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Second Interim Report
Clair Brown, Editor

11. Managing Creativity and Control in Innovation
Clair Brown

11.1 Introduction
11.2 The Development Process
11.3 The Development Process at USTech
11.4 The Development Process at JapanTech
11.5 Engineering Innovations on the Shop Floor
11.6 Conclusion

11.1 Introduction

This study focuses on the management of innovation in the semiconductor industry, where innovation is critical to both short-run and long-run competitiveness. In particular, we examine how work organization, incentive systems, and communication systems affect the creation, sharing, and control of knowledge. The semiconductor industry is characterized by rapid technological change, high capital costs, continual price declines, and strict quality standards. These industry characteristics result in high risks and returns to product innovation and in competitive pressures for continual reduction of manufacturing costs. They also make the semiconductor industry ideally situated for exploring technological innovation and knowledge diffusion.

Innovation can be divided into two fairly distinct activities in terms of when and where the innovation occurs. One type of innovation occurs in the development of a new product or process, and the second type occurs in improvements on the shop floor of a product or process. Long-run competitiveness of a leading-edge company depends on its product line, while short-run competitiveness depends on price and reliability. Over time, a leading-edge company must develop new products that the market values and must manufacture a quality product in a cost-effective fashion. The challenge for an industry leader is to bring a new product to market and recoup development costs during the short period when competition is limited and prices are relatively high. An industry follower must enter the market with the comparable product at a low cost, since the entry of competitors (followers) into the market causes prices to drop rapidly. This type of price competition drives shopfloor innovation, which determines the cost and quality of the product. Both long-run and short-run innovation processes are critical to company performance, but their relative importance to the firm depends upon the company’s technology strategy.

This study focuses on innovation by engineers in two specific activities--developing new products or processes and transferring the process to high volume fabrication. The management of tension between control and creativity, which are inherent in innovative activities, is studied by documenting and analyzing examples of how these tensions are successfully managed at a leading Japanese producer of memory (pseudonym "JapanTech") and a leading American producer of logic (pseudonym "USTech").

In development activities, two major tensions are studied:

  • the tension between encouraging new ideas and the need to choose only a few of the ideas to be used in the new product or process;

  • the tension between encouraging individuals to own and develop new ideas and encouraging engineers to share their ideas with a team for more rapid evaluation and development of the idea.

On the shop floor during the transfer, two major tensions are studied:

  • preventing unauthorized improvements by engineers while keeping them actively involved in solving problems and suggesting improvements;

  • having manufacturing engineers remain engaged in less interesting, but necessary, tasks such as documentation and problem solving rather than doing the more challenging tasks such as process improvements, which are not part of their assignment.

Of the engineers working in development and fabrication, only a subset are involved in both the development and transfer of a particular new process. Deciding the composition of this subgroup is one part of setting up the employment system that structures and encourages innovation.

The development process is somewhat shaped by the type of device being created. The development strategy is also affected by the product market. Producers of logic devices, which are distinguished by their architecture, must maintain their lead in developing improved capabilities. Producers of memory devices, which are a commodity product without distinguishing characteristics within a generation, must keep up with their competitors in unveiling the next generation and in producing high quality, low cost products. Development of memory devices is process driven; development of logic devices is driven by the architecture. Although development of memory devices used to be the technology driver for all companies, now issues specific to logic devices such as multi-level interconnect have become the technology drivers for logic producers. Nishi describes the development process as top-down for logic integrated circuits, which proceeds from the system architecture to a logic diagram to a circuit design, and as bottom-up for memory integrated circuits, which proceeds from a basic understanding of science to development of new materials and new processing techniques to new device structure. Nishi argues that the careers of those people who worked on the technologies that were not used continue to develop the technology for the next generation and so their careers do not suffer. We observed that sometimes this occurs. Okimoto and Nishi argue that Japanese practices advance research development in memory technology, which has predictable, linear trajectories, but Japanese practices constrain advances in logic technology, which has nonlinear, highly volatile trajectories. Transfer problems also differ in that memory devices must control leakages and logic devices have problems with interconnects and are harder to test.

Although comparisons across memory and logic producers impose constraints on employment structures, we have observed both differences and similarities in the management of technology regardless of the type of device. The two companies studied are successful in the innovation process both in development and in high volume manufacturing. This research is based upon several field work trips to USTech and JapanTech. In-depth interviews with over a dozen engineers and managers at each company were conducted. These interviews are supplemented by a survey of engineers from a wider range of companies regarding methods engineers use to collect and process information and how their work is structured and rewarded.

As we will see, the management of creativity and control operates differently in Japan compared to the US. Since large firms in Japan have similar compensation systems, which are largely shaped for the junior engineers through negotiations with the union in national annual wage bargaining and through widespread national employment practices, much of what we observed at JapanTech is representative of other large Japanese electronics companies. In the U.S., few electronics companies have any union representation, and employment practices are more widely varied across companies than in Japan. Therefore, USTech’s employment system cannot necessarily be thought of as representative of other large U.S. semiconductor companies. We will indicate which practices are widespread and which seem to be idiosyncratic in our analysis of USTech.

JapanTech’s HR system relies on teamwork and group responsibility with engineers engaging in a broad range of job tasks. Their education is developed through company-based classes, mentoring, and job rotation. Compensation reflects specific career ladders rather than company or individual performance. Engineers participate in knowledge sharing through presentations at conferences and patent applications.

In contrast, USTech’s engineers specialize in development (advanced degrees) and fabrication activities (BS degree). Manufacturing engineers are prohibited from making unauthorized improvements in the process. The development engineers are given individual autonomy and responsibility with large monetary rewards for good performance. USTech’s policy is not to share knowledge with the outside world; engineers rarely write or present papers or submit patents (except defensively). USTech’s practices reflect educational requirements in development and fabrication, the leading edge nature of the technology under development, and the difficulty in qualifying a logic chip’s characteristics after process modifications. Compared to USTech, other U.S. semiconductor companies have less strict policies of knowledge sharing, since they usually believe they have something to learn in the process. Also, other companies usually allow more improvements during the transfer, since the process is not as well-developed at the hand-off. Other companies usually do not give as much responsibility to new graduates; however, giving engineers individual autonomy and performance rewards are widespread practices in the U.S.

Organization of development and transfer activities both accommodates and requires these differences in the U.S. and Japanese HR systems, and simultaneously they determine innovation, diffusion, and control of knowledge. Precisely those structures of the Japanese firm that support team-based learning and problem-solving impose constraints on individual initiative and autonomy; for example, a system that supports knowledge sharing through public channels and supplier relationships raises potential problems of control of knowledge. Precisely those structures of the American firm that support individual creativity and breakthroughs impose problems of control over the process; for example, a system that restricts knowledge sharing raises potential inefficiencies associated with duplicating knowledge or developing inferior solutions.

A trade-off appears to exist between supporting information sharing for joint problem-solving and supporting individual creativity in problem-solving. The Japanese human resource system has highly developed systems to support interfirm knowledge creation and sharing (i.e., the joint development of ideas with or acquired knowledge from other firms) and intrafirm knowledge creation and sharing (i.e., the joint sharing of knowledge and skills among employees within a team and across groups). The U.S. human resource system is better at structuring and rewarding individual, as opposed to group, initiative and endeavors. Although U.S. companies do not have a history of interfirm knowledge sharing, American semiconductor companies recently have been experimenting with joint ventures with other companies, largely in response to the extremely high capital and research and development costs.

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