Managing Creativity and Control in Innovation:
Lessons from the Semiconductor Industry
in Japan and the U.S.
Clair Brown
Doshisha Business Cases 07-04
October 2007

Managing Creativity and Control in Innovation:
Lessons from the Semiconductor Industry in Japan and the U.S.
Clair Brown
Professor of Economics
Director, Center for Work, Technology, and Society, IIR
University of California, Berkeley
and Visiting Fellow
Institute for Technology, Entrepreneurship and Competitiveness (ITEC)
Doshisha University
This case study was originally prepared for MOT classes, funded by the Japanese Ministry for
Science and Education in 2004 with the support of the Alfred Sloan Foundation (U.S.) and
METI (Japan). The author would like to thank Melissa Appleyard, Neil Berglund,Ben Campbell,David Hodges, David Mowery, Rob Leachman, and Dan Rascher for very helpful comments on
earlier drafts. Copyright © 2007 by Clair Brown. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted in any form or by any means – electronic, mechanical,
photocopying, recording, or otherwise – without permission from the author or Doshisha
Business School.

Abstract
This case on management of innovation in the semiconductor industry studies
engineers developing new products at a leading semiconductor company in Japan and
one in the United States. How these two companies successfully manage tension
between control and creativity is documented and discussed. The management ofcreativity and control operates differently in Japan compared to the US. A trade-off
appears to exist between supporting information sharing for joint knowledge
development and supporting individual creativity in developing knowledge.
Introduction
This case study focuses on the management of innovation in the development of anew product and its required processes in the semiconductor industry, where innovationis critical to long-run competitiveness. In particular, we examine how workorganization, 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 from

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Managing Creativity and Control in Innovation:
Lessons from the Semiconductor Industry in Japan and the U.S.
Clair Brown

product innovation. They also make the semiconductor industry ideally situated for
exploring technological innovation.
Long-run competitiveness of a leading-edge company depends on its product line.
Over time, a leading-edge company must develop new products that the market values.
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. This case study focuses on innovation by engineers in developing new
products. The management of the trade-off between control and creativity, which are
inherent in innovative activities, is studied at a leading Japanese producer of memory
chips (pseudonym “JapanTech”) and a leading American producer of logic chips(pseudonym “USTech”). This research is based upon several field work trips to USTech
and JapanTech in the mid-to-late 1990s.
In development activities, two major tensions are studied:•

the tension between encouraging new ideas and the need to choose only a few of theideas to be used in the new product and process;•the tension between encouraging individuals to own and develop new ideas andencouraging engineers to share their ideas with a team for more rapid evaluation anddevelopment of the idea.

As we will see, the management of creativity and control operates differently inJapan compared to the US. Since large firms in Japan have similar compensation
systems, which are largely shaped for the junior engineers through negotiations with theunion 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 union
representation, and employment practices are more widely varied across companies thanin Japan. Therefore, USTech’s employment system cannot necessarily be thought of as
representative of other large U.S. semiconductor companies. In our analysis of USTech,we will indicate which practices are widespread and which seem to be idiosyncratic in
the industry.
JapanTech’s HR system relies on teamwork and group responsibility withengineers engaging in a broad range of job tasks. Engineers' 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 patentapplications.

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Managing Creativity and Control in Innovation:
Lessons from the Semiconductor Industry in Japan and the U.S.
Clair Brown

In contrast, USTech’s engineers specialize in either development (advanced
degrees) or fabrication activities (BS degree). 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 for development engineers and theleading edge nature of the technology under development. Compared to USTech, other
U.S. semiconductor companies have less strict policies of knowledge sharing, since theyusually believe they have something to learn in the process. Although other companies
usually do not give as much responsibility to new graduates as USTech, giving
engineers individual autonomy and performance rewards are widespread practices in the
U.S.
Organization of development activities both accommodates and requires thesedifferences in the U.S. and Japanese HR systems, and simultaneously they determine
innovation, diffusion, and control of knowledge. Precisely those structures of theJapanese firm that support team-based learning and problem-solving impose constraints
on individual initiative and autonomy. Precisely those structures of the U.S. firm that
support individual creativity and breakthroughs impose problems of control over theprocess.
A trade-off appears to exist between supporting information sharing for joint
knowledge creation and supporting individual creativity in knowledge development.
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., thejoint sharing of knowledge and skills among employees within a team and acrossgroups). 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, U.S. semiconductor companies
recently have been experimenting with joint ventures with other companies, largely inresponse to extremely high capital and research and development costs. In addition,
U.S. semiconductor companies have increasingly turned to young companies (start-ups)
as an important source of innovation, and often acquire the company or license thetechnology instead of developing the technology internally.
The Development Process
The development team has to simultaneously fulfill several management goals,
including the development of a new product that satisfies customers and is designed for
low-cost, high-quality manufacturing. Often management will use specific rules to help
guide the development process, such as a ceiling on the number of new fabrication steps

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Managing Creativity and Control in Innovation:
Lessons from the Semiconductor Industry in Japan and the U.S.
Clair Brown

and new types of equipment (or conversely, the process must use certain equipment).
These types of specific rules governing constraints on process steps or equipment aremuch easier to identify and implement (as well as negotiate) than management of thecreative process itself. Here we will focus on the tension between encouraging
individual autonomy and creativity and controlling the direction of the development
process, including the use of teamwork for encouraging, evaluating, and controllingindividual ideas in the development process.
Issues of creativity and control arise throughout the development process. We will
examine how the following relevant decisions are made at USTech and JapanTech:•

how well-defined the characteristics of the process are and how well-defined theconstraints are (e.g., equipment that can be used) in the assignment made to thedevelopment team;•

how the “winning” technologies are chosen and assigned to team members;•

how the ideas generated by the team members are trimmed down to a manageable
number and the members rewarded for their contributions;•

how work assignments are made over time as development proceeds, and how muchautonomy the members and the team have in making decisions;•what sources the engineers use for generating and developing ideas, such as
referring back to previous processes, reading theoretical literature, brainstorming inteam meetings;•

what sources the engineers use for information and feedback, including scientists atthe central research labs, team members, engineers at the receiving fab, marketing
experts or customers, engineers at other companies, or publicly-available technicalinformation.

The development process at USTech.
At USTech a strategic planning committee defines new lead products by marketingsegment. A strategic capabilities committee ensures that capabilities cut across businesssegments and lays out process capability over time, which defines the technology
roadmap. The goals of the development team are set by a strategic planning committee,
which annually updates the technology roadmap and the lead product for each newtechnology. Since any process change involves a lot of time and resources, a processchange must be big enough to make a significant difference in the products
manufactured. The planning committee makes the selection of architecture and gives
only one option with design rules to the development team. The design of circuit andblock architecture with layout is done at the research lab.

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Managing Creativity and Control in Innovation:
Lessons from the Semiconductor Industry in Japan and the U.S.
Clair Brown

Since the new technology is not compatible with the available process, thedevelopment team’s goal is to build a prototype of the product that is commercially
feasible. In order to differentiate between problems caused by modifications of theprocess versus the product, a new design is brought up on the old process in small
volume, and then the first shrink in line width (e.g., from .25 microns to .18 microns) is
usually made on the new process. This minimizes debugging problems since it
decouples the new design from new technology (process). The development manager
issues design rules based on algorithms (e.g., 70% of former size), and the design of thefirst shrink of the product is done in the development fab. Next, the product is brought
up on a new process at high volume. The development rules issued provide very simple“rules of thumb”; for example, 30% of the steps are new (70% are old), and theequipment associated with any given module lasts two generations (i.e., through two
different instruction sets or recipes). Learning across development teams is facilitatedby keeping archival records of project decisions throughout a program, and performing
a “postmortem” after a project is completed to see what can be done better next time.
This structure of development activities reflects the company’s strategy ofremaining the product market leader. Time to market is an important consideration andshort-run financial considerations are not dominant, so much of the work traditionallydone at the manufacturing fab, including the ramping to volume production, is done atthe development fab at USTech. The transfer rule is to freeze the technology andtransfer it to the manufacturing fab when the development fab has no fundamental yieldor manufacturing problems at a volume of 2000 wafers per week. If the development
fab can produce 2000 wafers per week rather than the more traditional 300 wafers, thenvolume-related problems will have already been solved and fab engineers become“believers” in the process. By ramping to volume at the development fab, thedevelopment engineer is forced to learn and use manufacturing skills. This encourages“developing for manufacturing” (i.e., developing in a way that minimizes
manufacturing problems and costs) since the development engineer experiences the
problems at high volume and does volume-related problem solving.
In order for the manufacturing engineers to have ownership of the new process andto make use of their manufacturing skills, they are transferred to the development fab up
to eighteen months before the transfer. Their role is to set manufacturing goals, define
optimized recipes, set up maintenance procedures, transfer deliverables (documentation,knowledge), undergo training, and help characterize the process. Although they help in
the qualification of the product and the transfer process, their primary tasks are to be
trained to run the new process and to manufacture the chips at the development fab.
The management style at USTech is distinguished by the cultivation of peerpressure, aggressive discussion of ideas, delegation of responsibility to young engineers,and job assignment along with stock options as rewards. In general, job assignment

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Managing Creativity and Control in Innovation:
Lessons from the Semiconductor Industry in Japan and the U.S.
Clair Brown

reflects the degree of complexity of the task and the experience and knowledge of theperson. A junior engineer is assigned an open-ended but less complex problem. A senior
engineer has a more detailed assignment with a complex problem. USTech believes thatlack of experience is beneficial in research and development, since an inexperienced
engineer does not have preconceived notions of what works or doesn’t work. For thisreason, young engineers are given major responsibilities in developing new processes ortechnologies. Managers described new graduates as providing a role model for older
workers, since they are hard working and creative in their problem solving.
Assignment of the correct people to a project is critical. Engineers are rewarded forexcellent performance by their next job assignment, and this provides a major incentive
to do well. Job assignments determine compensation, which is strongly performancebased. Those who do not do well are assigned tasks with a lower level of responsibility.
Only in rare instances do engineers ask for more challenging work or projects, and, in
response, they are told they need to perform well on simple tasks first. Engineersreported enormous peer pressure; “sitting back is not condoned.” Some engineers, who
cannot make the required breakthroughs, burn out and quit. However, USTech
restructures assignments when projects are not going well. One example was given of a
key engineer who “blew it” on a huge project, so the project was split into two parts,
core and support, and he did support.
Conflicts about ideas are resolved through confrontation, or a process of “disagreeand commit”. If a technology being developed is dropped or not integrated, younger
module engineers may be discouraged. However, in a conflict about which idea to use,the boss may ask the dissident to run the project. Engineers typically do not withhold
their ideas in the development process, which is problem driven. This is more of aproblem in research, which is idea driven.
USTech relies on decision-making through committees, and one’s influence in thecompany is determined by how many standing committees one is on. Everyone is partof a group, and engineers have a bi-weekly one-on-one meeting with their group leader
at which they can bring up problems. USTech is typical of U.S. semiconductor
companies in its reliance on teams making the decisions that structure work. The teamdecisions are supplemented by individual decisions and have limited managerial input,
once deadlines and schedules are set.
USTech has a formal methodology for learning new knowledge:
1. Search the literature. Engineers think that papers from universities are better
than company papers. However, Sematech has increased the quality andnumber of industry papers.
2. Compare methods used across equipment sets (e.g., read a report on defectmechanisms on thin film and see if it works on etch).

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Managing Creativity and Control in Innovation:
Lessons from the Semiconductor Industry in Japan and the U.S.
Clair Brown

However, USTech engineers reported that the technical literature is not very
helpful “because if anyone is doing (a solution to the problem under consideration),they are not sharing it; if they are sharing it, they are doing it poorly.” The engineers
often find industry papers misleading, since a paper may show only the best picture andnot report other cases. The partial reporting is hard to evaluate, and the process usuallydoesn’t work as well as reported. Normally, USTech engineers do not publish anythingoutside the company, since publishing is not important for career advancement within
the company or for professional reputation. USTech engineers are very proud to beworking for a technology leader, and they share in the cachet of the company’s name.
The engineers at USTech are very clear that any information sharing with outsiders
has to be done on a quid pro quo basis. Employees are aware of the risk of informationtransfer because they have taken classes on internal document control and are familiar
with past cases where intellectual property was transferred illegally. Even within
USTech, engineers need to have a reason to request company papers. In general, they do
not rely upon the exchange of knowledge with outsiders because “outsiders havenothing to share.” The company policy is not to answer questions from outsiders, since
USTech receives nothing in return. However, some engineers indicated that customers
and colleagues at other semiconductor and equipment companies are important sourcesof technical information.
Control over ideas is further ensured by using the patent process defensively. There
has been a renewed emphasis on patenting at USTech, especially in the process
architecture area. Engineers are paid $2000 for filing a patent. The rule of thumb is tokeep knowledge a trade secret, but to patent whatever can be reverse engineered. For
this reason, process integration does not need to patented.
USTech is typical of U.S. semiconductor companies in its engineers relying on
company colleagues and on journals and not relying on patents for technicalinformation. Engineers at other U.S. semiconductor companies are much more likely toshare with outsiders through conferences or personal contacts. USTech engineers seemto feel rewarded for their creative achievements through their national reputation ofworking for USTech without presenting papers at conferences.
USTech pays their engineers based on individual performance. Usefulness of ideas
is the main factor in the annual performance review, which includes a qualitative
summary of accomplishments and the employee’s strengths and weaknesses.
Performance is evaluated on a relative basis by ranking engineers on an equity curve by
quartiles. An engineer is ranked within a group of 10 to 20 engineers in his or her own
grade range. They are told their relative ranking (e.g., top one-third) and given a ratingof superior/outstanding (15%), successful (80%), or needs improvement (0-5%). Each
person is also told if their performance trend is greater or less than their peers. The
evaluation can affect pay within the rank group up to 10% (e.g., those with superior

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Managing Creativity and Control in Innovation:
Lessons from the Semiconductor Industry in Japan and the U.S.
Clair Brown

receiving a 6% pay increase, with good receiving 4%, etc.) plus promotions andresponsibility on the next job. Everyone is considered well paid, and they do not knoweach others’ rankings.
Compensation can include profit-sharing and stock options as well as salary.
Exempt and nonexempt employees have the same cash bonus system, which is based on
six month company profits (e.g., 5 to 7 days of pay). Higher grade levels (i.e., beginningwith the grade level at which PhDs enter) receive an executive bonus (percent of basepay), which varies by position and payoff rate. Stock options are paid for future
potential and are an important incentive mechanism. Some engineers earn more fromtheir stock options than from their salary. All grades are eligible for stock options butwith different participation percentages. For engineers, the bottom 10-15% do notreceive stock options; the middle 70-75% receive some options; the top 15% are
identified as key players and receive more options.
Promotion is also used to reward outstanding performance at USTech, whichdevelops its engineers, and many rise within the company. Engineers can be promoted
to group leader, whose job is still highly technical with supervision of approximately six
engineers and a few techs. The group leader must have been at USTech at least four
years. Competition for group leader is keen, and those passed over are miffed and ask“Why him and not me?” The group leader reports to an area manager, who has been at
USTech for 10 to 19 years and supervises 50 to 150 people. The area manager is the big
step into management, since the job is less technical and requires more leadership andadministration. Senior engineers who do not go into management have a parallel pathand report directly to an area manager. Less than 20% of engineers are on this track. So
far, USTech’s growth rate has allowed a satisfactory rate of promotion, but this might
become more difficult to achieve as the company matures.
The development process at JapanTech.
At JapanTech, development of the business plan, which includes discussions fromusers on what will sell as well as production requirements, is an important process. The
plan for memory is sent to the R&D division annually. The development process isconducted for two years by the central research lab, which undertakes research for all
the divisions of the company (including semiconductor) and then by the development
team for two years before it is handed off to the memory division. Central lab engineers
produce fundamental research reports and then develop process architecture andmodules (i.e., circuit design) based upon this research. Until last year, they also
developed the engineering sample.

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Managing Creativity and Control in Innovation:
Lessons from the Semiconductor Industry in Japan and the U.S.
Clair Brown

At JapanTech, the development process is divided into three stages: research,development, and fabrication of the engineering sample. The development lab does the
prototype development, which includes development of the new technologies andintegration (i.e., the process for fabrications) as well as actual fabrication of a prototype.
A cooperative relationship exists between the central research lab and the developmentlab. Since the semiconductor division commissions research on future technology, it isin charge of the research plan, and funds and receives the research results. The
development lab also develops the engineering sample (i.e., establishes the process,confirms characteristics, and completes and ships engineering samples to theengineering division). The engineering sample is then handed off to the businessdivision, which makes the commercial sample and then transfers it to the fab. The hand
off to the fab is made at an early stage (e.g., 5 good chips per wafer). In a recent
transfer, they needed over 1000 wafers to establish reliability. The biggest challenge istransferring technical know-how to the fab and understanding where equipment
bottlenecks will occur in volume production. The number and complexity of themodifications that are made decrease as the development progresses (e.g., in a recent
generation, five to ten mask changes were made in the engineering sample, fewer than
five changes were made in the commercial sample, and three to four minor maskchanges were made at the first receiving fab.)
Daily technical reports during development of the prototype device total 2000
pages per device; there are far fewer reports during the engineering sample stage. In
contrast, meetings for prompt exchange of information between engineers become more
important the further they are into production. Process engineers communicate withproduction engineers weekly in the early stage and then daily in the last stage.
JapanTech estimates that each stage costs approximately the same amount. Since
development resources are limited, the strategic decision of what device to concentrateon is important. JapanTech is continually adjusting resources to research, development,
and production.
Participation with equipment vendors appears controlled and contingent on thecharacteristics of the equipment under consideration. When the product requires
specialized nonstandard inputs from the supplier, or when the equipment is being
tailored to the specific needs of JapanTech, participation with the equipment vendor isextensive. When these conditions are absent, there is relatively little participation. Oncepurchased, equipment performance is continuously monitored. Since equipment is not
restricted to specific devices (i.e., semiconductors), one of the first decisions made iswhat equipment on hand would work for the device (i.e., product) being developed andwhat equipment needs to be purchased. For the existing equipment chosen for continued
use, production engineers make the equipment modifications for the new device. These
modification projects give the equipment engineers the opportunity to work on acreative project.

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Managing Creativity and Control in Innovation:
Lessons from the Semiconductor Industry in Japan and the U.S.
Clair Brown

JapanTech engineers have discussions with equipment manufacturers on how to
reduce price, on what machine options to order, and on required safety requirements formachines, which differ by prefecture. Today they are more frank in discussions withequipment vendors than previously, since the “cost of hiding information is perceived to
be too high”. JapanTech’s openness with the equipment vendors (in contrast to USTech)reflects the widespread use of similar equipment throughout the memory sector and thedecline in the price of equipment as modifications become standardized.
JapanTech has introduced a “total concept” approach to improve communications
between engineers; design, process, and product engineers must work together toproduce total concept through meetings and rotation. Discussions with equipment andmaterials manufacturers are also integrated into this process. The goal is to focus on
innovation in product design, since the days of price competition and incremental
improvements have been replaced by emphasis on innovative products. The “total
concept” approach includes six months of education on the production line for juniordevelopment engineers before they specialize in engineering tasks. Half of new hires atthe development lab have spent six months on the production line, and one-fifth of all
development engineers have spent six months on the line.
The project leader assigns work and makes schedules according to abilities. Ideas
are generated about technologies by team members. When a new idea is created by anindividual, verification and evaluation of the idea is performed through fabrication by
the test team, which decides the best choice for the new technology. In the final stage,
however, there is no time to try ideas by making samples, so the leader chooses among
competing ideas. The person whose idea is rejected is usually discouraged for a shorttime. The project leader tries to pick an idea as soon as possible and rejects other ideas
right away, even if they are equally good. He will consider using the rejected idea in thenext generation. Usually only small problems have many ideas for a solution; conflicts
among important ideas do not occur frequently.
In the development of the device we studied, only two major technologies werechanged. To develop the two technologies, a team was appointed that consisted of theleader (shunin) with five engineers for process development and three engineers forcircuit design. The shunin learns about basic information from central lab members andabout customer information from the memory division. The shunin’s supervisor (kacho)
decides the main job targets for the shunin, who decides job assignments for members.
The shunin also does a lot of training for the members.
Compared to the U.S., Japanese managers appear to be more involved in assigningtasks and less involved in setting deadlines. Compared to the U.S., teams appear to be
more involved, and individuals less involved, in prioritizing tasks in Japan, andindividuals are more involved in setting deadlines in Japan.

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Managing Creativity and Control in Innovation:
Lessons from the Semiconductor Industry in Japan and the U.S.
Clair Brown

On-the-job development of skill level for engineers is intended to include
development of originality and creativity. Job rotation is a major mechanism for skill
development. The goal is to rotate the jobs of the group members yearly across devices
and stage (e.g., year 1 in research on two generations out; year 2 in development of thenext generation; year 3 in fabrication of the engineering sample with 80% of time on the
fab line of current generation device). For example, one group had 10-14 team members
in development, 2-3 members (with none next year) in fabrication, and 4-5 members(growing to 5-7 next year) in research.
Japanese engineers would rather do research and development work thanfabrication work, which is hard and hands on (“for an operator and not suitable forself”), and the breakthroughs and patents are mostly in research and development.
However, the company believes that fabrication work has important educational aspects
so engineers are required to work on fabrication.
JapanTech also uses the transfer of engineers to transfer knowledge. This is part oftheir policy of periodic job rotation between R&D, the business division, and the fabs.
At the time of transfer, development engineers are sent to the manufacturing fab for one
month. However, one to two engineers (process and design) are sent for two years fromthe production fab to the business unit fabricating the commercial sample. A number ofengineers are sent to the volume fab for the hand-off. In the latest generation, the handoff to the second high-volume fab six months later needed only one-tenth as manyengineers as the original fab.
For JapanTech’s development engineers, an important goal is to be one of the firstcompanies to present a paper on the next generation memory device, which marks its
public debut at the ISSCC international conference. The companies already know about
individual processes before the presentations at the ISSCC conference, where they learn
what the other companies are emphasizing and their general direction of development.
However, companies do not present information about process integration at the ISSCC
conference. Overall, the ISSCC is important for motivating engineers as well as formarketing and sales.
Like other large Japanese companies, a complex system is used to determine
monthly salary, which is a combination of age pay plus grade and position pay. Until
they reach management, which typically takes twelve or so years, engineers are in thecompany union. During this period, earnings are fairly rigidly set with only minor
variations among engineers with the same education and tenure. Monthly salary andbonuses are negotiated with the union, and annual increases are determined by national
wage negotiations in the spring (Shunto, or annual spring offensive.) Twice yearly,
employees are paid a bonus (annual average of 5 months), with performance accounting
for up to 25% of the bonus. Performance pay amounts to only a small fraction of regularsalary, with recognition being more important than money. However, performance

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Managing Creativity and Control in Innovation:
Lessons from the Semiconductor Industry in Japan and the U.S.
Clair Brown

affects one’s rate of promotion, especially to management, which begins with theposition of kacho. All group leaders now become a kacho. However, with the aging of
the work force, JapanTech is running into the problem of too many shunin, so moreengineers must become technical specialists (tanto kacho). Currently, JapanTech isexperimenting at the development lab with paying an annual salary based more on
performance and less on experience and grade.
At JapanTech, an annual goal is 3 to 4 patents per engineer. About Y5000 is paid
at the time of patent application and about Y10,000 is paid if accepted (license). In theinfrequent case of a patent being used in the product line, a much bigger reward is paid
(Y1,000,000). Patents in the development lab are mostly for process (80%, of which
70% is process only and 30% is equipment only) with the remaining 20% for circuitdesign. All equipment patents are connected to process development.
Like other large Japanese companies, JapanTech relies on company-based
education for the development of its young engineers, who are hired after receiving a
BS. Unlike their American counterparts in R&D, Japanese engineers usually do nothave masters or doctoral degrees when they go to work for a company. They will often
receive an advanced degree from their company or from an affiliation with a university
while working for a company. JapanTech’s development lab has only 2 PhDs, one froma university and one from the company.
Conclusion
JapanTech and USTech use different employment systems to manage their productdevelopment. Both companies have HR systems made up of consistent and re-enforcing
parts, which reflect both their product and labor market environments. As a producer oflogic devices, USTech’s goal is to control the market for their devices by maintaining alead over potential competitors in introducing the next generation. Time to market, but
not price competition, is an important part of strategy. As a producer of memory,
JapanTech’s goal is to keep up with their competitors in introducing the next
generation. Since generations are now separated by only two years, the time to market
and price competition are both important parts of their strategy. JapanTech’s labormarket institutions include lifetime employment, annual national wage determination, acompany union, and a higher education system that does not provide much research or
graduate education. USTech’s labor market institutions include decentralized andindividualized wage setting in a mostly nonunionized industry, a mobile labor force,
employees accustomed to a high degree of autonomy and input into the job assignment
process, and a higher education system known for its research and graduate education.
Here we compare the major differences in the resulting HR systems:

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Managing Creativity and Control in Innovation:
Lessons from the Semiconductor Industry in Japan and the U.S.
Clair Brown

Work organization:•

Job assignment reflects past performance and expected future performance at
USTech, while job assignment at JapanTech reflects project’s requirement for skills
and knowledge already acquired, and the plan to develop the knowledge of juniorengineers. USTech rewards development engineers for outstanding performance byassigning them more responsibility on their next project. JapanTech assigns
development engineers to projects on the basis of company needs and requires morerotation among different types of tasks, including fabrication.

•

Although engineers at both companies prefer to do the more challenging
development work rather than the mundane tasks such as documenting
modifications and calibrating equipment, this problem seems to be more widespreadat JapanTech since most engineers do not specialize in development or
manufacturing, and they begin work with a BS degree. At JapanTech, engineers(excluding the Central Research Labs) rotate among development and fabrication
tasks. USTech’s engineers are more specialized, and their work reflects theireducation with development and research engineers likely to have advanced
degrees.

•

A confrontational style is practiced at USTech, but disagreements are put aside after
a commitment to an idea is made. Autonomy and creativity are highly prized at
USTech in development (but not in manufacturing). A consensus approach ispracticed at JapanTech, and teamwork and stability are highly prized.

Incentive or compensation systems:•

Both companies use a relative performance ranking system to evaluate theirengineers, but the rewards for performance are different. Pay, especially for the first
dozen or so years while the engineer is in the company union, is more rigidly set atJapanTech than USTech, which is more performance oriented. USTech focuses on
rewarding an individual’s ideas and efforts. Although both companies pay bonuses,
the bonus at JapanTech mainly reflects national wage setting while the bonus at
USTech reflects performance at the unit, division, and company levels. Also,
USTech engineers can be richly rewarded with stock options.

•JapanTech is struggling with the aging of its work force and the declining demand
for managers relative to those eligible. In a two-tier management system, JapanTech
is exploring how to provide cost-effective incentives to older professionals who are
specialists and do not supervisor employees. A younger and faster growing
company, USTech only mentioned this as a potential problem. However, USTech’s
performance-oriented and flexible compensation system allows it to deal withchanging company needs and employee demographics more easily than JapanTech’s

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Managing Creativity and Control in Innovation:
Lessons from the Semiconductor Industry in Japan and the U.S.
Clair Brown

compensation system, which is more dependent on rigid job grades and career
ladders.
Knowledge development and communication systems:•

USTech engineers rarely make public presentations, publish papers, or share
information with outsiders (including vendors), since USTech believes there isnothing to learn from others through sharing knowledge. Patent applications are
made only if the knowledge can be learned through reverse engineering. In contrast,
JapanTech depends on public presentations to maintain its reputation and toannounce the introduction of new devices. Knowledge sharing with suppliers is partof the equipment development process. Engineers are expected to submit 3-4 patents
annually. The publication of papers, patent applications, and conference
presentations are important for keeping up with the competition and for theadvancement of an engineer’s career.

•

When research engineers with advanced degrees are hired, often straight out of theuniversity, to work for USTech, they are assumed to have the research skills
necessary to undertake their own research projects or the manufacturing skills
necessary to oversee the operation of specific equipment. Both research andmanufacturing engineers go to work for JapanTech after graduating with a BS
degree. They are expected to learn on the job through their team work, continual
firm-based training, and job rotation that usually includes both development andfabrication activities. Some engineers earn advanced degrees while working, either
from the company or from an affiliated university.

•

At USTech, junior development engineers are given major responsibility fordeveloping new technologies. At JapanTech, major assignments are given to
subteams within a team setting, and new ideas are evaluated by a test group. Juniorengineers are assigned to work with senior engineers and are expected to learn
through their work assignments.

A company’s strategy for innovation in development is intertwined and reflects
the relative importance in maintaining market control (i.e., remaining first to market fora particular product) versus the relative importance of keeping up with the competition
in delivering new products at competitive prices. USTech is an example of the former
situation and JapanTech is an example of the latter. USTech encourages new ideas byhaving their development engineers highly specialized and by assigning major
responsibilities for solving a specific problem to one or two engineers. USTech controls
the development process by requiring design specifications. Engineers who are
successful are highly rewarded both monetarily and by their next assignment; those whoare not successful are likely to leave.

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Managing Creativity and Control in Innovation:
Lessons from the Semiconductor Industry in Japan and the U.S.
Clair Brown

JapanTech’s transfer of new technology occurs early in the process after only a few
good dice (chips) are produced in the development fab. The group leader decides at an
early stage among competing ideas, primarily based on the results from the test team.
The junior engineers’ education continues within the company through working withsenior engineers on projects and through formal classes. JapanTech also believes thatjob rotations that include fabrication as well as development assignments are an
important part of the education process. Since an engineer’s career depends on the
team’s presentations at conferences and patent applications, individual creativity is lessimportant than team outcomes, and the individual is granted less autonomy andresponsibility by the group leader.
Overall a system emphasizing individual autonomy, responsibility, and reward fordevelopment engineers, along with no knowledge sharing with outsiders, characterizes
USTech. A system of team work, explicit career ladders, and company-based educationfor engineers, who do not specialize in either development or fabrication jobs, alongwith required sharing of knowledge through required patent applications andpresentation of papers, characterizes JapanTech. Consistent with the external
environments imposed by their product and labor markets, these approaches resulted in
USTech being a top performer in logic and JapanTech being a top performer in memoryin the 1990s.
Since the research for this case was completed in the late 1990s, the marketplacefor USTech and JapanTech has changed considerably as the markets for consumer
electronics, telecommunications, and computing have been converging. Semiconductors
for PCs and simple cell phones have become a smaller share of the industry, and the riseof a variety of networked mobile and audio-visual products has made identifying
winners a difficult and risky undertaking. As a result of the changing marketplace,
USTech and JapanTech are in the process of changing the employment systems
documented above. USTech has become more open to sharing knowledge throughpresentations and reports, and the company is more actively engaged in the high-techcommunity. Creative activities now span a larger knowledge set, and control overengineers’ activities has been relaxed somewhat. The turnover rate at USTech is lower
than at other large US semiconductor companies. If the turnover rate should rise, then
USTech will become concerned with how to control their engineer’s knowledge sharing
with the outside world. As JapanTech has struggled to become more innovation in theirproduct line, JapanTech has been working to increase individual incentives for creative
performance and to give young engineers more autonomy in their job assignments.
However this must be done with union approval, which has slowed down the process ofchange. Although JapanTech has made progress in supporting and rewarding individual
creativity, team work is still its forte in pursuing innovative development. Time will tellif JapanTech is able to recapture market share, and if USTech is able to maintain aleadership position in the emerging marketplace.

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