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Strategy transformation through


strategic innovation capability –
a case study of Fanuc
Mitsuru Kodama1 and Tomoatsu Shibata2
1
College of Commerce, Nihon University, 6-2-1 kinuta setagaya-ku, Tokyo 157-8570, Japan.
kodama.mitsuru@nihon-u.ac.jp
2
Faculty of Economics, Tohoku University, Kawauchi, 27-1, Aoba-Ku, Sendai-Shi, 980-8576, Japan.
t-shibata@econ.tohoku.ac.jp

This paper presents a theoretical framework under which large companies should be able to
bring about strategy transformation. First, we present the concept of ‘strategic innovation
capability’, a corporate system capability to achieve corporate strategy transformation by
strategic innovation. Then, we consider strategic innovation capability by comparing it with
previous theories (dynamic capability, major innovation, dynamic capability, breakthrough
innovation capability). Second, we present the case example of strategy transformation at
Fanuc, a company that holds the top global share in the numerical control (NC) market. In
this case study research, we consider and analyze historically how the company aimed for
new creativity in the NC market, developed innovative NC technology for the machine tool
market, and used that technology energetically for commercialized products. From the
strategic innovation capability framework, the core theory of this paper, we also analyze and
consider how top management made conscious efforts to form a new development organi-
zation within the company, and the processes involved in achieving strategy transformation
to establish competitive superiority in this field. Finally, we discuss the implications drawn
from this case analysis, and the issues for future research.

1. Radical innovation and DS/Wii game business, and Apple’s US-developed


strategic change music distribution business are examples of the crea-
tion of the coevolution model, which is a new value

T o acquire a competitive edge and sustain it over


a long period, it is clearly important that com-
panies constantly create new products, services, and
chain in the information and communications tech-
nology (ICT) industry.
A succession of academic research texts in recent
business models (e.g., Jelinek and Schoonhoven, years on radical (e.g., Leifer et al., 2000), break-
1990; Morone, 1993; Markides, 1998). Creating and through (e.g., Hargadon, 2003), discontinuous (e.g.,
implementing new business models that radically Laurila, 1998; Kaplan et al., 2003), and disruptive
transform conventional products and services and (Christensen and Raynor, 2003) innovation has
shake up existing business rules induce major stra- provided numerous examples of companies taking
tegic change in the historical flow of traditional large on challenges oriented to the strategic changes of
corporations. The major transformation of the mobile exploring new markets and creating technologies,
phone business with NTT DOCOMO’s i-mode (e.g., the accompanying difficulties, and the numerous
Kodama, 2002; Peltokorpi et al., 2007), Nintendo’s reasons for success or failure. The conclusion is that

© 2013 RADMA and John Wiley & Sons Ltd 75


Mitsuru Kodama and Tomoatsu Shibata

acquiring the organizational capability to respond 2000). To acquire a radical innovation capability, a
rapidly to environmental change, develop new company needs different capabilities (including strat-
technologies, and promote business development egy, organization, resources, technology, processes,
(e.g., Tushman and Anderson, 1986; Brown and and leadership) to the practical management
Eisenhardt, 1997; Teece et al., 1997) is crucial. elements nurtured through incremental innovation
Cases have been reported, however, of traditional (e.g., Kodama, 2003, 2007; O’Reilly and Tushman,
large companies that were unable to respond well to 2004; Vanhaverbeke and Peeters, 2005).
environment change in numerous industries, includ- A large number of prior studies, mostly coming
ing personal computer markets (Mitchell, 1989), out of Europe and the USA, looked at the strategic
digital photos (Tripsas and Gavetti, 2000), disc drives change process and organizational capabilities essen-
(Christensen and Bower, 1996), semiconductor expo- tial to achieving radical innovation. But many of
sure apparatus (Henderson and Clark, 1990), and these studies focused on empirical or proven case
watches (Glasmeier, 1991), and this significantly studies of individual research and development
impacted their performance and chances of survival. (R&D) or practical projects within companies of all
The phenomenon is closely connected to the compa- sizes, or else, single-item successes or failures from
nies’ strong dependence on routines that activate independent venture companies (e.g., Howell and
specific path-dependent core competences (Nelson Higgins, 1990; Kuratko et al., 1990; Greene et al.,
and Winter, 1982; Teece et al., 1997). It means, more- 1999; Miles and Covin, 2002). Although this accu-
over, that the more companies pursue effective busi- mulated research is highly important, it is undeniable
ness activities to promote the economic activities that companies also rely on the success of individual
of expanding scale and scope, the more the existing champion projects and the special capabilities of the
core competences descend into core rigidities and heroes that implemented these projects. Thus with
competence traps, and the more they become unable respect to the capability of large corporations that do
to respond swiftly to major environmental change not rely on the capabilities of specific individuals to
(Levitt and March, 1988; Levinthal, 1991, 1997; systematically and continuously create radical inno-
Leonard-Barton, 1992). Promoting efficient corpo- vation, research from the viewpoint of strategy and
rate activity restricts task diversity and reduces activ- organization becomes increasingly important. Large
ities that induce employees to be independently corporations can deliver the slack to permit or
creative (e.g., Levinthal and March, 1993; Weick, promote the new routines of experimental and trial-
1995; Sutcliffe et al., 1999). and-error learning that start-up venture companies
In the past, a major source of competitiveness for find difficult to implement (Kogut and Zander, 1992;
traditional large corporations came from releasing Floyd and Wooldridge, 1999). In the past, however,
new version product by exploiting path-dependent there is little theoretical or empirical research on
capability and incrementally improving existing large corporations that created continuous, system-
products for existing markets (incremental innova- atic radical innovation, and research from the view-
tion), thereby gaining profits. Meanwhile, radical and point of corporate or management systems to
breakthrough innovations were a new paradigm shift promote such innovation needs to progress (e.g.,
of new markets and technologies, giving rise to the O’Connor, 2008).
dramatic expansion of product function, radical Previous research has made several attempts at
transformation of existing markets, creation of new defining innovation. Henderson and Clark (1990)
markets, and major cost reductions (Leifer et al., classified radical, architectural, modular, and incre-
2000; O’Connor and Rice, 2001). These kinds of mental product innovation at the development level.
radical innovations leading to new breakthroughs Davila et al. (2006) classified mutual transformation
differ substantially from the path-dependent incre- of technology and business models as radical inno-
mental innovations in the past. To achieve radical vation, and transformation of either technology or
innovation, a company requires new knowledge dis- business models as semi-radical innovation. More-
tinct from existing skills and expertise (e.g., Ettlie, over, O’Reilly and Tushman (2004) used the term
et al., 1984; Dewar and Dutton, 1986; Green et al., ‘radical’ for innovation accompanying discontinuous
1995). change and ‘architectural’ for innovation accompa-
The reason is that companies and individual proj- nying business process change. Garcia and Calantone
ects undertaking radical innovation face uncertainty (2002), moreover, uses ‘radical innovation’ for
and discontinuity in markets, technologies, organiza- actions causing simultaneous macro- and microlevel
tions, and resources; and while some projects may be changes in markets and technologies, and defines
able to ride them out, many others are highly likely other new product and service innovations as ‘really
to stall or fail midway through (e.g., Leifer et al., new innovation’. Again, based on the classifications

76 R&D Management 44, 1, 2014 © 2013 RADMA and John Wiley & Sons Ltd
Strategy transformation by strategic innovation

of Garcia and Calantone (2002), O’Connor (2008) concept of ‘strategic innovation capability’, which is
uses the term ‘major innovation’ (MI) for these the capability as a corporate system to realize a tran-
radical and really new innovations excluding incre- sition in corporate strategy through strategic innova-
mental innovations. tion. Then, we will compare this strategic innovation
Thus, the classification of innovation creating new capability with the preceding theories of ‘dynamic
values outside the range of incremental innovation capability’ (Teece et al., 1997; Eisenhardt and
differs from researcher to researcher. This paper Martine, 2000), ‘MI dynamic capability’ focused on
seeks to avoid complexity by referring to incremental radical innovation (O’Connor, 2008), and ‘break-
innovation as the processes of small-scale improve- through innovation capability’ (O’Connor et al.,
ment, such as minor changes to existing products 2008a).
and services (for example, minor improvements to Second, we discuss the research methodology
existing technologies, excluding new technology used with this paper. Third, the paper aims to iden-
elements) and business process efficiency improve- tify, from longitudinal qualitative research into the
ment without major changes. In general terms, this is machine tool business by Fanuc in Japan over the
‘strategic innovation’ creating new value with regard past 56 years, a theoretical framework of ‘strategic
to technologies and markets arising from new innovation capability’ that enables the corporation to
changes, but excluding incremental innovation (a establish an ongoing advantageous position in a
meaning shared by all previous research), as men- rapidly changing environment. Last, we discuss the
tioned by Davila et al. (2006), O’Reilly and Tushman implications derived from this research and future
(2004), and Garcia and Calantone (2002). We inter- research issues.
pret ‘strategic innovation’ as being almost identical in
meaning to ‘MI’ as mentioned by O’Connor (2008).
Therefore, strategic innovation involves the con-
2. Strategic innovation capability –
tinuous strategic creation of new product, service,
literature review and theoretical
and business models to acquire long-term, sustain-
framework of the paper
able, and competitive excellence. It embraces the
radical reform of conventional products and services
2.1. What is strategic innovation?
and the creation of new business models that
transform existing business rules. The meaning of Markides (1997) defined strategic innovation as the
‘strategic innovation’ as defined in this paper corre- dynamic creation of creative strategic positioning
sponds to the MIs comprising the radical and really from new products, services, and business models,
new innovations above with the meaning of strategi- and emphasized that this framework was a dynamic
cally and continuously creating new products, ser- view of strategy by which a company established
vices, and business models, while ‘incremental sustained competitive excellence. To achieve this,
innovation’ corresponds to version updates through companies must not adhere to existing positioning
small-scale improvement of existing products and (existing business), but must always innovate in
services. Strategic innovation that strategically and ways that destroy this positioning. Moreover,
continuously acquires new knowledge to create Govindarajan and Trimble (2005) defined it as real-
innovation becomes a key process whereby a izing strategically innovative new business models
company quickly establishes a position in new (including new products and services). This type of
markets and technologies, which is also a factor for strategic innovation refers to business innovation that
achieving ‘strategy transformation’, the theme of transforms established business into new business
this paper. Accordingly, the core framework of this and has a major impact on corporate performance. It
paper, ‘strategic innovation capability’, may also is essentially different from the incremental innova-
include the organizational capability to achieve this tion mentioned earlier.
‘strategy transformation’ through strategic continu- Thus the strategic innovation mentioned by
ous innovation. Markides (1997) and Govindarajan and Trimble
The structure of this paper is as follows. First, the (2005) can be interpreted as having almost the same
we will present the concept of ‘strategic innovation meaning as the definitions of the term in the previous
capability’ based on the literature review. Here, we chapter. Strategic innovation, moreover, refers to the
would like to derive a basic framework for creating realization of strategic change in both the corporate
strategic innovation, taking in major companies as system and in products, services, and business
well as individual project organizations and inde- models. Describing the corporate capability, or the
pendent venture companies. Then, we will explain ‘strategic innovation capability’, to achieve this kind
the meaning of strategic innovation and present the of strategic innovation is the focus of this chapter.

© 2013 RADMA and John Wiley & Sons Ltd R&D Management 44, 1, 2014 77
Mitsuru Kodama and Tomoatsu Shibata

Next, we will consider this capability in relation to nate) internal and external resources in order to
previous research on dynamic capability. respond to, or create, market change, and inductively
derived concepts of corporate dynamic capability
essential in both slow- and fast-moving market envi-
2.2. The capability map
ronments. They suggested the importance of ‘learn-
The resource-based theories focused on independent ing by doing’ with simple rules to emphasize results
capabilities for companies and organizations (e.g., rather than prior training and implementation pro-
Wernerfelt, 1984; Barney, 1991) have come to cesses, especially in fast-moving environments,
develop as strategy theory frameworks from the where uncertainty rises and an industry’s corporate
viewpoints of microeconomics and organizational borders become vague (Eisenhardt and Sull, 2001).
economics. These resource-based theories and This interest in strategy theory has evolved toward
Porter’s (1980) competition strategy theory enable a dynamic structure that reflects current corporate
a detailed analysis of strategic positioning and the activity. Furthermore, O’Connor (2008) respects the
relationship between competitive excellence and the dynamic capability theory of Eisenhardt and Martine
internal resources already owned by companies in (2000), and mentions that a large number of MIs
slowly changing environments and industries. (corresponding to strategic innovations), including
However, it is difficult to analyze how companies in the radical innovations mentioned above, developed
rapidly changing high-tech industries within com- gradually from slow (or very slow) market environ-
petitive environments, such as the ICT and digital ments, and were implemented over a period of
sectors, create new competitive excellence. Mean- several years to several decades. Thus, the concept of
while, dynamic capability (Teece et al., 1997) is an dynamic capability is described as a theory that can
attempt to build a dynamic theory on existing be evaluated and applied around the axes of both
resource-based theories, and dynamically integrates market speed and business uncertainty (including
and rebuilds competence inside and outside the risk) characterized by strategic innovation.
company in response to environmental change. The O’Connor (2008) used the term ‘MI dynamic
word ‘capability’ refers to business processes for capability’ for capability that promotes the ‘explora-
integrating and rebuilding assets inside and outside tion’ process (March, 1991) and realizes strategic
the company for the purpose of competitive excel- innovation under conditions of uncertainty and high
lence. Dynamic capability becomes the process of risk. MI dynamic capability differs from the dynamic
improving existing routine capabilities for transform- capability theory that emphasizes the evolution of
ing and exploiting existing corporate assets in the original ‘exploitation’ (March, 1991) activity
response to a changing environment (e.g., Zollo and process. MI dynamic capability responds to highly
Winter, 2002; Winter, 2003). Process management uncertain situations, regardless of the speed of
of existing routines and operations contributes to the market movement, and embraces the concept of
incremental innovation of existing business (Benner dynamic capability in the high-speed markets (also
and Tushman, 2003). including high uncertainty) mentioned by Eisenhardt
Companies apply dynamic capability and system- and Martine (2000).
atically and analytically formulate and implement Realistically speaking, many strategic innovations
strategies under relatively stable or slow-moving are established through the stages of discovery or
conditions with little business uncertainty. ‘Learning invention from slow- and very slow-moving basic
before doing’ (Pisano, 1994), that is, formulate and scientific research and technological development
implement detailed strategy planning and policies, is environments. Later, the developed core technologies
a key element of this dynamic capability in market and provisional business models based on discovered
structures with clear corporate boundaries and also or invented ideas are adopted and exploited in prod-
can grasp the players in value chains. ucts and services through improvisation and trial-
Later on, a number of researchers amended and and-error processes (including the weeding-out
reinterpreted their views of dynamic capability. The process) involving trial manufacture, experiment,
most relevant were Eisenhardt and Martine (2000), and incubation. Product and service markets are
who made adjustments for tautology problems relat- gradually established. Then the new products and
ing to the interpretation of capability, and presented services anticipated or forecast for the growth
clear interpretations of the relationship between markets become the competitive markets for other
dynamic capability and competitive excellence. They companies (just when other companies enter the
indicated that dynamic capability is the strategic and market depends on individual business). The market
organizational processes and the routines of compa- environment becomes fast moving, and companies
nies that use (integrate, reallocate, acquire, and elimi- accelerate their investment in necessary resources.

78 R&D Management 44, 1, 2014 © 2013 RADMA and John Wiley & Sons Ltd
Strategy transformation by strategic innovation

- Dynamic capability in fast-


moving markets
- MI Dynamic Capability High (Eisenhardt and Martine,
(Major innovation 2000; Eisenhardt and Sull,
Strategic innovation) 2001)
(O’Connor, 2008) Strategic emergence Strategic selection - MI Dynamic Capability
- Breakthrough Innovation (Major innovation
Capability (discovery (Domain I) (Domain II) Strategic innovation)
phase) Simple rules (O’Connor, 2008)
(O’Connor et al., 2008) Basic research Experiments & trials
Discovery & invention Specific situational - Breakthrough Innovation
Conceptualizing knowledge Capability (nurturing
Business concepts Improvised processes phase)
Uncertainty Learning by doing (O’Connor et al., 2008)

Strategic efficiency Strategic concentration - Breakthrough Innovation


Capability (acceleration
- Dynamic capability (Domain III)
(Teece et al., 1997)
(Domain IV) phase)
Preparing an (O’Connor et al., 2008)
Clear corporate organizational system for
- Dynamic capability in boundaries and - Dynamic Capability
slow – moving markets promoting business
established value chain Building a new value through higher learning
(Eisenhardt and Martine, Learning before doing ( Nelson and Winter, 1982;
2000) chain through
commercialization Winter 2000; King and
Tucci, 2002)
Low
Small Change Big
(external & internal)
Figure 1. Capability map.

O’Connor and DeMartino (2006) undertook long- Slow or very slow environmental change with a
term observation and analysis of radical innovation in highly uncertain domain (domain I) observed at the
major US corporations, and indicated the importance initial stage of strategic innovation is the technology
of the three-phase management (discover, incuba- creation stage arising from new ideas, business con-
tion, and acceleration) as a radical innovation (corre- cepts, discoveries, and invention, and corresponds to
sponding to strategic innovation) development the ‘discovery phase’ of O’Connor and DeMartino
framework. They then named the ability to imple- (2006). In this domain, the exploration process is
ment these processes the ‘breakthrough innovation advanced through the MI dynamic (or breakthrough
capability’, and suggested that building this capabil- innovation) capability mentioned earlier. The basic
ity into the company is a key management system research and creation of ideas that are the source of
leading to successful radical innovation (O’Connor new strategic innovation require (depending on the
et al., 2008a). field) a longer period of time as the ratio of the
Previous research, such as dynamic capability and scientific element and the degree of technological
MI innovation capability positioned around the two difficulty rises. The success of this domain relies
axes of uncertainty and change, led to the situation greatly on the creative thinking and action of middle
illustrated in Figure 1’s capability map, which shows managers and lower-ranked staff in a company’s
the relationship between those previous researches R&D and business development divisions, but stra-
and the three development phases of O’Connor and tegic participation and commitment from top and
DeMartino (2006), mentioned earlier. Here, strategic senior management are also great. We call this
uncertainty beyond the four elements of markets, domain ‘strategic emergence’.
technology, organization, and resources mentioned Next, the core technologies and business concepts
by Leifer et al. (2000) also exists; and change is not that migrate from the slow-moving environment
limited to the external elements of market speed and of domain I, with rapidly changing of the in-house
industrial technology speeds, but also corresponds to (or occasionally external) acquisition of human
the internal elements of a company’s own strategy, resources and the maintenance and upgrading of
organizational revamping, and concentration of organizations oriented to business incubation to a
resources.1 dramatically transforming domain II environment

© 2013 RADMA and John Wiley & Sons Ltd R&D Management 44, 1, 2014 79
Mitsuru Kodama and Tomoatsu Shibata

that sustains speed of change and uncertainty. In appropriate to accelerate commercialization (or
this domain, the exploration processes arising from else new business divisions are newly established,
dynamic capability (MI dynamic or breakthrough or made independent as external ventures), and
innovation) based on the simple rules mentioned by further resources are intensively invested through
Eisenhardt and Martine (2000) and O’Connor the strategic commitment of top and middle man-
(2008) are promoted. This domain corresponds to agement. We will call this domain ‘strategic concen-
the incubation phase of hypothetical setups, experi- tration’. In the past, a large number of product and
ments, and assessments mentioned by O’Connor service development projects for major corporations
and DeMartino (2006). Learning through trials and (e.g., Kodama, 2005, 2007) invested management
experiments also leads to less risk and uncertainty resources in commercialization through this kind
of markets and technologies and greater probability of shift from strategic selection to strategic
of success for incubations aimed at realizing stra- concentration.
tegic innovation (O’Connor et al., 2008b).2 Then top Meanwhile, with the concept of the ‘strategic
and middle management make decisions aimed at innovation loop’ (see the next section), companies
selecting and bringing to market the rigorously operating in the strategic concentration domain must
tested and evaluated product, service, and business strategically and sustainably advance technology and
models. review business models to enhance the value of prod-
O’Connor et al. (2008b) confines this incubation ucts and services, and respond to a fast-changing
domain to trial experiment and assessment models, competitive environment. To achieve this, companies
but in many cases, current business activities go must commercialize by shifting new business from
beyond trial experiments within the coexistence of domain I through II to III, where a new, constantly
uncertainty and dramatically changing, fast-moving updated knowledge integration process appears
environments to the launch of commercial busi- through new businesses that have migrated from the
nesses, where companies may boldly undertake risky strategic selection domain and comprehensive
cases with a high degree of uncertainty. In this upgrades of existing products and services arising
domain, numerous cases arise where the excessive from new technological development elements and
trust and commitment of the leaders and managers business models.
lead to strategic activities, based on the creation of This domain III can be interpreted as a capability
business through trial-and-error, while it is still that should embrace the notion of inherent dynamic
unclear whether the newly developed ideas and capability promoting incremental innovation,
prototypes are capable of building new business perform strongly in response to internal and external
models and value chains.3 These correspond to the change to create profits by evolving and diversifying
cases in the new online business world where prod- operating routines through high-level learning
ucts are both trialed and launched in dramatically (Nelson and Winter, 1982; Amburgey et al., 1993;
changing domains of general high risk and uncer- Winter, 2000; King and Tucci, 2002; Benner and
tainty. A key point is how to select and implement Tushman, 2003).
promising, valuable business. We call this domain Meanwhile, a great deal of existing business is
‘strategic selection’. positioned in domain IV, in slow-moving market
Then the new businesses (including new products environments with low uncertainty and a low rate of
and services) chosen through strategic selection in change. Here, incremental innovation is promoted
domain II to have prospects for the future and some- with the aim of systematically enhancing business
what reduced uncertainty shift to domain III, where efficiency through the exploitation process, which
uncertainty is reduced to some extent while external comprises activities to improve existing business
(environmental) and internal change is sustained. using mainstream organizations that demonstrate
Domain III is the stage where the strategic innova- inherent dynamic capability (Teece et al., 1997;
tion incubated (or partially commercialized) in Eisenhardt and Martine, 2000). Promoting this
domain II enters a growth orbit, and corresponds to domain IV process management accelerates an
the ‘acceleration phase’ mentioned by O’Connor organization’s speed of response to achieve incre-
and DeMartino (2006). According to O’Connor mental innovation (Benner and Tushman, 2003). We
et al. (2008b), this is where the exploitation process call this domain ‘strategic efficiency’.
is promoted by breakthrough innovation capability. We would like to consider strategic innovation
This domain achieves the building and optimization capability frameworks to sustainably achieve stra-
of processes and value chains for the selected new tegic innovation (the main theme of this paper) based
businesses. Then new business functions are wholly on the capability map that comprise these four
or partially transferred to the business divisions domains.

80 R&D Management 44, 1, 2014 © 2013 RADMA and John Wiley & Sons Ltd
Strategy transformation by strategic innovation

1.Management capability to realize the ‘strategic


Strategic innovation innovation loop’
2. Management capability within and among domains
capability (including shifts)
3. Integrate capabilities through dialectical management
High
Trial manufacture,
Creating ideas & Strategic selection
business concepts
Strategic emergence experiment, and
assessment
Inventing new
technologies
(Domain I) (Domain II) Trial process
Advanced
Testing hypotheses Strategic innovation Strategic innovation implementation of
Exploration process Exploration process commercialization
Weeding-out process
Uncertainty

Full-scale
commercialization
Improving efficiency of Invest in organization
existing business Strategic efficiency Strategic concentration and resources
Process management
High-profit business (Domain IV) (Domain III) Build value chains
Mainstream reserve
New–old business Incremental Incremental innovation and withdrawn
conversion innovation Exploitation process business
Exploitation process

Low
Small Changes (internal & external) Big
Figure 2. Strategic innovation system.

2.3. The strategic innovation loop and businesses, which are subject to major change, busi-
strategic innovation capability nesses that succeed in establishing themselves in
the market and achieving stability as mainstream
When considered from the viewpoints of corporate operations shift to slow-moving (or small) ‘strategic
exploration and exploitation processes, strategic and efficiency’ domain while promoting still greater
incremental innovation, and the time axis of business operational and business process efficiency mea-
contexts, the four domains form a continuous domain sures, and either become part of the existing main-
loop (see Figure 2). The strategic emergence and stream lineup or undergo business integration (which
selection domains, which are exploratory processes, promotes still greater business process efficiency).
are the core processes for strategic innovation pro- However, businesses subject to major external
cesses. ‘Strategic concentration’ is the acceleration change of markets and technologies following main-
phase indicated by O’Connor and DeMartino (2006). stream growth, and major internal changes in areas
This phase rapidly sets up new product, service, and such as strategy, organization, resources, and opera-
business model markets through the exploratory pro- tions (for example, ICT industry involving broad-
cesses of strategic emergence and selection, and band and mobile phones, online businesses, and
shifts the domain from exploration to exploitation. digital consumer electronics) always become posi-
Strategic concentration becomes the origin of a new tioned in this strategic concentration domain. Put
path of newly generated strategic innovation that another way, businesses growing in a mainstream
differs from the existing business of the strategic direction become deployed in one or both of the
efficiency domain. strategic concentration and efficiency domains.
In this strategic concentration domain, newly gen- Although new business in the strategic concentration
erated business always undergoes major internal or domain is the ‘mainstream reserve’, this does not
external change in its initial phase. At this stage, mean that all business can grow in a mainstream
it transforms internal elements aimed at building environment subject to major changes, and some
optimal value and supply chains in response to exter- businesses have to withdraw. This is especially true
nal change. Among these strategic concentration of the ICT industry.

© 2013 RADMA and John Wiley & Sons Ltd R&D Management 44, 1, 2014 81
Mitsuru Kodama and Tomoatsu Shibata

In this way, the flow of strategic innovation for Although excessive adherence to existing knowl-
major corporations shifts from domains I to domain edge to create new knowledge integration becomes a
II, then domain III (where some businesses undergo- hindrance, the absorption of knowledge from differ-
ing major changes maintain their position), and ent sectors and industries from a scientific, techno-
finally to domain IV (see Figure 2). Amid this move- logical, and marketing viewpoint and the knowledge
ment, existing business in the strategic efficiency integration process can trigger new strategic innova-
domain may become the target for new/old business tions (the i-mode business development correspond
conversion with the new path of strategic concentra- to this) (Kodama, 2002, 2009). Various innovation
tion business (or business that shifts from strategic theories including the importance of shedding the
concentration to strategic efficiency domains) arising ‘mental model’ (e.g., Spender, 1990), the focus on
from strategic innovation. The simultaneous man- ‘peripheral vision’ (Day and Schemaker, 2004) and
agement of existing positions and new strategic ‘boundary vision’ (Kodama, 2011), and the chal-
positions mentioned by Markides (1999) involves lenge of achieving ‘cross innovation’ (Johansson,
co-establishing in domains III and IV. Transferring 2004), and ‘destructive innovation’ (Christensen,
from old to new positions involves transferring exist- 1997) confer precious insights as regards innovators,
ing business in domain IV to accelerated, expanded but more detailed theory building is yet to be under-
new business in domain III. Realistically, however, taken. We consider, as a proposition, that the evolu-
although major corporations promote various stra- tion and diversification of high-level routines
tegically innovative projects, only some of them through advanced learning in domains III and IV
survive to become success stories after the natural fundamentally promotes sustainable innovation
selection process involved in the shift from domains (Christensen, 1997) while inducing a shift from
I to III. Amabile and Khaire (2008) note a number of domains III and/or IV to I arising from the sustain-
cases where outstanding ideas and business models able innovation of integrating new knowledge inside
born in domain I have been diluted and ended in and outside the company (Kodama, 2009), and
failure after a major corporation employs a different raising the probability of achieving new knowledge
managing organization to realize (commercialize) integration as a strategic innovation.5
them.4 This is one issue surrounding strategic inno- We would like to explain the following three new
vation in a major corporation. insights obtained from this framework, and use them
The most important inter-domain shift is that from as a basis for explaining the ‘strategic innovation
III and/or IV to I. This is the path that creates new capability’. The first point is that outstanding com-
strategic innovation (see Figure 2). It corresponds to panies possessing the dynamic strategic view delib-
the process that accelerates environmental and erately (including some emergent elements) drive
internal interaction and creates new ideas and new loops comprising continuous shifts among domains
technological inventions and discoveries based on [termed ‘strategic innovation loops’ in this paper
high-quality tacit knowledge (Nonaka and Takeuchi, (see Figure 2)] from domains I through IV and/or
1995). This knowledge is cultivated through the prac- from domain III to I. The dynamic strategy view
tice of researchers, engineers, marketers, and strategy co-establishes the different modes of the exploratory
specialists in shifting from domains I through IV and exploitative processes and secures long-term
(accumulating and integrating new practice through corporate growth (e.g., March, 1996; Tushman and
existing business practice and strategic innovation) O’Reilly, 1997; Benner and Tushman, 2003). These
via the ‘transformational experience’ (Amburgey two processes (Holland, 1975; March, 1991) do not
et al., 1993; King and Tucci, 2002) of previously employ opposing strategic activities; rather, com-
existing business routines and strategic innovation panies must implement strategy while skillfully
(e.g., Kodama, 2007). King and Tucci (2002) sug- balancing the strategic activities in a mutually com-
gested that the ‘transformational experience’ of prac- plementary way (He and Wong, 2004).
titioners involved in the continual (Katz and Allen, Meanwhile, Zollo and Winter (2002) propose a
1982) and large-scale (Tushman and Romanelli, knowledge evolution process based on adjusted evo-
1985; Amburgey et al., 1993) organizational innova- lutionary theory. The continuous routine activity well
tion of product development teams leads to continu- considered within this process can become a trigger
ous new product innovation and resets rigid to shift from the exploitation to the exploration
organizational inertia. Put another way, it enhances process, and experiential knowledge accumulated
potential for embedding new capabilities in organi- from learning activities also becomes an element in
zation members aimed at creating new routines to creating new dynamic capability (corresponding to a
transform organizations and realizing strategic shift from domain IV and/or domain III to domain I).
innovation. The authors explain how the recursive processes

82 R&D Management 44, 1, 2014 © 2013 RADMA and John Wiley & Sons Ltd
Strategy transformation by strategic innovation

and coevolution of these different modes simulta- Goold and Campbell, 2002) are arguably more impor-
neously promote corporate challenges and processes tant in achieving strategic innovation.
(routines). Much of the previous research discussed manage-
The second point is that observing large corpora- ment processes and organizations division such as two
tions at selected times on a time axis indicates the distinct archetypes – exploratory and exploitative, or
constant presence of each of the domains I to IV incremental or radical (e.g., Greenwood and Hinings,
possessing different business contexts. With large 1993; Tushman and O’Reilly, 1997) – and the ambi-
corporations, multiple projects oriented to strategic dextrous organization (e.g., O’Reilly and Tushman,
innovation function as layered strategic innova- 2004). Little detailed analysis has appeared, however,
tion loops on different time axes. Top and middle of the interfaces and interaction among management
management must therefore manage appropriately elements such as strategy, organizational structure,
within and among these domains and it is also impor- core competence, organizational culture, and leader-
tant that management can smoothly move through the ship, each of which differs from each of these two
domains of the strategic innovation loop. Different archetypes (e.g., Kodama, 2003, 2007). Nevertheless,
strategies, organizational structures, core competences, the co-establishment and coexistence of these two
organizational cultures, and leadership are required archetypes within the same large corporation, and
within each of these domains. The skills and expertise the skillful management of strategic contradiction
to create strategic emergence in the new discovery and (Smith and Tushman, 2005), creative abrasion
invention domain are heavily dependent on knowledge (Leonard-Barton, 1995), and productive friction
accumulated as experience gained in diverse, higher- (Hagel and Brown, 2005) to create synergies are also
dimensional routines enabled by transformative important elements of successful strategic innovation.
experiences in the continuous strategic innovation The coexistence of contradictions highlights the
loop (Nelson and Winter, 1982; Amburgey et al., 1993; important roles not just of the top management
Winter, 2000), and new knowledge absorbed and (Tushman and O’Reilly, 1997; Smith and Tushman,
integrated from outside a company. Therefore, the 2005), but also of middle management and staff
process to bring these about (the so-called knowledge (Govindarajan and Trimble, 2005). We call this ‘dia-
integration process) is a critical issue. Moreover, lectical management’ (Kodama, 2004, 2007).
O’Connor and DeMartino (2006) indicate the impor- Based on the three insights earlier, strategic inno-
tance of the relationship between organizational struc- vation capability is a concept that embraces the
ture and radical innovation capability with regard to the following three competences: the management
radical innovation development framework of major capability to implement the spiral strategic innova-
corporations moving from discovery, to cultivation, to tion loop; management capability within and
acceleration (corresponding to domains I to III, respec- among domains, including shifts; and integrative
tively), and note that a new research area is opening into competences to achieve the coexistence of two dif-
this topic. ferent archetypes through dialectic management (see
Point three is that analysis of the Fanuc case studies Figure 2). Moreover, strategic innovation capability
in this paper suggests that the exploration and exploi- embraces the existing dynamic and MI dynamic
tation processes are especially interactive. It has been capability (or breakthrough innovation capability)
argued that organizations within major corporations concepts mapped in Figure 1 while aiming to expand
undertaking radical innovation should either be iso- the concept of organizational capability for individ-
lated both physically and organizationally from the ual product development projects at large corpora-
mainstream organization, or else operate as independ- tions and venture companies in the direction of
ent venture companies (e.g., Kanter, 1983; Burgelman innovation capability for the corporate or manage-
and Sayles, 1985; Benner and Tushman, 2003; Hill ment system. This paper calls the kind of manage-
and Rothaermel, 2003). But an appropriate interface ment system that uses strategic innovation capability
with existing organizations is also potentially signifi- to activate the spiral of the strategic innovation loop,
cant for accelerating strategic innovation from the and continuously co-establishes existing business
viewpoint of strategy and resource integration with strategic innovation business the ‘strategic inno-
(e.g., Heller, 1990; Kodama, 2003). Questions of vation system’6 (see Figure 2).
organizational design (How much should a strategic
innovation business integrate with, or separate from,
existing businesses? Is it better to have complete 3. Data and method
separation, complete integration, or something in
between?) (e.g., Burgelman and Sayles, 1985; We adopted a qualitative research methodology
Christensen, 1997; Tushman and O’Reilly, 1997; because of the need for rich data that could facilitate

© 2013 RADMA and John Wiley & Sons Ltd R&D Management 44, 1, 2014 83
Mitsuru Kodama and Tomoatsu Shibata

the generation of theoretical categories we could not The second stage of analysis involved coding the
derive satisfactorily from existing theory. In particu- in-depth case history with respect to its characteris-
lar, due to the exploratory nature of this research and tics, origin, and effects. This was a highly iterative
our interest in identifying the main people, events, procedure that involved moving between the in-depth
activities, and influences that affect the progress of case history, existing theory, and the raw data (Glaser
innovation, we selected the grounded theory-based and Strauss, 1967). Data were subjected to continu-
study of data interpretation, which was blended ous, cyclical, evolving interpretation, and reinterpre-
with the case study design and with ethnographic tation that allow patterns to emerge.
approaches (Locke, 2001). The grounded theory approach was adopted based
The research data came primarily from longitudi- upon the researchers’ interpretation and description
nal study during around 30-year period (1983–2013) of phenomena based on the actors’ subjective
examining new knowledge convergence process with descriptions and interpretations of their experiences
respect to new products, services, and business devel- in a setting (Locke, 2001). This ‘interpretation of an
opment at a large company in competitive high-tech interpretation’ strives to provide contextual relevance
fields. This research paradigm, which was based on (Silvermann, 2000). From the in-depth case history,
in-depth qualitative study, has some similarity to eth- we initially advanced first-order descriptions based
nography (Atkinson and Hammersley, 1994) and on broad categories that were developed from the
other forms of research (Lalle, 2003) that derive their existing theory, and then refined these categories by
theoretical insights from naturally occurring data tracing patterns and consistencies (Strauss, 1987).
including interviews or questionnaires (Marshall and The analysis continued with this interplay between
Rossman, 1989). Especially, one of the authors of the data and the emerging patterns until the patterns
this paper himself serves as a manager of new were refined into conceptual categories (Eisenhardt,
product development in Fanuc (1983–1994), Japan’s 1989). The third stage of data analysis was to
largest company. This experience provided the examine the empirical in-depth case results across
author with direct knowledge and detailed informa- the selected categories and the theoretical literature,
tion with which the accuracy of the empirical analy- and to develop the logic of the conceptual framework
ses in this research was enhanced. Research data and and generate new theory.
insight are gained alongside or on the back of the Based on the data obtained from field studies, the
intervention. authors first produced an in-depth case concerning
The data collected over the 30 years of the inter- the company. Next, based on this study, they per-
vention have derived from work with practitioners formed analyses and observations from the viewpoint
involved in a large number and variety of customers of strategy transformation and strategic innovation
and outside partner as well as internal organization capability, etc. Various scholars (Eisenhardt, 1989;
members. During these interventions, the expressed Pettgrew, 1990; Yin, 1994) have discussed the valid-
experiences, views, action-centered dilemmas, and ity of case studies. Case studies make it possible to
actual actions of participants were recorded as explain the relevance and cause-and-effect relation-
research data in a variety of ways, including notes, ships of a variety of observations through deep and
internal and outside rich documents, etc. The theory detailed insights with consideration given to qualita-
that has emerged from this research has centered on tive information and subjectivity resulting from the
the concepts of ‘strategic innovation capability’. peculiarities of individual cases and the difficulties of
The data analysis for the research consisted of general analyses. Case studies not only compensate
three stages: (1) developing in-depth case history of a for the weaknesses of generalities, but are also indis-
big project’s activities from the raw data that we pensable in new, creative theorization.
could gain, (2) open coding and subsequent selective
coding the in-depth case history for the characteris-
tics and origin of ‘strategy transformation process’, 4. In-depth longitudinal case study
and (3) analyzing the pattern of relationships among of Fanuc7
the conceptual categories.
In the first stage of the data analysis, we con- In this chapter, regarding the historical processes that
structed chronological descriptions of the company’s enabled Fanuc, a company born as a venture within
activities with respect to strategy transformation Fujitsu, to grow to become the world’s leading
process, describing how it came about, when it hap- factory automation (FA) company, and the innova-
pened, who was involved, and major outcomes. tion process mechanisms in that growth process, the
Through this work, we completed an in-depth case paper presents and analyzes the in-depth case study
history of the company. of Fanuc’s strategy transformation based on the

84 R&D Management 44, 1, 2014 © 2013 RADMA and John Wiley & Sons Ltd
Strategy transformation by strategic innovation

concept of ‘strategic innovation capability’, which economic advantage of scale, but to solve the
is a corporate system capability for companies to problem of compatibility that has troubled
achieve strategic change through strategic innovation American machine tool users.
mentioned in chapter 2. It then suggests the mecha-
nisms by which Fanuc acquired strategic innovation Since gaining independence from Fujitsu in 1972, to
capability, showing how it implemented spiral stra- date, Fanuc has achieved close to 50% of the global
tegic innovation loops and dialectical management at market share and has sustained an extremely high
each stage of past, present, and future innovation business profitability of around 30%. At the same
processes. time, the company has proactively proceeded with
its global business development engaging in 50-50
joint ventures with major global companies such as
4.1. Overview of Fanuc and the machine
General Electric (GE) and General Motors Company
tool industry
LLC (GM). GE Fanuc was established in 1986 as a
After 1982, the Japanese machine tool industry was full-equality joint venture to develop computerized
proud to become the most productive in the world with numerical control (CNC) and program logic control
extremely high international competitiveness. The (PLC), while GM Fanuc was established in 1982 as a
significance of that achievement was not just simply full-equality joint venture involved with robotics.
the superior competitiveness in the industry itself, but
the strategic characteristics of machine tools as indus-
trial goods. Machine tools are often referred to as
4.2. Tracing the growth of Fanuc
‘mother machines’ because they are machines that It is possible to conceptualize Fanuc’s growth as
create other consumer goods such as automobiles and three historical phases (see Figure 3). Phase 1, from
electrical appliances. Accordingly, competitiveness in 1956 to 1972, is the phase beginning with the comp-
the machine tool industry is intimately tied in with the any’s inauguration as a venture within Fujitsu to its
competitiveness of other entire manufacturing indus- separation from Fujitsu to become independent.
tries. For example, The ‘Made inAmerica’report from Phase 2 corresponds to the successful technological
the Massachusetts Institute of Technology (MIT) transformations the company achieved with imple-
Commission on Industrial Productivity survey states mentation of direct current (DC) servomotors and
the following: (Dertouzos, 1990). microprocessors, leading to the establishment of its
present-day technological systems. This meant the
NC and NC machine tools give businesses the establishment of an NC dominant design (Anderson
flexibility and automation needed to provide and Tushman, 1990) corresponding to the period up
small amounts of, and a wide range of parts for to 1980. Phase 3 is then the following period of
the automotive, electronics and machine indus- dramatic market expansion in which the company
tries etc., just-in-time. built strategic partnerships with GE and GM, and
brought about bestselling NC technology. Following,
The Japanese machine tool industry came to have we described each phase of Fanuc’s strategy trans-
such competitiveness because it was underpinned by formation in sequence.
the superior functionality of its numerical control
(NC) machine tools, i.e., machine tools controlled
with NC devices. In Japan, compared with Germany 4.2.1. Phase 1 (1956 to 1972)
or America, the share of NC-type cutting machine Creation of an internal venture business. To under-
tools was extremely large in the cutting machine stand Fanuc’s history, we have to look back as far as
market, and one of the chief factors that enabled 1956. Technical director at Fujitsu at the time, Hanzo
Japan to produce many superior NC machine tools Omi, made the decision to break into the new field
was NC system supplier Fanuc. Japanese machine beyond communications of computers and control-
tool manufacturers left the design and production of lers, and appointed Toshio Ikeda and Seiuemon Inaba
NC systems completely up to Fanuc, which enabled as those respective project leaders. At the time,
them to pour their efforts into innovating the machine Fujitsu was only involved in communications equip-
tool technology itself. Regarding this, previously ment, and Ikeda and Inaba were simply instructed to
cited report states the following. find out what could be done in those fields.
However, there were many options for control-
NC design and production for NC machine related technologies, and the NC development theme,
tools in Japan is all done by Fanuc, a single eventually put forth by Inaba, was not a simple dis-
company. This is not so that Japan can gain an covery. In particular, Inaba, a mechanical engineer

© 2013 RADMA and John Wiley & Sons Ltd R&D Management 44, 1, 2014 85
Mitsuru Kodama and Tomoatsu Shibata

1956 Numerical control (NC) discovered by Seiuemon Inaba

1959 - Two important discoveries


(algebraic pulse distribution system, electric hydraulic pulse monitor)
Phase 1

1969 - Fully modularized NC (FANUC 260) completed

1972 - Company separates from Fujitsu

1974 - Partnership with Gettys, DC servomotor completed

Phase 2 1975 – NC with MPU (FANUC 2000C) completed

1978 - NC with Intel 8086 (System 6) completed

Phase 3
1985 - Global bestseller NC (Series 0) completed

Figure 3. Stages of growth at Fanuc.

who had graduated from the School of Precision consent from my boss, Director Omi, to set the
Engineering at Tokyo University had to search for a R&D theme as NC for the machine control
field dealing with machine controllers that was not team. . . . Then, the MIT report introduced to
the same as the process control field, which already me by Professor Yasuto Takahashi became like
had an established market at the time. In the midst of a bible for our research for sometime . . .
trial and error in which a development theme had (abbreviated) . . . because my roots are in
been difficult to determine, Inaba suddenly discov- mechanical engineering, it was around 1952,
ered the NC theme when looking at a copy of the that I began to think about what was missing
MIT report (Dertouzos, 1990). from mechanics, and I was introduced to a new
The first time that Inaba had heard of the MIT machine tool development, which was the Cin-
report was in October of 1956 at a conference held cinnati Milacron Hydrotel modified for com-
on automatic control at Waseda University. At the puter control. When I heard about it, I was
conference, the then California University Professor, extremely interested, and I studied the MIT
Yasuto Takahashi, showed Inaba a copy of the Sci- report which has been lent to me on microfilm
entific American featuring an article about NC by automatic control engineering Professor
milling machines. Inaba said the following about his Takahashi, who was serving at California Uni-
sentiments when he first saw the MIT report. versity at the time8.

Since my roots are in the mechanical engineer- In this way, Inaba discovered the new field of NC,
ing, I remember a sense of strong interest in finished his trial-and-error efforts to find out what
servo mechanisms the moment I first heard could be done, and went on to execute a new business
about the MIT report, and I immediately got strategy. At that time, Inaba’s development project

86 R&D Management 44, 1, 2014 © 2013 RADMA and John Wiley & Sons Ltd
Strategy transformation by strategic innovation

- Inaba discovers NC Strategic innovation capability


technology - Prototyping through
- Two important inventions High trial and error,
- Algebraic system experiments/evaluation
- Electric hydraulic - Releasing commercial
pulse motor (idea product into immature
from existing
Strategic emergence Strategic selection markets
exchange - Business continues to
equipment) (Domain I) (Domain II) run at a loss
- Joint research with - Strategic innovation - Strategic innovation
university - Exploration process - Exploration process
- MIT report

The strategy
Uncertainty transformation
challenge for new - NC with transistors
business (FANUC 220)
- Stabilized existing commercialized
Strategic efficiency Strategic concentration - Fully modularized NC
communications
equipment business with ICs (FANUC 260)
(exchange/transmission
(Domain IV) (Domain III) commercialized
devices, etc.)
- Incremental innovation - Incremental innovation - NC market expands
- Digital circuitry - Exploitation process - Exploitation process explosively
technology - Independence from
accumulation Existing comm. equipment business Fujitsu
Fanuc established

Low
Small Internal & external change Big
Figure 4. Strategic innovation system in Fanuc (phase 1).

team was a completely separate organization within In 1958, Makino Milling Machine Co. and Fujitsu
Fujitsu from the company’s existing communications jointly exhibited an NC milling machine at the
equipment departments, and top management at Osaka International Trade Fair; however, it was not a
Fujitsu had given the team a certain level of machine that could withstand practical application.
autonomy and freedom. This organizational system Then in 1959, Hitachi Seiki and Fujitsu delivered an
that Fujitsu had adopted at the time was highly NC milling machine to Mitsubishi Heavy Industries’
similar to the ‘ambidextrous organizations’ identified Nagoya Aircraft Works. This could have been said to
in previous research (e.g., Tushman and O’Reilly, be the first commercialized NC product, but it had a
1997), in which routine business interaction between problem in that it blew an average of one electronic
new and existing organizations is highly controlled, vacuum tube every day.
but where both organizations are overseen by higher In this trial-and-error process, Inaba brought
management. together his own knowledge of mechanical engineer-
ing, and Fujitsu’s know-how about digital circuitry
The invention of the algebraic electric hydraulic with the knowledge in the MIT report, and through
pulse motor. NC began at the Fujitsu Nakahara repeated prototyping experiments with NC machine
Factory laboratory with a project team consisting of tools, all of this knowledge accumulated and became
four or five engineers from both the electric and embodied as the tacit knowledge of the Inaba team.
mechanical fields. At the time, Inaba, a team leader This stage triggered a shift from the accumulation of
who had only just reached his 30s, pushed forward Fujitsu’s existing communications equipment know-
with development. Thus, the beginning of the project how in domains III and/or IV (core technologies of
in 1956 corresponds to the domain I ‘strategic emer- exchange equipment and transmission devices) back
gence’ phase in Figure 4. The first prototype was then to domain I.
achieved in 1957. As previously stated, the critical All of this came to fruition with the following
areas in NC are the computing and servomecha- epoch-making invention. In 1959, Inaba and his team
nisms. This prototype adopted a new element called invented the revolutionary ‘algebraic pulse distribu-
the Parametron invented by Eiichi Goto of Tokyo tion system’ and the ‘electric hydraulic pulse motor’.
University, and was an NC system that employed These two technological innovations enabled dra-
electric servomotors for its servomechanisms9. matic improvement in NC performance, which was

© 2013 RADMA and John Wiley & Sons Ltd R&D Management 44, 1, 2014 87
Mitsuru Kodama and Tomoatsu Shibata

recognized both in Japan and internationally with a This was the bones of Inaba’s invention. It was the
number of awards. The organization responsible knowledge he had gained from the Tokyo University
for this invention was the project team in Fujitsu that School of Precision Engineering that was behind
the company referred to as ‘Inaba’s NC Brigade’ or Inaba’s idea of amplifying power using hydraulics.
the ‘Inaba Family’. The algebraic pulse distribution Inaba commented as follows:
system was brought about through joint University-
commercial research. Inaba said the following: The school of precision engineering from
which I graduated was known as the school of
Aiming for devices that can be put to practical armory before the war, and as the name sug-
use, we would like to produce stability and gests, it was artillery that I studied. The gun
reliability in both the circuitry and the servos. turrets on warships were driven by hydraulic
We were fortunate to have been greatly motors. Using these hydraulic motors with NC
inspired by electrical engineering Assistant servo mechanisms, I tried controlling flow with
professor Tatsu Motooka of Tokyo University the electric pulse motor13.
Engineering Department, and his assistant, cur-
rently Tokyo University Institute of Industrial As described above, Inaba did not only start out with
Science Professor Kusuo Yamaguchi. We closed innovation R&D initiatives in an organization
dispatched an engineer from the Automatic within Fujitsu, but also made concerted efforts to
Control Department as it was called at the bring in technical know-how from outside the
time, which effectively became the brains of company (Tokyo University and the MIT report) and
the development from where we received thus promoted open innovation (Chesbrough, 2003),
guidance10. which can be interpreted as significant.
We site page 79 of O’Connor (2006) ‘radical inno-
As a result of this joint research, the invention of the vation must be open innovation’. This claim is based
‘algebraic pulse distribution circuit’ – technology on case studies of American companies in which
that could calculate the combinations of arcs and radical innovation has been promoted by open inno-
straight lines that make up the forms of mechanical vation concepts. At the time, the technical develop-
parts – came into being. Since its establishment, ment strategy of Inaba’s project was close to this
Fanuc has been extremely proactive in bringing in idea. In short, he achieved the first NC system by
knowledge from universities in this way. integrating the different technologies of Fujitsu’s
Fanuc’s adoption of open-loop electric/hydraulic communication equipment technical know-how
pulse motors was directly opposite to the closed-loop (digital circuitry technologies and so forth) with
DC motors adopted in the United States11. Electric technology from Tokyo University and the MIT
hydraulic pulse motors consist of an electric pulse report. Open innovation is an enabler that raises the
motor and a hydraulic servo, in which the output potential for the creation of new strategic innovation
from the electric pulse motor is amplified by hydrau- in the shift from domains III and/or IV back to
lics enabling significant power. Later on, when Fanuc domain I, as shown in Figures 2 and 3.
was established, this technology was invented and
patented by Inaba himself as the first president of the Creating the NC market. In 1959, through the
new company, although he got the idea from the process of prototyping, experimenting, and assessing
automatic exchange equipment that were being built the two inventions, the NC development process
by Fujitsu at the time. Inaba reminisced on those shifted from the domain I ‘strategic emergence’
times as follows: phase to the domain II ‘strategic selection’ phase. In
phase 2, the performance of NC was dramatically
I couldn’t ask the professors about the servo, so improved; however, market demand did not increase
I had to think up something myself, but then with such speed and the uncertainty of the business
I recalled the automatic exchange equipment became more pronounced. In fact, it was not until
that Fujitsu had been manufacturing12. 1965 that the NC Department got their finances into
the black. In other words, it took 9 years from Inaba’s
From that idea, Inaba imagined driving a motor by discovery of the NC field in 1956 until the NC busi-
inputting pulses, and went on to prototype the elec- ness turned a profit, but from then on, Fanuc’s ship-
tric pulse motor. However, this pulse motor alone was ments of NC products rose dramatically from 388
unsatisfactory in that it was not able to deliver much units in 1965, 483 units in 1968, 1184 units in 1969,
torque, so Inaba imagined amplifying the torque by and to 1684 units in 1970. With the two inventions
combining the pulse motor with a hydraulic motor. in 1959, the standard had already been set for NC

88 R&D Management 44, 1, 2014 © 2013 RADMA and John Wiley & Sons Ltd
Strategy transformation by strategic innovation

performance and stability to meet the demands of Module Module


practical application. Inaba said the following the
circumstances at the time:

We had great confidence in the NC technology,


but unfortunately the NC machine tool market
was still quite small, and it wasn’t easy to
achieve sales. Therefore, our huge efforts went Basic
unrewarded and our monthly accounts options
remained in the red14.

The NC machine tool market had not yet matured, Basic


but Inaba understood the characteristics of the market Additional control
locker unit
well. In other words, there is some critical point in
a market, and until that critical point is reached,
demand does not rise very much, but when it is,
market demand expands rapidly. Inaba had the fol-
Control unit Drive unit
lowing to say about the establishment of the market.
Figure 5. Structure of fully modularized NC (FANUC 260) (phase
At a certain time, markets grow explosively. 1).
There are many companies that can’t wait for
that and give up, ending in failure. We endured
that period patiently, and once 1966 came costs down, companies have to make a wide range
around the market for Japanese NC machine of standardized parts, but to respond to the diverse
tools suddenly took off . . . (abbreviated) . . . demands of the market, custom-made items are also
That means we waited 10 years from 1956 required, and the way to combine and overcome
when we first embarked on the development. these contradictory aspects is full modularization. In
That explosive growth continued afterwards, other words, all the modules that Fanuc produces are
but those kinds of issues are things that a standardized, but combining them as required
company must face15. enables the company to respond to various market
demands.
Even though he was unable to see growth in the For example, the FANUC 260 is a range of func-
market initially, Inaba continued with the NC devel- tional modules created by analyzing the details of
opment and proactively brought in new technologies. specifications demanded for a variety of machine
In actual fact, Fanuc shipped FANUC 220 using tran- tools. By mass producing and stocking these,
sistors in 1962, FANUC 260 with total integrated modules can be assembled to build an NC device
circuitry, and by 1969 had succeeded with complete to meet the specific needs of individual users. The
modularization, which accelerated growth in the NC modules are electronic circuits with specific func-
machine tool market in one fell swoop – the number tions created by combining a range of logical
of completely modularized units shipped in 1969 elements such as transistors and memory elements,
was three times that of the previous year. Fully which are mounted on separate printed circuits and
modularized NC meant that the company could units. See Figure 5 for an example of the FANUC
respond to a wide range of customer demands at low 260 configuration.
cost. In this way, Fanuc’s NC business shifted to the FANUC 260 has three types of basic control units,
‘strategic concentration’ domain III (and onto the about 9 basic options, and about 20 additional
‘strategic efficiency’ domain IV), when the uncer- options, which means that more than 60 million
tainty in the NC market in phase 2 in Figure 4 rapidly combinations are possible. Moreover, modules can
diminished. be connected with screws and cable connectors,
The main reason for the losses the company enabling completely solder-free assembly using only
experienced up to 1965 was custom orders. Custom screwdrivers and spanners. This makes it extremely
orders grew vigorously as the Sales Department easy to add functions. Thus, required functions can
took any orders to extend order volume16. However, be added easily without having to do any rewiring
custom-made products cost more than standardized on-site with the user. By adopting this completely
products, and when the company investigated, they modularized NC product architecture, Fanuc can
found all of these orders were making a loss. To bring respond to a wide range of market demands at low

© 2013 RADMA and John Wiley & Sons Ltd R&D Management 44, 1, 2014 89
Mitsuru Kodama and Tomoatsu Shibata

(Domain I) (Domain II) (Domain I) (Domain II)


-Technological
NC basic research - NC prototyping transformation from Prototyping, experimenting
experimenting, evaluation electric hydraulic pulse
and invention evaluating new NC
- Immature NC market motor to DC servo motor development
- Technical shift from
hardwired to soft wired

(Domain IV) (Domain III) (Domain IV) (Domain III)


- New NC commercialization
- Fully modularized NC
with DC servo motors and
The strategy commercialization
MPUs (FANUC 2000C,
transformation - NC market expansion The technology System 6)
challenge for
transformation
new business
challenge Existing NC business (upgrades and improvements)
Existing comm. equipment business
(Phase 1) The road to fully modularized NC (Phase 2) The road to new product architecture
(FANUC 260) (1956–1972) completion (1973–1980)

(Domain I) (Domain II)


- High reliability, fully
automated production Prototyping, experimenting
system evaluating new NC
- New software architecture development
achieved (system
development with user
innovation)

(Domain IV) (Domain III)


-Global bestseller NC
The challenge for (Series 0)
new technological
innovation commercialized

Existing NC business (upgrades and improvements)

(Phase 3) Becoming #1 in the global NC market (1981– Present)

Figure 6. Strategic innovation system in Fanuc.

cost, which in turn greatly contributes to further However, in April of 1972, management at Fujitsu
market expansion. decided to separate the NC Department from the
In the ‘strategic concentration’ domain III where company and form a new company, Fanuc. At the
demands for customization are high, there are also time, Fujitsu was facing enormous funding require-
hot-selling product lineups, and fierce competition ments needed to develop the Japanese-made com-
with competitors, and therefore, Fanuc must meet puter. Therefore, since the long-term investments in
demands with incremental innovation by upgrading NC had begun to bear fruit, it seemed like a rational
and improving its products on a daily basis. In con- judgment for Fujitsu to take the income from the NC
trast, in the ‘strategic efficiency’ domain IV the Department and put it in the Computer Department.
product lineup consists of catalogued products, but But looking back over the results, it was obvious that
here it is also important for Fanuc to further reduce separating Fanuc would prepare the right environ-
costs with incremental innovation. ment for business growth, which was a significant
factor in the leap forward that the NC business took.
Breaking away from Fujitsu. As described by the
shifts in domains I → II → III (and IV) shown in Shifts between domains in phase 1 (see phase 1 in
Figure 4, the new NC market was more creative for Figure 6). As described above, Fujitsu was success-
Fujitsu. When the NC Department moved into the ful in new strategy transformation with the formation
black in 1965, the number of NC units produced with of its new NC business, by incorporating knowledge
the expansion of the NC market stabilized, and the from outside the company into concepts it already
department was growing as high earner within the had about exchange technologies, while the company
company. In actual fact, Fujitsu’s profit ratio in 1970 proceeded with its existing communications equip-
was 6%, although the NC Department had achieved ment business (stable business with exchange equip-
more than 20%. It was at this point that the invest- ment and transmission devices, etc.). Then, with the
ments made into the NC Department over more than ‘emergent integration’ of knowledge from both
10 years began to bear fruit. within and outside the company (Fujitsu’s exchange

90 R&D Management 44, 1, 2014 © 2013 RADMA and John Wiley & Sons Ltd
Strategy transformation by strategic innovation

(Phase 1) (Phase 2) (Phase 3)


R&D Department-based
R&D Department-based Ambidextrous Organization
R&D Department-based
Ambidextrous Organization Supervisor (Dr. Inaba) Ambidextrous Organization

- NC technology discovered EH pulse DC servomotor


- Two important NC inventions Motor Dev. project - High reliability, fully automated
Algebraic system Dev. Dept production system
Electric hydraulic pulse motor - New software architecture achieved
- NC (FANUC 220) commercialized Technical transformation from - Global bestseller NC (Series 0)
- Fully modularized NC with ICs electric hydraulic pulse motor to commercialized
(FANUC 260) commercialized DC server motor and
commercialization
and
Technical transformation from
hardwired to soft-wired and
commercialization
Fujitsu top management Fanuc top management
Supervisor (Mr. Kobayashi)

Comm. Dr. Inaba’s Existing Series 0


equipment project Hardwired Soft-wired NC Dept. Dev.
department team logic logic Dev. project
Dev. Dept project

(Domain III) (Domain I) (Domain III) (Domain I) (Domain III) (Domain I)


(Domain IV) (Domain II) (Domain IV) (Domain II) (Domain IV) (Domain II)
-Incremental innovation - Strategic innovation -Incremental innovation - Strategic innovation -Incremental innovation - Strategic innovation
- Exploitation process - Exploration process - Exploitation process - Exploration process - Exploitation process - Exploration process

Dialectical management Dialectical management Dialectical management

Figure 7. Organizational changes in each phase of Fanuc’s strategy transformation.

equipment digital circuitry technology and technical how it had accumulated in these domains regarding
know-how from leading universities) and the devel- communications equipment (core exchange and
opment project team centered on Inaba, the company transmission devices technologies) was induced to
was able to develop the world’s first NC system using shift from domains III and/or IV back to domain I. In
algebraic electric/hydraulic pulse motors. Through this way, Fanuc demonstrated dialectical manage-
this innovation process, the company succeeded ment by coordinating an interface between its old and
greatly with the commercialization of its NC systems new organizations using its strategic innovation capa-
and followed the shift in phase 1 through domains I bility, and promoting explorations processes in its
→ II → III (and IV). new organizations to achieve new business (domains
To achieve new business strategy, Fujitsu con- I and II), while continuing with exploitation pro-
verted to a strategy aiming to achieve new NC busi- cesses in its existing communications business
ness with new exploration processes into the NC organizations (domains III and IV) (see phase 1 in
business (strategic emergence in domain I, and stra- Figure 7).
tegic selection in domain II) by investing develop-
ment resources (by setting up a development project
team centered on Inaba). The company then went 4.2.2. Phase 2 (1973 to 1980)
on to succeed with the commercialization of NC Technical shift from electric hydraulic pulse motors
systems as its new business, during which the NC to DC servomotors. The year after breaking away
business shifted through domains I → II → III (and from Fujitsu in 1972, Fanuc was facing an unfore-
IV). seen challenge. That was the first oil shock of 1973.
On the other hand, Fujitsu continued to execute its As an opportunity, user assessment of the electric
traditional existing communications equipment busi- hydraulic pulse motors that Inaba had had absolute
nesses in the ‘strategic concentration’ domain III and faith in began to change. There was a hydraulic pump
the ‘strategic efficiency’ domain IV, but the know- that was required to drive the electric hydraulic pulse

© 2013 RADMA and John Wiley & Sons Ltd R&D Management 44, 1, 2014 91
Mitsuru Kodama and Tomoatsu Shibata

motors, but the pump was extremely inefficient – for have ended up with another company. . . .
instance, it took a 100 hp drive to get a 50 hp output. (abbreviated) . . . at the time, if I had stuck with
However, the electric hydraulic pulse monitor was the electric hydraulic pulse motor, the Fanuc
the chief technology that had given Fanuc its unique we see today wouldn’t have existed19.
position, and as mentioned, was invented by Inaba
himself. For those reasons, in those circumstances, Inaba recalls those times as difficult ones when his
there was unusual attachment to Inaba’s electric managers and his engineers were in a pinch. As the
hydraulic pulse monitor. In fact, Inaba, said the fol- inventor of the electric hydraulic pulse motor, Inaba
lowing to his friend at Siemens at the time. had a strong attachment to the technology, but also as
a manager, he was caught between a rock and a hard
Taking the electric hydraulic pulse motor away place of having to look squarely at the limitations of
would be the same as taking away my life17. his own technology. And it was from that experience
that Inaba began to think that ‘Technology does have
But at the same time, however, Inaba had been car- a history. However from the engineers’ point of view,
rying out various experiments to try to find a new there is no past, only creativity’.
type of motor, which he recalled as follows:

At the time, I ordered two things, firstly I told Technological transformation from hardwired to
Koyama to develop a new electric pulse motor soft-wired. Later in 1975, Fanuc developed the
in four months, and secondly I told Endo to FANUC 2000C NC equipment with Intel’s 3000 series
investigate American company Gettys18. microprocessor unit (MPU). This was the world’s first
NC equipment with built-in MPU. The 3000 series was
In other words, first, Inaba ordered Koyama to not a one-chip type like those of the present day, but
develop an oil-free high-power electric pulse motor used a microprogram method in addition to bit-slice
in January of 1974. The electric pulse motor uses the design, and did not have any general purpose charac-
same open-loop method as the electric hydraulic teristics because the program had to be loaded in at
pulse motor, and even though it did not use oil, Inaba Intel’s factory.
was still heavily biased toward the open-loop-type Nevertheless, the adoption of the MPU meant a
pulse monitor. In addition to Koyama developing the shift from control using circuitry built with transis-
electric pulse motor, Endo conducted a thorough tors and diodes, to control using software. In other
survey of the state of American closed-loop DC ser- words, this was a huge shift in NC design thinking
vomotors as the second approach. from the hardwired to the soft-wired. Because the
Inaba prepared, just in case, to negotiate for tech- MPU component is in fact a computer, NC using
nological partnering on the DC servomotor. Then as MPU is called CNC, and is often distinguished from
instructed, Koyama completed the electric pulse conventional NC.
motor development within the allotted 4 months, in Technical issues that confronted the development
May of 1974. However, because the noise of this of CNC were performance and reliability.
motor was extreme, Inaba decided it could not be
used practically, and decided to do away with the The biggest issue was whether a computer
open-loop technology of the pulse motor and switch running software could process interpolation.
over to the closed-loop DC servomotor. We performed various simulations and actually
Once Inaba had made that decision, Fanuc engi- tried things to find out what was possible and
neers obtained schematics for the DC servomotors what could be known, but the interpolation issue
from their now technological partner Gettys in the was the biggest issue. . . . (abbreviated) . . . we
United States, and completed a DC servomotor in a used semiconductor memory, but the technol-
mere 2 months. Then in September that year, the ogy hadn’t been properly established, and the
company exhibited an NC device using DC servos at manufacturer couldn’t provide us with the right
a machine tool fair in Osaka. This was actually a very advice. For example, when using ICs, but we
important decision for Fanuc. Switching from the were groping for answers because we had no
pulse motor to the servomotor, and from the open- idea whether ICs could be mounted on printed
loop to the closed-loop systems changed basic design circuit boards and connected together by etching
concepts. Looking back on those times, Inaba said the copper on the board, and we weren’t sure
the following: how to increase reliability in terms of noise20.

If my decision had been even just a little bit To deal with these technical uncertainties, the
later, the share we now enjoy would probably company formed a new CNC design section in

92 R&D Management 44, 1, 2014 © 2013 RADMA and John Wiley & Sons Ltd
Strategy transformation by strategic innovation

addition to its existing hardwired NC design section, Then around 1978, the NC systems using semicon-
and operated both departments simultaneously. The ductor technologies had improved to the point where
hardwired NC section was involved in developing they would surpass the hardwired NC in terms of
NC for mass production using technology that had performance and reliability, and so the hardwired NC
already been established, and its aim was to develop design section was absorbed into the computer NC
highly reliable NC at a low cost. On the other hand, design section. Until that time, the two technological
the goals of the CNC section was to pay attention to systems of hardwired and soft-wired had existed in
the trends in cutting-edge semiconductor technol- parallel, but it was in 1978 when the company tech-
ogies and whether they could be incorporated into nologically integrated the two into the CNC only.
NC systems, and whether performance and reliability In 1978, Intel developed the MPU 8086, a single-
could be improved. Thus, the technological and chip-type IC similar to those that we can still see
design objectives of both departments were com- today, and Fanuc developed its System 6 using the
pletely different, so the organizations were separated. 8086 in 1979. The success of the System 6 made
Director Kurakake said the following about that Fanuc the first company in the world to adopt the
situation. 8086 for mass-produced goods. After that, Intel went
headlong into the personal computer business.
We completely split the troops into separate However, for Fanuc, the success of implementing the
hardwired and computer sections. There was a 8086 was a decisive moment for Fanuc’s triumph in
departmental head overseeing the sections, and the NC market. Compared with Fanuc, American NC
I was put in the computer section but had no manufacturers were not as proactive about imple-
lingering attachment at all to the hardwired menting semiconductor technologies such as MPUs,
section. I don’t know what would have hap- which was a fatal move on their part.
pened if we had tried to do it together. For my
part I had absolutely no regrets about that, Shifts between domains in phase 2 (see phase 2 in
because we were able to do something new and Figure 6). As described above, phase 2 did not only
get involved with the potential of computers21. involve Fanuc maintaining business by sales activ-
ities and improvements and upgrades to existing NC
In this way, both sections worked in completely dif- systems with the total modularization of hardwired
ferent directions but were overseen by one person, business that grew out of phase 1, but Fanuc also
Director Kobayashi; and organizational consistency engaged in serious strategy transformation to deal
was sustained by him. with economic conditions and structural changes
brought on by the oil shock and by technological
The director oversaw both departments, so he transformation to miniaturize and raise quality. As
knew the limitations of the current version of shown by phase 2 in Figure 6, this is an example of
NC, and thus was able to see what needed to strategy transformation to bring about new product
be done next, but there was a serious problem architecture through new exploration processes (stra-
in trying to figure out how to develop beyond tegic emergence in domain I, and strategic selection
the current products which were creating in domain II) using Fanuc’s development resources
revenue22. (Koyama’s mission to develop an electric pulse
motor within four months, Endo’s survey and tech-
In this way, there was tight control over business nological partnering with Gettys in the USA to
interaction between the different sections in the develop the DC servomotor, and the configuring of
organizational system that Fanuc had adopted, and as the new developmental section system for soft-wired
such, because one manager oversaw both organiza- NC systems). The NC system was then successfully
tions, this structure is very similar to that of an ‘ambi- commercialized with new product architecture, and
dextrous organization’. Ambidextrous organizations the new NC product shifted from domain I → II →
are configured so that all business functions in the III (and IV).
value chain (R&D, sales and marketing, technology, On the other hand, the business of existing NC
support, etc.) are duplicated in old organizations and (hardwired and fully modularized NC systems) was
new organizations. However, Fanuc only clearly split carried out in existing organizations in the ‘strategic
up the roles of its R&D functions, which was char- concentration’ domain III, and the ‘strategic effi-
acterized by the appropriate setting up of an interface ciency’ domain IV, and then that existing NC product
in the business value chain within the company, development know-how accumulated in domains
which is somewhat different than that described by III and IV was induced to shift to domain I. In this
existing research. way, Fanuc demonstrated dialectical management by

© 2013 RADMA and John Wiley & Sons Ltd R&D Management 44, 1, 2014 93
Mitsuru Kodama and Tomoatsu Shibata

using its strategic innovation capability to coordinate It is also difficult to assess reliability. Functions
an interface between its old and new organizations and performance can be easily evaluated by actually
for promoting exploration processes (domains I trying them out. Similarly, the cutting speed and pre-
and II) to achieve new product architecture with cision of NC machine tools can be easily understood
new organizations, while promoting exploitation by actually using them. However, malfunctions are
processes (domains III and IV) with its fully often caused by on-site unplanned use of equipment,
modularized NC systems (see phase 2 in Figure 7). which is why it is difficult to evaluate product reli-
ability. Kurakake had the following to say about the
difficulty of assessing reliability.
4.2.3. Phase 3 (1981 to present)
Developing bestseller NC. By shifting design You can try making something and pretty much
thinking from hardwired to soft-wired in the second understand performance, but you don’t know
phase, the new NC with good product flexibility and about reliability. Even on the surface, electrical
expandability caused the market to grow signifi- components are just arrangements of parts, and
cantly. We described the process of developing there is no way that an untrained person can
product architecture after the implementation of know whether they are reliable or not just by
MPUs, as analyzed in the previous section. In this looking at them24.
section, we present a development case of the Series
0 bestseller NC. To improve reliability of hardware, it is important
The Series 0 went into mass production in Septem- to reduce the number of components, and reduce
ber of 1985, and at the end of July 2004, 350,000 the interdependency between components. For that
units had been shipped, becoming the #1 global best- reason, a range of parts such as custom large scale
seller CNC product. There are two main factors integrated circuit (LSI), hybrid integrated circuits
behind this success, both of which are new techno- (ICs), printed circuits, power sources and display
logical innovations: the first being the total automa- technologies were rapidly developed for the Series 0
tion of Fanuc’s factory for high reliability, achieved and by using a thin display, the depth required for
by refined manufacturing and design, and the second the display was reduced to about one third of that
being the development of new software architecture required for a cathode ray tube (CRT). As a result of
by promoting ‘the customer as the innovator’ (CAI)23 these measures, the Series 0 has twice the processing
(Hippel, 1998; Hippel and Katz, 2002) and ‘user speeds of older equipment with about half as many
innovation’ (Hippel, 2009). We describe these two parts. High reliability is the result of rethinking down-
factors in sequence. to-earth design based on accumulated technologies.
The Series 0 failure rate is 0.008 per month per One more reason for the success of the Series 0
unit with its extremely reliable technology. When was the accomplishment of a fully automated factory.
using industrial goods like NC, the importance of One of Fanuc’s strengths is its ability to substantially
reliability is incomparably higher than consumables, reduce costs with FA. The Series 0 was the first time
since if industrial goods breakdown, for example in the company achieved full automation. For that
an automobile factory, the production line has to be reason, the Series 0 hardware design had to be recon-
stopped. The concept behind the Series 0 high reli- sidered from the point of view of manufacturing. In
ability was to use technologies accumulated up to short, to achieve fully automated manufacturing con-
that time, and to optimally equip the product with the sideration must be given from the beginning at the
most compact NC possible. Rather than redesigning design stage.
to produce cutting-edge technologies, that meant With NC manufacturing, first, components have
polishing existing products and finding new ways to to be mounted onto printed circuit boards, which is
assemble them. a job done by automated machines. Then, once the
High reliability can only be achieved by the con- components have been mounted onto printed circuit
tinuous down-to-earth accumulation of technology, boards, each board must be tested, which is done
and will never be achieved in a short space of time. automatically by a specialized testing machine to
Making new functions and adding them to existing raise efficiency. Once testing is complete, several
products is one way to go, but products that are boards are assembled to create a single NC device,
highly reliable are not brought about by adding which is also done by a robot. Finally, the assembled
something new, but by unceasingly rethinking the NC devices are tested in another machine for overall
entire product, and in some cases, adding new func- performance. The Series 0 was the first product
tions can cause misalignments in entire systems, thus created with this type of full automation. Kurakake
reducing the reliability of a product. said the following:

94 R&D Management 44, 1, 2014 © 2013 RADMA and John Wiley & Sons Ltd
Strategy transformation by strategic innovation

The new thing here was the automated mount- customizable functions, machine tool manufacturers,
ing, and automated assembly. Whereas previ- or end users could freely innovate independently
ously factory workers had mounted circuit from Fanuc, which was enabled by Fanuc rebuilding
board components by hand, this was the first its software architecture.
time we have achieved 100% automated Fanuc holds a 70% share of Japanese NC equip-
mounting. The boards are assembled automati- ment. Therefore, for machine tool manufacturers, the
cally using robots. This was also a new idea25. big challenge is how to bring about product differen-
tiation while using Fanuc’s virtually ubiquitous NC
To achieve fully automated manufacturing like this, equipment. Conventionally, to give machine tools
design concepts considering manufacturing are individualized characteristics, they were customized,
needed. Even with aligning components onto printed but machine tool manufacturers asked Fanuc to
circuit board, design has to consider everything from develop new functions, which the company would do
component selection, how the robot can grab them, and then provide to the machine tool manufacturers.
how to tighten screws, how big the screws need to With this method, machine tool manufacturers would
be, where should the screw holes be, etc. – design has often demand further modifications, additional func-
to consider everything down to the tiniest detail. tions, and once again ask Fanuc to make corrections
That means right from the initial stages of design, the or developments, which meant that all of the work
demands from manufacturing must be taken up, and ended up back at Fanuc. In short, machine tool manu-
meetings with manufacturing staff have to be facturers could not modify or add functions by them-
ongoing. Kurakake had the following to say about selves. Not only was this a huge inconvenience for
design considerations. both the machine tool manufacturers and Fanuc,
but it also cost money. Regarding this situation,
For a robot to grab an object, it is necessary to Kishi (Executive Director, November 1996), said the
include a hole on the device for the robot to following:
grab. It’s only a little modification, but if time
Trying to get individual characteristics like
is not given over to consider how the robot can
that, machine tool manufacturers asked Fanuc
grab component in the design, and the robot
to develop functions to certain specifications,
can’t pick things up once the equipment has
and when those requests came we had to
been built, then you are already losing the
provide quotes for them, including how much
race. I put it like this but it is not concurrent
time it would take. It meant that if the machine
engineering, just that the type of equipment
tool manufacturer wanted to add or modify a
deployed was designed in consideration of how
function to create their own features, there was
to make something26.
no way that they could do it without us helping
them28.
In this way, the success of the Series 0 was brought
about by carefully accumulating technologies up to The main reason for this was the basic software
the time, improving reliability, and cooperation involved with control hardware and control applica-
between design and manufacturing. tion software involved with the user were blended
The second characteristic was the advances in soft- together in the conventional NC software, which
ware architecture. The big change in software archi- meant that basic software and application software
tecture was the separation of user-controlled sections both had to be modified to meet customization
and vendor-controlled sections of the software that requests. As machine tools are often called mother
could be performed in the Series 0, the first genera- machines and are characterized as machines that
tion CNC. Why this separation? Because, this type of make other consumable machines such as automo-
architecture enables both users and vendors to inno- biles and electronic goods, the application software
vate independently of each other. This kind of archi- was basically custom-made for individual users. But
tecture enables users to satisfy their own demands by to provide application software, Fanuc had to listen
themselves, and vendors to satisfy their own needs to the demands of machine tool manufacturers and
independent of the user. Here, we describe the back- create the software, which cost money and took time,
ground of this kind of modularization. and then there is also the effort involved with pre-
Fanuc’s Series 0 is the world’s bestselling CNC cisely conveying user needs to Fanuc so that the
system27. One of the drivers that brought about this company could understand them. Put differently,
bestselling CNC system was the need to provide because application software is highly sticky infor-
customized functions called custom-made macros mation regarding user needs, that stickiness was
to meet the diverse needs of end users. Using these ending up as costs for Fanuc.

© 2013 RADMA and John Wiley & Sons Ltd R&D Management 44, 1, 2014 95
Mitsuru Kodama and Tomoatsu Shibata

NC software (phase 2) NC software (phase 3) Recreating architecture this way enables the
(Series 0) machine tool manufacturers as NC users and Fanuc
Applications Users as the NC vendor to independently innovate in par-
Blending Change (user modules)
allel with each other. Fanuc was released from the
C language library
(toolkits) Fanuc
diverse demands of machine tool manufacturers and
controlled end users and was able to focus on improving its core
Basic software
(vendor modules) technologies such as hardware and basic software.
On the other hand, machine tool manufacturers and
Fanuc NC Hardware end users were no longer affected by hardware and
basic software changes made by Fanuc and gained
Figure 8. Evolution of software architecture. NC, numerical the ability to create unique functionality themselves.
control. What are the factors that dictate the need to
restructure software architecture in this way? If
application software with a lot of sticky information
It was for that reason that Fanuc decided to think related to needs (Hippel, 1998) could be developed
about providing software tools and packages with a by users, it would be advantageous both for the user
lineup of basic functions needed to operate machine and Fanuc. And that was enabled by recreating
tools, and that would enable the users themselves to architecture modularized with user-controlled and
add functionality to deliver unique features to their vendor-controlled sections. In short, promoting user
machines. Fanuc saw that such a move would release innovation is a factor that influences software archi-
the company from some of the NC software respon- tecture restructuring processes.
sibility enveloping it at the time, and give it over to As described above, development projects were set
the machine tool manufacturers themselves. Kishi up as new organizations separate from the existing
said the following about those times. NC Department to create high-quality NC with high
reliability and automated production systems and to
We thought we could provide the basics needed drive development of software architecture with the
to run a machine tool, and also provide tools to CAI.
give machine tool manufacturers the ability to
create uniqueness in their products by adding Strategic partnership with GE. Phase 3 was a
functionality. Basically we just said ‘Fanuc period of significant development in terms of
will make you some tools and then you, the globalization, for instance the company’s formation
machine tool manufacturer, can use those of a strategic partnership with GE. In 1986, GE and
tools to add functions however you like to Fanuc set up a full-equality joint venture, each with
create your own unique products.’ That means, 50% capital investment to work on CNC and PLC
even though the machines may look identical, called GE Fanuc Automation Corporation (GE
company A’s machine tools or company B’s Fanuc). Headquartered in Charlottesville, Virginia in
machine tools can all have their functionality the United States, the company oversees three sub-
modified to bring out individual characteristics sidiaries in North America, Europe, and Asia. The
using the same NC devices29. extremely broad scope of this partnership extends
across cooperation in development, manufacturing,
To execute this, the company modularized the soft- and marketing. To make it known that this was a
ware architecture into application sections that could partnership of full equality, Inaba suggested that the
be controlled by the user, and basic software section company should be called ‘GE Fanuc’, for ‘GEF’
that could be controlled by the vendor as shown in would not have sufficed. For this, he gained under-
Figure 8, and set up a C language library between standing from GE. Anybody could easily guess what
them. The C language library is a software toolkit the initials GE stand for, but the F for Fanuc would
that for instance contains functions to display char- be completely unknown. Obviously, personnel would
acters on screen or read keystrokes, and a range come equally from both companies, and one person
of internal NC input–output control functions for from GE and Fanuc each was sent to preside over the
parameters and current cutting tool position and so new company in a joint chairmanship system.
forth. Machine tool manufacturers were thus able to Fanuc’s globalization concepts are clearly appar-
freely assemble functions with the C language library ent in this partnership with GE. Rather than relying
to create their own screens and display their own purely on the company’s own resources, its partner-
unique information. Without having to rely on Fanuc, ships with trusted local companies for R&D, manu-
they became able to add functions as they pleased. facture, and marketing are horizontal cooperative

96 R&D Management 44, 1, 2014 © 2013 RADMA and John Wiley & Sons Ltd
Strategy transformation by strategic innovation

relationships. For such relationships to be enabled, 5.1. Strategic innovation capability by


partners must be fully equal. Accordingly, mergers forming a strategic innovation loop
with local companies must on principle be based on
50-50 capital expenditure, regardless of whether they In analyzing this case, we have described the history
are in the West or in Asia. In building a cooperative of changes to Fanuc’s business strategies as changes
relationship through a fully equal partnership with through three historical phases as the birth of new
another company, Fanuc is able to help out with local products and businesses (strategic emergence in
production training and aims to go beyond simple domain I), their cultivation (strategic selection in
exporting as part of its globalization concepts. domain II), their acceleration (strategic concentration
in domain III), and business stabilization (strategic
Shifts between domains in phase 3 (see phase 3 in efficiency in domain IV) as illustrated by strategic
Figure 6). As described above, in phase 3, business innovation loop in Figure 2. In each three phases, as
was not only driven with improvements and upgrades in Figure 6, NC systems were developed through
and sales activities for the existing MPU and DC the strategic innovation loop (domains I → II → III
servomotor NC business (FANUC 2000C, System 6), and/or IV and back to domain I).
which had been commercialized from phase 2, Fanuc In phase 1 in Figure 6, Fanuc continued to provide
also undertook major technological transformation to its existing communications equipment services in
respond to technical innovations for the new user domains III and IV, while it achieved commerciali-
innovation software architecture development with zation (domains I → II → III and IV) through trial
CAI and automation of production systems by uni- and experiment to develop NC and achieve new busi-
fying design and development with manufacturing. ness. Then, in phase 2, the company engaged in the
Described as phase 3 in Figure 6, Fanuc switched to development of new NC systems with new product
strategies to turn toward development resources as architecture for new strategy transformation needed
new exploration processes (strategic emergence in to meet circumstantial and technological changes.
domain I, and strategic selection in domain II) to Fanuc was successful in operating its existing NC
achieve the new software architecture as well as full business (domains III and IV) while commercializing
automation in its factories for the commercialization new NC developments in parallel (domains I → II →
of the innovative Series 0 NC product, and, thanks to III and IV). Moreover, the company followed similar
the new technological transformation, the commer- innovation processes in phase 3 as phase 2.
cialization of the NC system (Series 0) was a success, The strategic innovation capability that brings
and the company’s new NC business once again about shifting between these domains – the ‘strategic
shifted from domain I → II → III (and IV). innovation loop’ – was acquired through unrelenting
Meanwhile, the company’s existing NC product innovation activities carried out over time and with
(FANUC 2000C, System 6) business was carried out patience in R&D processes through the companies
in existing organizations in the strategic concentra- more than 50-year history, and lead to processes of
tion domain III and strategic efficiency domain IV, commercialization starting from the NC technology
but the NC machine development hardwired and R&D at Fanuc just as presented in detailed case
soft-wired know-how accumulated in the past was studies. As cited in the theoretical framework dis-
induced to shift from domain III (and/or IV) back to cussed in section 2, realistically, much of strategic
domain I. In this way, Fanuc engaged in dialectical innovation comes from the stages of discovery and
management by using its strategic innovation capa- inventions in environments in which basic scientific
bility to coordinate an interface between its old and research or technological development is sluggish.
new organizations for promoting exploration pro- Domain I, where slow environmental changes and
cesses (domains I and II) to achieve new product high uncertainties are observed, is the stage where
architecture while promoting exploitation processes new ideas and business concepts, and new technol-
(domains III and IV) to upgrade and improve its ogies are created from new discoveries and inven-
existing NC systems in its existing organizations (see tions. And, as basic research and the emergence of
phase 3 in Figure 7). ideas are the sources of new strategic innovation,
depending on the technical field like those found with
NC technologies, the more weight there is on scien-
tific factors or the higher the level of technical diffi-
5. Implications culty in a particular field, the longer the amount of
time required for the process, as can be seen in phase
From this case of strategic innovation, we describe 1. Thus, in achieving its NC technology, Fanuc spent
newly extracted implications. many years on hardware and software product

© 2013 RADMA and John Wiley & Sons Ltd R&D Management 44, 1, 2014 97
Mitsuru Kodama and Tomoatsu Shibata

development, commercialized products providing transformation. The second of these factors is the
uniformity with its hardware and software and auto- ability to execute ‘sift management’ between
mating its production systems as its most fundamen- domains and within each domain. Fanuc achieves
tally important research themes (Fanuc continues shifts within and between domains in each phase
research in these fields). In particular, the company’s of its strategy transformation with the emergence of
achievements in domain I were due to the emergent a new product or business (strategic emergence in
ideas and actions of middle management in Fanuc’s domain I), then engages in cultivation (strategic
R&D Department, but the strategic contribution and selection in domain II), acceleration (strategic con-
commitment of leaders such as Inaba and other top centration in domain III), and stabilization (strategic
management and senior managers who ran both new efficiency in domain IV), and then shifts back to the
and existing organizations (described in phase 2) creation of new business (domain I). As described by
were also important factors for success. Figure 7, the third factor in each phase of strategy
Furthermore, in domains I and II, there were wide- transformation is the demonstration of integration
ranging patterns of the knowledge integration process of competencies to execute dialectical management
including open innovation elements that transcended to combine exploration and exploitation processes
the company internally and externally to enable in the differing archetypes of new and existing
R&D into the NC equipment (within the company organizations.
itself, with other companies and with universities,
etc.). Traditionally, many large, hierarchical compa-
5.2. Promoting strategic innovation with
nies have mainly promoted closed innovation in inter-
the creation of new development
nal R&D organizations. Closed innovation processes
organizations
were important for developing innovation with path-
dependent knowledge accumulated through the In each phase, Fanuc’s execution of strategic innova-
company history. However, to develop the NC tech- tion to create new businesses or technologically
nology in Fanuc’s R&D Department, even though transform was characterized by the creation of new
closed innovation was the main consideration, Fanuc development organizations within the company cen-
proactively pursued joint development within and tered on top management (see Figure 7). Being
outside itself with other companies (e.g., GM and formed from new members, development organiza-
GE) and major universities. tions received support from top management
Furthermore, Fanuc’s R&D Department devel- deployed within the organizations, which were given
oped prototype experimental systems based on its significant authority to set down and execute business
core technologies developed in domain I, which it put and technical strategies for the future. As seen in
to work in the domain II stage with experiments in a Fanuc, innovative leadership is required to guide
number of fields related to the new NC equipment. In such organizations, and organizational members
this domain, by upgrading and improving prototype must be afforded flexibility and autonomy, while
systems, the prototype systems were drawn closer to future business and technical strategies must be
completion as a commercially viable services in the allowed to emerge, and experimentation and incuba-
R&D Department. Through the processes in domain tion must be driven continually. There is also a need
II, a range of machine tool markets for application of in large companies for human resources strategies
NC technology gradually became established, and that enable drastic personnel selections to form new
the shift to the genuine commercialization of domain organizations when facing strategic innovation30. For
III (and IV) took place. Particularly in domain III, this, leadership by the top management team is key
market environments rapidly changed with competi- (Fujitsu’s top management at the time or Inaba of
tion from other machine tool manufacturers, and Fanuc).
Fanuc quickly invested resources required for Fanuc’s strategic innovation capabilities promoted
exhaustive incremental innovation for its NC prod- synergies between the exploration and exploitation
ucts. Meanwhile, thorough efficiency was promoted processes in its old and new organizations, brought
for NC products using stabilized (or perhaps dying) about the appropriate interface between the new and
technology in domain IV. old organizations, integrated technical strategies (new
As described above, it is clear that Fanuc used the and existing technologies), organizational structures
three factors of strategic innovation capability as (new and existing organizations) and competencies
cited in chapter 2. The first of these is the capability (e.g., hardware and software technology know-
to achieve a strategic innovation loop to shift from how), and thus brought about major achievements
domain I → II → III and/or IV and back to domain I. by achieving strategic innovation to realize new
Fanuc achieved this in each phase of its strategy product architecture and establish new NC business.

98 R&D Management 44, 1, 2014 © 2013 RADMA and John Wiley & Sons Ltd
Strategy transformation by strategic innovation

Moreover, as shown in Figure 7, Fujitsu and Fanuc innovative organizations) between these features
were able to configure ambidextrous organizations (whether, for example, they are open or closed
from the two different archetypes using dialectical systems) and subsystems, and the dynamic situ-
management, which is an extremely important part of ational changes (balanced or unbalanced) of individ-
strategic innovation capability, to skillfully manage ual subsystems with the overall (corporate) system
new and existing technologies with combination and responding to internal and external change. System
coexistence within the same company, and bring theories (e.g., von Bertalanffy, 1960; Capra, 1996)
about synergies between the old and new organiza- and complex adaptation theories (e.g., Stacey, 1996;
tions, an important factor for success in achieving Morel and Ramanujam, 1999) are capable of inclu-
strategic innovation in large companies. sively handling the points above. O’Connor (2008)
explains how system theory is effective in clarifying
a large corporation’s radical innovation system, and
6. Conclusion and future research demonstrates some propositions with respect to the
relationship among a number of subsystems.
In this paper, we have touched upon previous The second aspect is the research approach from
research and presented the concept of strategic inno- the knowledge-based theory of firm (Nonaka and
vation capability as a corporate system capability that Takeuchi, 1995; Grant, 1996). Companies that
achieves strategy transformation by strategic innova- achieve sustainable strategic innovation can be said
tion in a large company. We have verified this theo- to be implementing a new knowledge creation (or
retical framework through the detailed case study of integration) chain through a layered strategic innova-
strategy transformation at Fanuc, a company that tion loop (see Figure 2). But research is required into
holds the top share of the global NC market. In this ‘knowledge integration dynamics’ that asks such
case study, we have presented the innovation pro- questions as how strategic innovation capability can
cesses in which Fanuc demonstrates its strategic change or realize this knowledge innovation process
innovation capability, proactively achieves innova- occurring within and among domains (including
tive NC technologies and products, and establishes shifts) (see Figure 2); how strategic behavior and
competitiveness in this field. We have obtained organizational structure change; and what patterns
knowledge of the importance of acquiring strategic form the optimal knowledge integration process for
innovation capability in which top management con- realizing strategic innovation. This research, which
sciously creates new development organizations needs to progress from a theoretical, actual, and prac-
within a company to simultaneously manage explo- tical viewpoint, forms the true theme of this paper.
ration and exploitation processes through the opera-
tions of existing and new organizations to achieve
strategy transformation.
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contradictions: a top management model for managing (2006) for research regarding strategic uncertainty.
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536. organizational and resource uncertainty is difficult,
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Nature and Sources of Managerial Judgement. Oxford: resources should be rejected after screening.
Basil Blackwell. 3. The likelihood of experiencing a certain amount of
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Strauss, A. (1987) Qualitative Analysis for Social Scien- hypothesis from my own office experience.
tists. New York: Cambridge University Press. 4. This is due to the existence of the knowledge boundaries
Sutcliffe, K., Sitkin, S., and Browning, L. (1999) Tailoring between the product planning divisions that supervise
process management to situational requirements. In: the creation of business concepts and ideas, the devel-
Cole, R. and Scott, W. (eds), The Quality Movement and opment divisions that realize them, and the production
Organization Theory. Thousand Oaks, CA: Sage. pp. and manufacturing divisions. See Kodama (2007).
315–330. 5. Numerous studies (e.g., Nonaka and Takeuchi, 1995)
Teece, D., Pisano, G., and Shuen, A. (1997) Dynamic capa- exist regarding the theoretical frameworks relating
bilities and strategic management. Strategic Manage- to the creation of knowledge such as breakthrough
ment Journal, 18, 3, 509–533. or new ideas. Analysis from various viewpoints will
Tripsas, M. and Gavetti, G. (2000) Capabilities, cognition, be the subject of future research topics. One such
and inertia: evidence from digital imaging. Strategic example relates to the creative process for business
Management Journal, 21, 10, 1147–1161. concepts arising from the synthesis of market and tech-
Tushman, M. and Romanelli, R. (1985) Organizational nology paradigms (see Kodama, 2009).
evolution: a metamorphosis model of convergence and 6. We would like to note the points of difference between
reorientation. Research in Organizational Behavior, 7, the ‘strategic innovation system’ and the ‘management
2, 171–222. system’ arising from ‘breakthrough innovation capa-
Tushman, M.L. and Anderson, P. (1986) Technological bility’ (O’Connor et al., 2008b). One such point is that
discontinuities and organizational environments. Admin- since O’Connor’s model is sequential – it shifts from
istrative Science Quarterly, 31, 2, 439–465. discovery through cultivation to acceleration – it is

102 R&D Management 44, 1, 2014 © 2013 RADMA and John Wiley & Sons Ltd
Strategy transformation by strategic innovation

weak on the positive feedback process of reflection the product development and manufacturing staff (in a
on, and practical application of, the practical knowl- company) from the work involved in understanding the
edge and accumulated transformational experience of details customer needs accurately, and instead the
in-house expertise, skills, and routines acquired through innovation tasks related to those needs are shifted onto
executing breakthrough innovation and existing busi- the customer (prototype design, prototyping, simula-
ness. Another is that the sequential model provides a tions, and assessments, etc.). As a result, this toolkit
weak framework for shifting to a strategic emergence approach can dramatically reduce costs associated
domain that gives rise to discovery, invention, and crea- with transferring sticky information by separating
tivity. Third, it provides a weak dynamic strategy view product and service development tasks into two
framework for a company to acquire and sustain new subtasks, i.e., subtasks related to customer needs and
strategic positions over many years. With regard to this, subtasks related to companies’ solutions. This means
the strategic innovation system in this paper (see that companies no longer need to understand the
Figure 2), comprehensively considers the three points highly sticky details of customer needs and can focus
above while creating corporate and management system on routine works, while at the same time, customers
models for sustainable strategic innovation. can efficiently engage in trial-and-error processes
7. This case study was created with reference to inter- through practical learning using toolkits to achieve
views with persons involved, books, papers, and pub- exactly the functionality that they require.
lished materials. In particular, we received much help in 24. Op. cit., 20.
the form of information and interviews provided to us 25. Op. cit., 20.
by Fanuc. We would like to express our gratitude here. 26. Op. cit., 20.
8. Refer to Inaba (2003). 27. This recognition came from an interview with Hajimu
9. Op. cit., 8. Kishi on 21st of November 1996 (at the time Executive
10. Op. cit., 8. Director and Director of FA sales).
11. The pulse monitor is characterized as follows: First, it 28. Op. cit., 26.
has applications in a wide range of areas including 29. Op. cit., 26.
large-size machine tools and a diversity of NC appli- 30. Similar to the i-mode development case. Refer to
cations. Second, the electric hydraulic pulse monitor Kodama (2003) for details.
can be combined with machine tools by cogs and feed
screws to create NC machine tools extremely easily.
12. Op. cit., 8. Mitsuru Kodama is Professor of Innovation and
13. Op. cit., 8. Technology Management in the College of Com-
14. Op. cit., 8.
merce and Graduate School of Business Administra-
15. Op. cit., 8.
16. Op. cit., 8.
tion at Nihon University. His research has been
17. Op. cit., 8. published in international journals such as Long
18. Interview with Seiuemon Inaba on 14th of July 2003 Range Planning, Organization Studies, Journal of
(Honorary Chairman at the time). Management Studies, Technovation and Information
19. Op. cit., 8. Systems Management, among others. He also has
20. Interview with Mitsuo Kurakake on 7 December 2000 published nine books in English such as Competing
(Executive Director at that time). through ICT Capability (Palgrave Macmillan, 2012),
21. Op. cit., 20. Knowledge Integration Dynamics (World Scientific,
22. Op. cit., 20. 2011), Boundary Management (Springer, 2009),
23. Hipple (1998; Hippel and Katz, 2002) pointed to Knowledge Innovation (Edward Elgar, 2007), among
toolkits that have been developed for customers in
others. He is an Associate Editor of two international
certain industries (custom LSI, computer telephony
integration field, etc.), and how these enabled problem
academic Journals, International Journal of Mobile
solving to be shifted to the customer, by enabling the Communications and International Journal of Elec-
customer to freely modify products and applications tronic Business.
using these tools. Custom LSI toolkits are devices that
enable customers to achieve desired functions by pro- Tomoatsu Shibata is a Professor of Innovation Man-
gramming content electronically at the logical circuit agement in the Department of Economics and Gradu-
level, and are called field programmable gate arrays
ate School of Business Administration at Tohoku
that are, in the case of LSI, application-specific ICs in
the narrow sense – tools that enable the customer to
University. His research papers have been published
develop prototypes and functions, and perform evalu- in Research Policy, Journal of Engineering and
ations. Because these programs are rewritable, they Technology Management, R&D Management, Inter-
enable customers to freely check performance of national Journal of Technology Management, Inter-
prototypes. Currently, only performed in a limited national Journal of Innovation Management, among
number of fields, ‘customizing as innovator’ releases others.

© 2013 RADMA and John Wiley & Sons Ltd R&D Management 44, 1, 2014 103

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