AN ANALYSIS OF THROUGH IVO ZANDER’S

INNOVATION NETWORK TAXONOMY -

BASED ON ARTICLE: HOW DO YOU MEAN ‘GLOBAL’? AN EMPIRICAL INVESTIGATION OF INNOVATION

NETWORKS IN THE MULTINATIONAL CORPORATION

By: Laura Cerri and Virpi Nieminen On April 18th, 2008

Solvay Business School – Université Libre de Bruxelles

Course Assignment for R&D in Multinational Enterprises Professor Michele Cincera Table of Contents

Introduction ...... 3 Article Summary ...... 3 Methodology ...... 5 Results ...... 7 Conclusion ...... 8 The case of Unilever ...... 9 History and Key Facts ...... 9 R&D Spending and Patents ...... 9 Analysis of Unilever’s R&D according to Ivo Zander’s article ...... 10 Introduction ...... 10 Unilever’s degree of diversification and duplication ...... 13 Unilever’s position in the taxonomy ...... 14 Conclusion ...... 18 Findings and Conclusion ...... 18 Bibliography ...... 20 Introduction

Current literature recognizes the continuing boom in the dispersion of technological capabilities, as well as its advantages, but it fails to explore the differences in the resulting international innovation networks. The article summarized attempts to fill in the gap by identifying different types of innovation networks and at the same time, examining how the preconditions for exploiting dispersion may vary across firms. The resulting taxonomy consists of four different classifications of innovation networks across industries and corporations, based on the degree of duplication and diversification of advanced technological capabilities. The objective of the article is to shed light on the nature of technological capability dispersion, instead of the traditional approach of studying the coordination of dispersion.

In the second part of the essay, Unilever is analyzed with the article functioning as a theoretical framework.

Finally, the last section of Findings and Conclusion will summarize the key findings expressed in the article by Zander in light of the case of Unilever presented.

Article Summary

Recent literature has emphasized the geographical dispersion of technological capabilities as an important addition to internationalization strategies. In reality, a correlation between internationalization and the dispersion of technological capabilities exists, as expansionary activities have resulted in a higher level of technological capabilities transferred abroad in order to exploit internationally dispersed resources. Other benefits of geographical dispersion arise from enhanced flexibility, growth, and the formation of new innovation processes within the corporation. With dispersion, traditional innovation routines tend to be replaced by globally integrated innovation projects. Two different types of global innovation projects have been identified in practice. The first one is called cross-fertilization between geographically dispersed units, where units engage in similar types of innovation activities and benefit from knowledge exchange. The second type involves integration and recombination of distinct technological capabilities into new products and systems. Previous literature simply associated growth and dispersion of technological capabilities with increased international experience, commitment to foreign markets, and centrifugal forces boosting technological activity among foreign units.

Expansion practices depend on product characteristics and industry affiliation, while the degree of dispersion of technological capabilities depend on management attributes towards internationalization, strategy, and the amount of operational and technological freedom of foreign units. More importantly, dispersion depends on market conditions at the critical time of foreign expansion, and opportunities to merger and acquisition. Some of these influencing factors are very company specific, causing significant variance in the degree of technological capabilities dispersed. Even within the same industry.

With the traditional approach to R&D only minor activities, such as technology transfer or technological support, were allocated to foreign units, while the bulk of the research remained in the country of origin. This approach can be summarized with the home-base exploiting and home-base augmenting taxonomy, already discussed in class. With this strict coordination, costly duplication of efforts was effectively avoided, but these multinationals did just as effectively deprive themselves of growth and innovation synergy. Dispersion of technological capabilities now tends to follow the dispersion of sales and manufacturing operations. Innovation activities are hence expected to develop from local-to-local to global-to-global. In other words, before innovation was leveraged by adapting local products to other local markets. Now global, flexible links harness innovation synergy, scope economies, and worldwide learning. Names describing these new globally linked units are “internationally interdependent laboratories” and “global creators”. Against previous believes, duplication of capabilities is not always counterproductive, nor a sign of redundancy or lack of control. On the contrary, it can lead to innovation synergy through knowledge exchanges and project transfers. Methodology

The taxonomy consists of two dimensions, duplication and diversification, that determine the classifications of the innovation networks. Note that these dimensions were drawn from previous literature and correlate with the afore-mentioned global innovation projects: cross-fertilization and recombination of technologies. The definitions of the dimensions are as follow:

• International duplication of technological capabilities occurs when geographically dispersed units maintain capabilities in the same field of technology. • International diversification of technological capabilities occurs when geographically dispersed units represent unique fields of technological expertise.

The two dimensions give an indication of the growth and internationalization of technological capabilities, as well as the type of leverage the firm exercises. The four classifications that form the taxonomy are as follow:

• Home-centered firms retain the majority of their advanced technological capabilities in the country of origin. Some duplication or diversification may still exist, but no significant advantages are derived from dispersed research efforts. • Internationally duplicated firms have strengthened technological capabilities abroad, but foreign units are involved in the same technological field as home. Duplication may have resulted from technology transfer or foreign acquisition. Innovation activities involve the multinational as a whole, and the firms enjoy enhanced flexibility and knowledge exchange. • Internationally diversified firms exercise a strict division of labor, where all foreign units are specialized in a given technology. Activity might be geared towards local demand, but more often than not they are a part of a world product mandate with worldwide responsibility for selected components or products. Advantages include growth opportunities and a capacity to integrate and recombine different technologies into new products or systems. • Dispersed firms have shifted technological capabilities abroad the most with complex structures of both duplication and diversification. They have built the preconditions for cross-fertilization and knowledge sharing on a worldwide basis.

The two dimensions selected for the taxonomy are easily calculated for each company using U.S. patents as indicators of advanced technological capabilities. The reason for selecting U.S. patents derives from the fact that they reflect high-quality inventions and reveal the nationality of the inventor. Patents records also divide technological inventions into 400 classes and subclasses, enabling narrow classifications of a firm’s capabilities and to analyze the changes in the geographical location. The measurement for duplication takes into account both the number of locations in which the firm is active and the distribution of technological activity across those locations. To even out fluctuations, patenting activity was aggregated over the period of 1986-1990. The calculation is measured with an entropy measure, with outcomes ranging between zero and ln n. An outcome of zero would signify concentrated technological capabilities, while ln n would mean a perfectly even distribution of technological capabilities between R&D units. Pi stands for the share of patents accounted for by the ith location.

Entropy measure = Σ pi ln 1/Pi

Diversification of technological capabilities was calculated with the same entropy measure. The only difference was that for each individual sample firm a simple count of the number of unique technologies represented by various locations was used to take into account that the propensity of patents may differ across industries and technologies.

24 Swedish multinationals were then positioned within the taxonomy using cluster analysis techniques to identify groups of firms with similar international innovation networks during the period of 1986-1990. Previous studies have shown that these corporations account for over two-thirds of all R&D in Swedish industry. The cluster analysis employed Ward’s method, one of the hierarchical agglomerative techniques, with an objective function called the Error Sum of Squares (ESS): ESS = Σ ( Σ x²ij - 1/nj ( Σ xij) ²)

Since the entropy measure for diversification tends to be higher, both dimensions were standardized to unit variance in order for them to carry the same weight in the cluster analysis. Conclusions were then drawn on the relevance of the classification, inter-firm differences, network structure trends, unequal opportunities, and the relationship between dispersion and competitiveness.

Results

Four clusters were found, one of them smaller than the rest. The four clusters represent different types of innovation networks, each consisting of certain types of industries. Despite a significant variance in corporations’ capability diversification, diversification is still more popular than duplication. Apparently firms attempt to concentrate technological resources to achieve economies of scale or critical mass in research personnel.

In order to compare the positions of these firms in 1986-1990, a second analysis of the same firms was reproduced from the time period of 1961-1965. Significant longitudinal changes in the positions were observed in the matrix, since many of these firms started to internationalize in the early 1960s. Acquisitions enabled quick transformations from the home-centered to the dispersed category (firms in the white goods, welding equipment, office equipment, and agricultural equipment industries), while the rest of the companies internationalized from the home-centered category by slightly favoring either the duplicated or diversified category. Pharmaceutical multinationals were the only ones strongly duplicating, while reducing diversification of technological capabilities.

A third analysis compared the direction and magnitude of changes in the positions of the firms between the two time periods, by calculating the average, un-standardized growth rates. The overall trend observed was a significant internationalization of technological capabilities. 11 out of the 24 companies increasing both duplication and diversification, while nine expanded in just one of the dimensions. Two companies did not change their position, while only one company (Ericsson) reduced both duplication and diversification.

Conclusion

The firms that remained home-centered (in the automotive, telecommunications, iron and steel, pulp and paper industries) may suffer from the lack of exposure to and experience of international research efforts. Others outside of the home-centered category differ significantly in the amount and structure of capabilities, which means variance in growth opportunities, pre-conditions for cross-fertilization, and recombination capabilities. These differences derive from different approaches to upgrade competitive advantage. Duplicated efforts tend to have an advantage over cross-fertilization, while diversified efforts tend to profit from growth and recombination capabilities. The multinationals with dispersed capabilities usually enjoy all three advantages. However, it is important to remember that dispersion of capabilities does not necessarily translate into new innovation networks. Duplication is usually a result of multi-domestic strategies, while diversification implies a multi-center structure of the multinational network.

Drivers for geographical dispersion are a synthesis of the necessity to adapt products to local demand, create ties to local research communities, develop unique capabilities, and opportunities to acquisitions. It seems that internationalization produces proportionally both duplication and diversification, since the clusters align diagonally in the taxonomy matrix. This suggests that managers and engineers will have to consider two important issues in managing and developing international research. The former calls for a balance of costs and the need for critical mass in research efforts against the advantages of flexibility and cross-fertilization. The second issue concerns diversification: how to integrate specialized research units, as every one of them has unique routines and information flows? In the end, both issues set enhanced innovation against increasing costs and lengthened development times. A correlation of international dispersion of technological capabilities with growth and competitiveness was not found. Ericsson, for instance, is located in the home- centered category, but has been growing in a competitive manner without engaging in capability dispersion. Further research is still needed in studying the effects of large and small home markets, how firms integrate dispersed R&D efforts, and the frequency and relative importance of international knowledge exchange in order to better understand competitive advantage and the changing nature of the multinational corporations.

The case of Unilever

History and Key Facts

Unilever is one of the largest companies worldwide, providing fast moving consumer goods, varying from food to personal care and home care. The company’s mission is to provide people all over the world with products that will help them “feel good, look good and get more out of life.”1 The company Unilever, as it is currently known, was officially created only on January 1st 1930, by the merger of the Dutch margarine producer and the English soap manufacturer Lever Bros, which were respectively founded in 1872 and 1886. Unilever is now producing in 317 manufacturing sites over six continents, and among its 400 brands are some of the most well known and admired names.

R&D Spending and Patents

In 2007 the global turnover reached 40.2 billion euros2, slightly more than what has registered in the previous year, being 39.642 billion euros. This turnover can be broken down by regions, giving a European turnover of 15 000 million euros in 2006, a turnover of 13 779 million euros for the Americas, and 10 863 million euros for Asia and Africa.

1 Unilever company’s website, 25th March 2008 2 Q4 2007 and full year result presentation, from Unilever company’s website The company’s R&D spending in the year 2006 amounted to more than 900 million euros, giving an R&D intensity ratio of 0.0227. This means that investments in R&D amounted to only 2.27 percent of the annual global turnover, slightly less than the 2.48 percent registered the previous year. In 2005 the annual turnover amounted to 38 401 euros3, while the R&D spending reached 953 million euros.4 Unilever biggest competitor, Procter & Gamble, registered net sales of $ 68 222 in 2006, and an R&D expenditure of $ 20755, giving an R&D intensity ratio of 0.0304. Therefore, the R&D investment accounted for approximately 3 percent of the annual global net sales, down from 3.4 percent registered the previous year.6

In the year 2006, the number of patents registered at the United States Patent Office was 98, giving an R&D spending of almost 9.2 million euros per patent. The previous year the number of patents registered at the United States Patent Office was only of 93. However, it has to be taken into consideration that Unilever, besides registering its own patents, bases some of its products and processes on patents or trademarks that are owned or controlled by its affiliates.7 Hence, the results previously presented might be showing a slightly negatively biased picture of the actual R&D intensity and efficiency of the company.

Analysis of Unilever’s R&D according to Ivo Zander’s article

Introduction

Unilever presents a good number of R&D centers all over the world, in order to allow a prompt response to changing trends, needs and tastes among consumers anywhere in the world. Beside the various regional and national R&D sites, there are 15 global product development sites. The global research centers, which are named on the following map, consist of only six sites: two are based in the (Colworth and Port 3 Unilever company’s website, 25th March 2008 4 http://timesofindia.indiatimes.com/articleshow/498207.cms 5 P&G company’s website, 10th April 2008 6 Industrial research institute's 8th annual R&D leaderboard: R&D spending by the top 100 U.S. and non- U.S. R&D investors in 2005 7 Unilever company’s website, 25th March 2008 Sunlight), one in the Netherlands (Vlaardingen), one in the United States (Trumbull), one in China (Shanghai), and the last one in India (Bangalore). These sites are well connected with each others, as well as regional technology centers and academic groups, via an integrated network that allows for synergies and facilitated access to the latest and best scientific thinking.

Figure 1. Unilever’s Global and Regional Sites

Port Sunlight, UK Colworth, UK Trumbull, USA Vlaardingen, NL Shanghai, China Bangalore, India

Source: Unilever’s website, www.unilever.com

The global R&D center of , situated near , employs more than 700 scientists and engineers from all over the world. The center is the major R&D site for home and personal care, and produces more than 100 patent filing innovations and an average of 140 peer-reviewed papers and conferences every year. Port Sunlight is not an isolated center; its aim is to create innovative products for consumers around the world and it successfully fulfills its goal by working in close touch across the network shared by all the Unilever R&D centers.

The other major site based in the United Kingdom, Colworth, employs 700 people. Among them are scientists, technologists, and legal professionals. This R&D center focuses on agribusiness, specialty chemicals, food technology, product safety, environmental impact, diagnostic and personal care. The Chinese site in Shanghai is a dedicated chemistry laboratory, employing 70 chemists in developing molecules and materials in the areas of home and personal care. “The laboratory's ambition is to become one of the best chemistry laboratories in the world with first-class, unique capabilities in synthetic materials and natural actives needed to deliver break-through technologies to our products.”

The fourth major site, Trumbull, in the United States, was only established in 2005 and employs more than 200 scientists and engineers. The center focuses on global research and development of skin products and laundry products, previously located in Edgewater, New Jersey.

On the contrary of all the previously described sites, the R&D center in Bangalore employs 210 scientists and researchers. Focus is targeted at foods, home and personal care and even corporate researches. Synergies between the three are leveraged extensively.

The sixth R&D site, Vlaardingen, based in the Netherlands, is the biggest center, employing approximately 900 people. Vlaardingen hosts within Unilever’s Food and Nutrition Research Institute, carrying out technological innovation studies in the fields of plant science, preservation and microbial science, consumer science, biopolymer science, human health and nutrition and food processing.

Very recently, on March 4th 2008, Unilever announced the opening of the Centre of Excellence (CoE) “Structured Emulsions” in Vlaardingen. This CoE is a global technology center, focusing on new product development in the field of foods. Moreover, the center will be home for “Unilever's European product development centre for Foodsolutions, Unilever's Foodservice business, and the European packaging technology centre with a technology and material focus on tubs, pots and glass packaging”. The peculiarity of the center is that it is actually a multi-site organization among Vlaardingen, Dijon in France and Englewood Cliffs in the United States, employing 225 R&D professionals from 20 countries. Obviously the three-site location is a disadvantage in terms of commodity costs, however, it is believed that this increase will be offset by the excellent contributions of the center, by delivering new product innovations and allowing a smarter use of ingredients and application of new technologies.

Besides its own R&D centers, Unilever pursues many partnerships, collaborations and ventures with Universities and other companies. The leading examples are: the Unilever Centre for Molecular Informatics (UCMI) in 2001, resulting from a partnership with the Cambridge University department of chemistry, and the Unilever Technology Venture (UTV), a collaboration between Unilever and start-ups or small companies to pursuit Unilever’s mission.

Unilever’s degree of diversification and duplication

The six principal global research sites are evidence of both diversification and duplication, because while maintaining a few overlapping capabilities, each individual site still specializes on a set of predetermined unique technological capabilities. However, the presence of numerous coexisting regional and local R&D sites is rather considered duplication of technological capability efforts. These regional R&D sites mainly adapt the product to the local needs, benefiting from knowledge exchange and cross- fertilization.

The new CoE center shows the new trend from local-to-local towards global-to-global innovation activity, as previously described in the article summary. This new trend, characterized by the creation of synergy, flexible networks and worldwide learning allows the company to benefit from all of the three previously mentioned advantages of international projects: cross-fertilization, growth and recombination capabilities. The CoE center, located in three different countries, is a sign of a multi-domestic strategy, hence considered duplication, allows for knowledge sharing. The CoE is also well integrated into a network of flexible links and, therefore, boosts innovation and recombination capabilities. Unilever’s position in the taxonomy

The tables presented in this section help in positioning Unilever into the taxonomy proposed by the article. The first table shows the breakdown of the patents registered by Unilever, according to the inventor country.

Table 1: Unilever’s Patents by Inventor Country Total number of patents by Unilever (1987-present) = 1230 Inventor Country Number of patents Great Britain 558 The Netherlands 253 United States 656 - New Jersey (NJ) (260) - Connecticut (CT) (148) - New York (NY) (91) - Illinois (IL) (74) China 1 India 26 France 38 Czech Republic 1 Argentina Republic 6 3 Brazil 14 Australia 14 Japan 6 South Africa 2 Canada 5 Ireland 2 Mexico 4 Sweden 2 Italy 29 Hong Kong 3 Thailand 7 Switzerland 6 Greece 2 Denmark 5 Germany 37 Portugal 2 Indonesia 3 Malaysia 2 Kenya 1 Antigua and Barbuda 1 Total 1689* (*Total exceeds the total number of patents held by Unilever, since it is possible for several inventors to be involved in the creation of a single patent.)

As can be seen, the patents that can be assigned to the home countries (Great Britain and the Netherlands) account for approximately half of the total number of patents. This shows that the home country still plays a major role in innovation. However, as the following table highlights, there is a significant trend towards the dispersion of technological capabilities and innovation.

Table 2: Unilever’s Patents History Analysis Time period Number in USPTO Number of patents Countries involved 1978-1983 1230 1 CA, GB 1986-1990 1209 – 1229 21 NL, GB2, GR, GB7, GB3, DE 2003-present 1 – 587 587 GB, FR, IT, NL, US, BR, ZA, DE, IN, HK, ID, DK, CH, AR, TH, AU, CZ, MX, JP, KE, SE, MY, IE, AG

In order to position Unilever on the taxonomy, showing the degree of diversification and duplication, it is necessary to consider the acquisition and disposal activities of Unilever, in addition to using the previously presented data collected from the US Patent and Trademark Office (USPTO). The company went through a long series of acquisitions between the years of 1958 up until now, as the following table shows.

Table 3: Unilever’s Merger and Acquisition Activity Acquisitions: 1958 acquisition of the frozen food and producer Vita NV in the Netherlands. It will then become Iglo Mora Group 1961 acquisition of ice cream producer in the United States 1970 acquisition of Zwanenberg’s at Oss, a Dutch company that will then become Unilever meat group UVG 1971 acquisition of International, tea business company 1973 acquisition of Frigo ice cream in Spain 1978 acquisition of the leading producer of adhesives, starch and speciality organic chemicals National Starch in the United Stated 1984 acquisition of , tea retailer in the United Kingdom 1986 acquisition of Naarden fragrances and food flavours and of Chesebrough- Pond’s in the United States 1989 acquisition of Calvin klein and Elizabeth Arden/Fabergé 1993 acquisition of ice cream in the United States 1997 acquisition of ice cream in Brazil 2000 acquisition of Bestfoods in Portugal 2001 Joint Venture with Indonesia’s Kecap company, for the development and production of a food product (soy sauce) 2006 acquisition of Elais-Unilever S.A., which is Unilever’s main food business in Greece 2008 acquisition of Russian ice cream company Inmarko

Table 4: Unilever’s Disposal Activity Disposals: 1994 conplition of disposal of , Unilever's West African trading, brewing and textiles company 1997 sale of Unilever's chemicals businesses including National Starch and Quest International 2004 disposal of more than 20 businesses, among which partial household care business in North America, edible oil business in Mexico and frozen pizza and baguette business in Europe merger of chemical business in India with Tata Chemicals 2005 disposal of the Prestige fragrance business UCI to Coty Inc. the business was operating in the United States sale of Stanton Oil in United Kingdom and Ireland, Unilever’s energy unit Dextro in many countries in Europe, Opal in Peru, the syrup producer Karo and the food producer Knax in Mexico, Crispa, , , and Maizena in South Africa, Biopon in Hungary sale of tea plantations in India disposal of spreads and cooking business in Australia and New Zeland and of the frozen pizza business in Austria 2006 sale of the majority of frozen food business in Europe to Permira Funds. The business sold was operating in Austria, Belgium, France, Germany, Ireland, the Netherlands, Portugal and United Kingdom sale of various businesses and brands, among which: Mora (ice cream and frozen food) in the Netherlands and Belgium, Finesse (hair care) in North America and Nihar (hair care) in India

As described in the paper, undergoing several mergers and acquisitions was a common method adopted by many companies in the 60s to quickly move from the home-centered position to a rather dispersed position. In the case of Unilever, these acquisitions were mainly targeted to introduce two new business fields into the company: frozen food and tea products. Consequently, these acquisitions were conducted in a large number of countries. However, as the number of disposals is numerous as well, it can be concluded that these activities notably increased the level of internationalization and only partially the level of dispersion.

Finally, after having taken into considerations the findings offered by the patent analysis and the merger and acquisition activities, the following graph could be derived.

Figure 2: Cluster Analysis and Positioning of Unilever

Source: Zander, I. 1999.

Unilever’s innovation networks are characterized by a higher degree of duplication rather than diversification, falling into the second cluster. According to the article, the second cluster presents the following peculiarities: a pronounced expansion of foreign technological capabilities, especially within the international innovation network, and to some extent the creation of unique technological capabilities or centers of excellence in foreign locations. These characteristics apply to the case of Unilever, but the intensity of merger and acquisition activities in the past place the company towards the upper right hand side of this cluster. The blue arrow drawn on the graph shows the change in positioning played by Unilever. The company was able to move from a rather home- centered position to the current rather dispersed position, thanks to the merger and acquisition activity, as well as the innovation and reorganization of its R&D sites.

Conclusion

The article analyzed stresses the existence of two very important balancing factors in international research: cost and critical mass versus flexibility and cross-fertilization; and the difficulty of integrating several specialized unites with unique capabilities. With the creation of the CoE and the Trumbull research centers, Unilever has been able to achieve an ideal level of critical mass that does not compromise flexibility nor cross-fertilization. When it comes to integrating specialized unites, Unilever has successfully implemented a multinational Center of Excellence, which through synergies, worldwide learning and flexible knowledge exchange unites research centers.

Contradicting the trend observed by the author, Unilever exercises a slightly higher level of duplication than diversification in comparison to the analyzed average.

Findings and Conclusion

To sum up, the article identifies a taxonomy consisting in two dimensions, duplication and diversification, in order to determine the classification of the innovation networks. Duplication and dispersion are an indicator of growth and internationalization of technological capabilities, besides indicating the type of leverage of the firm. Given this, companies can be classified into four categories: Home-centered firms, Internationally duplicated firms, Internationally diversified firms and Dispersed firms. According to the data presented, Unilever can be classified as a rather dispersed firm, enjoying a slightly higher degree of duplication of technological capabilities compared to the degree of diversification, demonstrating a multi-domestic strategy. This is also due to the merger and acquisition activities conducted, that, as described in the article too, allowed a swift shift from a home-centered positioning to the current position. According to the paper, Unilever shows a slightly controversial trend by demonstrating a higher degree of duplication. However, being a multinational with dispersed capabilities, Unilever enjoys the benefits offered by both dimensions: cross-fertilization, growth and recombination capabilities. Bibliography

Crawford, R. Kent. 2006. Industrial Research Institute, 8th annual R&D leaderboard: R&D spending by the top 100 U.s. and non-U.S. R&D investors in 2005. research- Technology Management, 1st November 2006, United States.

Zander, I. 1999. How do you mean ‘global’? An empirical investigation of innovation networks in the multinational corporation. Research Policy, 28(2-3), 195-213.

P&G’s company website, accessed on April 10th 2008: < http://www.pg.com/>

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Unilever’s company website, accessed on March 25th 2008: < http://www.unilever.com> From Unilever’s company website: - Q4 2007 presentation, accessed on March 25th 2008 - 2007 full year result presentation, accessed on March 25th 2008