to end up like the previously very successful mobile phone manufacturer Nokia? Nokia’s success story ended with the inability to find a suitable solution when facing the triumph of the disruptive smartphone.
However, some incumbents were able to successfully survive disruptions (Danneels, 2004). Researchers investigating these successes found that especially innovativeness becomes increasingly important under such circumstances (Czarnitzki and Thorwarth, 2012; Droge et al., 2008; Prahalad and Hamel, 1994). Radical innovations provide a firm with new opportunities to create a future perspective, whereas incremental innovations enable a firm to reach this future stage. Thus, a balanced innovation portfolio, adjusted to the business environment, is crucial to stay competitive today and tomorrow (Hult et al., 2004; Killen et al., 2008; Raisch et al., 2009). March (1991) called achieving this an “adaptive process in the relation between the exploration of new possibilities [radical] and the exploitation of old certainties [incremental]” (p.71). The ability to balance exploration and exploitation within one company is a dynamic capability and was later defined as ambidexterity (Andriopoulos and Lewis, 2009). Achieving ambidexterity pays out especially under
disruptions but is rather difficult, since exploration and exploitation have partly contradicting
requirements (He and Wong, 2004; McCarthy and Gordon, 2011). Therefore, exploration is often neglected, since it is claimed to be unlikely to provide short-term success, especially under environmental pressure.
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Additionally, basic research functions as a base for applied research and could increase a firm’s absorptive capacity (Czarnitzki and Thorwarth, 2012; Green and Scotchmer, 1995). Due to these benefits, it is assumed that companies in disruptive environments increase their investments in basic research. In contrast to this assumption, other previous studies show that US companies shifted their R&D investments from basic to applied research although many industries are increasingly challenged by a disruptive environment (Arora et al., 2018; Pisano, 2010).
Further investigation is needed to analyze in depth whether basic research has an increasing relevance for companies in disruptive environments. I address this literature gap by investigating the role of basic research as a strategy for incumbents to increase exploration, thus ambidexterity, and in turn the potential to survive disruptions. Consequently, the main question of this study is:
What is the role of basic research for established companies dealing with the challenges of disruptive environments?
Researching this is important because incumbents need to constantly adjust their strategies to their respective environment if they want to sustain their competitive advantage. The literature should support them by determining the most promising strategies, since these are often not to be decided easily. Are the gains of basic research worthwhile to take the drawbacks in disruptive environments? That is a difficult question; therefore, guidance from theory is important.
Since only little theory exists about the role of basic research, a qualitative multi-case study was used to answer the research question. It took place in the German automotive industry, as it is one of those formerly stable industries which are now facing enormous threats by new technologies, market entrants, regulations and changing customer needs (Gercheva, 2018; Teece, 2018). To ensure triangulation, this study is based on 341 minutes of semi-structured interviews with nine practitioners, added by data from 212 secondary sources including press releases, websites and annual reports. In sum, I built and compared six company cases and one expert case, following the multi-case study approach of Eisenhardt (1998).
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increase other explorative activities, for example experimentation with new technologies or trend scouting. These may possess similar benefits with fewer disadvantages. Due to the limitations of a qualitative study approach and the subjective understanding of the term basic research by the interviewees, general managerial implications cannot be given. Nevertheless, the findings can be used as a starting point to further develop empirically proven concepts.
In summary, this research contributes to the literature gap by providing a comprehensive picture about the advantages and disadvantages of corporate basic research in stable and disrupted environments. It adds insights to the theory of ambidexterity with a dynamic capability-based view, by emphasizing the importance of ambidexterity for incumbents under disruptions, as already suggested by others (He and Wong, 2004; Jansen et al., 2005; O’Reilly and Tushman, 2008). Since, resources are often scarce under disruption, achieving ambidexterity is a balancing act between exploration and exploitation (Cao et al., 2009). Hence, besides environmental factors influencing advantages and disadvantages of potential strategies, also the strategies’ own impact on both exploration and exploitation need to be deeply examined. Further, affected firms need to consider the fact that a disruptive phase is often followed by another stable phase (Christensen and Raynor, 2013). Thus, flexibility to quickly change the strategies under different environmental conditions may be important.
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2. Theory
Kline and Rosenberg (2010) called “the process of innovation […] an exercise in the management and reduction of uncertainty” (p.275). Hence, a well-designed innovation management strategy can be crucial for surviving in disruptive environments characterized by uncertainty, since it gives firms new opportunities to tackle challenges of disruption (Schilling, 2013). But how to adapt the innovation management best? Investing more in basic research could be one of many potential strategies to do so, because basic research expands a firm’s explorative activities and is consequently supporting ambidexterity. In this chapter I provide findings from previous research relevant for this study.
2.1. Disruptive Environments
A disruptive environment is defined as an environment characterized by a phase interrupting a formerly stable era, mostly induced by innovations, which thus becomes increasingly dynamic. This phase of disruption could last for years or even decades and often restructures the whole industrial landscape (Christensen and Raynor, 2013). The literature mostly connected the term to innovation. I also include causes induced by other revolutionary changes (e.g. legislative, competitive).
Stable and dynamic environments are characterized differently and therefore require different organizational structures and strategies. Hence, affected companies must actively transform their corporate strategies and organizational set-up towards the future requirements. When the environment is stable, firms can better predict their future, which leads them to make long-term commitments and to improve core competences. Dynamic or disruptive environments, on the other hand, are characterized by complexity, turbulence, short product life cycles, fiercer competition and creative destruction (Dreyer and Grønhaug, 2004; Jansen et al., 2005; Sharfman and Dean, 1991). That provides uncertainties and impedes decision making. Disruptive environments are especially dangerous for large and established companies, due to incumbents’ inertia, rigidity or stakeholder resource dependency (Bergek et al., 2013; Sandström et al., 2009). Additionally, they tend to get locked into core technologies and focus too much on efficiency; hence are less likely to pursue organizational change (Kraatz and Zajac, 2001; O'Connor and Rice, 2001).
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They defined a dynamic capability as “the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments” (p.516).
Liu (2013) stated that future competitiveness in dynamic environments is mostly determined by strong forward-thinking strategies. In this respect, researchers emphasized the importance of capabilities enabling fast responses on change, flexibility and properly managed innovativeness (Teece et al., 1997; Dreyer and Grønhaug, 2004; Christensen and Overdorf (2000). Droge et al. (2008) even highlighted innovativeness as more important than market intelligence for product success in turbulent (e.g. disruptive) environments, since innovation can be used to actively influence the change. Innovations can be distinguished into two broader categories: the incremental and the radical (breakthrough) innovations (Schilling, 2013; Zhou et al., 2005). Incremental innovations are characterized by improvements and smaller technology changes, whereas breakthrough innovations are “novel, unique or state-of-the-art technological advances” (Zhou et al., 2005, p.43). Especially radical innovations can help actively shaping environmental disruptions, but incremental innovations are crucial to stay competitive in the short term.
2.2. The Challenge of Ambidexterity
Thus, to stay competitive today and tomorrow in disruptive environments requires to handle two different innovation management approaches at the same time. The important dynamic capability to simultaneously pursue both contrasting activities simultaneously is called ambidexterity (Gibson and Birkinshaw, 2004). It is broadly defined “as an organization’s ability to be aligned and efficient in its management of today’s business demands [exploitation], while simultaneously being adaptive to changes in the environment [exploration]” (O’Reilly and Tushman, 2008; Raisch and Birkinshaw, 2008, p.375). Both activities vary in type and timing of their outcomes. Exploitation is likely to lead to incremental and exploration to radical innovations (Andriopoulos and Lewis, 2009; March, 1991). March (1991) associated exploration with “terms such as search, variation, risk taking, experimentation, play, flexibility, discovery, innovation [and] exploitation [with] refinement, choice, production, efficiency, selection, implementation [and] execution” (p.71). According to March (1991), it is important to balance exploration and exploitation to attain a firm’s sustainable long-term success:
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In practice, it is a highly complex attempt to develop ambidexterity as it requires the right organizational structure, culture and a strong management (McCarthy and Gordon, 2011). However, managing ambidexterity successfully is related with increasing firms’ sales growth rates and leads to a better ability to adapt to environmental change (He and Wong, 2004; O’Reilly and Tushman, 2008). Within a highly dynamic and competitive environment, exploration is needed to cope with uncertainty caused by dynamism and exploitation is necessary to profit from the outcomes of exploration faster than competitors (Jansen et al., 2005).Incumbents tend to neglect exploration by falling into innovation traps, i.e. favoring the familiar, the mature and preferring to search for solutions close to existing solutions (Ahuja and Lampert, 2001). Therefore, it is in question how incumbents can increase exploration to balance their innovation efforts and hence achieve ambidexterity. One potential strategy to do so is to conduct more basic research.
2.3. Ambidexterity and Basic Research
The OECD defines basic research as “experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundations of phenomena and observable facts, without any particular application or use in view” (OECD, 2002, p.77). Looking at the pharmaceutical industry, for example, it means trying to understand underlying mechanisms of a disease. Applied research is in turn to find a medicament for this disease (Lim, 2004). Hence, applied research is also the acquisition of new knowledge, but it is “directed primarily towards a specific practical aim or objective” (OECD, 2002, p.78). Though, in practice, basic and applied research are difficult to differentiate, and its transition should be seen as a spectrum with gradual rather than categorical differences (Nelson, 1959; OECD, 2002). From pure basic to pure applied research, the results get more predictable and the objectives clearer and closer to a practical problem (Nelson, 1959). The OECD admits difficulties in the applicability of its definition for basic research in an economic context and further differentiates basic research into pure and oriented basic research. “Oriented basic research is carried out with the expectation that it will produce a broad base of knowledge likely to form the basis of the solution to recognized or expected, current or future problems or possibilities” (OECD, 2002, p. 78). Pure basic research in turn does not specifically aim for long-term economic or social benefits (OECD, 2002). I use oriented basic research in this study, as companies presumably rarely conduct pure basic research.
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of R&D exploitation and exploration. Development is clearly classified as R&D exploitation as it is closely connected to the objective of implementing a product. Czarnitzki and Thorwarth (2012) emphasized that basic research often builds the breeding ground for applied research which further can be used for development. Therefore, all R&D types should be used as complements.
Basic research creates a positive effect on firms’ success (Czarnitzki and Thorwarth, 2012). Besides providing a breeding ground for applied research, basic research often functions as an antecedent for breakthrough innovations (Malva et al. 2015). Moreover, basic research could enhance the absorptive capacity of a firm, which enables a better processing of externally generated knowledge (Green and Scotchmer, 1995). The main problem of incumbents is to balance their strength in developing incremental innovations and their weakness in developing breakthrough innovations. To overcome their tendency towards exploitation, incumbents need to foster exploration for R&D ambidexterity. That could be done for example by intensifying experimentation or basic research (Ahuja and Lampert, 2001; Bergek et al., 2013; McCarthy and Gordon, 2011; McNamara et al., 2007).
Nonetheless, basic research also has some drawbacks. It is less focused, imposes uncertainty and is difficult to appropriate; hence, a good management of basic research is essential to gain from it (Czarnitzki and Thorwarth, 2012; Trajtenberg et al., 1992). Firms need to acknowledge that basic research is a long-term investment, which often pays out lately, indirectly or even never at all (Rosenberg, 1989; Trajtenberg et al., 1992). Those disadvantages make basic research costly and less productive than its applied counterpart (Solomon et al., 2015; Trajtenberg et al., 1992).
On average basic research represents less than 5% of corporate R&D expenditures (Barge-Gil and López, 2014). Due to a big gap between private and social benefits it is mostly conducted in public R&D institutes or universities (Trajtenberg et al., 1992). In an economic context, according to Nelson (1959), the costs for basic research are only accepted if the predicted benefits are sufficiently ample. Low-tech companies, for instance, gain less from basic research than high-tech firms and hence are less willing to invest in it (Czarnitzki and Thorwarth, 2012). That could be explained by different environmental circumstances, e.g. under low uncertainty basic research may not pay out.
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3. Methodology
As mentioned previously, the literature lacks to explain the actual importance of basic research for incumbents in disruptive environments. This qualitative research is conducted to investigate if companies facing such situations recognize a changing potential of basic research. To get a deep understanding of the topic, a multi-case study within the German automotive industry is conducted. This industry was chosen because it currently faces disruptive environmental change, e.g. induced by disruptive technologies as e-mobility and autonomous driving (Teece, 2018). Yin (1981, p.98) defines the case study as “an empirical inquiry that investigates a contemporary phenomenon in its real-life context, especially when the boundaries between phenomenon and context are not clearly evident”. Yin further highlighted the importance of triangulation, which is assured through a combination of semi-structured interviews enriched by qualitative secondary data. Eisenhardt (1989) builds on Yin’s approach and develops a concept to use case study research for theory building and provides proper guidance especially for the analysis. Eisenhardt’s approach builds the foundation of this study.
3.1. Research Setting
The German automotive industry was chosen, since its environment was relatively stable in the past, but is getting continuously disrupted since a few decades (Gercheva, 2018; Teece, 2018). Volkswagen (2018) stated in its 2018 annual report: “The automotive industry is undergoing a radical transformation process. Multinational corporations like us are facing major challenges in the areas of customer/market, technological advances and legislation.” Ford (2018) claimed it the biggest change in their over 100-years-old history. Therefore, this research setting provides optimal conditions to investigate the perceived potential of basic research in disruptive environments.
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3.2. Data Collection
Glaser and Strauss (1967) highlighted the importance of a strong connection to practice when building theory as this makes theory testing efforts easier and its results more forceful. Therefore, the cases are based on semi-structured interviews with R&D managers and experts from the German automotive industry - in total 341 minutes of dialogue - enhanced by qualitative data from 212 documents. This approach helps building strong cases by ensuring triangulation. A multi-case study, rather than a single-case study, was chosen as it makes the findings more robust (Blumberg et al., 2014). In sum, seven anonymized cases were built.
Semi-structured interviews. These were chosen to collect opinions, perceptions and experience about basic research within the German automotive industry. The interviews were conducted by video or telephone calls, recorded and transcribed afterwards. A semi-structured approach was used since it helps to cover all important topics but also allows “to modify the style, pace and ordering of questions to evoke the fullest responses from the interviewee” (Qu and Dumay, 2011, p.246). By doing so, not only a perception or opinion itself but also its underlying reasons can be figured out. In consequence, this approach combines both the advantages of structure and flexibility and makes it easier to compare and analyze the data. However, it also leads to a lack in the reliability and validity of this study, since it does not entirely capture information objectively and in the same way for all respondents (Qu and Dumay, 2011). But, in qualitative theory building, trustworthiness, rigor and triangulation are more important measures to identify the quality of a study than objectivity (Golafshani, 2003). The interviews are divided into three sections: (1) perceptions about the business environment, (2) internal R&D and the role of basic research and (3) its potential in disruptive environments. The questionnaire can be found in the appendix.
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Cases Category Position Date Secondary Data
No.1 OEM 1.1: Developer
(E-Mobility) 09.04.2019 46min Press releases (47(106)) Annual reports (3) Website
1.2: Project Coordinator
(Autonomous Driving)
12.04.2019 30min
No.2 OEM Researcher 09.04.2019 42min Press releases (53(355)) Annual reports (3) Website
No.3 OEM Researcher 29.04.2019 34min Press releases (48) (Filter: R&D & Strategy) Annual reports (3) Website
No.4 Supplier Developer 04.04.2019 26min Press releases (0 (11)) Annual reports (0) Website
No.5 Supplier Director R&D
(Business Unit) 24.04.2019 34min Press releases (42 (161)) Annual reports (3) Website
No.6 Supplier Vice President R&D 29.04.2019 36min Press releases (7 (93)) Annual reports (1) Website
No.7 Expert 7.1 Consultant 08.04.2019 49min 7.2 CEO
Research Institute 11.04.2019 44min
Total: 341min (212 (793)) documents
Table 1: Cases and Data Sources
3.3. Data Analysis
Following the theory of Eisenhardt (1989), the starting point of the data analysis is the construction of cases by coding the interviews. The seven cases were then further compared with each other in order to recognize patterns and to develop a theoretical framework. They are based on data concerning three automobile manufacturers (OEMs), three suppliers and two experts (e.g. consultant, researcher). This distribution was chosen to represent the whole industry and to adjust for selection bias.
12 Figure 1: Coding Scheme
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4. Results
Within this chapter, I present all relevant findings from the data analysis. First, the perceptions of the recent developments in the German automotive industry are described. Afterwards, I show how the role of basic research generally and in disruptive environments is viewed within this industry. Finally, I list all relevant other strategies which are used in the automotive industry to cope with the challenges of disruption.
4.1. Disruptions in the Automotive Industry
The automobile manufacturers form the largest industry and the dobbin in Germany’s economy with the highest R&D expenditures and about 834 000 employees (Statistisches Bundesamt, 2019; VDA, 2018). The following table provides an overview of the case companies’ perceptions of the changes within their industry and how well-prepared they feel regarding the accompanied challenges.
Case Disruption
Industry Preparation Industry for Core Business Challenge Preparation Company
Primary Secondary Primary Secondary
Case 1 Medium High - Medium Medium High
Case 2 High High - Medium - Medium/High
Case 3 High High - Medium High Medium
Case 4 Low - - Low - (High)
Case 5 Medium High Medium Low Medium High
Case 6 High High Medium Low - High
Case 7 High Medium/High - -
Table 2: Perceptions about the Level of Disruption & Preparation for it
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The speed for the overall disruption is mostly seen as uncertain. Most of the interviewees perceive the whole process as rather stepwise. Not surprisingly, they agreed on the assumption that the car in general is not going to be displaced at least within the upcoming two decades, since a vehicle for the individual transportation of humans is very complex, dependent on a proper infrastructure, needs to fulfill high safety standards and is expensive to develop (C2, 7.1). However, its components are changing a lot. The mentioned main factors for this disruption’s speed are customer reactions, the future relevance of core technologies and governmental regulations. This process will take years or even decades (C1, 2).
Causes of the disruption. The automotive industry is challenged from various directions. Even though the automobile itself will not be displaced soon, the driving experience will change significantly, and the industry is pressured by many new requirements from different stakeholders. The causes of the current disruption can be classified into four interrelated categories, presented in figure two.
Figure 2: Causes of the Disruption (Automotive)
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changing customer demands lead to a market entry by new companies and other industries. Together with the globalization, these aspects are increasing the competitive pressure.
Governmental regulations affect the disruption in a more indirect way, since they represent the society’s preferences and influence the competitive framework and the implementation of new technologies. A press release proclaims: “In countries which offer appropriate infrastructure and regulatory support, we see how quickly electromobility can become the norm” (C1). Thus, regulations can facilitate (e.g. e-mobility - environmental regulations) or slow down (e.g. autonomous driving - safety standards, infrastructure) the disruption.
Status of preparation. From a broad perspective at least three of the interviewees conceive that adjusting to the disruptions could be difficult for incumbents and the overall economy in Germany. Especially the situation on the labor market raises concerns, since its upwards trend is in danger and this poses a big threat for the overall German economy (Statistisches Bundesamt, 2019).
“Now it is in question how the established companies are going to adapt. And yes, one or the other will succeed better. That will also show us how the structural change will take place here. A mentality of keeping everything as it is will not work. All this will be accompanied by a disruptive shift in the labor market. There is no way around it; the alternative would be to directly stop doing business” (C5).
However, when it comes to the companies, all interviewed firms perceive themselves as rather well-prepared to handle the change. Case five for instance stated: “We are in a marathon that is already well underway, and we are one of the front runners.”
4.2. Basic Research
In contrast to the literature, suggesting to increase basic research within disruptive environments, my analysis paints a different picture. In this section, first I present the understanding of the definition of basic research in practice. Afterwards, I summarize the importance of basic research in general and in disruptive environments. As basic research was not mentioned in the secondary data, the following is only based on the interviews.
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there is no direct application in view was recognized by seven out of nine interviewees. However, the statements from the right column show that when asking for using the definition in practice, the interviewees had problems to differ between basic and applied research.
Case Interviewee’s Definition Problem in Practice
Case
1 “For me, basic research is research at universities that does not specifically pursue a goal and rather enables a technology that is not yet controllable. (…) Although this research has a rough objective, it does not have a concrete application objective in mind. There is simply no potential application.” (1.1)
“I would say that basic research is research that explores new technologies, also from other areas, that could potentially be useful for our cars” (1.2)
“Oh, but we quickly come to applied research here again. Difficult!” (1.1)
Case 2
“I don't have a definition in mind right now. I can only tell you what I would say from my gut”. (Example - Emissions)
Case
3 “Basic research is research which I carry out independently of a use case, just out of a scientific field. Yes, just the further development and the examination of the foundations of a scientific field. One simply does not research use-case-specific, rather out of the topic, from the state-of-the-art perspective.”
“Basic research for me is for example the topic ... hmm ... that is also no basic research anymore.”
Case
4 “Hmm... how would you define basic research?” “Load measurements (…) Oh, but that is applied research or even development again.” Case
5 “For me, basic research is something that has a lot to do with understanding. Well, to build an understanding, for instance about physical phenomena, mechanical or of any other nature. Research which is not yet product-specific but intended to serve as a basis for further development, to develop tools etc. This research is not directly and specifically about products but serves to generally improve the quality and the speed of later research and development.”
“Sometimes the transitions are very smooth.”
Case
6 “In basic research, things are researched and analyzed without already having a concrete application in mind.” “The definition of basic research alone is already somewhat divergent from a global point of view. In America for example they have a completely different understanding. They do not have basic research as we know it.”
Case 7
“In basic research, the goal is to gain knowledge, and I'm going to say that its results are open-ended.” (7.1)
“For me, basic research is very close to the laws of nature. Basic research is research that aims to understand something that we have not yet understood. Often, as I said, it is aiming to better understand and grasp a natural phenomenon. Thus, for me, basic research forms the basis for applied research, not necessarily associated with a practical benefit. This comes later in applied research.” (7.2)
“Well, of course you cannot easily label it as black or white. Hmm, yes, that is somehow different depending on the topic.” (7.1)
“Ah, maybe that is already applied research again.” (7.2)
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Besides the general problems of giving an example for basic research, I could recognize a pattern in their finally given illustrations. The examples were often deduced from the word “basic”. Hence, they were either covering something very broadly applicable as “laws of nature” or “natural phenomena” (C2, 5, 7) or are about “materials” as the base for later products (C1, 2, 4, 5, 6, 7). If there was still some application visible, the interpretation switches to terms as “detail”, “microscopic” or “ions” (C1, 2, 6, 7). However, especially labeling research about materials as basic research was not without doubt. One interviewee explained the problem as follows: “The steel manufacturers are also mostly doing applied research, because they of cause also have a product in mind, here a raw material” (C6). Research “to acquire new knowledge of the foundations of phenomena and observable facts” (OECD, 2002, p.77) is a task also common in industrial practice. However, the difficulty for the interviewees was the separation of these activities from a practical application to differentiate them from applied research. The example of case two’s interviewee can be used to explain the problematic:
“[Emissions] consist of very different components. There are coarser particles that are easy to filter out, but then there are also very small and fine components. According to the coarser particles, we already exactly know how they behave under various influences (air pressure, weather, etc.). Concerning the fine ones this is still largely unclear. Nobody knows how they are distributed, where they go and how to filter them. The current filters are much too coarse for the small particles. To have a closer look and to determine how the small particles behave in the air and under different influences, I would call basic research.”
By connecting this example to the OECD definition, it seems to be a proper example of basic research. However, nothing is known about the motivation behind the research effort. If the interviewee was working for a firm innovating exhaust systems, aiming specifically to filter small particles, then he would have a concrete product in mind, at least from a broader perspective. This shows that the transitions between both research types are smooth.
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All interviewees agreed upon a low relevance of conducting basic research within their companies. The fact that no secondary data about basic research was found supports this. The interviewees mentioned more disadvantages than advantages and stressed them much more. Advantages were often only mentioned after asking insistently. The following table gives an overview about the mentioned advantages and disadvantages.
ADVANTAGES Case 1 Case 2 Case 3 Case 4 Case 5 Case 6 Case 7 Base for Applied Research
Broaden Horizon & Creativity Facilitation Setting Trends Long-Term Orientation Evaluation of Ideas DISADVANTAGES Time to Success
No Guarantee for Success High Costs
Efficiency Complexity Measurability & Controllability
Table 4: Advantages and Disadvantages of Basic Research (Grey= Response; White = No Response)
The main problems of in-house basic research are grounded in high uncertainty about the results, a long time period until one could gain from it and high costs. Two interviewees summarized it as follows:
“Basic research simply makes no sense for our research department because it usually takes a very long time without generating any concrete results. You will only profit from it if someone involved in applied research has done something with it that can be used for economic purposes” (Case 1.1). “It is simply too expensive, too complex and we also have our public research facilities for that” (C7.1).
However, except for one, all interviewees agreed in the high importance of using the results of basic research conducted somewhere else, since they function as the basement for applied science.
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Other reasons for the small role of basic research. Even if I could not find any evidence for a decreasing investment in basic research as suggested by the literature, potential reasons for such development have been questioned in the interviews. I did this to better grasp the overall role of basic research. All answers can be found in the appendix, but the main mentioned reasons are the following.
First, a better information exchange could lead to a decrease of corporate basic research. Either induced by an increasing cooperation between science and industry or due to digitalization and new information technologies (C2, 3, 7). Case two emphasized:
“In the past, global information sharing was not that easy. Back then, you went to the library and borrowed a few books. Today, you have much greater access to scientific knowledge. We do not need to reinvent the wheel and can fall back on other people's work.” (Case 2).
And case three added: “We are in a situation where basic research is conducted somewhere else. That is why we simply do not have to become active ourselves”. But an increasing cooperation between universities and industry was not seen without criticism, since “as a result of increased cooperation, research at universities is, of course, increasingly conducted in the applied field” (C6).
Secondly, the strong profit-orientation within the industry forces R&D departments to act as efficient as possible (C1, 3, 5, 7). On the one hand, digitalization and topics as artificial intelligence and computer-based simulations enable fully new ways of doing research:
“I believe that the level of research is still the same, but that perhaps you simply have to spend less to conduct research in new areas. A few years ago, before launching a new product on the market, you had to make the different prototypes a hundred times and test them in different ways. Nowadays, with the help of simulations and virtual models, many steps can be eliminated (…) even in basic research, it is no longer necessary to calculate and test manually” (Case 7.2).
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“These days, with the great pressure of competition and the large variety of money-grubbing technologies (e.g. connectivity, electric mobility and autonomous driving), you can no longer afford basic research. You simply have to set priorities internally. Where do we spend the money and where not? I think the pressure will simply increase and basic research will always lose out, so that you can use the resources to finance something else” (Case 1.1).
So, reasons for a potential decrease of today’s corporate basic research are manifold. However, the results do not suggest any decrease in practice.
In summary: A potential decrease in basic research, as examined by other researchers, could be caused by better information exchange, more efficient R&D departments, increasing competitive pressure, limited capacities and a better cooperation between science and industry.
Basic research – importance in disruptive environments. No interviewee perceives any changes in the importance of basic research during the past decades. The only declared change concerns the topics of basic research, directed mostly towards digitalization, thus, new and more unexplored fields (C2, 7.1, 7.2). However, most interviewees also had problems to name the general role of basic research, which increases the difficulty in determining changes. Case three stated: “I couldn't say whether the importance has somehow increased or decreased in the past. The importance of basic research is justifiably small. Since it is so small, it is very difficult to perceive any change there.”
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In summary, for most of the interviewees the disadvantages predominate the advantages of conducting basic research in undisrupted as well as in disrupted environments, which explains its small general role. Because of this and a smooth transition towards applied research, changes in basic research are difficult to determine. The definition’s part about knowledge generation to understand phenomena seems to get more important in disruptive environments, but the required strong goal orientation under such circumstances moderates this effect.
In summary: The general role of basic research is likely not to change for firms acting in disruptive environments, mostly due to the disadvantages of conducting research without any application in view.
4.3. Other Strategic Responses to the Disruptions in the Automotive Industry
The results show that increasing investments in basic research is not the most likely action when facing disruptions. The remaining question is now which other strategies are used to master disruptions. In sum, three main strategies are prevalent. A continuative overview of the cases’ suggestions and actual responses accompanied by their motivations can be found in the appendix.
The first broader strategic response incorporates trend scouting, experimentation, innovation, new orientation and flexibility. It is called increasing exploration, since it fits to March’s (1991) attributes for exploration (“search, variation, risk taking, experimentation, play, flexibility, discovery, innovation” p.71). In this context it means to sense for opportunities provided from change and embrace them by experimenting with new technologies and business models. Especially trend scouting was highly emphasized as one of the most important strategies to prepare for future uncertainties (C1, 2, 4, 5, 6). Additionally, all case companies are currently building up expertise in at least one new technology in order to adapt to the changes and most of them try to become a more flexible and agile organization with an entrepreneurial spirit (C1, 2, 3, 5, 6). Furthermore, the three car manufacturers changed their business orientation and vision statements.
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“I guess, what's important is partnerships with other companies. Many of the tasks we have to master for the new topics are so big and require insanely high investments. You cannot cope with them on your own anymore, especially when the market entry is far away” (C2).
Thirdly, the interviewees emphasize the importance of using a highly focused strategy with clear priorities. Focus setting for instance was mentioned within six cases, since it is impossible to invest and excel in all new and highly complex technologies at the same time. The most disrupted companies from this study (C1, 2, 3, 5) focus mainly on one of today’s big topics, but also experiment with the other technologies to stay flexible. The overall pattern can be found in the appendix. Case two stated:
“The changes are currently so diverse; hence, we also have to look at what we are focusing on best. Everything at the same time is impossible. These decisions are difficult to make. That's why we have to consider strategically how we can move from one step to the next.”
Besides priority setting, a well-defined strategy for the stepwise transition from one to the next priority also is crucial under disruption. Investing in the right technology in the right moment is often the key factor in determining a company’s ability to survive under technological disruptions. Case one emphasized that Nokia did not get bankrupt because they did not know about the smartphone; they just did not see the potential and decided too late to invest in this new technology. Another big part of the third strategy was the attempt to get more efficient for generating enough own resources to invest in future technologies while maintaining the current economic performance (C2, 3, 5, 6).
To sum it up, the interviewees mentioned the importance of flexibility and agility in disruptive environments, for example by opening the organization in terms of knowledge creation and by broadly sensing and experimenting to be always prepared for any scenario. However, they also emphasized the importance of staying focused and not to lose sight of the strategic orientation and the company’s general objectives. The intensification of explorative efforts could be a hint for an increasing importance of basic research. The importance of a detailed strategic plan with extensive priority setting, however, could explain why the less goal-oriented basic research did not increase despite this.
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5. Discussion and Conclusion
In this chapter, I discuss the previously described results and attempt to answer the following research question: What is the role of basic research for established companies dealing with the challenges of disruptive environments? This topic has been mostly neglected in previous studies and no coherent picture exists. Eventually, I present implications, limitations and relevant topics for future research.
5.1. Overall Strategic Responses
The German automotive industry claims itself as medium to highly disrupted. As mentioned above, the phase of disruption can take years or even decades, which is the case in this industry (C1, 2; Christensen and Raynor, 2013). Since this branch has many stakeholders and a complex product, the different parts are not disrupted simultaneously and at an equal intensity. But almost all case firms notice a growing environmental pressure and began to prepare for it.
The causes for the disruption are very diverse and closely interrelated. They are mainly based on new technologies, increasing competition and changing customer demands. Governmental regulations facilitate or slow down such developments. Therefore, I would label them indirect causes. Figure three presents the sources of the disruption and the reactions of the automotive industry to it:
Figure 3: Causes of Disruption and Responses from Industry
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Overall, the used strategies fit very well to what the theory suggests. Teece (2018) recently dealt with the developments in the automotive industry and connected them to his dynamic capability theory. His advice to managers from the industry is “to sense and make sense of emerging shifts in the environment, rapidly seize potential opportunities, and transform their organizations to maintain environmental fitness” (p.501). Strategy one, which includes for example experimentation with new technologies and trend scouting, can be interpreted as sensing for new opportunities. Cooperating as the second strategy can also be used to sense the environment but also enables to rapidly seize potential opportunities. That fits to the currently increasing attention in literature towards open innovation (Chesbrough, 2006). By sharing risks and costs and by joining expertise, new opportunities can be grasped much faster than when acting alone. Thirdly, a clear strategic plan with priorities helps to achieve the necessary transformation without losing the short-term environmental fit. That is important to bear the costs for large upfront investments and hence to survive in the long-term.
The strategies can also be connected to the theory of ambidexterity. The first two approaches are used to increase exploration (e.g. the organization’s innovativeness), aiming to prepare for different scenarios and to achieve long-term goals. The third strategy aims to avoid getting lost in too many projects and to achieve short-term goals by increasing efficiency (e.g. through incremental process innovations). Thus, it is more an exploitative activity, according to March (1991). To put it in a nutshell, I would call the overall strategic response of the case companies achieving ambidexterity.
5.2. The Role of Basic Research
The increasing importance of exploration in disruptive environments could lead to the assumption that also basic research, as an explorative activity, plays a larger role, for instance to increase innovativeness of the firm. However, an increasing relevance of the already rather low importance of basic research was not mentioned by any interviewee. Additionally, the fact that basic research was not alluded in the secondary documents leads to the assumption that its importance is very low and not likely to change in a disruptive environment although, as proven by previous literature, the advantages of basic research get more meaningful under disruptions. So, why is the role of basic research although unlikely to change under disruptions?
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the following figure. The factors on the left-hand side reinforce the negative value of the disadvantages and mitigate the positive value of the advantages. The boxes on the right-hand side have the opposite effect.
Figure 4: Basic Research: Costs-Benefits-Ratio under Disruption
The case firms are likely to increase their investments in explorative activities under disruptions, which fits to the ambidexterity theory. That implies that the advantages of basic research, e.g. broadening the horizon and setting trends, might also become more important as they match the companies’ specific needs under disruption. However, in the disruptive environment of the automotive industry, there are also factors mitigating the positive effect of these advantages. Those factors are for instance, a better global information exchange and an increased cooperation between research institutes and the industry. Affected incumbents could more easily use the results of others as a base for applied research. Additionally, cooperation with other firms may also lead to a splitting of basic research efforts between two companies.
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5.3. Theoretical Implications
This study contributes to the management literature by providing insights about the role of basic research under disruptions. Previous studies show the positive effect of basic research on innovativeness and absorptive capacity (Green and Scotchmer, 1995; Malva et al., 2015). My analysis uncovered that this is not fully recognized in practice and provides other reasons for why basic research does not seem to be the first strategic choice for incumbents acting in disruptive environments. To define areas where basic research adds the most benefits at the lowest costs, it is advisable to deeply examine its cost-benefits-ratio in different contexts, as above (Nelson, 1959).
My study reveals major difficulties in applying the OECD definition for basic research in an industrial context. That is not new to the literature, since it was already mentioned by Nelson in 1959 and recognized by the OECD itself. However, there are still no appropriate measures to differentiate between basic and applied research in an industrial context. The OECD attempt to differentiate between pure and oriented basic research was a good starting point to improve its definition, but unfortunately it aggravates the smooth transition towards applied research.
Besides my findings about basic research, I found evidence for ambidexterity as a strategy for incumbents in disruptive environments (Gibson and Birkinshaw, 2004; Raisch et al., 2009). However, I highly emphasize to consider the resource endowments of a firm when determining the right strategies to increase ambidexterity. Cao et al. (2009) highlighted that with enough resources, high levels of both exploration and exploitation can be pursued simultaneously and ambidexterity is a combined dimension. Though, under resources scarcity ambidexterity is more a balancing act. So, it is important to determine an activity’s impact on both exploration and exploitation. That was the case for basic research in the automotive industry. Due to many new and money-grabbing technologies, the resources are scarce and basic research had a positive impact on exploration but also a negative impact on exploitation; hence, it cannot be considered the first choice. Advising incumbents to rise exploration without considering their effect on exploitation under resource scarcity could be risky.
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5.4. Practical Implications
Successful incumbents often realize potential threats too late, fall into innovation traps and are not flexible enough to react to massive changes within their environments (Ahuja and Lampert, 2001; Kraatz and Zajac, 2001; Sandström et al., 2009). That frequently led to the fall of formerly successful and well-established companies. Therefore, it is crucial for managers of such firms to follow the right strategies when facing environmental disruptions. Because this study did not provide enough indication for a changing role of basic research in such circumstances, I would not recommend to change the investments in it. Due to the limited use-case orientation, the disadvantages of basic research in an industrial context are severe and likely to outweigh increasing advantages.
Instead, I would rather recommend to achieve ambidexterity by other means. Exploration could be increased for instance by trend scouting or experimentation with new technologies. Also, cooperation seems to be promising for this attempt. But to achieve short-term as well as long-term goals, both strategies should be escorted by a strong strategic concept, including clear priorities. However, since these strategies were not compared with the economic performance of individual case companies, no claims can be made about their effectiveness in practice.
5.5. Limitations and Future Research
First, as already mentioned, the definition of basic research is difficult to apply in practice. The OECD (2002) stated that a full sequencing and separation of basic and applied research rarely exists in practice. It is likely that the same employees are responsible for both within an iterative process. The major sticking point of the definition is that there is “no application or use in view”. It is uncommon in practice to precisely differentiate between research types when distributing resources. Case three claims basic research as part of the scouting or early R&D phase and does not separate it clearly (C3). This leads to the main limitation of this study, i.e. that all results are somehow based on a subjective interpretation and differentiation of basic and applied research in practice. The black-and-white-thinking on the different research types in theory made it furthermore difficult to identify changes in the research efforts of a firm since firms do not differentiate themselves. To better investigate the role of basic research in disruptive environments, it could be useful to develop more differentiated measures for basic research together with the help of practitioners. Nelson (1959) emphasized that the topic should be seen as a stream between both types. I suggest to do it that way and to define a novel scale with more fine-grained options between the extremes of pure basic and pure applied research by discussing the topic with experts from different industries. Such scale can be used for a quantitative study, aiming to define the role of basic research in different environments.
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intensities, product margins or development times could impact the relevance of basic research (pharmaceuticals vs. food sector). Since this study took place in the automotive industry only, a similar investigation in another context could lead to different results.
The results could further be falsified because none of my interviewed companies perceives itself at high risk due to the disruption. I tried to compensate for that by including experts and by asking for reactions in different hypothetical scenarios and opinions about other companies. Nevertheless, all of them perceive at least an increasing pressure and some changes; hence, it can be assumed that their reactions would may just be intensified when facing more disruptions in real life. However, I would suggest to repeat this study only with companies perceiving their close environment as highly stable or highly disrupted (e.g. tires and power train manufacturers).
Another limitation is grounded on the fact that I interviewed one to two managers each case, mostly senior managers. That provides a somewhat limited perspective on companies’ strategies. One interviewee highlighted that managers from different hierarchical levels often perceive the potential of technologies or strategies differently. Therefore, the hierarchical level of the interviewees could bias the results and hence should be considered in a further study. Nevertheless, I used triangulation to compensate for these biases.
Furthermore, the term disruption was used unitarily, even though its causes were rather diverse. Thus, the role of basic research may be different under the challenges of specific causes or other environmental conditions. For example, the importance of basic research may decrease under high competition, whereas it may increase when the disruption is caused by one technology.
Therefore, future research should investigate more deeply the actual role of basic research in different environmental contexts. When using a more fine-grained differentiation between research types, qualitative and quantitative research would be more robust. Furthermore, by comparing investments in basic research with the company’s economic performance, one could unearth the potential and not only the current role of basic research. The findings of such a quantitative study could be used afterwards to create a framework which could help practitioners to decide under which circumstances it is probably useful to increase or decrease basic in relation to applied research.
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Consequently, the research question can be answered with the following conclusion:
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Appendices
A – Interview ProtocolI. Opening
My name is Katharina Anders and I study Strategic Innovation Management at the University of Groningen. As part of my master's thesis, I examine the importance of basic research in companies whose industry is expected to undergo significant change. The data of this interview will be anonymized and please just let me know, if there are questions that you cannot or that you are not allowed to answer. If there are no questions left, I will start the recording. Many thanks for your help!
1. In which position do you work at ... and what are your everyday activities? II. Perception of the corporate environment
2. Where do you see your industry in five to ten years? Do you think that much will have changed by then?
- Where do you see the causes of these changes? 3. Is your company prepared for these changes?
- What strategies do you use in your organization to deal with future demands of the automotive industry and to maintain or even improve your market position?
4. What do you think, how can an established company successfully survive an industrial disruption? 5. What role do innovations play in your business and do the current developments affect your R&D
department? (Employees, strategic orientation, investments) 6. How important are radical innovations currently in your company? III. R&D strategies and goals
7. How would you define basic research? - Do you have an example for me?
(I explain the OECD definition)
8. What role do basic research and applied research play for your company? - Why are you investing / not investing in basic research?
9. How much do you invest in basic research in terms of the relative proportion of your total spending on research and development?
10. Do you cooperate with external partners to benefit from their basic research? IV. Basic research in changing industries
11. Has your relative investment in basic research changed lately? - What were the reasons? (if BR relevant)
12. In which fields of technology do you pursue basic research as a priority? (if BR relevant) 13. Do you think that basic research will become more important for your company in the future?
14. Do you think basic research plays the same role in other companies in your industry as it does for you? 15. Are you supported by public funding for the conduction of basic research?
V. Closing
Is there anything you would like to add, or have any questions emerged during the interview? If you want to, I will send you the final thesis after finishing it. Thank you very much for your help!
37 B – Reasons for a Decrease of Basic Research
Reasons for Decrease Case 1 Case 2 Case 3 Case 4 Case 5 Case 6 Case 7 Economic Framework/ Profit Orientation Specialization Efficiency Capacity Focus Information Exchange Change in Attention Intern. Competition (Pressure)
Service (R&D lower)
Complexity
38 C - Other Strategies
a. Overview
Case 1 Case 2 Case 3 Case 4 Case 5 Case 6 Case7 1. 2. 1. 2. 1. 2. 1. 2. 1. 2. 1. 2. 1. EXPLORATION New Orientation New Technologies & Innovations Experimentation & Broad Horizon Trend Scouting, Bench Marking
Flexibility & Agility
Entrepreneurial
Culture
COOPERATION Cooperation
STRATEGIC ORIENTATION & PRIORITIES Strategic Plan Focus Setting/ Priorities Efficiency Step-by-Step, Technology Switch OTHERS
Lobbyism & Public Affairs
Active Participation
Grey= Response; White = No Response; 1. = Primary Data; 2. = Secondary Data
b. Focus: Technology
Technology Case 1 Case 2 Case 3 Case 5 Case 6 E-Mobility Autonomous Driving Digitalization Connectivity Mobility as Service
