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Editorial rganizing for Innovation in Established Firms is the title of the special section included in this 2005 September issue. Guest editor Bart Van Looy from INCENTIM, K.U. Leuven has brought together a total of seven contributions under this topic. A number of these contributions are based on presentations made at the INIR focused workshop on the same topic, held in Leuven, in January 2004. Also in this issue are three additional contributions and a total of three book reviews, which will be further outlined after the introduction to the special’s theme and its content below. Innovation has long been acknowledged as crucial for the long-term survival and growth of the firm; at the same time, organizing for innovation is not a straightforward exercise. The complexities entailed when designing and implementing a sound innovation strategy can be related directly to the multitude of objectives such a strategy comprises. Previous research has advanced the notions of incremental versus radical innovation, innovation as continuous improvement versus innovation as creative destruction, flexibility to keep (innovation) options open versus commitment to well-defined innovation pathways, divergent versus convergent behaviour, exploitation versus exploration or path creation versus path dependence as core concepts to understand the dualities at play. Organizations trying to achieve both types of innovation activities are faced with multiple, often contradictory, demands confronting them in the challenge to reconcile paradoxical requirements. Recently, several scholars have advanced the notions of semi- or quasi-autonomous structures and ambidextrous organizations to handle the paradoxical requirements encountered. Within those configurations, conflicting elements can coexist by adopting organizational designs that allow for differentiating explorative activities from their mainstream exploitation-oriented counterparts. Adopting such organizational forms is seen as crucial for allowing continuous innovation – implying the presence of both incremental and more radical forms of innovation – within established firms. At the same time, the precise nature of the processes and managerial practices implied, as well as enabling or
O
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constraining factors (contingencies) remain less documented. Within this special issue we want to contribute to our understanding of how to handle the complexities of organizing for continuous innovation. The different contributions adopt both analytical and empirical approaches to highlight issues, concerns and as practices that seem to work. The first contribution, by Bart Van Looy, Thierry Martens and Koenraad Debackere, serves as an introduction to the issues at hand by drawing our attention to the sustainability of ambidextrous organizing. Such organizational forms imply the simultaneous presence of different activities, coinciding with differences in technology and market maturation. Financial returns will reflect this diversified resource allocation pattern. In addition, as higher levels of complexity are being introduced, ambidextrous organizations are facing extra managerial or organizational costs. So at first sight – compared to organizations that focus on the most profitable part of the portfolio – ambidextrous organizations tend to be inferior in terms of financial returns. By developing an analytical model, based on life-cycle dynamics, the authors investigate under which conditions ambidextrous organizations can outperform focused firms. The insights obtained reveal not only the relevancy of adopting extended timeframes, but also bring the presence of interface management practices aimed at cross-fertilization – between the different activities and (underlying) technologies present – to the forefront as necessary in order for ambidextrous organizations to be sustainable. Fabrizio Cesaroni, Alberto Di Minin and Andrea Piccaluga analyse the patterns of exploration, technology transfer and commercialization, that four large, Italian, industrial R&D labs have adopted in order to combine short-term objectives of exploitation of research results and competencies, and longterm goals of exploration of new technological trajectories. The paper reveals important contingencies to be taken into account when defining and implementing innovation strategies aimed at continuous innovation. Analysing the R&D trajectories of ST Microelectronics, Pirelli, Telecom Italia and Fiat reveals not only the relevancy of alliances and
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networks and the importance of strategic vision; critical contingencies – such as the type of technological change and the presence and control of relevant complementary assets in a particular industry – need to be taken into account in order to come up with appropriate strategic decisions and adequate organizational design choices. Oliver Gassmann and Gerrit Reepmeyer scrutinize the complexity of organizing for continuous innovation within the pharmaceutical industry. Pharmaceutical firms face the challenge of simultaneously adopting new design and development technologies in order to address R&D productivity concerns; integrating and adopting a range of new paradigms and knowledge is also high on the innovation agenda. Addressing both challenges requires more than the development of global alliances and networks and the adoption of differentiated organizational practices on the level of R&D activities; pharmaceutical firms are increasingly being confronted with rethinking their business model as well. Wim Vanhaverbeke and Nico Peeters examine how within established firms corporate strategy, competence building and new business development might interact in order to rejuvenate a company. New business development approached as a dynamic capability is advanced as critical. The analysis of DSM reveals the intimate interplay between strategic vision, competencies already present and the development of new competencies. By creating tensions between present capabilities and desired futures, development dynamics of a strategic nature are being initiated. Iterative processes of mutual co-influence and coevolvement result in dynamic capabilities in which installing corporate venturing arrangements that address new business development objectives are being complemented with disciplined ‘strategic dialogue’ practices. Boaz Uittenbogaard, Lute Broens and Aard Groen dig further into the concept of corporate entrepreneurship. They develop and apply an analytical guideline for creating a corporate entrepreneurship function to realize business development in a high-tech context. Internal development efforts need to become complemented with networking. The strategic nature of the innovation process is also brought out in this contribution. The article by Carmen Cabello, Antonio Carmona and Ramon Valle documents the practices of different Spanish firms and examines to what extent customisation and operational flexibility, internal communication and collaboration with other organizations and institutions are critical, in order for firms to be effective in terms of innovation. Innovative
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firms do adopt new organizational forms, while at the same time a lot of variety can be observed. Life-cycle dynamics and the development speed of the industry and its constituting technologies are identified as important contingencies. Innovative companies use the tactic of subcontracting some of their non-core or ancillary activities in order to improve flexibility, providing opportunities to free resources for innovation activities. Udo-Ernst Haner concludes this special issue by examining the physical design and layout implications of organizing for continuous innovation. By analysing the principles of the Interactive Creativity Landscape, an integral part of the Fraunhofer Office Innovation Center in Germany and, the ‘Learning Garden’, constructed by a Scandinavian financial institution, it becomes apparent that organizations increasingly require a diversity of spatial arrangements supporting the different aspects and processes creativity and innovation entail. Throughout the special issue, several themes and topics emerge: the role of industry and technology life-cycle dynamics; the importance of alliances and networks; the strategic and the configurative nature of the processes implied in which the adoption of organizational practices allowing for differentiating and integrating figure prominently. All these insights offer ample opportunities and suggestions for future research. Whereas the majority of this special issue builds on casestudy material, the further development of our insights into practices that work and can make a difference might benefit from more largescale empirical research, including the assessment of the impact on the innovative and economical performance of firms that organize for continuous innovation. Creativity and Innovation Management welcomes submissions addressing these issues! We are continuously involved in organising events such as the INIR workshop that was the basis for this special issue. Please keep an eye on our website, where we will publish calls for papers for these events, one of which will be organized in May next year, adjoining the HTSF Conference in Twente. The first of the three additional contributions is by Claudine Soosay. As a complement to her paper with Paul Hyland, published in our March 2004 issue, Soosay here reports on an empirical study of individual competencies in distribution centres to enable continuous innovation. The results of her study underpin collective behaviours and organizational capabilities needed for continuous innovation, demonstrating how differing extents of competencies and behaviours of employees can impact on the operation of firms and their
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capacities to innovate. Michael Ames and Mark Runco, in their contribution on ideation and convergent thinking, make an effort to further our understanding of how and why certain entrepreneurs are successful, by researching the extent to which their success reflects ideational skills. Although the authors advise future research to replicate and extend their investigation, if the current finding of ideational differences between more- and lesstalented entrepreneurs holds up, it would be reasonable to encourage and support entrepreneurial potential via programmes that target ideation. There is no shortage of such programmes, and as a journal we would be particularly interested in further research reporting on the actual effects of these on ideational skills. Last, but certainly not least, this issue’s closing contribution is a ‘practioner’s insight’, which discusses how Lunar Design taps into the power of imagination, which certainly is a topic favoured by Creativity and Innovation Management. In their single case study, Constantine Andriopoulos and Manto Gotsi report on the virtues of ‘blue sky’ projects, identifying several organizational benefits in initiating and supporting such activities. Since Lunar Design has been a star performer for more than a decade, achieving worldwide recognition for its foresight in multiple-project innovation, the authors claim that this case study provides valuable insights on processes that can mobilize imagination in other work settings. Three interesting book reviews that are relevant in the areas covered by Creativity and Innovation Management are included to finish the issue. Remko van der Lugt gives his
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vision on a book edited by Sven Hemlin et al., Creative Knowledge Environments: the influences on creativity in research and innovation, Han van der Meer highly recommends Tom Kelley’s The Art of Innovation Lessons in Creativity from IDEO, America’s leading design firm and Astrid Hunck-Meiswinkel takes us through Cross-functional Innovation Management: Perspectives from Different Disciplines, edited by Soenke Albers. We are convinced that any member of the creativity and innovation management community will find readings of interest in this again very full and rich issue. We strive to continue the format of publishing dedicated specials of six or seven contributions plus a number of additional papers from our general submissions from now onwards. The next issue in this format will contain a selection of papers from last year’s International Product Development Management Conference, hosted by Trinity College in Dublin, and put together following a rigorous review procedure by Mairead Brady, Louis Brennan and Paul Coughlan. Again we would urge you to keep an eye on our website, were we will report and announce on further events relevant for members of our community. This issue should reach you just before the 9th European Conference on Creativity and Innovation: ‘Transformation’, to be held in Lodz, Poland (4–7 September 2005), and we wish all of you attending a very good meeting! Selected papers from Lodz will be published in our January 2007 issue. Bart Van Looy Petra de Weerd – Nederhof
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Organizing for Continuous Innovation: On the Sustainability of Ambidextrous Organizations Bart Van Looy, Thierry Martens and Koenraad Debackere Organizing for innovation does not present itself as a straightforward exercise. The complexities entailed when implementing an innovation strategy can be related directly to the multitude of objectives it comprises. Recently, several scholars have advanced the notions of semi- or quasi-structures and ambidextrous organizations to handle these multiple requirements. These organizational forms imply the simultaneous presence of different activities, exhibiting differences in technology and market maturation. As a consequence, financial returns will reflect this diversified resource allocation pattern. Moreover, as higher levels of complexity are being introduced; ambidextrous organizations will encounter additional, organizational, costs. Compared to organizations that focus on the most profitable part of the portfolio, ambidextrous organizations – ceteris paribus – tend to be inferior in terms of financial returns. Within this contribution we explore under which conditions ambidextrous organizations can outperform focused firms; considered a prerequisite for their sustainability. In order to do so, we develop an analytical framework depicting the differential value dynamics, focused and ambidextrous firms can enact. Our findings reveal the relevancy of adopting extended time frames as well as introducing interface management practices aimed at cross-fertilization. Finally, the synergetic potential of (underlying) technologies comes to the forefront as necessary in order for ambidextrous organizations to become sustainable.
Introduction A system – any system, economic or other – that at every given point of time fully utilizes its possibilities to the best advantage may yet in the long run be inferior to a system that does so at no given point of time, because the latter’s failure to do so may be a condition for the level or speed of long-run performance (J. Schumpeter, The Process of Creative Destruction, p. 83). nnovation has long been acknowledged as crucial for the long-term survival and growth of the firm; at the same time technological innovation can be seen as one of the critical driving forces behind elevating the economic well-being of people and nations (Schumpeter, 1934; Tushman, Anderson & O’Reilly, 1997; Van de Ven, Angle & Poole,
I
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1989; Van de Ven et al., 1999). However, organizing for innovation does not present itself as a straightforward exercise. The complexities entailed when designing and implementing a sound innovation strategy can be related directly to the multitude of objectives such a strategy comprises. In this respect, relevant distinctions have been advanced and outlined by, amongst others, Abernathy and Utterback (1978), Dosi (1982), Anderson and Tushman (1991), March (1991), Ghemawat (1991), Bower and Christensen (1994), Brown and Eisenhardt (1997), and Garud and Karnoe (2002). The notions of incremental versus radical innovation, flexibility versus commitment, divergent versus convergent behavior, exploitation versus exploration or path creation versus path dependence form the core of the dualities being outlined. As such, organizations trying to achieve both types of activities © Blackwell Publishing Ltd, 2005. 9600 Garsington Road, Oxford OX4 2DQ and 350 Main St, Malden, MA 02148, USA.
ORGANIZING FOR CONTINUOUS INNOVATION
are being confronted with multiple, often contradictory demands imposing upon organizations the challenge of reconciling conflicting requirements (Benner & Tushman, 2003; Dougherty, 1996; Leonard-Barton, 1992). In the next section we further illuminate the dynamics underlying the multitude of innovation objectives and their implications for organizing innovation. This will bring us to the recent ideas on organizing by means of semi or quasi-structures (Brown & Eisenhardt, 1997; Schoonhoven & Jellinek, 1990) and by adopting ambidextrous organizational forms (Tushman, Anderson & O’Reilly, 1997). It will become apparent that ambidextrous organizations imply the simultaneous presence of different activities, coinciding with differences in technology and market maturation. Financial returns will inevitably reflect this diversified allocation pattern. Given similar investments within a fixed time period, firms concentrating only on the most lucrative part of the technology life-cycle will not only experience higher returns; the consistency in terms of their organizational design also implies less managerial and organizational costs. Stated otherwise, ambidextrous firms seem to present themselves as inferior in terms of value creation compared to companies that focus, jeopardizing their sustainability. This then becomes the central point we want to address within this paper: which are the conditions under which firms adopting an ambidextrous orientation are able to outperform focused firms and by doing so ensure their sustainability? After further situating the issue within the literature (the next section), we will address this question by developing a formal value creation model. This model depicts differences in value creation for focused and ambidextrous organizations related to technology and market maturity, while at the same time additional costs and benefits for ambidextrous firms are modelled in a formal way. This analytical modelling makes the value dynamics at play more visible, allowing to assess the impact of differences in underlying antecedents on financial returns. We will end this contribution by discussing the managerial implications of the insights obtained and by outlining directions for further research.
Organizing for Innovation: Setting the Stage The challenges faced by organizations that strive simultaneously for achieving innovation of a more incremental and radical nature can be traced back to the social dynamics – both communication and organizing – in
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which both types of activities, i.e. exploration and exploitation, unfold (March, 1991). Whereas exploitation refers to activities such as ‘refinement, efficiency, selection and implementation’, exploration is best captured by notions like ‘search, variation, experimentation and discovery’ (March, 1991, p. 102). Strong similarities can be noticed with the notions of divergent and convergent behaviour as outlined by Van de Ven, Polley, Garud and Venkatraman (1999). The social dynamics in which both types of activities are embedded not only expose characteristics of a different, but even of an opposing nature. Exploitation benefits from homogeneous relational fields, whereas exploration presupposes more heterogeneous ones; exploration implies conflict and a redefinition of identities, while exploitation thrives on consensus and can be seen as identity confirming (Van Looy, 2000). Hence, innovation activities, by their very nature, display dual and paradoxical requirements in terms of interaction. These polarities, pertaining to the social dynamics in which exploitation versus exploration unfold, can be seen as one of the root causes of the complex nature of organizing innovation at the firm level. In line with the notion of creative destruction, advanced by Schumpeter in the mid-1930s, several scholars have pointed to the tensions organizations encounter when organizing for exploitation and exploration simultaneously. Such tensions are being experienced especially by ‘incumbent firms’ as they have put in place multiple resources and capabilities aimed at exploitation. The very presence of these resources might hamper engaging in activities of a more explorative nature. Abernathy (1991) argued that it is almost impossible for an organization to be simultaneously creative and productive. In addition, both activities do differ in terms of their contribution to the competitive advantage of a firm, depending on the stage a technology and/or industry is finding itself in: whereas creativity can be seen as highly relevant during the pre-dominant design – exploration oriented-phase; productivity dominates during post-dominant design – exploitation oriented-phases (Abernathy & Utterback, 1978; Anderson & Tushman, 1991). Along similar lines, Ghemawat (1991) – adopting a game-theoretic perspective – points out the irreconcilable nature of ‘flexibility’ on the one hand and ‘commitment’ on the other hand. As long as exploration is a priority, one needs to remain flexible from an organizational point of view as well as to the objectives pursued. Once committed, i.e. once a firm has adopted a determined exploitation trajectory, flexibility is at odds with the dominant mode
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of organization required for exploitative purposes. Ghemawat argues that this duality ‘flexibility’ versus ‘commitment’ is extremely difficult to handle and to maintain simultaneously within an organization. More recently, Benner and Tushman (2003) reminded us of these tensions when comparing the dominance of process management activities with the prerequisites of combining exploitation and exploration. So, when designing and implementing innovation strategies, organizations need to find ways to handle these tensions. At least this is, if they want to achieve exploitation and exploration oriented objectives simultaneously rather than sequentially. Recently, several scholars have advanced the notions of semi- or quasi-structures (Brown & Eisenhardt, 1997; Schoonhoven & Jellinek, 1990) and ambidextrous organizations (Benner & Tushman, 2003; Tushman, Anderson & O’Reilly, 1997) to handle the opposing requirements encountered. Brown and Eisenhardt (1997) point into the direction of ‘hybrid’ structures, which combine characteristics of organic and mechanic structures (Burns & Stalker, 1961).1 Christensen and Overdorf (2000) advance the idea of complementing ‘traditional’ organizational practices, with the creation of new organizational structures, spinouts and acquisitions in order to achieve the exploration-oriented objectives of an innovation strategy. To the extent that companies pursue at the same time objectives of a more exploitative nature, hybrid organizational forms will therefore become a necessity. This argument has been advanced explicitly and convincingly by Nadler and Tushman (1997), Tushman, Anderson and O’Reilly (1997) and more recently O’Reilly and Tushman (2004) when elaborating on the idea of ambidextrous organizations. When facing the challenge of addressing simultaneously incremental, architectural and radical innovation, the authors point to the relevance of designing organizations which are inherently unstable as the adequate organisational arrangements required for the different objectives are of an opposite nature. At the same time, handling those tensions requires the presence of a clear common vision within which they make sense. The presence of overarching concepts allows spanning a variety of perspectives and technical competencies, while at the same time generating sufficient
1 See in this respect also the notion of ‘quasistructures’ advanced by Schoonhoven and Jellinek (1991).
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‘mobilizing’ power to result in joint action. This vision needs to be coupled to capabilities – at the senior management level – which allow balancing of the tensions presented.2 Within such configurations, conflicting ingredients can coexist by adopting organizational designs of a hybrid nature; an issue explicitly addressed as well by authors such as Christensen and Overdorf (2000). As a consequence, innovation strategies entail the deployment of multiple organizational arrangements resulting in configurations of an ambidextrous nature. As ambidextrous organizational forms imply the simultaneous presence of different activities – coinciding with differences in technology and market maturation – financial returns inevitably will reflect this diversified resource allocation pattern. As indicated before, compared to organizations that focus (within a given time period) on the – at that moment – most lucrative part of the portfolio, ambidextrous organizations may tend to be inferior in terms of financial performance.3 In addition, the idea of semi-structures or ambidextrous organizations is diametrically opposed to the notion of internal consistency that has dominated the literature on organizational design over the last decades (Miller & Friezen, 1984; Mintzberg, 1979). Given such tendencies towards internal consistency, ambidextrous organizations imply additional resources as higher levels of managerial and organizational complexity are being introduced. Stated otherwise, ambidextrous organizations face the risk, at least in the short term, of being outperformed by organizations with more focus. Hence the question whether and under which conditions, organizations of a more ambidextrous nature can indeed be sustainable, becomes a pertinent one. Within this contribution we want to explore such antecedents and requisites by developing a set of premises that will allow analysing and hence assessing their effects on value creation, as we will explain within the next section.
2
Sheremata (2000) outlined the various organisational dimensions which can be instrumental for finding an equilibrium between the ‘centrifugal’ and ‘centripetal’ forces at work in those situations; including Decentralization, Reach, Free Flow of Information, Connectedness, Project Management influence, Cross-functional team influence and Temporal pacing. 3 See in this respect for instance the findings of Wernerfelt and Montgomery, 1988.
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Methodological Approach: Defining a Formal Value Creation Model In order to clarify the nature of the conditions under which ambidextrous organizations can become sustainable ambidextrous organizations we develop a rather simple set of premises, which will allow modelling the financial dynamics of different types of firms. As outlined above, we will focus on comparing ambidextrous or diversified firms with firms that focus on only one – the most lucrative – type of activity. Note that within this section we will use the notion ‘diversified firm’ as the premises outlined only partially reflect the notion of ambidextrous organizations. At the same time, it will become apparent throughout the analysis that the findings obtained by analysing this simplified representation are highly informative for understanding the financial dynamics of ambidextrous organizations. The different premises relate to (1) the technology life-cycle affecting the amount of value created in a given time period; (2) the resources needed to organize and manage the diversity entailed within ambidextrous organizations; and lastly (3) resources needed to enact the diversity present within ambidextrous organizational forms (if chosen to do so). Indeed, compared to organizations focusing on only one activity, ambidextrous organizations are not just encountering additional complexity and hence costs (premise 2). As they are characterized by a diversity of activities, potential benefits stemming from this variety need to be taken into account as well (premise 3). Note that both the second and third premises only affect financial returns of ambidextrous organizations, as focused firms are here defined as engaging in only one type of activity. In what follows, we will elaborate the different assumptions and their formal counterparts systematically. Within the formal analysis the comparison between focused and diversified or ambidextrous firms will be central. With respect to the latter, we will develop and compare several models. This variety coincides with differential emphasis on (a) resource allocation patterns across the portfolio of products/technologies; (b) efforts devoted to constructive gate-keeping activities or ‘coupling’ (tight versus loose) and, lastly (c) the characteristics pertaining to heterogeneity of the (product/technology) portfolio present (technology distance, concentration).
Value Creation Reflecting Technology Life-Cycle Positions In order to model the value creation of firms, a Pearl-Reed curve is used to reflect differences
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related to the technological life cycle (Martino, 1980; Young, 1993). The formula for the Pearl-Reed curve is L 1+ e - b ( t - a) For L = 1, b = 1 and a = 0, this curve looks as follows: THE PEARL-REED CURVE 1 0,9 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0 –5
–4
–3
–2
–1
0
1
2
3
4
5
Figure 1. The Pearl-Reed Curve We distinguish between four different stages within the technology life-cycle: seed, growth, mature and decline. Using Rogers’ curve on the diffusion of innovation (Rogers, 1962), the following threshold values coincide with the different stages: Combining these two building blocks, we come to the following model: L for the rising part of the curve 1+ e - b ( t - a) L for the sinking part of the curve 1+ e b¢ ( t - a¢ ) Whereby • L = 10 (arbitrarily chosen) • a is determined by which starting point is chosen • if the chosen stage is ‘seed’, a takes the value for which the Pearl-Reed curve will be at 1% of its maximum • if the chosen stage is ‘growth’, a takes the value for which the Pearl-Reed curve will be at 16% of its maximum Table 1. Threshold Values for the Different Lifecycle Stages Lifecycle stage
Threshold values
Seed Growth Mature Decline
From 0.01 L to 0.16 L From 0.16 L to 0.84 L From 0.84 L and upwards From 0.999 L and downwards
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• if the chosen stage is ‘mature’, a takes the value for which the Pearl-Reed curve will be at 84% of its maximum • if the chosen stage is ‘decline’, a takes the value for which the (declining) PearlReed curve will be at 99.9% of its maximum This approach – whereby a reflects different positions on the technology life-cycle – allows us to continue with only b and b¢ as parameters within the Pearl-Reed formula in further analysis. These remaining parameters b and b¢ reflect the inclination of the curve, for the rising and sinking part of the Pearl-Reed curve respectively. When b increases, the upward part of the curve will become steeper; an increase in b¢ results in a sharper decline for the sinking part of the curve. For instance, starting in the ‘growth’ stage, with b = 0.3, decline setting in at t = 50 with b¢ = 0.2, the model for value creation looks like Figure 2 below:
12,00 10,00 8,00 6,00 4,00 2,00 0,00 0
20
40
60
80
100
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The financial returns created during any given time period are obtained by calculating the integral of the curve for the period under consideration and results in equation (1)
Ú a
L L Ê 1 + e - b ( 40- a) ˆ dt = ln ( ) 1 + e b t- a b Ë e - b 40 + e - b ( 40- a) ¯
(1)
For focused firms, i.e. organizations that allocate 100 percent of their resources to one activity, the overall value will be the result of the integral outlined. For diversified firms, the overall value equals the weighted sum of the values obtained by the integral pertaining to the different technological stages outlined (seed, growth, maturity, decline). Weights reflect directly the resources allocated to either activity and are subject to variation, ranging from 10/90 percent to 90/10 percent, whereby a minimum level of 10 percent activity is deemed essential to be considered a diversified firm.
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As argued above, diversified firms are confronted with additional levels of organizational and managerial complexity (see in this respect Christensen, 1997; Sheremata, 2000). A certain proportion of the added value created over time will be taken into account as cost and hence become deduced from the value total obtained by applying equation (1). The proportion applied ranges from 4 to 10 percent depending on the presence of different stages within the portfolio. Seed activities as part of the portfolio are considered as implying more resources (5 percent) than mature or even declining activities (3 percent, 2 percent respectively). Moreover, based on the work of Christensen (1997), it seems plausible to assume a positive, exponential, relationship between distance – as observed at any given time period between different parts of the organization – and the amount of complexity encountered. Lastly, we also assumed a – curvilinear – relationship between resource allocation patterns across different parts of the organization, and the managerial and organizational costs encountered. This relationship has been incorporated by means of an Herfindahl index, which increases the more resources are equally distributed. This results in the following formula for Cdiv, which depicts the costs encountered by a firm diversifying its activities: cdiv = f (stages, value created) * g(herfindahl) * h1(techn.dist)
Figure 2. Model for Value Creation
a + 40
Resource Considerations/Costs Encountered by Diversified Firms
f(stages, value created) = (5% * Âis + 4% * Âig +3% * Âim + 2% * Âio) * overall value created in one period • where is, ig, im and io are binary variables (0/1), indicating whether a seed, growth, mature or decline stage is present within the organizational portfolio in this period. Herfindahl index = Â ai2 g(herfindahl) = 1 - Â ai2 h1(techn.dist) = ed dist • dist is either 0 (same stage), 1 (1 stage difference; e.g. seed-growth), 2, or 3, • d = 0.135 (chosen so that at the greatest distance (3), this value is 50 percent higher than at smallest distance (0)) Similarly, resources/costs for enactment are modelled with the same building blocks. However, the influence of the distance – as observed at any given time period between different parts of the organization – is here
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Resource allocation Pattern (Herfindal Index)
Technological Distance (between different ‘parts’ of the organization)
Resources/Costs needed to translate potential into effective realizations
Additional Value Creation
Resources/Costs needed to handle Organizational Complexity (stemming from presence of diversity)
Total Value Creation
Figure 3. Financial Returns and Resource/Cost Relationships as Defined for Diversified (Ambidextrous) Firms
assumed to be a negative, exponential, relationship, implying that the larger the ‘technological’ distance the greater the willingness of the different parts of the organization to engage in mutual development. This results in the following formula: cenact = f (stages, value created) * g(herfindahl) * h2(techn.dist) h2(techn.dist) = e-ndist • dist is either 0, 1, 2, or 3, • q = 0.231 (chosen so that at the greatest distance (3), this value is 50 percent lower than at smallest distance (0)). Figure 3 summarizes the relationships outlined above.
Results Focused Versus Diversified Firms Table 2 summarizes the findings – in terms of financial returns – for focused firms. As
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expected, differences in terms of position on the technology life cycle translate into differences in terms of overall value creation over one time period consisting of 40 periods, with the mature stage resulting in the overall best performance. Increasing levels of b and b¢ affect the overall value obtained, especially – and not surprisingly – for early and later stages (seed and decline). It can also be noticed from Table 2 that firms situating their activities within the mature part of the technological life-cycle outperform all three other types of (focused) firms for values of b, b¢ ranging from 0.1 to 0.4. As such, this firm will be used as a ‘benchmark’ when comparing the performance of focused firms with diversified firms. Within Table 3, a comparison between such a focused firm and a diversified firm combining mature activities (90 percent) with seed activities can be found. When looking at the first period only, the value differential after one period (of 40 episodes) becomes apparent (391.29 versus 359.06). As such, these observations are again, a logical consequence of
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Table 2. Value Creation for Focused Firms Depending on Life Cycle Stage and Variation of b, b¢
b, b, b, b,
b¢ b¢ b¢ b¢
= = = =
0.1 0.2 0.3 0.4
Seed
Growth
Mature
Decline
5.22 69.06 169.95 227.31
225.92 308.46 338.92 354.19
382.91 391.29 394.19 395.64
394.78 330.94 230.05 172.69
the concepts introduced and their analytical counterparts. A logical next step consists of comparing focused and diversified firms over longer time periods. Table 3 contains the findings for both the focused firm – starting with 100 percent of mature activities – and the diversified firm combining mature activities with seed activities over three time periods, consisting each of 40 episodes. Given the initial start conditions, in the next periods, the focused firm will evolve towards maturity and decline, while the diversified firm follows a similar thrust. Within this analysis, different levels of b¢ have been introduced, ranging from 0.1 to 0.4 (higher levels of b¢ would lead to decline rates similar to fashion items only). At the same time, b has been set at 0.2.4 As Table 3 makes clear, only when b¢ exceeds 0.15 do diversified firms of this nature outperform focused, mature, firms. As such this difference can be labelled as a ‘portfolio effect’, which becomes stronger the steeper the decline of the value curve. At this stage, only value creation is considered; when taking into account the additional costs encountered by the diversified firm (see Table 4) – stemming from managing and organizing the diversity present – the relative superiority of diversified firms (again, for b¢ > 0.15) disappears; only when b¢ equals 0.4 a marginal difference in favour of diversified firms is to be observed. So this analysis reveals that – even over longer time periods – firms of a more diversified nature are not exactly more attractive even though they benefit from ‘fading in/fading out’ effects.
Introducing Resource Reallocation Dynamics Of course, and rightly so, it can be argued that a diversified firm might benefit from more 4 Given the start conditions, the total value over three periods will be influenced most by b¢ as maturity and decline becomes relevant as from period 2.
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than merely the ‘technology portfolio’ effect. First, one could argue that the presence of multiple activities allows for reallocation of resources between such activities. Second, such firms could actively strive for synergies that start to impact the value curve itself. However, before examining the effects of this latter approach we first examine the impact of resource reallocation dynamics. In a next step, two scenarios, relating to the degree of resource reallocation flexibility are being introduced. Within a first scenario this flexibility is unlimited, resulting in a resource allocation pattern yielding the highest total revenue, with the only constraint that at least 10 percent of the resources are devoted to the ‘less performing’ part of the portfolio. Second, a more realistic scenario is being deployed whereby the organization is allowed to reallocate 5 percent of its resources per episode from period 2 onwards, whereby shifts occur when one part of the portfolio is superior to the other. When comparing the findings of Table 5, with the results obtained for focused firms in Table 3, the difference between focused and diversified firms becomes more outspoken and in favour of diversified firms. In terms of value creation, we obtain differences ranging from almost 9 percent to 60 percent depending again on the level of b¢. Bringing in the resource/cost implications of diversified firms does not alter this picture significantly, as Table 6 makes clear. The difference between the two resource allocation scenarios (‘without constraints’ and ‘gradually’) is marginal in terms of total value creation. Comparing both scenarios in terms of costs encountered, it can be noticed that gradually shifting implies higher costs, an effect resulting from the presence of the Herfindahl index within the resource equations. As such, a first important observation becomes prominent; diversified firms might indeed outperform focused firms, but this clearly depends on two conditions or requisites; first, the rate of decline of a certain tech-
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Table 3. Total Value Creation for Focused and Diversified Firms over Three Time Periods Focused Firm Portfolio characteristics
b¢ = 0.1
b¢ = 0.15
b¢ = 0.2
b¢ = 0.4
100% M 100% D 100% D Total
391.29 394.77 267.08 1053.12
391.29 377.43 82.65 851.37
391.29 330.92 14.44 736.65
391.29 172.68 0 563.97
Diversified Firm (without shifts in resource allocation) Portfolio characteristics
b¢ = 0.1
b¢ = 0.15
b¢ = 0.2
b¢ = 0.4
10%S/90%M 10%G-M/90%D(*) 10%M-D/90%D Total
359.06 393.83 279.98 1032.88
359.06 378.24 112.86 850.17
359.06 336.38 48.15 743.60
359.06 193.97 20.27 573.30
Notes: S = Seed; G = Growth; M = Mature; D = Decline); * During period 2, the diversified firm spans the growth phase to end already in the first episodes of Maturity at the end of period 2. Similar dynamics can be observed for Period 3, this time pertaining to Maturity and Decline.
Table 4. Costs encountered by the Diversified Firm over Three Time Periods Portfolio Characteristics 10%S/90%M 10%G-M/90%D 10%M-D/90%D Total
b¢ = 0.1
b¢ = 0.15
b¢ = 0.2
b¢ = 0.4
6.23 4.17 2.1 12.5
6.23 4.01 0.88 11.12
6.23 3.58 0.37 10.18
6.23 2.11 0.16 8.5
Notes: S = Seed; G = Growth; M = Mature; D = Decline
nological régime affects the extent to which diversified firms benefit from the presence of a portfolio of activities. Second, and yielding a far greater effect, the extent to which resources can become reallocated across different parts of the portfolio affects the value differentials observed. This latter observation points our attention into the direction of the synergetic potential between different technologies, in this case in terms of deployment of resources/ assets across different technologies. As will become clear in the next section, the notion of synergetic potential will manifest itself under other forms as well.
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Diversified Enacting Firms Within the next steps of the analysis, we model the effect of actively pursuing synergies between the different activities present within diversified firms on financial returns. In order to model such relationships, we assume that firms enacting synergies between different parts of their organizations and the implied technological capabilities, are able to influence both b and L. Recall that b reflects the inclination of the curve, with higher values coinciding with steeper curves. L reflects the upper bound of the curve, and hence can
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Table 5. Total Value Creation for Diversified Firms Able to Reallocate Resources over Three Time Periods Diversified Firm shifting resources without constraints
Period 1 Period 2 Period 3 Total
Portfolio Characteristics
b¢ = 0.1
b¢ = 0.15
b¢ = 0.2
b¢ = 0.4
10%S/90%M G/M M/D
359.06 397.27 383.20 1139.54
359.06 395.22 354.56 1108.84
359.06 390.23 317.82 1067.11
359.06 373.00 182.40 914.47
Diversified Firm shifting resources gradually (5% each time period)
Period 1 Period 2 Period 3 Total
Portfolio Characteristics
b¢ = 0.1
b¢ = 0.15
b¢ = 0.2
b¢ = 0.4
10%S/90%M G/M M/D
359.06 396.64 383.20 1138.91
359.06 393.15 354.56 1107.26
359.06 386.64 317.82 1063.53
359.06 353.43 182.40 894.90
Note: S = Seed; G = Growth; M = Mature; D = Decline)
Table 6. Costs Encountered by the Diversified Firm Able to Shift Resources over Three Time Periods Diversified Firm shifting resources without constraints
Period 1 Period 2 Period 3 Total 3 time periods
b¢ = 0.1
b¢ = 0.15
b¢ = 0.2
b¢ = 0.4
6.23 4.21 2.85 13.29
6.23 4.18 2.64 13.05
6.23 4.13 2.37 12.73
6.23 3.96 1.4 11.59
Diversified Firm shifting resources gradually (5% each time period)
Period 1 Period 2 Period 3 Total 3 time periods
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b¢ = 0.1
b¢ = 0.15
b¢ = 0.2
b¢ = 0.4
6.23 6.13 2.85 15.21
6.23 6.08 2.64 14.95
6.23 5.96 2.37 14.56
6.23 5.98 1.40 12.91
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Table 7. Comparing Net Value Creation of Enacting, Diversified firms with Focused Firms over One Time Period Mature/Seed = 90/10 b = 0.20
Mature/Seed = 10/90 b = 0.20
Net value creation in absolute terms effect on b
effect on b
effect on L
+0.05
+0.1
+0.15
+0.2
effect on L
+0.05
+0.1
+0.15
+0.2
+0 +1 +2 +3 +4 +5 +10
356.82 388.38 419.58 450.42 481.02 511.39 659.40
362.44 395.26 427.71 459.95 491.94 523.73 679.48
366.57 400.25 433.70 466.88 499.92 532.67 694.16
369.63 404.02 438.18 472.13 505.89 539.46 705.21
+0 +1 +2 +3 +4 +5 +10
148.54 159.46 170.06 180.32 190.35 200.14 245.77
187.89 203.28 218.35 233.18 247.77 262.13 330.91
216.82 235.57 254.08 272.32 290.38 308.22 394.91
238.61 259.91 281.00 301.84 322.53 343.03 443.30
Net value creation expressed as % deviation from most performing focused firm (100%Mature) – One time period consisting of 40 episodes effect on b
effect on b
effect on L
+0.05
+0.1
+0.15
+0.2
effect on L
+0.05
+0.1
+0.15
+0.2
+0 +1 +2 +3 +4 +5 +10
-8.8% -0.7% 7.2% 15.1% 22.9% 30.7% 68.5%
-7.4% 1.0% 9.3% 17.5% 25.7% 33.8% 73.7%
-6.3% 2.3% 10.8% 19.3% 27.8% 36.1% 77.4%
-5.5% 3.3% 12.0% 20.7% 29.3% 37.9% 80.2%
+0 +1 +2 +3 +4 +5 +10
-62.0% -59.2% -56.5% -53.9% -51.4% -48.9% -37.2%
-52.0% -48.0% -44.2% -40.4% -36.7% -33.0% -15.4%
-44.6% -39.8% -35.1% -30.4% -25.8% -21.2% 0.9%
-39.0% -33.6% -28.2% -22.9% -17.6% -12.3% 13.3%
be understood as indicating the total size of the market. To the extent that diversified firms are able to influence both parameters, i.e. growing faster during seed/growth phases and/or enlarging the total market size by combining different activities, this might result in a superior performance compared to diversified firms which do not enact the diversity present. Table 7 summarizes the findings for two different resource configurations; diversified firms focusing on mature or seed activities (90 percent) which they complement with seed or mature activities (10 percent). Within Table 7, net value creation is being depicted (i.e. value minus costs encountered) both in absolute
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terms (upper half) and expressed as a proportion of the value obtained by the most performing focused firm, i.e. a form which devotes all its resources to mature activities (lower half). As the left-hand side of Table 7 makes clear, diversified, enacting, firms are able to outperform – within one given time period consisting of 40 episodes – their focused counterpart, as soon as L increases with more than 10 percent (in absolute terms: +1) or when L increases with 10 percent and b increases with +0.1. Moreover, even a diversified firm with a portfolio characterised by 90 percent seed and 10 percent mature activities, turns out to be able to outperform a focused firm within one
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Table 8. Comparing Net Value Creation of Enacting, Diversified firms with Focused Firms over three Time Periods M/S = 90/10 b = 0.20 value = 1123.7 Net value creation in absolute terms effect on b effect on L +0 +1 +2 +3 +4 +5 +10
+0.05
+0.1
+0.15
+0.2
1122.99 1231.08 1338.87 1446.29 1553.47 1660.32 2191.12
1129.02 1238.50 1347.60 1456.46 1565.10 1673.54 2212.47
1133.27 1243.62 1353.75 1463.60 1573.30 1682.72 2227.52
1136.34 1247.40 1358.23 1468.85 1579.28 1689.53 2238.63
Net value creation expressed as % deviation from most performing focused firm effect on b effect on L +0 +1 +2 +3 +4 +5 +10
+0.05
+0.1
+0.15
+0.2
6.6% 16.9% 27.1% 37.3% 47.5% 57.7% 108.1%
7.2% 17.6% 28.0% 38.3% 48.6% 58.9% 110.1%
7.6% 18.1% 28.5% 39.0% 49.4% 59.8% 111.5%
7.9% 18.4% 29.0% 39.5% 50.0% 60.4% 112.6%
time period, if L doubles (in absolute terms +10) and when b increases additionally with 0.2.5 Lastly, when bringing in both resource allocation flexibility and three time periods, the findings obtained so far start to reinforce each other, leading to much more interesting perspectives for diversified, enacting firms. 5 In general terms; enacting firms are able to reduce the difference with focused firms considerably – by merely enacting within one time period (and hence no reallocation of resources) – when 50 percent or more of the resources are allocated to seed activities. When more than 50 percent is attributed to mature activities, enacting firms outperform focused firms as soon as delta b = 0.05 and L increases by 1 (10 percent).
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Table 8 reports the findings obtained in this respect. The net value creation – over three time periods, each consisting of 40 episodes – of an enacting firm, able to reallocate resources gradually, and starting with 90 percent of mature activities, combined with 10 percent of seed activities, outperforms the most performing focused firm in all cases. The lower half of the table indicates the proportional difference with such a focused firm (100 percent mature activities). A more systematic analysis even reveals that – in the case of no positive effect on L, diversified firms can even outperform mature focused firms, if b > 0.05 and the portfolio of the diversified firm includes 70 percent mature activities. When additionally L increases by 1, diversified, enacting firms, starting with a portfolio with 40 percent
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mature activities (and hence 60 percent seed), outperform the mature, focused firm.6
Conclusions and Suggestions for Further Research Our findings reveal that – under certain conditions – ambidextrous firms can indeed take on sustainable forms whereby sustainability is defined as resulting in overall value creation equal or superior to focused mature firms. In order for such a relative stronger performance to occur, different elements play a role: adopting longer timeframes; being able to shift resources across different parts of the portfolio; and lastly, actively pursuing or enacting synergies which might affect both the inclination (b, b¢) and the upper limit (L) of the value curve analysed here. Longer timeframes allow portfolio effects to unfold. Diversified or ambidextrous organizations are characterized by the simultaneous presence of mature and emerging activities. When decline sets in for mature activities, ambidextrous organizations can compensate in terms of financial returns, by the growth of emerging activities. It has become apparent that such portfolio effects require extended timeframes to manifest themselves. At the same time, ambidextrous firms are not outperforming focused firms; rather they are able to compensate over time the inferior performance of the first phases. A much higher impact on financial returns is observed when synergies are being introduced. Synergies manifest themselves threefold: flexibility in terms of resource allocation across activities, cross-fertilization affecting market growth rates (b and b¢), and affecting the overall size of the market as reflected in L. Beneficial effects resulting from flexibility in terms of resource allocation should come as no surprise: as an organization is able to shift resources from declining parts of the business portfolio to growing parts, financial returns tend to increase rather than decrease. This observation comes close to the idea of sharing resources across different parts of the ambidextrous organization, a characteristic of ambidextrous organizational forms stressed more recently by O’Reilly and Tushman (2004). At the same time, this observation should also point our attention to the conditions under which such a sharing or shifting of resources is feasible. Only if resources utilized 6
These findings are not included in this paper, due to page constraints, however available from the authors upon request.
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for mature activities within one period can be re-deployed in activities with more growth potential in a next period, beneficial effects are to be expected.7 Stated otherwise, reallocation presupposes relatedness or synergy on the level of technology.8 Furthermore, our analysis stresses the crucial role of synergies in two other ways. First, the more one is able to affect the growth rates – both of emerging and declining activities (b and b¢) – the more beneficial effects in terms of financial returns become outspoken within our models.9 Second, combining resources deployed within two different activities might result in the development of new products and/or market applications, affecting the overall size of the attainable market for ambidextrous firms (L). Our analysis reveals that when ambidextrous firms are able to influence the size of the market, sustainability almost becomes a non-issue. These findings are in line with the empirical observations made by Teece et al. (1994) and He and Wong (2004). The interaction effect of exploration and exploitation activities on economical performance observed within this latter study might be directly related to the cross-fertilization dynamics outlined within this contribution. All these observations underscore the relevancy of adopting interface management practices directed towards enacting synergies. Stated otherwise, in terms of managerial practice, ‘tight’ coupling – at certain stages – seems to be as relevant as ‘loose’ coupling (as advanced by Tushman, Anderson & O’Reilly, 1997). In line with Rosenberg’s adagio – inside the black box (of technology) – such coupling seems only feasible to the extent underlying technologies and resources do have synergetic potential. Our analysis suggests a crucial 7 Applying this logic, one might for instance pose the question – from a technological or resource perspective – to what extent can capabilities deployed within mature energy activities (like oil refining) be easily displaced to activities focusing on developing alternative energy technologies (such as fuel cells, wind energy or photovoltaic energy). 8 Unless resources are only looked upon as financial, but such a conception of resources might ultimately lead to resource allocation decisions governed only by market mechanisms (rather than within the boundaries of the ambidextrous firm). See in this respect the distinction made by Chatterjee and Wernerfelt (1991). 9 A case in point can be found in the current developments with respect to hybrid cars, that use both a gasoline engine and an electric motor for propulsion. Combining both technologies might allow emerging activities – in this case electric components – to grow faster, while at the same time attenuating the decline of older technologies.
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(managerial) role in terms of assessing and enacting the potential cross-fertilization effects when defining and developing the portfolio of activities of the ambidextrous firm. Only if such a potential is present and effectuated, the necessary and sufficient conditions for ambidextrous organizations to become sustainable seem to be met. Lastly, it goes without saying that the observations reported here are but a first effort to model the value dynamics underlying ambidextrous firms. Additional analysis and refinements seem relevant and are actually being pursued by the authors. Such refinements relate to introducing multiple allocation models (implying portfolios comprising of more than just two activities) as well as refining financial return and resource dynamics by including their unpredictable nature. Empirical testing of the dynamics and relationships outlined in order to refine them seems highly appropriate.
Notes This paper benefited form comments provided by participants at the New Product Development Conference, Dublin (2004) and the INIR workshop Leuven (2004) where earlier versions of this article have been presented. We want to thanks especially Stefan Haelfilger, Bart Leten, Petra de Weerd-Nederhof and Olaf Fisschex for their constructive suggestions and encouragements when developing this article.
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Poole, M.S. (eds), Research On The Management Of Innovation: The Minnesota Studies. Harper & Row Publishers, New York. Benner, M.J. and Tushman, M.L. (2003) ‘Exploitation, exploration, and process management: The productivity dilemma revisited’ The Academy of Management Review; 28(2), 238–56. Bower, J. and Christensen, C. (1994) ‘Disruptive technologies: catching the wave’, Harvard Business Review, January–February 43–53. Brown, S.L. and Eisenhardt, K.M. (1995)‘ Product development: past research, present findings, and future directions’, Academy of Management Review, 20(2), 343–78. Brown, S.L. and Eisenhardt, K.M. (1997) ‘The art of continuous change: linking complexity theory and time-paced evolution in relentlessly shifting organizations’, Administrative Science Quarterly, 42(1), 1–34. Burns, T. and Stalker, G.M. (1961) The Management of Innovation. Tavistock, London. Christensen, C. (1997) The innovator’s dilemma: When new technologies cause great firms to fail. Harvard Business Press, Cambridge, MA. Chatterjee, S. and Wernerfelt, B. (1991) ‘The link between resources and type of diversification: Theory and Evidence’, Strategic Management Journal, 12, 33–48. Christensen, C.M. and Overdorf, M. (2000) ‘Meeting the challenge of disruptive change’, Harvard Business Review, 78(2), 66. Dosi, G. (1982) ‘Technological Paradigms and Technological Trajectories’, Research Policy, 11, 147–62. Dougherty, D. (1992) ‘Interpretive Barriers to Successful Product Innovation in Large Firms’, Organization Science, 3(2), 179–201. Dougherty, D. (1996) ‘Organizing for innovation’. In Cleggs, S. and Hardy, C., (eds.), Handbook of organization studies, pp. 424–39. Sage, London. Eisenhardt, K.M. and Tabrizi, B.N. (1995) ‘Accelerating Adaptive Processes: Product Innovation In The Global Computer Industry’, Administrative Science Quarterly, 91, 84–110. Fiol, M. (1994) ‘Consensus, Diversity and Learning in Organizations’, Organization Science, 5(3), 403– 20. Garud, R. and Karnoe, P. (2002) Path Dependency and Creation. LEA Publishers, NJ. Ghemawat, P. (1991) Flexibility and Commitment: The Dynamics of Strategy. The Free Press, New York. He, Z. and Wong, P. (2004) ‘Exploration vs. Exploitation: An Empirical Test of the Ambidexterity Hypothesis’, Organization Science, 15, 481–494. Keller, R. (2001) ‘Cross-functional project groups in Research and New Product Development; Diversity, Communications, Job Stress and Outcomes’, The Academy of Management Journal, 3, 547–55. Leonard-Barton, D. (1992) ‘Core capabilities and core rigidities: A paradox in managing new product development’, Strategic Management Journal, Summer Special Issue, 13, 111–25. March, J. (1991) ‘Exploration and exploitation in organizational learning’, Organization Science, 2, 1.
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Martino, J. (1980). ‘Technological Forecasting – An Overview’, Management Science, 26(1), 28–33. Miller, P. and Friesen, D. (1984) Organisations: A Quantum View. Prentice-Hall, NJ. Mintzberg, H. (1979) The structuring of organizations: a synthesis of the research. Prentice Hall, NJ. Nadler, D.A. and Tushman, M.L. (1997) Competing by design. The Power of Organizational Architecture. Oxford University Press, NY. Nonaka, I. (1990) ‘Redundant, Overlapping Organization; A Japanese Approach To Managing The Innovation Process’, California Management Review, Spring, 27–38. Nonaka, I. and Takeuchi, H. (1995) The Knowledge Creating Company. Oxford University Press, NY. O’Reilly, C. and Tushman, M. (2004) ‘The Ambidextrous Organization’, Harvard Business Review, April, 74–81. Pelz, D.C. and Andrews, F.M. (1967) Scientists In Organisations John Wiley & Sons, New York. Ring, P. and Van de Ven, A. (1989) ‘Formal And Informal Dimensions Of Transactions’. In Van Ven, A., Polley, D., Garud, R. and Venkatraman, S., (eds.), The Innovation Journey. Oxford University Press, NY. Rogers, E. (1962) The Diffusion of Innovation. Free Press, New York. Rosenberg, N. (1982) Inside the Black Box: Technology and Economics. Cambridge University Press, Cambridge. Schoonhoven Bird, C. and Jellinek, M. (1990) ‘Dynamic tension in innovative, high technology firms: managing rapid technological change through organizational culture’. In: Tushman, M. and Anderson, P., (eds.), Managing strategic innovation and change. Oxford University Press, Oxford. Schumpeter, J.A. (1934) Business cycles: a theoretical, historical and statistical analysis of the capitalist process. McGraw-Hill, New York. Schumpeter, J.A. (1959) The theory of economic development. Harvard University Press, Cambridge, MA. Sheremata, W. (2000) ‘Centrifugal and Centripetal Forces in Radical New Product Development under Time Pressure’, The Academy of Management Review, 25(2), 389–408. Sutton, J. (2001) Technology and Market Structure. MIT Press, MA. Teece, D., Rumelt, R., Dosi, G. and Winter, S. (1994) ‘Understanding corporate coherence’, Journal of Economic Behaviour and Organizations, 23, 1–30. Tushman, M. and Katz, R. (1980) ‘External Communication and Project Performance: An Investigation Into The Role Of Gatekeepers,’ Management Science, 26(11), 1071–85. Tushman, M. (1977) ‘Special Boundary Roles in The Innovation Process’, Administrative Science Quarterly, 22, 587–605.
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Tushman, M. (1978) ‘Impacts Of Perceived Environmental Variability On Patterns Of Work Related Communication’, Academy Of Management Journal, 22(3), 482–500. Tushman, M. (1978) ‘Technical Communication in R&D Laboratories: The Impact Of Project Work Characteristics’, Academy Of Management Journal, 21(4), 624–45. Tushman, M.L. and Anderson, P.C. (1986) ‘Technology discontinuities and organizational environments’, Administrative Science Quarterly, 31, 439–65. Tushman, M.L., Anderson, P.C. and O’Reilly, C. (1997) ‘Technology cycles, innovation streams, and ambidextrous organizations: organizational renewal through innovation streams and strategic change’. In Tushman, M.L. and Anderson, P.C.. Managing strategic innovation and change: a collection of readings. Oxford University Press, New York. Van de Ven, A., Angle, H. and Poole, M.S. (eds.) Research On The Management Of Innovation: The Minnesota Studies. Harper & Row Publishers, NY. Van de Ven, A., Polley, D., Garud, R. and Venkatraman, S. (1999) The Innovation Journey. Oxford University Press, Oxford. Van Looy, B. (2000) ‘Interaction strategies when innovating’. Ph.D dissertation, K.U. Leuven. Wernerfelt, B. and Montgomery, C. (1988) ‘Tobin’s q and the Importance of Focus in Firm Performance’, The American Economic Review, 246–50. Young, P. (1993). ‘Technological Growth Curves. A Competition of Forecasting Models’, Technological Forecasting and Social Change, 44, 375–89.
Bart Van Looy is responsible for the research activities of INCENTIM, a research division at Katholieke Universiteit Leuven (Faculty of Economics and Applied Economics) in the field of innovation management, science and technology policy, and hightechnology entrepreneurship. Thierry Martens is working at Esselte Ltd as director of European Supply Chain applications responsible for developing appropriate processes and procedures. Koenraad Debackere is professor in innovation and technology management at Katholieke Universiteit Leuven, is head of the research division INCENTIM, and is promoter-coordinator of Steunpunt O&O Statistieken.
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Exploration and Exploitation Strategies in Industrial R&D Fabrizio Cesaroni, Alberto Di Minin and Andrea Piccaluga This paper discusses four types of strategic decisions in technology management in established firms. We argue that more attention, both from a theoretical and an empirical perspective, should be paid to the strategic solutions which are implemented as a consequence of such decisions, as well as to the various types of interactions between strategic decisions and organizational solutions in industrial R&D. Here we apply management concepts derived from the industrial dynamics literature to R&D, and use a theoretical framework to describe and analyse four case studies concerning the largest R&D centres of Italian firms operating in different industrial sectors (telecommunications, automotive, communication and cables, and semiconductors). The different approaches that those private R&D centres have chosen in their recent past are compared and discussed. We analyse the patterns of exploration, technology transfer and commercialization that industrial R&D labs have adopted in order to combine short-term objectives of exploitation of research results and competencies, and longterm goals of exploration of new technological trajectories, based upon the use of two dimensions: first, the type of technological change, and second the control of complementary assets and the existence of a dominant design. We argue that the interpretation of the four case studies can represent a useful basis for discussion among R&D managers as well as innovation and technology management scholars.
Introduction
F
irms have to face several serious trade-offs with regard to the organization and management of R&D activities. Incumbents, in particular, have to invest in R&D in order to maintain and improve their competitiveness, but at present they often have to do so in increasingly difficult markets, which provide them with scarce resources. They have to be carefully informed about scientific and technological progress related to their industries, collaborate with dynamic partners and simultaneously maintain some key technological competencies and proprietary knowledge. They need to seek for talents and opportunities worldwide, while they keep an R&D base in their home countries. The main topic discussed in this paper is the complexity posed by the trade-off between exploration and exploitation in R&D, especially for established industrial organizations. Among the possible dimensions that can be
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used to analyse this issue, this paper will focus on the type of technological change, with respect to the firm’s core technologies, on the one hand, and on the control of the relevant complementary assets and knowledge in a particular industry, on the other hand. Both academics and managers might gain insights from the proposed approach. The theoretical framework applies concepts that are known in the industrial dynamics literature, but which probably represent an original adaptation for R&D management. Managers may find the integration between the framework and the case studies a valuable point for discussion about their own organizations, especially when serious trade-offs do exist and when strategic decisions have to be made. The paper is organised as follows: in the second section we start by discussing the theoretical framework which defines possible strategic approaches that firms can adopt in different technological and competitive environments. In the third section we briefly dis© Blackwell Publishing Ltd, 2005. 9600 Garsington Road, Oxford OX4 2DQ and 350 Main St, Malden, MA 02148, USA.
EXPLORATION AND EXPLOITATION STRATEGIES IN INDUSTRIAL R&D
cuss the methodology used to promote the empirical analysis. We present four practical cases as examples of the strategic choices discussed in the mentioned framework, and a final section concludes the paper.
The Analysis of Technological and Competitive Forces: A Theoretical Framework The theoretical framework that is here presented consists of a decision tree that can be used to describe the technological and competitive landscape. This framework identifies strategies that companies can adopt in order to take advantage of their competitive positions, R&D investments and complementary assets according to different situations. The four different scenarios that have been identified are presented in Figure 1. The first dimension that we take into account is the type of technological change that the industry is experiencing, which can be
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incremental or radical. The second dimension considers both complementary assets and the presence of a dominant design. More precisely, in situations of incremental technological change, the control of the firm over complementary assets represents a key variable to be considered. In fact, an incremental technological change does not alter the need of incumbents to get access to these assets for the exploitation of the new technology. The relative importance of complementary assets is therefore likely to remain unaltered. Incumbents that control these assets have a clear advantage for the exploitation of the technology. In situations of radical technological change, on the other hand, the phase of development of the industry needs to be taken into account. A radical change in the industry is in fact likely to lead to the emergence of a new dominant paradigm, which may change the relative importance of the complementary assets owned or controlled by incumbents. In order to understand what the most appropriate R&D strategy can be, it is necessary to consider whether the firm is already in control of the dominant
R&D Investment Exploitation.
YES
Firms will leverage their R&D investments through their main operations. New ways to leverage R&D capabilities through other business models should be explored.
(CRF case)
Control of complementary assets INCREMENTAL
Market for Technology. Firms should seek to leverage their investments in innovation on the secondary market for technology.
(Pirelli Lab case)
NO
Type of technological change
Dominant Design Exploitation. YES
RADICAL
Firms that are in control of the dominant emerging design need to leverage their leading position by establishing strategic alliances and securing complementary assets.
(STM case)
Emergence of a dominant paradigm R&D Exploration.
NO
Incumbents in the industry might be competing for the definition of a dominant design. Firms need to invest in innovation, since old complementary assets may not be sufficient to maintain leadership.
(TiLab case)
Figure 1: Exploration and exploitation strategies: the decision tree.
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design or whether it is competing with other firms for its definition. Freeman and Perez (1988), who take into account different types of technological dynamics, make a very useful contribution in support of the basis of the proposed theoretical approach. What characterizes their taxonomy is the ‘proximity of the effect of change’ with respect to the centre of innovation. When a technology is going through very turbulent dynamics we observe innovations that lead to new technological systems, the appearance and disappearance of new paradigms and to the convergence of separate knowledge and technological domains. Examples of turbulent technological dynamics are the adoption of system-on-chips and the advent of CAD in the semiconductor industry. Convergence of telecommunications and IT offers a similar example for the telecommunication industry. Sectors such as automotive and optical telecommunication systems are characterized by more clearly defined technological trajectories. In these sectors, the acquisition of appropriate resources and competencies might be expensive, and competencies and resources that have to be acquired and used in order to compete are commonly known. Technological change is also a constant factor for mature industries, but efforts in these cases are usually directed towards incremental innovations, since disruptive innovations are hardly expected or difficult to predict. With regard to a more precise description of the proposed model, when the type of technological change is incremental, firms cannot profitably focus their competitive strategies on the exploitation of new technologies, and key competencies are usually located downstream in complementary assets, and consist of distinctive manufacturing and marketing capabilities. While few spaces are left for new entrants in the industry, the main concern of leading incumbent firms is to defend their position and to avoid competition. This often calls for a rationalization of internal processes (including R&D activities), in order to gain economies of scale and increase the gap of efficiency with respect to potential entrants, hence creating strong barriers to entry. R&D efforts are in these cases mostly directed towards the incorporation of new processes and incremental innovations on the existing products, rather then towards the development of radically new products. In these situations, the pressure on cost minimization is extreme. Consequently, licensing and spin-off are often identified as proper strategies to diversify activities beyond consolidated corporate businesses. In addition, in the case of incremental technological change, companies that do not
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control key complementary assets will find significant difficulties to leverage their technological knowledge as a competitive weapon. Unless the new technology is far better than the previous one (and often, even in this case) their resources may well be insufficient against market leaders, whose key advantages are represented by consolidated manufacturing and marketing strengths. Rather, in order to benefit from (successful) R&D activities, new entrants may have to share their novel technologies with other partners that own complementary competencies. In some cases, technologies can be conveniently sold or licensed out to incumbents (Arora, Fosfuri & Gambaredella, 2001; Gans & Stern, 2003). When radical technological changes take place, non-leading competitors can take advantage of new business opportunities by trying to impose a different industrial structure and possibly new dominant paradigms. If new entrants succeed in managing the new technologies and acquire the necessary complementary competencies – for example by defining an effective network of noncompetitive relationships with external partners – they can pose a serious threat for market leaders. New technological trajectories do provide potential entrants with the opportunity to enter markets and play a key role. Traditionally, we have seen Japanese companies playing the role of outsiders and achieving important results in the consumer electronics, automotive, motorcycle industries (Glasmeier, 2000; Mintzberg et al., 1996;Womack, Jones & Roos, 1990). The advent of e-commerce and disruptive changes in distribution channels created tremendous opportunities for companies such as Amazon, eBay and Dell, that reinvented key concepts for the industry (Fields, 2004). Also, in situations of radical technological change, R&D managers should recognize the need to combine resources that originate from different sources. Leaders within the old technological paradigms will be likely to seek for new strategic partnerships and technological alliances will represent once more key assets for the control of emerging markets (Chesbrough & Teece, 1996). New entrants might leverage new knowledge and capabilities accumulated somewhere else. The impact of different technological régimes on the competitive and co-operative behaviour of established firms has already been studied in the literature.1 For instance, Garud (1994) suggests that during the early stages of technology development, when the pace of 1
We thank an anonymous referee for this suggestion.
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technological change is fairly rapid, rivals will compete with one another to establish technology dominance in markets and institutions. By contrast, during later stages, when a dominant technology paradigm has emerged, rivals will enter into co-operative agreements with one another to establish a stable industry environment within which to recover their investments. In general, in the presence of turbulent technological environments, firms need to monitor different sources of technological change, well beyond corporate boundaries (Pavitt, 1984). The definition of standards and the imposition of new technological paradigms are at the heart of firms’ strategies, even if their competitive positions are weak, as in the case of (hightech) start-ups. In fact, the dominance of old, mature markets and the experience accumulated in manufacturing processes might not represent sufficient barriers to defend market share. Both incumbents and new entrants need to have proper absorptive capacities (Cohen & Levinthal, 1990) and relational capabilities (Lorenzoni & Baden-Fuller, 1995) in order to develop their specific technological vision and recognize new opportunities. The competitive advantages of established firms compared to new entrants vanishes in stages of disruptive technological change.
Methodology In order to provide provisional evidence of the different strategies that companies can adopt in the four situations described in the theoretical framework, we selected four case studies, one for each possible scenario, from established Italian manufacturing firms. These cases are among the most important experiences of private R&D activities presently active in Italy. It is worth noting that these four cases only represent examples of strategies that companies can adopt in each case, while a complete test of the framework would require broader empirical evidence supported by appropriate statistical analyses. As the first stage of a longer research programme, we started by selecting case studies which, in our opinion, best fit the framework. Information collected for each case was the result of face-to-face interviews with CEOs of the four companies. We have had the opportunity of discussions with managers and researchers from Centro Ricerche Fiat and Tilab during the last 5–6 years, and during this period we collected interviews and documents about the two companies. We have also had the opportunity of talking with R&D manag-
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ers from STMicroelectronics and Pirelli OT in the last two years.
From Monopoly to Technology Exploitation: Telecom Italia Lab The case of Telecom Italia Lab (TILab) during the 1999–2001 period shows that, with high technological turbulence and tight budget constraints, to stay ahead of competitors for the definition of new technological paradigms is not an easy task. The presence of various incumbents and possible new entrants within an industry calls for a long-term commitment to innovation. In such a context, the control (and diligent management) of the firm’s complementary assets does not provide a sustainable competitive advantage. During the 1990s, incumbents in the telecommunications industry faced increasing pressures from discontinuous technological shifts and a changing competitive environment. More specifically, the convergence of telecommunications and information technologies (IT) generated significant technological turbulence for large telecommunications operators. On the market side, the deregulation process in Europe led to the emergence of new actors, which rendered the market more fluid and complex. In several countries incumbents, for the first time, faced a real competitive environment in the domestic markets. The necessary strategy to adopt was stricter control on overhead costs and in particular on R&D. One of the possible solutions was to allow R&D centres autonomously to seek for additional financial resources, especially from outside their industrial group, and to exploit externalities from R&D activities. One of the main sources of profitability shifted from the architecture of a functional and efficient network infrastructure, to the definition of advanced services. Therefore, research that could previously focus on ‘hard components’ (telecoms networks) had to now look into ‘soft variables’ (such as services). This reduced the time horizon of research projects and also called for new skills, competencies and forms of understanding of market dynamics. All this determined closer co-operation between (research) labs and (operating) departments. It seemed necessary for R&D centres to incorporate the functions of an innovation hub (Leifer et al., 2000), which is able to gather innovative ideas inside the industrial group and to hunt for opportunities and talents wherever possible. These strategic choices often translated into internal spin-offs and incubators as well as setting up specialized competencies for
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the marketing of inventions produced in the laboratories. New corporate venture capital activities were also used to detect and attract new ideas, technologies or business opportunities. During the 1990s, Telecom Italia (TI) – the former monopolist telecoms operator – undertook radical changes, which affected the role and organization of its research labs. The first change was the privatization of the former public monopolist – although the Italian State retained golden-share privileges – and the consequent creation of the TI Group. A second important event was Roberto Colaninno’s acquisition of the group in February 1999. Colaninno was the CEO of the Omnitel/Tecnost Group, the largest (new) competitor of (incumbent) Telecom Italia. Antitrust laws prevented the creation of a new (private) quasi-monopoly, and Omnitel had to be sold. However, Colaninno’s presence in TI lasted merely two years. A new buyout in 2001 led the industrial group Pirelli to control TI. During this period, Cselt (later renamed TiLab), the group’s R&D centre, with about 1,000 people, enlarged its mission and changed its organization. The result was a completely renewed research centre, organized in three business areas: Technology Integration & Research; Venture Capital; and ICT Skill Building. The objective of these changes was to create an extremely flexible organization, able to integrate new realities through the creation of autonomous units, partnership with external subjects, and financial participation to new entrepreneurial activities. For almost two years, from 2001 to 2002, Telecom Italia Lab was part of the venture capital unit of the Group. In addition to the activities of traditional competence retention, in 2001 TiLab started to support internal spin-off processes and incubator structures in order to promote a sort of ‘controlled external spillover’ of its personnel. The management gave researchers the possibility of developing projects in a quasi-market environment, with the necessary autonomy, but not with all the risks connected with normal entrepreneurial activity. This independence was short-lived. One of the first moves of the new Pirelli management was to review the responsibilities given to TiLab, and to move the venture capital team back to TI. The changes, which have taken place in the telecoms sector and specifically in the R&D centre’s ownership, have not allowed the emergence of a robust strategic direction. The top management in the Telecom Group has struggled to deal with the changing competitive dynamics of the telecoms sector, and has
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tried to devise a strategy for the R&D lab only after that. During the last months of Colaninno’s period and in the first months of Pirelli’s period, the project of joining together venture capital competencies and assets with scientific and technological resources has become clear. However it would have required an even stronger commitment in communication, diffusion and incentives for researchers. During a period in which the transition in TiLab required still more resources and open support from the new top management, recent events seem to suggest that the intention is indeed to change, once again, the strategy. TiLab refocused its activities towards more traditional R&D services for the Group, such as studies and feasibility tests, experiments and normative specifications. The lack of positive results and a truly convincing success story from the model of ‘internal entrepreneurship’ contributed to the decision to change direction. In 2004 TiLab employed 1,142 people (among them 920 researchers), had a turnover of €143 million and further increased its orientation towards working in applications for the Telecom Group. In the 2001–3 period about 150 patent applications were presented. Further analysis on the future performance of TiLab and the TI Group will be needed to fully appreciate the direction and success of these subsequent choices.
STMicroelectronics: Combining Internal R&D and Network Structure In 2003, ST’s net revenues were US$7.2 billion and net earnings were US$253 million. ST was the world’s leading supplier of analogue Integrated Circuits (ICs), MPEG-2 decoders and ASICs in 2002. Since the year 2000, ST has consistently ranked among the top five semiconductor producers for revenues worldwide. Looking back, it was difficult to imagine that ST Microelectronics would have become one of the semiconductor industry’s greatest success stories. In 1987, when the French semiconductor company Thomson Sémiconducteurs (TS) merged with its Italian competitor SGS, few expected the new entity to challenge the semiconductor market for world leadership. Before the merger, SGS suffered from a crippling debt load, although the manufacturing organization was still profitable. Thomson, on the other hand, enjoyed a cleaner balance sheet but was operating at a loss. The semiconductor industry was dominated by American and Japanese companies, and other Asian countries with lower labour costs were poised to take over huge chunks of wafer production.
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It was not exactly the best time to think about a European champion in the semiconductor industry, especially one starting from the relatively weak positions of TS and SGS. Two main elements contributed to ST success: first, ST defined a coherent recruiting and R&D strategy based on the notion that quality research and technological capabilities existed not only in the central hubs of the semiconductor industry but also in peripheral locations worldwide. Technological sourcing and a close relationship with key customers are important elements to fully capture the value of a complex R&D network. Second, ST was among the first companies that perceived and correctly interpreted the potentially disruptive impact of the system-on-chip (SoC) architecture. Throughout the 1980s and 1990s, relevant changes affected the semiconductor industry. In terms of the innovation path that was followed, Moore’s law accompanied the constant upgrade of manufacturing technologies. In addition, on the demand side – in the electronic sector – a vast amount of new applications required more sophisticated silicon supports. Vertical control of the technologies for many consumer applications became impossible. One of the main sources of competitive advantage became the definition of standards for specific phases of production, with the goal to create lock-in situations for ‘open but owned’ systems (Borrus & Zysman, 1997). The development of semiconductors towards the use of MEMS called for the integration and interaction of scientific competencies and languages that were not accustomed to work together. The approach adopted by ST recognized the limits of both vertical control of technology and innovation by acquisition. This is why tight alliances with key customers, suppliers, and technological partners became fundamental aspects of ST’s strategy in facing a very challenging competitive environment. According to ST management, in order to make the collaboration fruitful for both ST and its partners, the ‘identification of the right tasks for the right people’ (Cuomo, 2003) was a crucial element. On the technology side, a number of phenomena such as the development of CAD and new e-commerce practices facilitated a global vertical disintegration of the semiconductor industry (Macher, Mowery & Simcoe, 2002). In this new model, fabless companies localized in the most innovative regions, and foundries were built by local contractors or by the mother companies in more peripheral sites, in order to exploit other types of location advantages (Leachman & Leachman, 2003).
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During this time of drastic transition for the industry, ST was able to establish an effective division of labour on a global scale. The firm developed an almost a-centric structure, with key roles assigned to ‘internal entrepreneurs’ who were able to direct resources to the various nodes of the corporate network (Fisher, 2002). ST also decentralized its R&D function, engaging in technological partnerships with peripheral regions. Only until a few years ago, innovation in the periphery, and in particular the decision to locate R&D facilities in places like Catania (Sicily), was against common practice in the semiconductor industry. However, this choice was taken according to a coherent logic, that is, to locate to where there was public investment in research and abundance of unexploited high-quality human resources at a reasonably low price. It is also well known that the absence of other equally interesting employment opportunity increases researchers’ corporate loyalty and thus determines efficient barriers for the loss of key technological competencies. During the phases of development of the system-on-chip applications, ST’s strategy for R&D proved to be particularly valid for the definition of a new system architecture. In the SoC design, performance of the chip can be optimized only if the solution is tuned for its application. Because the optimized new design is based on the customers’ application needs, close interaction with customers must be the key element for success as well as the SoC maker’s internal system-level knowledge. ST defined strategic partnerships with its twelve most important clients. Over time these alliances matured into a clear interdependence, where innovations of the customer’s product rely on the innovation of the SoC module and vice versa. This mutual dependency of module and product system made these strategic partnerships important complementary assets that ‘co-developed’ (Teece, 1986) with the innovation. Even if ST was able to secure intellectual property rights around SoC, knowledge that was not developed internally was the result of key alliances with universities both in Europe and in the USA. According to ST managers (Cuomo, 2003), the access to research projects and the definition of agreements for the exploitation of research findings was a priority for the success of the project. The localization of ST manufacturing, design and R&D was an indispensable complementary asset for the integration of the various source of knowledge. In fact: (i) the location of fabs and R&D centres in peripheral locations allowed ST to exploit consistent cost savings, both for its
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product development and its manufacturing activities; (ii) design centres located close to the customers allowed ST to have a constant feedback from its ‘lead users’; and (iii) the development of the SoC solution became possible when a large firm like ST established control over a distributed network of collaborations and research projects.
Autonomy and Technology Transfer: Centro Ricerche Fiat (CRF) Centro Ricerche Fiat (Fiat Research Centre – CRF) is one of the 12 subsidiaries of the Fiat Group; it employs 930 people, its 2004 revenues were €124 million, and in the same year it had 1,211 active patents. CRF was founded in 1976, and soon later became an independent centre of the Fiat Group. Significant autonomy from the mother company and efforts to find new clients for its (research) outputs among large and, especially, small firms – quite often Fiat mechanical suppliers – have been constant key aspects of CRF’s recent strategy. Nonetheless, 2003 and 2004 were years of intense changes in the Fiat Group top management; Fiat’s whole strategy has been redefined, with significant consequences on the role played by CRF within the Group. These modifications are still in progress and it is only possible to provide some provisional interpretation. For this reason we will focus here on the important managerial choices adopted by CRF prior to these very recent changes. CRF has been traditionally characterized by a high degree of independence from the Fiat Group, mainly as the result of events that took place during the 1990s. In 1993, most Fiat sectors reacted to the automotive industry crisis by refocusing their activities and by reducing the overall number of employees. However, in this period CRF tried to keep all employees by making an effort to diversify the sources of revenues, by increasingly taking part in publicly funded research programmes, and by offering its services to customers external to the Group. The early success of this strategy gave CRF a sense of independence and dynamism that revealed much more value than simple budget figures could imply. The most relevant effect of this new approach has been an increasing attention to technology transfer that, in the words of a widely cited CRF’s slogan, becomes ‘CCCP: Competitiveness for Customers at Competitive Prices’. The automotive sector, in which CRF operates, is a fairly mature industry, whose main technologies are widespread among competitors, and radical, or at least ‘more than incremental’ innovations are not developed
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frequently. Hence, the technological domain is characterized by a certain stability. From a competitive point of view, the industry is dominated by a few large groups, which operate on a global scale. Fiat has been part of this leading group of firms for a large part of the last few decades. As described above, in such a context the main concern of an incumbent firm is to rationalize R&D expenditures, in order to maintain a leading position and also possibly to increase the returns from R&D and its complementary assets. The case of CRF appears to be a quintessential example of the way this strategy can be pursued. Indeed, in order to maintain a leading position in research and simultaneously promote an effective transfer of technologies inside and outside the Fiat Group, CRF’s focus has been both on long-term exploration and on short-term exploitation strategies. However, funds to be devoted to the exploration of new technological trajectories had to be maintained independently from any specific goal regarding technology transfer. Possible sources of such (exploration) funds were (and still are) national and European funding agencies for participation in public research projects. For this reason, during the last decades, CRF has constantly increased its participation to such programmes, and, in turn, has had the possibility of maintaining connections with the international scientific community. New competencies arising from this path have then been devoted to pursuing short-terms goals of technology transfer. Technology transfer, especially when directed at small firms – mainly Fiat suppliers – is considered by CRF the best solution to maximize R&D returns and to exploit existing technological competencies. In order to make technology transfer effective, a set of specific procedures has been implemented. More specifically, managers are regularly asked to look for ‘proper’ clients, to develop ‘proper’ products and to transfer ‘proper’ human resources. CRF believes that this combination is the most effective way to transfer technological knowledge (Michellone, 1995). A thorough analysis of these activities is made before starting any transfer process, in order to identify concrete opportunities, the ways to transfer research results and the existence of possible strategic constraints. As a consequence, it can be said that CRF’s strategy primarily derives its strength from a clear focus on customers. The identification of customers and their needs represents the first, initial phase of the process, and research activity follows at a later stage. Results only come at the end. The focus on customers also has a specific significance. For many firms – especially SMEs
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– the introduction of innovations and new technologies represents a drastic change in their organization, routines and capabilities. For this reason, CRF makes an effort to identify the proper people within customers’ organizations in order to start effective interaction. These are the people who will have to manage – and directly pay for – the innovation. More precisely, the price customers have to pay does not only consists of a ‘monetary’ component. The more radical the technological change, the higher the price in terms of new skills, competencies and knowledge. Complete success can be guaranteed only by reducing obstacles to the transfer, and by avoiding the ‘not invented here’ syndrome. Ultimately, success of the transfer process depends on the correct definition of the ‘product’ (the technological solution) to be transferred. Usually, these products are developed by offering additional features and characteristics that satisfy not only customers’ minimal expectations, but also their latent expectations. CRF’s goal is to take into account customers’ competitiveness and the markets where customers operate. In turn, CRF’s researchers are required not only to integrate know-how and competencies from different technological areas, but also to analyse the complex environment in which customers usually operate. Lastly, the transfer process is usually complemented with the transfer of those researchers actively involved in the development of the new technology. Indeed, the transfer of human resources ensures that their tacit knowledge gets transferred with the technology as well. One further advantage of this approach is that those same researchers will represent the future preferred interface between CRF and the customer. The network of former researchers allows CRF to create even stronger links with its clients’ portfolio. In a sector such as automotive, where the main competitive capabilities lie downwards in production and marketing, R&D activities usually represent a net cost to be maintained under strict control. CRF has been able, during the last two decades, to preserve relevant innovative capabilities, while reducing the overall need of financial resources for R&D. At the same time, an effective integration of both exploration and exploitation strategies has been shown to be compatible with the strategy described. Very recently, moreover, the Fiat Group has been paying increasing attention to both the knowledge producing and the technology transfer skill of the CRF and has funded large medium-term research projects with the aim of transferring their results to the various Group’s divisions. In this way, CRF’s skills in transferring research
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results should be further exploited within Group’s boundaries.
Pirelli OT: When the ‘Market for Firms’ Becomes the ‘Market for Technology’ Pirelli’s core business is represented by tyres, energy cables and systems, telecom cables and systems, and real estate. Tyres and energy cables are the traditional (historical) businesses for Pirelli, in which it plays a leading role in the international market. By contrast, Pirelli has entered the telecom cables market only recently, and its role can be assimilated to that of a new entrant. The competitive position that Pirelli had in this market, the characteristics of the technological domain and the choices that Pirelli made in this business make it an unusual example of the strategies that firms can adopt in situations of incremental technological change in industries where the company is not in control of key complementary assets. Indeed, at the end of 2000, Pirelli’s R&D activities attracted international attention when the company made an important deal for the sale of its optical division with the American company Corning. That agreement represented an interesting example of the strategies that companies can pursue for the exploitation of successful technological outcomes in situations in which they are new entrants (or minor actors) and in which technology dynamics are controlled by other incumbents, who set the pace of advancement within a technological paradigm. In fact, for Pirelli, a company not new to technological leadership, but not an historical presence in telecom cables market, the choice to sell its optical division to Corning was a first-time event. The analysis of the motivations that brought Pirelli to this decision allows us to discuss the possible strategies that new entrants can adopt in similar situations. Before 2001, the Pirelli group comprised two main divisions, Pirelli Tyres and Pirelli Cables & Systems, which provided about 40 percent and 60 percent respectively of total turnover.2 The Cables & Systems division was further divided into the Energy and the Communication divisions, and Communication was finally composed of three branches, Optic Cables, Optical Components and Submarine Optical Systems. The optical components 2 See http://www.pirelli.com/en_42/this_is_pirelli/ investor_relation/file_pdf/corning_deal.pdf for further details (accessed 11 January 2004).
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research and manufacturing activities were conducted by Optical Technologies (OT). This small American subsidiary, based in Delaware and partly owned by Cisco Systems, later became part of the Corning deal. While OT’s contribution to the total revenues of the Pirelli’s group was marginal, Corning’s evaluation of the venture was 167 times its 2002 revenues, which were approximately US$22 million. Ultimately, Corning ended up paying US$3.6 billion for Pirelli’s 90 percent share of the company. To understand the motivations behind such a decision, it is worth recalling the competencies of OT and comparing the different business strategies pursued by Corning and Pirelli. OT’s activities were directed towards the development and manufacturing of optical components and technologies. Particularly relevant were the technologies for the production of lithium niobate modulators, and of submarine 980-nm pump diodes. These technologies were used in high-speed, long-haul optical communications networks. These two technologies were particularly relevant to Corning, in order for it to enhance its position as a supplier of photonic products to optical layer companies. Furthermore, OT’s capabilities in pump lasers for submarine use directly complemented Corning’s terrestrial pump capabilities (CED, 2000). From Corning’s point of view, the real value of OT was not measured by its current market share or manufacturing capabilities, but lay in its technological competencies. In the words of Pirelli’s chairman, Marco Tronchetti Provera, ‘Corning saw hidden value’ in the firm’s optical patents (Business Europe, 2000). Corning, indeed, was investing heavily in the opticalfibre telecoms systems, and was aiming to become one of the few market leaders in such a sector. The technologies developed by OT could play a particularly important role. Furthermore, the growth estimations for the market for optical communications were very promising and the amount paid to Pirelli was therefore compatible with projected profits. Pirelli, on the other hand, had very different strategic needs. Optical components only had marginal importance in Pirelli’s business portfolio. In fact, in order to become competitive in the optical component market, Pirelli needed a much larger market share. At the same time, OT had developed relevant technological know-how, ready to be exploited. By selling OT to Corning, Pirelli made it possible to extract the maximum value from its technological assets in optical components, and to reinvest the money earned to reinforce its core businesses and to implement important diversification strategies.
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The key point of the Pirelli–Corning case is that when complementary technologies have to be combined in order to offer a complex system, the ownership of only a part of the technology does not allow the firm to extract all the possible rents. In this situation, the greatest value goes to the institution that controls and integrates the different components. While Corning was clearly acting in order to pursue such a goal, Pirelli’s competencies were limited to a marginal – albeit extremely valuable – aspect of the entire technological system. Furthermore, this asset was not contributing significantly to Pirelli’s core business, and it would have required relevant investments in complementary assets and technologies to be fully exploited. As it has been emphasized (Arora, Fosfuri & Gambardella, 2001), the possibility of having a market for technologies and technological competencies represents an additional and valuable option for those firms with strong technological capabilities but weak complementary assets. The trade of firms represents an extreme but attractive solution to operate on the international market for technologies.3
Conclusions Industrial R&D centres cannot develop internally all the research that their mother company or corporate level might need. At the same time, no clear recipe for an effective network structure, able to combine internal R&D effort and collaborations, can be provided. Management is confirmed once more, and perhaps some useful considerations can be obtained by analysing the cases through the lenses of the theoretical framework that has been presented. The analysis of the four cases described in this study confirms, among other things, that the management of trade-offs between exploration and exploitation in R&D has to be modulated, given the firm’s relative position with respect to both the existing technological and competitive domains. A first conclusion is that, in presence of both incremental and radical technological change, a successful management of the trade-off requires the definition of effective network structures. CRF and ST seem to have been particularly capable in adopting specific solutions to build and maintain dynamic network relations. CRF – operat-
3
It is worth mentioning that at present the Pirelli Group can count on the Pirelli Labs, located in Milan, which have two divisions, Optical Innovation and Material Innovation.
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ing in a more mature industry – developed intense relations with its clients, which in most cases are Fiat’s suppliers. ST, in a more turbulent technological landscape, developed codesign partnerships with its clients/partners and R&D collaborations with public and private ‘research suppliers’. Through these networks, CRF was able to find resources to sustain the scientific and technological performance of the group, and ST was able to monitor new technologies and develop competencies all over the world through an amazingly responsive network of collaborations. A second finding that applies to both situations of radical and incremental technological change, is that success is also based upon clear decision-making, which benefits from the presence of skilled natural leaders. In both CRF and ST, the contribution of their CEOs, Giancarlo Michellone and Pasquale Pistorio respectively, has been very important in defining, defending and further expanding strategic decisions. The way they have been able to motivate their immediate collaborators in the top management teams towards specific strategic commitments is remarkable, and has greatly contributed to the successful implementation of the strategy. On the other hand, slow decision-making processes and poor organizational communication may have a negative impact on knowledge-intensive organizations. This is particularly so in firms where restructuring and ownership changes generate fears among researchers about outsourcing or drastic revisions of the R&D vision. From this point of view, the lack of a well-communicated vision produces particularly negative results in organizations whose task is to produce breakthrough results for science and technology. Another conclusion is that even large established companies might suffer from an increased dynamism in the technological domain. The case of TiLab is a clear example of a large incumbent R&D centre, equipped with all the complementary capabilities and assets, that is facing turbulent technological dynamics and which has not completely defined a strategy to maintain its position in the market. Clearly, the incapability of TiLab to find its own strategic conduct is partly the result of the period in which it was a state monopoly, and was used to compete in a legally protected environment. However, any established firm operating in such a technological environment would find it difficult to adopt appropriate strategies. Lastly, the example of Pirelli, and the deal with Corning for the sale of Optical Technologies, shows that when a firm – even a large one – is not a leader in the target industry, the val-
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orization of an internal R&D investment through the market for technology can be a particularly interesting solution. In fact, if a new entrant has developed relevant technologies that are far from its core business, and if the vision of the top management is clear about the future growth patterns that are likely to be followed, the sale of a whole subsidiary might represent an effective strategy, since new financial resources can then contribute to reinforcing the core activity. On the other hand, what might not be desirable is the sale of companies, or technologies, dictated by budget constrains rather than by a deliberate long-run strategy.
Acknowledgements We would like to thank Gian Carlo Michellone, Dario Monti, Massimo Casali, Gabriella Marinsek, Maria Onida, Elena Sinchetto, Gianni Morra, Francesco Testa, Paolo Volpi and the CRF’s staff for the deep, interesting discussions about their organization. Our gratitude goes also to the TiLab staff members which we had the opportunity to meet and work with, Fulvio Faraci, Roberto Saracco, Francesca Mondello, Aurora Amato. Eugenio Iannone and Donatella De Vita provided us detailed information and a complete description of Pirelli’s strategy and organization. Lastly, we would like to thank Alessandro Cremonesi and Andrea Cuomo at StMicroelectronics, for their useful comments. Obviously, inaccurate descriptions and interpretations of events and facts about the cases we have described are our sole responsibility. We also thank the two anonymous referees who reviewed the paper.
References Arora, A., Fosfuri, A. and Gambardella, A. (2001) Markets for Technology: the Economics of Innovation and Corporate Strategy. MIT Press, Cambridge, MA. Borrus, M. and Zysman, J. (1997) ‘Wintelism and the changing terms of global competition: prototype of the future?’ BRIE Working Paper 96B. Business Europe (2000) ‘Multinational Monitor: Pirelli strikes it rich’, Business Europe, 40(20), 3. CED (2000) ‘Corning swallows up Pirelli’s Optical Components for $3.6B’, CED 26(11), 12. Chesbrough, H.W. and Teece, D.J. (1996) ‘When is virtual virtuous? Organizing for innovation’, Harvard Business Review 74(1), 65. Cohen, W.M. and Levinthal, D.A. (1990) Absorptive capacity: a new perspective on learning and
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innovation’, Administrative Sciences Quarterly 35, 569–596. Cuomo, A. (2003) Innovazione e imrese high-tech: il caso ST Microelectronics. In Distretti Industriali e Distretti Tecnologici. Modelli di Sviluppo per il Mezzogiorno, edited by F. Cesaroni and A. Piccaluga. Franco Angeli, Milan. Fisher, L.M. (2002). ‘ST Microelectronics: the metamorphysics of a metanational pioneer’, Strategy and Business, third quarter. Fields, G. (2004) Territories of Profit: Communications, Capitalist Development and Innovation at G.F. Swift and Dell Computer. Stanford University Press, Palo Alto. Freeman, C. and Perez, C. (1988) ‘Structural crises of adjustment, business cycles and investment behaviour’. In Dosi, G., Freeman, C., Nelson, R., Silverberg, G. and Soete, L. (eds.), Technical Change and Economic Theory. Pinter, London. Gans, J.S. and Stern, S. (2003) ‘The product market and the market for “ideas”: commercialization strategies for technology entrepreneurs’, Research Policy 32, 333–350. Garud, R. (1994) ‘Cooperative and competitive behaviors during the process of creative destruction’, Research Policy 23, 385–394. Glasmeier, A. (2000) Manufacturing Time: The Rise and Fall of Watch Industries and Regions Around the Globe. Guilford Press, New York. Leachman, R.C. and Leachman, C.H. (2003) ‘Globalization of semiconductors: do real men have fabs, or virtual fabs?’. In Kenney, M. and Florida, R. (eds.), Locating Global Advantage. Stanford University Press, Stanford. Leifer, R., Rice, M., McDermott, C.M., O’Connor, G.C. and Veryzer, R. W. (2000) Radical Innovation: How Companies Can Outsmart Upstarts. Harvard Business School Publishing, Cambridge, MA. Lorenzoni, G. and Baden-Fuller, C. (1995) ‘Creating a strategic center to manage a web of partners’, California Management Review 37(3), 146. Macher, J.T., Mowery, D.C. and Simcoe, T.S. (2002) ‘E-business and disintegration of the semiconductor industry value chain’, Industry and Innovation 9(3), 155–181. Michellone, G.C. (1995) ‘Organizing science: Constraints and new challenges’, ATA – Ingegneria Automotoristica 48(12), 675–684. Mintzberg, H., Pascale, R.T., Goold, M. and Rumelt, R.P. (1996) ‘The “Honda Effect” revised’, California Management Review 38(4), 78–117.
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Pavitt, K. (1984) ‘Patterns of technical change: towards a taxonomy and a theory’, Research Policy 13(6), 343–376. Teece, D.J. (1986) ‘Profiting from technological innovation: Implications for integration, collaboration, licensing and public policy’, Research Policy 15, 285–305. Womack, J.P., Jones, D.T. and Roos, D. (1990) The Machine that Changed the World: the Story of Lean Production. HarperCollins Publishers, New York.
Andrea Piccaluga is full professor in Business Administration and Management of Innovation at the University of Lecce (Italy) and research fellow at the In-Sat Lab of the St. Anna School of Advanced Studies (Pisa, Italy). His research interests regard the management of technology and innovation in industrial firms and public research centres. His recent research activity focuses on the creation and growth of small researchbased high-tech firms and on new models for the organization of industrial R&D. Fabrizio Cesaroni is assistant professor at the University of Lecce (Italy) and research fellow at the St. Anna School of Advanced Studies (Pisa, Italy), where he obtained a PhD with a thesis titled ‘Technology Strategies in the Knowledge Economy’. His main research interests are in the economics and management of technology transfer, and specifically in the role played by technology-based start-ups in fostering the economic development. Alberto Di Min is a PhD Candidate at the University of California at Berkeley. His research stands at the intersection of Regional Development and Business Studies. In particular, he is currently considering Intellectual Property Management as one of the key dimension to look at in order to analyse a firm’s technology sourcing strategy and innovation. He received a MS in Public Policy from the Georgia Institute of Technology and a BA in Economics from the University of Pisa and the St. Anna School.
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Organizing Pharmaceutical Innovation: From Science-based Knowledge Creators to Drug-oriented Knowledge Brokers Oliver Gassmann and Gerrit Reepmeyer The pharmaceutical industry is exposed to severe conditions: while a typical R&D process lasts up to 13 years, only one out of 10,000 substances becomes a marketable product. In addition, markets for pharmaceutical products tend to become more fragmented, leading to an increased risk of market failure. At the same time, R&D productivity has been deteriorating for several years. The number of new drug approvals is constantly declining, while R&D expenditures are escalating as a result of high investments in new drug discovery technologies and more complex clinical studies. As a response, pharmaceutical firms have started to focus on balancing the right size and structure of their R&D activities. This leads to several organizational trends: (1) novel management of technologies; (2) R&D internationalization; and (3) open innovation modes.
Innovation as a Key Success Factor in the Pharmaceutical Industry ew other industries are as driven by science, research and development as the pharmaceutical industry. Efficient and effective R&D management thus receives a deliberate emphasis in almost any pharmaceutical company. However, despite decades of intensive research, we are still a long way from solid guidelines for the manageability of pharmaceutical innovation. In 2003, the major US and European pharmaceutical companies invested more than US$33 billion in R&D, at a higher R&D-to-sales ratio than virtually any other industry, including chemicals, automobiles, electronics, aerospace, and computers (PhRMA, 2004). However, while R&D processes last up to 13 years, only one of 5,000 product-ideas is launched on the market (Pfeiffer, 2000), and only one out of 10,000 substances becomes a marketable product (Völker, 2001). In addition, only three out of ten drugs that reach the market generate revenues that meet or exceed average R&D costs, and the 20 percent of products with the highest returns generate 70 percent of total returns
F
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according to a study by Duke University economists (Reuters, 2002). The drug development pipeline is the engine that drives pharmaceutical companies, and market valuations of pharmaceutical companies are usually based on prospected new drug approvals and expected new drug revenues. The double-digit growth rates of the past 30 years in the pharmaceutical industry are now strictly incorporated into the pharmaceutical industry’s overall growth expectations. This means that a large pharmaceutical company must introduce at least two to four new drugs on the market per year in order to maintain the implied growth. How do the innovating pharmaceutical companies organize their innovation activities in order to meet these challenges? We pursued this research question when analyzing several of the world’s leading pharmaceutical companies.
Literature Review The literature on pharmaceutical R&D management is extensive. In particular, the
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emergence of the biotechnology industry over the last two decades has led to a surge in publications about biotech firms and their respective impact on pharmaceutical R&D. Regarding organizational trends in pharmaceutical R&D, we identified three relevant literature streams: (1) literature in the area of organizational performance in pharmaceutical R&D (including resource allocation and the valuation of R&D projects), (2) research focusing on R&D internationalization in the pharmaceutical industry, and lastly (3) literature on organizational issues related to pharma-biotech collaborations.
Organizational Performance in Pharmaceutical R&D Teoh (1994) analyzed the R&D performance of major pharmaceutical companies, and observed which strategies have the best chance of producing successful new chemical entities (NCEs). He found that technological familiarity scored well as a success forecaster. Other important predictors for success include product differentiation, competitive intensity and source of technology. National origin, however, did not turn out to be a significant factor. Boerner (2002) figured out that the main success factors include the internal clinical capabilities, the ability to internalize critical external knowledge as well as the means by which a firm organizes development activities with key partners. Moreover, success in pharmaceutical R&D very much depends on leadership centering around the following management practices (Needleman, 2001): selecting excellent targets for drug discovery, driving rapidly ‘killer’ experiments that provide decision-critical information, focusing limited resources to enhance speed, breaking down barriers between research and manufacturing and managing product lifecycles effectively. In addition, the origins of competitive advantage lie in the ability to identify and respond to environmental cues well in advance of observing performance-oriented pay-offs (Cockburn, Henderson & Stern, 2000). Therefore, R&D and salesforce have an indirect and direct effect on sustained competitive advantage (Yeoh & Roth, 1999). Another key element for success is the organizational embeddedness of central research activities (Cardinal & Hatfield, 2000; Drews, 1989). While central research is the most promising vehicle to bring new methods and concepts into the corporation, a central research unit alone does not deliver satisfying results. The transition of technology from central to divisional research and the organizational and technical conditions of both types of research
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play a critical role. Although the approach of using real options to evaluate R&D projects has been critically discussed by several pharmaceutical companies because of its high complexity, this valuation technique has received widespread attention among research on pharmaceutical R&D management (see Brach & Paxson 2001; Bunch & Schacht 2002; Cassimon et al. 2004; Loch & Bode-Greuel 2001). McGrath and Nerkar (2004) went a step further and explored firms’ general motivation to invest in a new option. Based on a study covering 45,757 patents established by the 31 major players in the pharmaceutical industry, they concluded that investments in pharmaceutical R&D are consistent with the overall logic of real options reasoning, regardless of whether it is done implicitly or explicitly.
R&D Internationalization in the Pharmaceutical Industry Internationalization of pharmaceutical R&D has been subject to research by Drews (1989) and Henderson (1994) who both underlined the importance of managing information in pharmaceutical innovation which attracted substantial investments in the build-up of ICT infrastructure and international communication networks. Albertini and Butler (1995) gave an excellent overview of international networking and collaboration in research and development for the case of Glaxo. Kuemmerle (1999) reported on the globalization of pharmaceutical and electronic companies but did not elaborate in detail on differences between those two industries. Halliday et al. (1997) studied R&D strategy and the investment patterns of pharmaceutical multinationals, finding that the largest and thus most internationalized companies had the highest R&D ratios and advanced relatively more new chemical entities. Beckmann and Fischer (1994) summarized rationales for R&D internationalization in large pharmaceutical companies.
Organizational Issues Related to Pharma-biotech Collaborations The general trend towards collaborative R&D in the pharmaceutical industry has been analyzed by several scholars (see Jones, 2000; Pisano, Shan & Teece, 1988; Powell, Koput & Smith-Doerr, 1996; Tapon & Thong, 1999; Tidd, 1997; Whittaker & Bower 1994). According to Jones, Conway and Steward, (2000), there are many explanations for increased networking in the pharmaceutical industry including
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shared risks, market access, complementary assets and speed to market. Today’s pharmaceutical R&D is no longer a stand-alone activity by single companies, but can rather be defined by a complex web of inter-firm agreements and alliances that link the complementary assets of one firm to another. Pharmaceutical companies form the nodes in large-scale scientific networks that include biotech firms as well as universities (Albertini & Butler, 1995). As abrupt innovations in biology and chemistry are serendipitous and impossible to predict, only a vast network of research relationships with universities and independent labs helps get access to these serendipitous discoveries. Management of collaborations with outside innovation will thus be a core competence in pharmaceutical R&D (Tapon & Thong, 1999). As R&D activities are increasingly bought-in, Jones (2000) expects in the future a substantial reduction in the number of scientists directly employed by leading firms. According to Jones (2000), the proportion of external R&D compared to internal R&D expenditure increased, for instance, from 5 percent to 16 percent between 1989 and 1995 in the pharmaceutical industry in the UK.
Research Methodology Our own research is based on this literature, but also on previous work we have done on pharmaceutical R&D management, see for example Gassmann and von Zedtwitz (1998, 1999, 2003) as well as von Zedtwitz and Gassmann (2002). Between 1994 and 1999, we studied transnational R&D management and the evolution of international R&D organizations in more than 80 multinational companies from various industries; during the final phase of this period, we developed in-depth case studies of six pharmaceutical/chemical companies while working on a cross-industry comparison of managing global innovation. Interviews were based on semi-structured questionnaires, and included personal observations and additional reports on the subjects investigated to complement the interviewee’s input. Furthermore, we returned our observations in written form and asked our contact partners to revise and correct erroneous interpretations. Thus, we aimed to secure a solid base of information using methods described by Yin (1988) and Creswell (1994) as data triangulation. In 2002, we analyzed the Swiss pharmaceutical industry for a foreign health research institute, which allowed us to update our previous research with Swiss and other Western
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European pharmaceutical companies. In early 2003, we conducted an expert workshop, inviting 14 R&D managers and directors from ten leading pharmaceutical and biotech companies, in which we presented our findings, discussed their validity and assessed their implication for organizing pharmaceutical innovation. Later on in 2003, we conducted a survey among 60 companies on strategic technology management issues, by order of Novartis among others.
Key Challenges in Pharmaceutical Innovation The Productivity Paradox in R&D By definition, R&D productivity is the ratio of input in R&D (money, resources, people) versus its output (new products, patents, publications). The black box in between consists of the drug development pipeline, new screening and research technologies, worldwide cooperation networks in clinical research and testing, and a whole new armada of licensing and co-operation agreements with competitors and biotechnology start-ups. Still, as a recent Reuters study (2003) shows, R&D performance of the major pharmaceutical companies is sub-optimal: • pipeline output is low and declining; • costs of R&D are rising rapidly, driven by larger and more complex clinical studies and expensive new enabling technologies; • over-supply of ‘me-too’ launches and a lack of genuinely innovative drugs make it difficult to replace revenues lost through patent expiry; • protracted clinical trials and administrative procedures reduce the marketed shelf life of patented products. In addition, R&D expenditures of the pharmaceutical companies worldwide have grown constantly over the last decades (in relative terms, from 11.4 percent of sales in 1970 to 18.5 percent in 2001), and according to PhRMA (2004), the major US and European companies invested more than US$33 billion in R&D in 2003. However, the number of new chemical entities (NCEs) that have been approved for market entry by the US Food and Drug Administration (FDA) has declined from 53 in 1996 to only 35 in 2003 (see Figure 1). Consequently, drug development costs per new drug approval are constantly increasing. In 1976, it cost US$54 million to develop a new drug, US$231 million in 1987, and about US$280 million in 1991 (DiMasi, 2001). This number has grown to close to US$1 billion by
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$609mn $609mn
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each over the past decades, the average duration of the clinical development time has increased significantly since the 1970s, whereas the early 2000s saw some improvements (Figure 2). However, compared to the 1980s and 1990s, modest time gains seem to have been made during the drug approval stage (i.e. after most R&D has actually been completed) and where the co-operation, speed and involvement of regulatory authorities is paramount. The long average development times are partly due to relatively high attrition rates in later stages of the development process. The attrition rates – the percentage of NCEs that drop out of testing in a certain stage – are the highest in the pre-clinical phase (60.2 percent) and the clinical phase II (52.1 percent), that is after several years of development have already been conducted. Once a new drug candidate is submitted to the health authorities, the attrition rate decreases to around 10 percent (Buchanan, 2002). Translating the attrition rates into success rates provides an overview about the probability of success for a compound in the R&D pipeline. While a compound in the pre-clinical phase only has a probability of success of around 10 percent, this rate increases significantly once the compound passes the clinical phase II and reaches clinical phase III (65.8 percent). In this regard, it has to be considered that in most industries the decision to terminate a project is made based on economic considerations, whereas the typical reasons in the pharmaceutical industry are technical or scientific ones (e.g., a lack of efficacy or safety which
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Figure 2. Break-up of time spent by a drug candidate in the clinical and approval phases Source: PhRMA, 2004. might only become visible at the clinical phase II). Reflecting both the attrition rate and probability of success, the highest potential for improvements in productivity are in clinical phase II as well as before the pre-clinical phase (i.e. lead finding and lead optimization). The organizational challenge consists of reducing the attrition rate in the late costs-intensive phases by higher effectiveness in earlier phases.
Changing Market Trends With an average annual growth rate of 11.1 percent from 1970 until 2002, the pharmaceutical market is one of the fastest growing markets in the world, reaching more than US$400 billion in sales in 2002 (PhRMA 2003). Today, these double-digit growth rates are strictly incorporated into the industry’s overall growth expectations. For the past decades, most pharmaceutical companies relied on blockbuster drugs – a drug with at least US$1 billion in annual sales – as the market strategy to achieve these growth rates. In 2002, 58 ethical pharmaceutical products with aggregated sales of US$120 billion have been considered blockbuster drugs. According to Reuters (2003), only two companies – GlaxoSmithKline and Pfizer – own eight blockbuster products. The majority of companies owns between one and three blockbusters (e.g., Eli Lilly, AstraZeneca, Novartis or Bayer). The ratio of blockbuster sales to total sales varies tremen-
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dously. While, for example, Pfizer generates 80 percent of total sales with its eight blockbuster products, other companies such as BritolMyers Squibb, Novartis or Aventis have a rather balanced drug portfolio. Reliance on blockbuster drugs has remained a largely unquestioned growth strategy of most leading pharmaceutical companies, given the strong first-mover advantages in the pharmaceutical market. However, analysis conducted by Reuters (2003) shows that approximately US$30 billion of blockbuster revenues were due to lose US patent protection at the end of 2002. Furthermore, the blockbuster market in 2008 will be worth only 1.4 times that of the blockbuster market in 2000 and will thus not be able to keep up with the 10 percent+ annual revenue growth expectations (Reuters, 2003). In addition, the traditional blockbuster markets are crowded with competing products launched at closer intervals to each other and targeting similar therapy areas. This raises the question of whether blockbusters can or should remain a focus of future growth. Most pharmaceutical companies have thus started to question the traditional blockbuster strategy and balance their drug portfolios in order to compensate for declining blockbuster growth by other means. The emergence of new drug discovery technologies, such as genomics, pharmacogenomics and proteomics, has heralded new opportunities for the pharmaceutical industry
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not only to generate products of higher and more selective efficacy but also to explore the opportunity of individualization and mass customization of pharmaceutical products, targeting smaller patient populations with specific genotypes. Hence, it is justified to ask whether the mass application of a single drug to a large patient population will remain a viable strategy for the future. However, pharmacogenomics-derived products will not mean the end of the blockbuster paradigm; rather, they will help change the accepted definition of these high earning products to that of ‘multi-busters’, a series of personalized therapies that are able to dominate a certain targeted disease area. Consequently, the new ‘multi-buster’ strategy requires targeting much more different markets with specialized therapies. Pharmaceutical companies are expected to increase their ‘shots on goal’ by introducing much more products targeting these various and relatively small market segments. However, specialty markets bear higher risks as they might not allow the pharmaceutical company to easily recoup their R&D investments because of their limited market size. In addition, broadening market reach across several nichemarkets bears an additional risk of market failure because of a lack of focus and diversification disadvantages. Novartis’ Gleevec is a successful example of a currently marketed product that illustrates how markets may become micro-segmented under a genomics-driven business model (see Reuters, 2003). Gleevec has now received blockbuster status, but unlike mass-market megadrugs, it targets a chromosomal abnormality that occurs in only a small segment of the population (i.e. chronic myelogenous leukaemia, CML). The market for drugs launched for this indication was not considered sufficient in size to allow companies to recoup their R&D investment. However, Gleevec has generated lucrative revenues since its launch in 2001. Its success partly reflects Novartis’ aggressive, pre-launch PR strategy to drive rapid sales growth in an emerging market. With a market share of almost 100 percent in this specialty market, Gleevec has turned out to be the third most successful pharmaceutical launch in 2001. Successful market strategies today not only require a focus on the number of new products, but also a distinctive approach to target potentially attractive niche-markets and an adjustment in the way in which medicines are profiled and marketed. The clinical profile and the timing of product launch thus become increasingly important factors for future product success.
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Some Organizational Trends in Pharmaceutical Innovation Organizing with Novel Technologies While the most recent scientific and technological revolution has been the biotechnology boom starting in the late 1970s and early 1980s, there are ever more complex sciences and technologies now that affect the entire pharmaceutical R&D process (i.e. to help discover lead compounds and develop drug candidates). All novel technological approaches used today are mainly triggered by improved computing power, the rise in novel computer applications and the discovery and understanding of the Human Genome. The most prominent technologies that are expected to have the highest impact on drug discovery and development include high-throughput screening, combinatorial chemistry, bioinformatics, proteomics, genomics, pharmacogenomics, and molecular design (for details see Gassmann, Reepmeyer & von Zedtwitz, 2004). High-throughput screening has emerged as the major tool currently in use for lead identification. It allows large numbers of chemicals to be automatically tested for their impact on biological activity. Some companies achieved improvements in screening effectiveness well above a multiple of 25 by using high-throughput screening technologies (see Reuters, 2002). However, as the production of compounds did not expand at the same rate as the screening of compounds, a bottleneck in the discovery process occurred. Hence, the increasing application of high-throughput screening triggered the emergence of combinatorial chemistry, which allows large numbers of compounds to be made by the systemic and repetitive covalent connection of a set of different ‘building blocks’ of varying structures to each other. The subsequent availability of huge amounts of data that are generated by the new discovery technologies requires new ways to process and prepare the entailed information in order for it to be accessible for the overall innovation process. Given that a single pharmaceutical lab can generate more than 100GB of data per day, sophisticated bioinformatics systems are needed that primarily cover data management software, statistical analysis software and visualization technologies. Proteomics describes a novel approach to drug discovery. The term proteome refers to all the proteins expressed by a genome, and proteomics is consequently dealing with proteins produced by cells and organisms. Proteomics includes not only the identification and quantification of proteins, but also the determination of their localization, modifica-
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tions, interactions, activities, and, ultimately, their function. Genomics describes a revolutionizing and completely different drug discovery approach. It is based on the process of identifying genes involved in diseases through the comparison of the genomes of individuals with and without disease. Genomics is the most high profile of the many enabling technologies recently developed in pharmaceutical research. Genomic technologies will enable the identification of 3,000 to 10,000 new drug targets, compared with the current number of 500 (Pfeiffer, 2000). The integration of genomics and other technologies will lead to a shift from broadly targeted drugs to more focused medicines with much higher therapeutic value for the target population, allowing for masscustomization of drugs. However, validation of the many targets generated by genomic methods is the major bottleneck today. The effect of an individual’s genetic inheritance on the body’s response to drugs is the object of analysis of pharmacogenomics initiatives. Pharmacogenomics integrates traditional pharmaceutical sciences such as biochemistry with annotated knowledge of genes, proteins and single nucleotide polymorphisms and thus combines the disciplines of pharmacology and genomics. Hence, pharmacogenomics primarily deals with the production of tailor-made drugs for individuals. While most drug discovery technologies, such as high-throughput screening or combinatorial chemistry, rely upon screening through vast inventories of naturally occurring and man-made chemicals in search of previously undiscovered substances with the desired biological activity, molecular drug design, by contrast, tries to discover new drugs by looking at the structure of the underlying proteins. Instead of eliminating the irrelevant substances in order to find the relevant ones, molecular drug design is analytically deriving the design of the target molecules. This approach seems to be far more effective and efficient than screening methods because it is based on an analytical process rather than serendipity. The drug design methodology consists of iterative cycles of design, simulation, synthesis, structural assessment and redesign. All of these new sciences and technologies require tremendous investments in state-ofthe-art technology platforms and infrastructure. The two technology platforms of highthroughput screening and combinatorial chemistry, for example, account for more than half of all spending on new discovery technologies in the pharmaceutical industry (Reuters, 2002). Other technology platforms, such as
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genomics-related sciences and technologies, do not represent less capital-intensive investments. For instance, Lehman Brothers (1999) estimated that it requires a US$100 million annual investment to participate in the genomics arena. To compete in the more aggressive game of this emerging technology, a company might require up to US$300 million annually (Agarwal et al., 2001). With an average integrated pharmaceutical company spending around 25 percent of R&D on discovery, an aggressive investment in new technologies would consume more than 75 percent of a middle-tier company such as Roche or Schering-Plough’s discovery budget, and would still consume 30 percent of a top-tier company’s budget such as GlaxoSmithKline or Pfizer (Reuters, 2002). While these technologies definitely account for major improvements in pharmaceutical research, they remain relatively novel, and their transition into launched products is yet to be seen. There is still a lack of evidence that these investments lead to real improvements in R&D productivity. In addition, pharmaceutical companies do not even have the option of abandoning the idea of being involved in the latest drug discovery technologies simply because they cannot afford to leave the upside potential of these developments to other companies and run the risk of loosing substantial ground to competition over the long run. In 1998, Bayer decided early on to get access to genomics-related technologies and subsequently entered into a technology-alliance with Millennium Pharmaceuticals. Between 1998 and 2003, Bayer invested a total amount of around US$465 million into this research partnership. This investment included an equity investment of US$96.6 million for a 14 percent stake in Millennium. Bayer’s intention was to use Millennium’s genomicsrelated technology platform to discover 225 new genomics-based drug targets. At the end of this collaboration, more than 450 drug targets could have been identified for Bayer by Millennium. In addition, Bayer was able to sell its interest in Millennium for approximately US$300 million, which is equivalent to a multiple of three times its initial investment. While this collaboration is regarded as a success by both parties, the industry, however, remains sceptical about the alliance’s results: only one validated pre-clinical drug candidate emerged out of all drug targets that had been identified during this research alliance. In general, the new technological enablers support a faster and more effective transfer of scientific knowledge into new drug design. Trial-and-error based knowledge creation is complemented by more rational algorithms
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and results contributing to a more detailed understanding of the drug target function for onset, progression and chronicity of the disease. Pharmaceutical companies are subsequently forced to find innovative organizational ways to access these technological enablers in order to gain an edge over competition.
Organizing for Globalization As a science-driven endeavour, the pharmaceutical industry is inherently global. This is even more the case for pharmaceutical companies originating in small countries, as high R&D costs are determined by the task at hand but can only be recouped by selling the resulting drug to a worldwide market. Although many smaller multinationals that previously relied on centralized R&D now engage in sourcing technology from around the world, the R&D internationalization of the 1980s and 1990s is largely restricted to multinational companies. The pioneers of R&D internationalization are high-tech companies operating in small markets and with few R&D resources in their home country, as it is the case for Novartis and Roche (Switzerland). Swiss, Dutch and Belgian companies carried out more than 50 percent of their R&D outside their home country by the end of the 1980s. Only in recent years has the increased competition from within and outside their industries forced these companies to source technological knowledge on a global scale. The management of cross-border R&D activities is characterized by a significantly higher degree of complexity than local R&D management. The extra costs of international co-ordination must be balanced by synergy effects such as decreased time-to-market, improved effectiveness and enhanced learning capabilities. Corporate top managers are confronted with finding the optimal R&D organization based on the type of R&D activities, the present geographic dispersion of subsequent value-adding activities such as production and marketing, and the co-ordination between a multitude of contributors to the R&D process. Pharmaceutical companies belong to the most internationalized firms when it comes to R&D. With a range of 20–70 percent of R&D spent outside the home country, pharmaceutical firms outperform many companies from other technology-intensive industries in terms of R&D internationalization (see Gassmann, Reepmeyer & von Zedtwitz, 2004). Drivers of R&D internationalization can be categorized into one of five different categories of input-, output-, political and
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sociocultural, efficiency as well as R&Dexternal factors (Gassmann & von Zedtwitz, 1998). Input-oriented factors are concerned with R&D personnel qualification, know-how sourcing and regional infrastructure: factors that are largely outside the direct influence of R&D but necessary for its fundamental operations. Proximity to markets and customers, improvements of image and collaborations are output- or product-oriented factors. These factors can be chosen or influenced by the company in order to improve the effectiveness of its R&D. Efficiency-related criteria concern the costs of running and the critical mass of R&D units, as well as efficient hand-over processes between R&D and other corporate functions. Direct cost advantages (such as the often publicly discussed labour costs) rarely influence the internationalization of R&D, but other efficiency-oriented factors such as costs of coordination and transfer, and critical laboratory size do have an even bigger impact on international R&D organization. Direct costs may become more important in the coming years as the other factors improve in low labour-cost countries (Thurow, 1996). Political and sociocultural factors such as local content rules, technology acceptance and public approval times, play an important role for locating R&D abroad. Protectionist, legal and cultural constraints imposed by national governments, however, often require a company to establish local R&D units. R&D-external forces such as a business unit’s striving for autonomy and the build-up of local competence alters the original mission of a local R&D unit. This evolution may take place unnoticed by the headquarters particularly in strongly decentralized companies. Acquisitions are rarely based on the motivation to obtain particular technological skills but rather on market access considerations. The development of local products requires the early involvement of market and customer application know-how, which is more likely to be found in regional business units. Companies with local R&D exhibit an inclination towards overemphasizing different local market specification in order to support local autonomy and independence from the parent company. Host-country restrictions, such as local content requirements, tolls, import quota and fulfillment of standards, can attract R&D into key market countries (pull regulations). On the other hand, home-country restrictions may induce companies to move R&D abroad (push regulations): European regulations caused biotechnology R&D to be transferred to the USA. In addition, external factors have a great impact on the dispersion of R&D sites.
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As a response to the global changes and challenges in pharmaceutical research, Novartis launched in 2002 its corporate ‘Institute for BioMedical Research’ in close proximity to MIT in Cambridge/Massachussetts (USA), which takes the lead in worldwide corporate R&D activities. While Basel (Switzerland) officially remains the company’s R&D headquarter for now, the new BioMedical Research centre in the USA is growing significantly and is managing several offices worldwide. The Cambridge facility alone currently houses over 400 scientists and technology experts and is expected to expand to approximately 1,000 employees in the near future. The entire BioMedical Research institute will receive around US$4 billion in investments over the next ten years. In general, today’s pharmaceutical companies are increasingly impelled to rethink their organizational structures in order to optimally benefit from the challenges and opportunities offered by globalization in pharmaceutical R&D.
Organizing for Outside Innovation Most companies have conceded that fundamental breakthroughs in technology or science are increasingly likely to occur outside their organizations (see also Chesbrough, 2003). The cascade of knowledge flowing from new sciences and technologies is simply far too complex for any company to handle alone, and the increasing pressure to gain access to novel technologies has forced pharmaceutical companies to open their boundaries and look beyond their own research borders. Merck had already realized in its 2000 annual report that its own biomedical research contributes about 1 percent of worldwide biomedical research. In order to tap into the remaining 99 percent, the company intends to actively reach out to universities, research institutions and companies on a global scale to bring the best of technology and potential products into Merck. Furthermore, as serendipity is still considered a key success factor, particularly in the early discovery phases, a network to outside innovation is highly important because the likelihood of a single company generating all necessary substances in-house is relatively low. This has led to the belief that collaborations with various types of external entities engaged in pharmaceutical research and discovery, such as biotech firms or university research labs, have become a necessity for pharmaceutical R&D management. While technologyrelated collaborations with external partners are not a new phenomenon, they are even
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more critical today because of the ever increasing technological risks in drug discovery. Technology areas that are not yet covered by the pharmaceutical companies particularly have to be subject to in-depth analyses how they can best be accessed outside the corporate boundaries. As a response, most pharmaceutical companies have started to concentrate on their core competencies evolving around technology platforms and therapy areas. They streamline their R&D activities, deciding which tasks have to remain inside the own boundaries and which tasks should be absorbed from outside entities or can be multiplicated by disposing them to external partners. Balancing the right size and structure of the R&D department has thus turned out to be one of the primary objectives in pharmaceutical R&D management (Figure 3). The traditionally integrated structure of pharmaceutical R&D departments is expected to further decrease, and the interaction with external partners is subsequently increasing. While the internal complexity of pharmaceutical R&D can thus be reduced, the complexity of managing relationships to external partners is growing accordingly. The interactions with external partners cover various domains including licensing, outsourcing, collaborations, mergers & acquisitions, joint ventures, spin-offs or divestitures. Although outsourcing is controversially discussed in the pharmaceutical industry because of the high complexity in drug discovery, outsourcing some R&D activities to pharmaceutical service providers might lead to time and cost savings, would allow for access to new technologies and know-how, and could help manage peak resource shortages. Many pharmaceutical companies already work with multiple outsourcing partners during the innovation process to build greater experience in managing value networks rather than just value chains. Besides biotechnology, genomics-based and other platform companies, these partners include a wide variety of service providers, such as contract research organizations (CROs) or contract manufacturing organizations (CMOs) among others. Research by Lehman Brothers (1999) has shown that contract research organizations are able to conduct clinical trials up to 30 percent faster than the average large pharmaceutical company. In 1999, pharmaceutical companies spent about 25 percent of their R&D budgets for services provided by CROs. This figure is expected to increase to about 40 percent (see Lehman Brothers 1999). At this stage, the CRO industry consists of over 1,000 companies based in the USA, Europe and Asia. There are many rather small
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external internal
Pharma R&D
Absorption Absorption
• In-licensing • Alliances • Mergers & acquisitions • Joint ventures
Multiplication Multiplication
• Out-licensing • Over-capacities • Spin-offs & divestitures • Outsourcing
internal external
Figure 3. Balancing the right size and structure of the R&D department leads to increased interaction with external partners
Financial Investments
Level of Involvement
high
Shared Revenues and Profits Management of Platforms low
Fee for Service
established
emerging
new
State of interaction
Figure 4. Changing interaction with outside innovation in pharmaceutical R&D CROs that are usually regionally embedded into local market structures. However, the nature of interaction between pharmaceutical companies and their external partners has started to change over the recent past (see Gassmann, Reepmeyer & von Zedtwitz, 2004). Besides outsourcing relatively straight-forward activities such as technical services or the management of technology platforms, the pharmaceutical
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company could proactively use its external partners to hand over even more complex tasks (Figure 4). Novel co-operation modes could include the partner firm sharing drug development risks via certain revenue- and profit-sharing arrangements. These collaborations typically centre around complex licensing and/or codevelopment agreements. Probably the most prominent example of a successful licensing
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deal includes the drug Lipitor, which is now owned by Pfizer. Warner Lambert (which had later been acquired by Pfizer) originally licensed Lipitor from Yamanouchi. Afterwards, Pfizer marketed Lipitor to compete with drugs such as Zocor (Merck), Pravachol (Bristol-Myers Squibb) and Lipobay (Bayer) for the lucrative cholesterol-lowering drug market. Pfizer used its unique marketing strength and sales capabilities to turn this externally sourced ‘me-too’ drug into the most successful blockbuster ever. In 2003, Lipitor became the first and only pharmaceutical product ever to top US$10 billion in annual sales. The most radical organizational scenario for the future regarding the interaction with outside innovation in pharmaceutical R&D could include that the pharmaceutical company itself actively supports external innovation activities by making financial investments into legal entities that serve as a co-operation partner. A good example of this case is the Novartis Venture Fund, which provides capital for spin-offs in order to reduce not-needed capacities and release entrepreneurial responsibility and capability.
Conclusions Closing the productivity gap in research and development is the foremost task in the pharmaceutical industry and represents the single most important direction for future activities in pharmaceutical innovation. As illustrated before, pharmaceutical companies are utilizing several organizational vehicles and mechanisms in order to widen the intake of new drug candidates and to make drug development more efficient. Some trends and future directions for the organization of pharmaceutical R&D include: • A wide range of novel drug discovery technologies already in use, such as highthroughput screening, combinatorial chemistry, bioinformatics, or molecular drug design, are expected to improve pharmaceutical research. The application of these technologies allows for the automation of much of the discovery function, promoting a more comprehensive and consistent screening process as well as enhancements in R&D productivity. From an organizational perspective, this means a move away from a disease-centred discovery process to a systematic and mechanistic discovery process in the early phases. • The integration of genomics, proteomics, molecular design and other technologies will lead to improved target identification
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and attrition, enhanced lead optimization, improved clinical trial designs that speed approval and signal a shift from broadly targeted drugs to more focused medicines with much higher therapeutic value for the target population. With access to genomics technologies estimated to require a minimum US$100 million annual commitment, top-tier pharmaceutical companies might be most likely to be the first to fully integrate the new technologies. However, technology-related collaborations with specialized biopharmaceutical companies on particular niche-areas complement the pharmaceutical companies’ coverage of any of these novel technology platforms. • Pharmaceutical companies should contemplate wheter the traditional paradigm of the blockbuster concept is still applicable for the future. Many firms will probably not be able to rely on only a few blockbuster products any longer. Personalized medicine, dependent on the genetic profiles of the patients, is required, while the economic consequences of the resulting patient segmentation and product customization have to be considered. New organizational strategies have to be found which centre around creative business models that proactively address these emerging opportunities. In addition, it should be considered that today even a single compound can create its own market. • Pharmaceutical products are ideally global. Hence, R&D has also to adopt an increasingly internationalized strategy. It is therefore important to align the R&D strategy with the corporate strategy. Is global R&D a consequence of business decisions, or is global business a consequence of R&D decisions? In this regard, it is essential to clarify what decision criteria exist and which criteria would influence the initial mission, ramp-up and evaluation of new R&D sites. After having decided where new knowledge can be accessed or products should be marketed, the most appropriate organizational approaches should be evaluated. Alternatives could range from setting up R&D facilities entirely on its own to outsourcing and partnering on only certain selected issues. • Reduced efficiency and flexibility, difficulties to transfer know-how and an unclear intellectual property situation are seen as major disadvantages in pharmaceutical R&D. Service providers, which could complement the competencies of the pharmaceutical company, may take over an increasingly important role in managing pharmaceutical innovation. Regarding the
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pharmaceutical company, the balance between in-house and external activities (make-or-buy decision) is mostly competency or know-how driven, and not capacity or cost driven. Preferred partnerships and co-operation on a project-by-project basis with pre-selected vendors are the two most favourable co-operation models in practice. In addition, the co-operation partners can increasingly be used to take on more complex tasks of the collaboration including, for example, sharing of development risks. However, controlling the critical components in the value chain remains one of the most important issues. • During early-stage research and discovery, the R&D organization should be designed for maximal creativity and effectiveness of its discovery effort applying the most novel sciences and technologies across various technology platforms and therapy areas. However, there is a cut-off in any pharmaceutical R&D project after which project management gives discipline absolute priority over incremental improvements. Overall, the combined thrust of all project activities determines a company’s competence areas and thus therapeutic fields. While R&D of pharmaceutical companies has been facing intense criticism because of declining productivity, the overall industry is looking forward to an exciting future. Several new technologies in the drug discovery process are in their infancy and expected to revolutionize the way pharmaceutical companies manage innovation. The incorporation of novel sciences and technologies, new market strategies, improved R&D pipeline management and a balanced internationalization and collaboration strategy are major elements in the general strategy towards success in pharmaceutical R&D.
References Agarwal, S., Desai, S., Holcomb, M.M. and Oberoi, A. (2001) ‘Unlocking the Value in Big Pharma’, The McKinsey Quarterly 2, 65–73. Albertini, S. and Butler, J. (1995) ‘R&D Networks in a pharmaceutical company: Some implications for human resource management’, R&D Management, 25(4), 377–93. Beckmann, C. and Fischer, J. (1994) ‘Einflussfaktoren auf die Internationalisierung von Forschung und Entwicklung in der Chemischen und Pharmazeutischen Industrie’, Zeitschrift für Betriebswirtschaftliche Forschung, 46(7/8), 630–57. Boerner, C.S.R. (2002) New product development organization and performance: theory and evidence from the pharmaceutical industry. Dissertation at the
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University of California at Berkeley. UMI Number: 3063299. Spring 2002. Brach, M.A. and Paxson, D.A. (2001) ‘A gene to drug venture: poisson options analysis’, R&D Management, 31(2), 203–214. Buchanan, I.P.M. (2002): R&D Collaborations – A partners’ perspective. Vertex Pharmaceuticals. Presentation, 27 February, Zurich. Bunch, P.R. and Schacht, A.L. (2002) ‘Modeling resource requirements for pharmaceutical R&D’, Research Technology Management, Jan–Feb, 48–56. Cardinal, L.B. and Hatfield, D.E. (2000) ‘Internal knowledge generation: the research laboratory and innovative productivity in the pharmaceutical industry’, Journal of Engineering and Technology Management, 17, 247–71. Cassimon, D., Engelen, P.J., Thomassen, L. and van Wouwe, M. (2004) ‘The valuation of a NDA using a 6-fold compound option’, Research Policy, 33, 41–51. Chesbrough, H.W. (2003) Open Innovation: The New Imperative for Creating and Profiting from Technology. Harvard Business School Press, Boston MA. Cockburn, I.M., Henderson, R.M. and Stern, S. (2000) ‘Untangling the origins of competitive advantage’, Strategic Management Journal, 21, 1123–45. Creswell, J. (1994) Research Design-Qualitative & Quantitative Approaches. Sage Publications, Thousand Oaks CA. DiMasi, J. (2001) ‘Tufts center for the study of drug development pegs costs of a new prescription drug at $802 million’. Press release, Tufts University, 30 November. Drews, J. (1989) ‘Research in the pharmaceutical industry’, European Management Journal, 7(1), pp. 23–30. Gassmann, O. and von Zedtwitz, M. (1998) ‘Organization of Industrial R&D on a Global Scale’ R&D Management, 28(3), 147–61. Gassmann, O. and von Zedtwitz, M. (1999) ‘New concepts and trends in international R&D organization’, Research Policy, 28, 231–50. Gassmann, O. and von Zedtwitz, M. (2003) ‘Trends and determinants of managing virtual R&D teams’, R&D Management, 33(3), 243–62. Gassmann, O., Reepmeyer, G. and von Zedtwitz (2004) Leading Pharmaceutical Innovation – Trends and Drivers for Growth in the Pharmaceutical Industry. Springer, Berlin. Halliday, R.G., Drasdo, A.L., Lumley, C.E. and Walker, S.R. (1997) ‘The allocation of resources for R&D in the world’s leading pharmaceutical companies’, R&D Management, 27(1), pp. 63–77. Henderson, R. (1994) ‘Managing Innovation in the Information Age’, Harvard Business Review, 72(Jan–Feb), 100–5. Jones, O. (2000) ‘Innovation management as a postmodern phenomenon: The outsourcing of pharmaceutical R&D’, British Journal of Management, 11, 341–56. Jones, O., Conway, S. and Steward, F. (2000) ‘Introduction: Social interaction and organisation change’. In: Jones, O., Conway, S. and Steward, F. (eds.), Social interaction and organisational change: Aston perspectives on innovation networks. Imperial College Press, London.
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KPMG (2002) Pharmaceuticals – Global Insights. KPMG Report by John Morris, Chair of the Europe, Middle East, South Asia, Africa Chemicals & Pharmaceuticals Practice, February. Kuemmerle, W. (1999) ‘Foreign direct investment in industrial research in the pharmaceutical and electronics industries-results from a survey of multinational firms’, Research Policy, 28(2–3), 179– 94. Lehman Brothers (1999) Pharmaceutical Outsourcing Digest, 3 December. Loch, C.H. and Bode-Greuel, K. (2001) ‘Evaluating growth options as sources of value for pharmaceutical research projects’, R&D Management, 31(2), 231–48. McGrath, R.G. and Nerkar, A. (2004) ‘Real options reasoning and a new look at the R&D investment strategies of pharmaceutical firms’, Strategic Management Journal, 25, 1–21. Needleman, P. (2001) ‘From a twinkle in the eye to a blockbuster drug’, Research Technology Management, Nov–Dec, 38–41. Pfeiffer, P. (2000) Sicherung von F&E-Kompetenz in multinationalen Pharmaunternehmen. Dissertation at the University of St. Gallen, Dissertation-No. 2362. PhRMA (2003) Pharmaceutical Research and Manufacturers of America, PhRMA Annual Membership Survey. PhRMA, Washington, DC. PhRMA (2004) Pharmaceutical Industry Profile 2004. PhRMA, Washington, DC. Pisano, G., Shan, W. and Teece, D. (1988) ‘Joint ventures and collaboration in the biotechnology industry’. In: Mowery, D.C. (ed.), International collaborative ventures in US manufacturing. Ballinger, Cambridge, pp. 183–222. Powell, W.W., Koput, K.W. and Smith-Doerr, L. (1996) ‘Interorganizational collaboration and the locus of innovation: networks of learning in biotechnology’, Administrative Science Quarterly, 41(1), 116–45. Reuters (2002) Pharmaceutical innovation – an analysis of leading companies and strategies. Reuters Business Insight, Healthcare, London, UK. Reuters (2003) The blockbuster drug outlook to 2007: Identifying, creating and maintaining the pharmaceutical industry’s growth drivers. Reuters Business Insight, Healthcare, London, UK. Tapon, F. and Thong, M. (1999) ‘Research collaborations by mulit-national research oriented pharmaceutical firms: 1988–1997’, R&D Management, 29(3), 219–31. Teoh, P-L. (1994) ‘Speed to global market success: an empirical prediction of new product success in the ethical pharmaceutical industry’, European Journal of Marketing, 11, pp. 29–49. Thurow, L. (1996) The future of capitalism. New York: W. Morrow and Co. Tidd, J. (1997) ‘Complexity, networks and learning: Integrative themes for research on the manage-
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ment of innovation’, International Journal of Innovation Management, 1(1), 1–19. Völker, R. (2001) ‘Planung und Steuerung von Entwicklungsprojekten in der Pharmabranche’. In: Gassmann, O., Kobe, C. and Voit, E. (eds.), High-Risk-Projekte. Springer, Berlin, pp. 231– 47. von Zedtwitz, M. and Gassmann, O. (2002) Market versus technology drive in R&D internationalization: four different patterns of managing research and development. Research Policy, 31(4), 569–88. Whittaker, E. and Bower, D.J. (1994) ‘A Shift to External Alliances for Product Development in the Pharmaceutical Industry’, R&D Management, 24(3), 249–60. Yeoh, P-L. and Roth, K. (1999) ‘An empirical analysis of sustained advantage in the US pharmaceutical industry: impact of firm resources and capabilities’, Strategic Management Journal, 20, 637–53. Yin, R.K. (1988) Case Study Research: Design and Methods. Newbury Park, London.
Oliver Gassmann is Professor for Technology Management at the University of St. Gallen and Director at the Institute of Technology Management. After his PhD in 1996 he worked for Schindler Corporation headquartered in Ebikon/Switerland. From 1998–2002 he has been Vice President Technology Management responsible for Corporate Research worldwide. In addition, he is a member of several boards, e.g. Board for Science and Research of Economiesuisse and Editorial Board of R&D Management. He has published 8 books as author, co-author and editor, and over 100 publications in the area of technology and innovation management. Gerrit Reepmeyer holds a master’s degree in business and engineering from the Technical University of Berlin as well as an M.S. in Management from Stevens Institute of Technology (USA). He has been a doctoral candidate and research associate with Professor Gassmann at the University of St. Gallen since 2002, and he is currently a Visiting Scholar at the Columbia Business School. His research focuses on R&D management in the pharmaceutical industry. Before joining Professor Gassmann’s research team, Gerrit worked with the venture capital firm KnowledgeCube in New York which invests in high technology start-ups.
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Embracing Innovation as Strategy: Corporate Venturing, Competence Building and Corporate Strategy Making Wim Vanhaverbeke and Nico Peeters Large diversified companies companies do not have good track records in managing discontinuous change and in turning breakthrough innovations into long-term growth and profit engines. Their existing technological capabilities tend to facilitate cognitive inertia, path dependency and low levels of experimentation. However, some companies seem to find a dynamic balance between exploitation and exploration, between path creation and path dependence. We focus on how these established firms manage that continuous change process, and more specifically we seek to answer how corporate strategy, competence building and new business development interact in rejuvenating a company. Furthermore, we investigate how these concepts are at play on an operational level by looking at corporate practices in large companies that have a track record of successful strategic rejuvenation.
n a business environment characterized by rapid and disruptive technological changes, incumbents have to acquire new technological capabilities and explore new business opportunities in order to stay profitable in the long run. New business development as an organizational practice can be an effective carrier to build novel competencies. Yet, these competencies or the technology they constitute may be imitable. It is the meta-capability of integrative innovation management that is the basis for the firm’s competitive strength. It is the way new business development practices interact with new competence building and corporate strategy that makes successful new business development hard to replicate, and therefore a source of sustainable profitability. New business development can only be legitimized if the corporate strategy is creating a misfit between current competencies and those that are required to compete effectively in the future. New competencies in turn further challenge the extant strategy, thereby opening new strategic perspectives. This dynamic interplay between (technological) competencies and
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strategy implies that a firm’s strategic vision actually is a ‘moving target’. A successful innovating company therefore resolves the duality between current strategy, new competencies and future strategy: an ambidextrous organization possesses that capability, with corporate venturing (new business development) as an effective operational mode to reconcile the inherent incongruence in the company.
Introduction The competitive landscape is changing rapidly. Significant discontinuities such as globalization, deregulation, blurring industry boundaries through new business models, technological convergence and disintermediation pose new managerial challenges forcing managers to create new competencies (Prahalad, 1998). Similarly, discontinuous technological innovations (Tushman & Anderson, 1986) may threaten the strategic position of incumbents. While radical innovations have the potential to turn core competencies into © Blackwell Publishing Ltd, 2005. 9600 Garsington Road, Oxford OX4 2DQ and 350 Main St, Malden, MA 02148, USA.
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‘core rigidities’ (Leonard-Barton, 1992), new technologies also enable companies to create competitive advantage both in existing and in new, yet unstructured industries. Many scholars have argued that most companies – with a few notable exceptions such as GE’s successful entry in the CT scanner industry, Du Pont’s biodegradable polymer (Biomax), Motorola’s mobile telephone business, Hewlett-Packard’s development of the ink jet and ink business, and Corning’s optical fibre business – do not have good track records in managing discontinuous change and in turning breakthrough innovations into longterm growth and profit engines (Christensen, 1997; Prahalad, 1998; Prahalad & Hamel, 1990; Tushman & O’Reilly, 1996). Furthermore, incumbents are on average not adept to manage the challenges and reap the business opportunities related to the emergence of disruptive or discontinuous technologies (Bower & Christensen, 1995; Christensen, 1997; Dougherty & Heller, 1994; Dougherty & Hardy, 1996; Leifer et al., 2000). Lastly, even companies with strong technological capabilities systematically have problems converting discontinuous technological innovations into competitive advantage in new industries, applications or markets. An intriguing question then is: why do some firms manage to profitably exploit nontraditional business opportunities and why do others appear to be bound to their existing and maturing set of businesses? More specifically, we will look at exploiting business opportunities that are based on radical technological innovations. We will review this question from a dual perspective. In a first section, we provide a conceptual framework for the understanding of innovation and particularly the management of new venture initiatives based on new technologies. We will see how new business development functions as a carrier for competence building, and that the integrative management of innovation in general – or the new business development process in particular – can be understood as a dynamic capability from which the firm derives its competitive advantage. New business development (NBD) will then be connected to corporate strategy, and the dynamic interaction between both will be explored. More specifically, we provide some organizational practices that have to be present in order to get mutually stimulating effect between new business development, competence building and strategy formation. The result is a resilient or ambidextrous company where corporate strategy stretches the company towards new competence building, which allows it to enter competitively in new
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markets or industries through new business development practices. In a second section, we report how we conducted a series of interviews to get a detailed case study on corporate entrepreneurship and related management practices within DSM, a large Dutch chemical company. The results of this case study are reported in the third section. In this case study we link some of the theoretical concepts discussed in the first section to concrete and rich routines and procedures in the company. In the last section we analyse the mutual relationship between corporate entrepreneurship, competence building and the strategy-making process.
Conceptual Framework New Business Development as an Organizational Carrier for Competence Building New business development can be a valuable process for a company to effectively tackle the challenges posed by emerging radical technologies. Confronted with new technologies, a company has to develop new competencies to meet the technological and commercial requirements of the growth opportunities. Some large diversified companies develop a semi- or quasi-autonomous organization within the company to learn new competencies and to acquire the required technologies (Burgelman, 1983, 1995; Christensen, 1997; Lynn, 1998; Tidd, Bessant & Pavitt, 2001). That is: corporate venturing or new business development1 projects commonly function as drivers for competence development and deployment – an essential condition to successfully manage radical innovation.2 Several authors (Bakker, Jones & Nichols, 1994; Floyd & Wooldridge 1999; Helfat & Raubitschek, 2000; Hoskisson & Busenitz, 1 New business development (NBD) (Roberts & Berry, 1985) is used as synonym for corporate venturing (CV) (Block & MacMillan, 1995; Von Hippel, 1988), corporate incubators (Hansen et al., 2000) and corporate entrepreneurship (Ellis & Taylor, 1987; Kuratko, Montagno & Hornsby, 1990; Zahra & Covin, 1995). 2 Some authors (Christensen, 1997; Christensen & Raynor, 2003; Hamel, 2002) are also critical about the success of dedicated ‘new business development’ units. They are more in favour of dispersed corporate entrepreneurship. Many firms do have indeed bad experiences with new business development experiments, but usually because they did not had the right organizational context in which it could play its role as a carrier for corporate renewal (see also Chesbrough, 2003).
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2002; Kazanjian, Drazin & Glynn, 2002; Zahra, Nielsen & Bogner, 1999) highlight the importance of new product development to the development and exploitation of capabilities and knowledge, and thereby bring the role of product development, venturing initiatives and corporate entrepreneurship into the (dynamic) analysis of resources, capabilities and knowledge. They indicate how firms can utilize competencies and knowledge to introduce sequences of new products that in turn may extend the competencies of the company. Successful new product development and commercialization build on but also broaden the knowledge and capability base of the company. Hence, new product and business development or other types of corporate ventures – for example, internationalization initiatives – are the organizational carriers to extend existing competencies and to build new ones. More specifically, Bakker, Jones and Nichols (1994) argue that the concept of corporate competencies increases the efficiency and effectiveness of the NBD-process, which, in turn, enables the company to build competitive advantage in new, attractive business areas.
Managing New Business Development as a Dynamic Capability Companies have to deepen their knowledge base in their core technologies to stay ahead of the competition in the current markets. But technologies mature and firms usually have to broaden their technology base in technological areas that are required to compete effectively industries which are promising but new to them. Companies face considerable organizational challenges if the most attractive growth opportunities lie outside their current applications and technologies. This challenge largely derives from the fact that the decision to develop new businesses creates a fruitful misfit between the existing competencies and those that are required. Bakker, Jones and Nichols (1994, p. 15) formulate it as follows: ‘NBD endeavors the need to overcome the misfit of the current organization with the desired organization by identifying, acquiring and developing competencies’. NBD functions in the first place as an “organizational carrier” through which new competencies are developed or acquired in order to create new, profitable businesses. Companies try to stay ahead of (potential) competitors by investing in research and development and external technology sourcing (Chesbrough, 2003; Keil 2002). But technology investments only pay off when they are commercialized; that is when companies spot value-creating
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opportunities in technological capabilities and market trends and translate these entrepreneurial insights into valuable products for customers. Each time an NBD-team starts a new NBD-project it attracts people, resources, and technological or market know-how and directs them toward a common goal. It moves knowledge from the idea phase to the full commercialization of a product. During that entrepreneurial process the team encounters continuously technological problems and market uncertainties that have to be resolved progressively as the project proceeds. This in turn boosts the company’s knowledge and skills about markets and technologies. As a result, NBD is one of the most important “organizational carriers” to bolster a firm’s technological capabilities over time. In this way, NBD compels organizations to broaden their knowledge and technology base, but at the same time it is the organizational carrier through which new competencies are developed or acquired. Entering new businesses implies the development of new technological competencies, as the company can no longer solely exploit its current competencies. To enable companies to optimally learn new technological capabilities they need not only a strong in-house technological infrastructure, but also a strong external technology acquisition capability, as internal R&D with knowledge and technology from outside are considered to be complements, reinforcing each other’s productivity (Cohen & Levinthal, 1990; Duysters & Hagedoorn, 2000; Lane & Lubatkin, 1998). This imported knowledge can take various forms, ‘including new employees, purchased equipment, licensed technologies, or acquisitions of other companies. Sources of imported knowledge include customers (Von Hippel, 1988), suppliers (Leonard-Barton, 1992), alliance partners (Gomes-Casseres, 1989; Kogut, 1988), universities, government laboratories and consultants’ (Kazanjian, Drazin & Glynn, 2002, p. 179). Put differently, as technological pace and complexity are increasing, companies have to complement internal development with external acquisition of technology through external ventures (e.g. having a minority holding in venture capital funds or start-ups), alliances and acquisitions (Granstrand et al., 1992; Lambe & Spekman, 1997). As a result, internal and external learning should therefore be managed in an integrative way. A common organizational instrument to do so is the incorporation of NBD into a semior quasi-autonomous new venture division (Brown & Eisenhardt, 1997; Fast, 1978; Schoonhoven & Jelinek, 1990) or a corporate
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incubator (Hansen et al., 2000). The advantages of such a semi-autonomous unit – that usually reports only to senior management – are multiple.3 First, the ventures that are too risky for managers of existing business units get nurtured for a considerable time. Second, because of its autonomy the small unit can explore new technologies and build new competencies, as it can hire dedicated front-line managers (project champions), tap into the capabilities of the central R&D lab (and shaping its explorative research), negotiate licence agreements or establish alliance with companies that have (complementary) technology or market know-how (Leonard-Barton, 1992). Maybe the most important advantage is that experienced unit-members become experts in detecting and evaluating new venture opportunities, in establishing a social network outside the company and in acquiring external technology from different sources. In this way, the unit becomes a valuable vehicle for knowledge building (Kazajian, Drazin & Glynn, 2002). On the other hand, many firms have not been successful in managing new business development or focused corporate entrepreneurship (Chesbrough, 2003). Autonomous business units exploring new business opportunities for the company have been crushed by the power mainstream businesses that are cash-generators and have a have a short-term financial focus. ‘New business development’ units are almost by definition peripheral in a company where the majority of the managers at all levels are preoccupied with incremental innovations, improvements, operational efficiency, cost cuts and ‘narrow’ market share competition. Nurturing radical innovations and exploring attractive business opportunities for the future growth of the company is at odds with the dominant logic within the firm. Prahalad and Bettis (1986) introduced this term: it is a set of heuristic rules, norms and beliefs that managers create to guide their actions. Dominant logic facilitates the coordination among the different parts of the company and it filters out ideas and initiatives that do not comport with it. Hence, it is a selection mechanism that allows a company to 3
This semi-autonomy does not imply that the venture unit is not controlled at all. On the contrary, Thornhill and Amit (2000) find empirical evidence that high venture autonomy are charactistic of low performing ventures in large companies. Barringer and Bluedorn (1999) furthermore show that strategic controls that reward creativity and the pursuit of new business opportunities through radical innovations have a significant impact on the entrepreneurship intensity in companies.
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maintain focus and coherence among the firm’s activities (Chesbrough & Rosenbloom, 2002). This drive towards internal consistency is likely to stifle initiatives that experiment, open up new business opportunities and create variations and heterogeneity. If these tendencies towards internal consistency are present, it is clear that a companies that want to balance exploration and exploitation (March, 1991; Benner & Tushman, 2002, 2003) face paradoxical management requirements and have to be managed in a fashion that is distinct from the traditional roles of strategy, structure and systems (Ghoshal & Bartlett, 1997). Long-term involvement of firms in new business development activities indicates that they mastered the ability to recognize new business opportunities and to subsequently build the competencies to capitalize on those opportunities. This ability can be understood as a dynamic capability helping firms to achieve competitive advantage (Eisenhardt & Martin, 2000; Helfat, 1997; Teece, Pisano & Shuen, 1997). Long-term involvement of a company in new business development activities indicates that it has developed the capability to handle the conflicting demands of mainstream and new stream businesses. Successfully managed NBD thus helps a firm build competitive advantage, and as an enabler of new competence development, it is crucial for the rejuvenation of technological capabilities and the long-term profitability of a company. In the next subsection, we will explore the relationship between NBD, new competence building and strategy formation. We argue that successful and sustained NBD involvement allowing a company to detect new path creation and generating options for future business opportunities can only be achieved if it has also developed organizational routines or practices that structure and spur competence building and strategy formation. The relationship between NBD and competence building on the one hand and NBD and strategy formation on the other hand, has received some attention in the literature (Bakker Jones & Nichols, 1994; Burgelman, 1983; Dess et al., 1999; Dougherty, 1995; Thornhill & Amit, 2000; Tushman & O’Reilly, 1996). We will argue that NBD, strategy formation and competence building have to be linked to each other to understand the different roles NBD can play in an established company.
Strategy as a Moving Target Releasing the innovative forces in a company does not automatically translate into the
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desired competence building that secures the firm’s future revenue streams. If there is no sense of overall direction in the company, chaos is likely to emerge; operational business units that are managed as profit centres will stick to incremental innovations with shortterm revenues; central lab researchers will focus on challenging breakthrough inventions that cannot be developed as corporate ventures because of inadequate technology or market feasibility; individual intrapreneurs may start up a venture that has to be spunout or divested later on because there is no way to integrate it in the company. Burgelman (1983, 1986) claims that a company needs to allow for initiatives that do not fit with its current strategy, but they always have to be screened in terms of alignment with the company’s future strategy. The need for cohesiveness and complementarity between the mainstream businesses and the NBD activities has also been stressed by others (Barringer & Bluedorn, 1999; Lengnick-Hall, 1992; Thornhill & Amit, 2000; Tushman & Nadler, 1986). Indeed, when firms have the ambition to rejuvenate competencies or to build new ones, they have to have a sense of overall strategic direction. Corporate strategy as ‘stretch’ – an overarching corporate purpose (Ghoshal & Bartlett, 1997) or strategic intent (Hamel & Prahalad, 1994) – leads to a substantial ‘misfit’ between a company’s extant competencies and its ambitions (Hamel & Prahalad, 1994). This misfit creates a tension between the exploitation of current competencies and the exploration of new ones (March, 1991), between control and stability on the one hand and flexibility and creativity on the other hand (Zahra, Nielsen & Bogner, 1999). Strategy as stretch provides a direction but also identifies the major competencies to build or upgrade, and is therefore a crucial part of strategic renewal processes (Ghoshal & Bartlett, 1997; Volberda, BadenFuller & van de Bosch, 2001). Furthermore, the tension stimulates managers and employees the get committed to learning processes accelerating in this way the building of new competencies. Strategic vision does not only give direction and sense to the development of new competencies, but it is at the same time facilitated by the corporate venturing process and explorative technological research that goes with it. With each new venture the company learns about new technologies, applications and markets, which in turn sharpen the recognition of new strategic opportunities: the current technological competencies of a company or the deepening or extension of it may drive the cognition of
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(future) strategy.4 In other words, the corporate strategy-making process is fostered by the ongoing technology building process: a strong commitment to and deep knowledge of a particular technology field allow ‘a company to see a strategy that other firms fail to imagine’ (Itami & Numagami, 1992, p. 127). Hence, the continuous interaction between corporate strategy and NBD leads to the coevolution of both, where they mutually nurture each other in an iterative process. That is: there is a dynamic interaction between technology development and corporate strategy (Burgelman, 1983; Hamel & Prahalad, 1994; Itami & Numagami, 1992; Kazanjian, Drazin & Glynn, 2002; Zajac, Kraatz & Bresser, 2000).5 The development of technology and strategy are intrinsically related to each other and are complementary, but their joint dynamics can only be understood if they are related to corporate entrepreneurship activities. Others have shown that corporate entrepreneurship and core competencies are mutually constitutive (Burgelman, 1983; Dougherty, 1995). Companies are gradually building new competencies by nurturing external ventures, creating new internal ventures and developing new businesses. However, the same process drives the cognition of new strategic perspectives and, as a consequence, a ‘strategic vision’ has to be considered as a moving target. Building new competencies leads to the cognition of new strategic opportunities putting the current strategic vision under continuous pressure to adapt accordingly. Consequently, we argue that entrepreneurial activities, corporate strategy and competence building have to be considered simultaneously to understand 4
Itami and Numagami (1992) emphasize this positive effect of cognitive processes. The literature has emphasized the negative effects focusing on the inability to unlearn (Hamel & Prahalad, 1994) the impact of technological trajectories and organizational inertia (Ahuja & Lampert, 2001; Cohen & Levinthal, 1990; Dougherty, 1995; Leonard-Barton, 1992; Levinthal & March, 1993). 5 The same need for a dynamic framework is echoed in the literature about technological capabilities, where technology-based companies face an apparent paradox: companies have to take advantage of the existing technical capabilities – competencies – without being hampered by the technological trajectory they followed in the past (Helfat & Raubitschek, 2000; Henderson & Clark, 1990; Leonard-Barton, 1992; Teece, Pisano & Shuen, 1997; Zajac, Kraatz & Bresser, 2000). The tension between leveraging existing capabilities and the creation of new ones through entrepreneurial activities is also at the core of the emergent literature about strategic entrepreneurship (Hitt et al., 2002).
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the crucial role of corporate ventures in how established companies change and learn at the corporate level.
From Dominant Logic to Continuous Change Strategy as stretch puts the innovative organization constantly under pressure: the development of new competencies through co-ordinated actions of R&D labs and new business development units brings the company closer to being in line with its strategic vision. At the same time, however, these new competencies, which are for instance based on deep knowledge of a particular technology, stimulate people from central R&D labs, new venture managers or others to envision new business opportunities. The company has to further adapt its corporate strategy if these opportunities are not fully in line with the current strategy. New business development – which might be the firm’s response to discontinuous (technological) change in the environment – thus simultaneously creates ‘fit’ and ‘stretch’. This apparent incongruence challenges management, facing the task to prepare the organization not only to develop the appropriate competencies to implement the current strategy, but also to envision how the leveraging of these novel competencies determines the strategic position of the company in tomorrow’s competitive landscape. Tushman and O’Reilly (1996) suggest that only an ‘ambidextrous organization’ is ready to successfully cope with this apparent paradoxical challenge. Corporate ventures constitute one way to create ‘ambidexterity’ in a company as they are favourable for ‘hosting multiple contradictory structures, processes and cultures within the same firm’ (Tushman & O’Reilly, 1996, p. 24). In this way, a company can succeed to simultaneously exploit its current competencies and explore new technologies (March, 1991) – not passively undergoing the contextual (technological) changes, but proactively shaping its own future. In other words, it is a continuously changing, learning company. How a large company can successfully tackle those challenges and become ambidextrous by developing its dynamic innovation capability is explained and illustrated in the following section. We take DSM as an example: we examine how the company manages to rejuvenate its technological capabilities and sustain its competitive advantage thanks to the strong interactions between strategic flexibility, competence building and the creation of corporate ventures beyond its current markets or technologies.
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Methods There is no unifying paradigm in the research field of (corporate) entrepreneurship leaving us with the option to adopt an explorative research design and to focus on empirically derived rather than theoretical models. Moreover, the dynamics between corporate ventures, the strategy-making process and competence building are complex and contingent to the organizational context. The linkages between venture activities, competencies and strategy are highly embedded in the broader corporate culture and are not always made explicit. In order to capture this complexity and embeddedness, we chose to work with an explorative case study method (Glaser & Strauss, 1967). We made two choices. First, we focused on a single company – DSM, a Dutch chemical manufacturer – in order to get fine-grained information about these linkages that are in the literature as yet an incompletely documented phenomenon. The detailed description of these linkages comes at the expense of external validity. Next, the detailed information could only be obtained by semi-structured in-depth interviews, with managers from different parts of the company. Since corporate entrepreneurship is almost by definition opposed to the mainstream businesses, it was important to interview managers from different parts of the company. We conducted interviews with nine managers during a twoyear period. Four of them had different positions in the corporate venturing unit, one was member of the board, two interviewees were respectively head of Corporate Planning and Development and head of Corporate Research, and the last two were general managers of operational business units. The interviews were semi-structured and took usually two to three hours. As we conducted interviews we focused our attention on the question why the corporate venture unit could play a significant role in the discussions about corporate strategy making and competence building although it was small in terms of budget or number of employees. We focused on the organizational mechanisms or routines that enabled this. We constantly compared information from the most recent interview with that of prior interviews with other managers. In cases where inconsistent information emerged we conducted a follow-up interview until the inconsistencies were resolved or new insights were made explicit.
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The Extended Role of Corporate Venturing at DSM Setting DSM is a Dutch Speciality Chemicals and Materials company that is active worldwide: in 2003 the group had annual sales of close to €6.1 billion and employed about 26,000 people. The company was founded in 1902 as a state-owned coal-mining company, yet a century of change led the firm from coal mining over petrochemicals to speciality chemicals. New business development and corporate venturing over time grew in importance as instruments to drive these strategic changes, and our interest lies in the management processes underpinning the innovation initiatives and successful redefinition of DSM’s strategy. The most recent strategic reorientation of DSM reduced the firm’s business portfolio from the original three clusters ‘Life Science Products’ (LSP, including biotechnology), ‘Performance Materials’ (PM, particularly elastomers, resins, plastics) and ‘Industrial Chemicals’ (IC, mainly petrochemicals) to two. DSM sold its petrochemicals business to the Saudi Arabian company SABIC in 2002, and now concentrates entirely on LSP and PM. The company aims to achieve sales of around €10 billion by 2005, with at least 80 percent of sales accounted for by specialities (LSP and PM). DSM’s management intends to become a leader in the strategic group of global ‘multispecialty’ players6 by readjusting the ecompany’s product portfolio in terms of focus and size. In line with its strategic vision to become a global multi-speciality player DSM defined biotechnology and performance materials as its two technological mainstays. Potential
6 In the chemical industry trends are leading towards a structure with three strategic groups (Porter, 1985) of chemical companies. First, large conglomerates (sales of over €25 billion, e.g. Dow Chemical, DuPont, Bayer and BASF). Second, highly focused pure play specialists (sales usually not surpassing the €3 billion mark, e.g. Lonza, Givaudan and Novozymes). Lastly, the global ‘multi-speciality’ players (size of roughly €5 to 15 billion in annual sales, e.g. AKZO Nobel, CIBA, Clariant, Degussa, ICI, Rhodia, and Rohm & Haas) offering a portfolio consisting predominantly of a set of chemical specialties. Somewhat outside this chemical spectrum are the large global oil companies, which are relevant for chemicals as they increasingly dominate the petrochemical business, and the group of large global pharmaceutical and food processing companies, which are also consolidating.
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synergies at the intersection of both technologies were identified as key technological search areas to find new sources for innovative successes giving the company a competitive edge as a multi-speciality player in the long run. How the company managed the transition from a bulk chemical firm to a multi-specialist player can best be understood by taking a closer look at the internal processes that underpin the company’s strategic flexibility.7
Strategic Vision Innovation is explicitly captured as a value driver in DSM’s strategic vision: innovation is believed to be the key to the long-term profitability of the firm. In order to stimulate innovation within the company, strategy formulation processes are fully interactive, embracing all levels of the organization (General Management, Business Groups, Corporate R&D, Board of Directors and so on). The company has institutionalized a formal ‘Corporate Strategy Dialogue’ and a ‘Business Strategy Dialogue’ for that purpose – complemented by continuous informal dialogue and debate within the organization. These interactive processes assure the bottomup stream of innovative ideas within the firm, on corporate and business level respectively. Furthermore, through a ‘Business Technology Analysis’ (BTA) new technological developments (internal as well as external) are systematically monitored and evaluated in view of the new dimensions they can give to the company’s strategy. Top priorities are subsequently identified, and (resource) provisions for the implementation thereof are made. These are formalized in a ‘Strategic Contract’ with the Board of Directors, in which long-term performance is defined both in terms of financial criteria and (incremental as well as radical) innovation initiatives to achieve sustainable corporate growth. In this way, a balance between shortterm responsibility for business performance and long-term responsibility for sustainability in the future is achieved.
Innovation in Action A strategic vision that puts innovation at the core of the company’s activities, would not be viable if the company did not systematically 7
Based on in-depth interviews with several managers at DSM, a.o. Emmo Meijer, Chief Technology Officer at DSM, and Robert Kirschbaum of ‘DSM Venturing and Business Development’ and company documents.
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organize and develop competencies for the exploration of new technologies on the one hand, and the commercial exploitation of these novel technologies on the other hand. The exploration of new technologies is embedded in the mission of DSM’s R&D. At least 10 percent of the company’s R&D budget is assigned to Corporate R&D for the exploration of novel technologies that cannot at first sight be housed in a business group. The remaining 90 percent of the firm’s research budget is allocated to R&D within each business group, partially for the realization of incremental innovations, partly for exploration of radical innovations. R&D can thus be considered the most open function in DSM: it interacts with the entire knowledge infrastructure, internally as well as externally. Internal and external ventures and the related explorative technological research are the key drivers to the development of competencies in this respect. As for the integration and implementation of novel technologies into DSM, the company has set up a Corporate Research Board, where corporate R&D and (mainstream!) business group directors discuss and think together about new scientific and technological developments. This not only makes the business groups aware of and familiar with new technologies, it also increases the businesses’ willingness to market newly developed technologies. The Corporate Research Board thus facilitates the absorption of new technologies in the business, stimulating technological innovation. A ‘Stage-Gate’ process has been designed to further smooth the progress of bottom-up innovation and the absorption of new technologies: ideas are generated by the research community, and their feasibility is subsequently evaluated by a Research Council, in which Corporate R&D joins forces with the R&D Directors of the business groups per cluster. The Research Council in question will also formulate the innovation initiative in a project proposal, to be approved by the Corporate Research Board. The Corporate Research Board will – in view of the company’s strategy – make the ultimate ‘go’ or ‘kill’ decision. Thus, innovation is ‘stratified’ in an objective process, so as not to suppress creativity and avoid bureaucracy, while a firm connection is established between corporate R&D and business units. The final ‘go’ decision for an innovation project also implies the allocation of a project to a particular business or by absence of a business group into which the new technology can be integrated to ‘DSM Venturing & Business Development’ to nurture the innovation. This
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business development unit is a separate business group that organizes new business development initiatives as well as the firm’s external venturing activities. This business group is actively involved in new business development (internal corporate ventures), investments in venture capital funds and in promising start-up companies (external venturing), and equity and non-equity alliances with universities and other businesses with complementary technologies or other intangible assets such as knowledge about and expertise in manufacturing. ‘DSM Venturing & Business Development’ is, as it were, the breeding ground for truly path-creating innovations (Garud & Karnoe, 2001), rooting in DSM. A constant element in this innovation process is the interaction between technology and strategy. DSM’s innovation initiatives – internal and external venturing, sustaining or disruptive – find their origin in the early exploration of new scientific domains or novel technologies. DSM’s acquaintance with new technologies drives the cognition of new strategic opportunities and at the same time lays the foundations for the building of new competencies. This mutual interaction between strategy and technology is in itself a forceful driver in the firm’s innovative ventures. The competitive advantage of the company lies not so much in the technologies or resources the firm develops or acquires, but in the integral process it had designed to manage innovation company-wide.
Imagining Options for the Future As Hamel and Prahalad (1994) have argued, competition for the future is competition for opportunity share rather than market share. DSM too embarked on a search for profitable business opportunities. It therefore explored new technological areas, at the same time related to, yet remote from its current technology base in LSP and PM. At the intersection of both biotechnology and materials science it discovered ‘bioterials’. Bioterials can be defined as each material of which the production has been realized through bio-based processes (e.g. biocatalysis (emzymes) or bioprocessing) instead of synthetic chemistry. The advantages are that traditional products are now produced based on renewable resources that some of these products are biodegradable, or that production costs are considerably lower. The potential value of the growing business opportunities at the intersection of biotechnology and chemical processes has recently also been highlighted by industry watchers (Bachmann et al., 2000), while the
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recognition of the strategic potential for DSM in this area has been growing steadily as a result of the company’s ongoing technology developments and acquisitions in these fields. DSM is consequently committed to further develop its expertise in bioterials, and to finetune its strategy of becoming a leading global multi-speciality player. The opportunity identified in bioterials did thus fit with the corporate strategic objective of becoming a global leader in the multispeciality industry group. Because of the perceived benefits of high added-value activities in this research area, characterized by high growth and more stable profit levels, management had reoriented the company’s strategy in this direction. As a consequence, building technological capabilities in this field was set forth as a stretching goal. In that sense, corporate strategy was a driver for new competence building (bioterials). It is an illustration how current strategy cultivates the firm’s future technology. Yet, at the same time, DSM’s new strategic focus on bioterials was in itself the result of an ongoing recognition process that was a ‘byproduct’ of the research and development efforts and technology acquisitions in the areas of biotechnology and materials science. Researchers and managers identified bioterials because of their acquaintance with and knowledge about both technologies (Cohen & Levinthal, 1990): in other words, current technology drives the cognition of future strategy. The combination of biotechnology and materials science indicates a consistent streamlining of the technological coherence within the company. New business development (bioterials), at the intersection of two existing business (LSP and PM), was the carrier for the development of these new technological competencies, that at the same time ‘fit’ and ‘stretch’ the company’s strategy. This goes to show that corporate strategy and technological competencies mutually interact, generating a process of continuous technological competence building and providing a direction for future competence building that is in line with the stretched strategic goal-setting. The company’s strategy then indeed becomes a ‘moving target’, fostering innovation. The ability to actualize innovation and capitalize on new opportunities originates in DSM’s ‘openness’ to new developments in science and technology: this openness is not only a matter of external co-operative dynamics (external ventures, alliances) but also of internal practices (internal ventures) and corporate culture. Its origin can be traced back to the processes, procedures and man-
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agement practices that the company has implemented, and which are in fact a mere formalization of its underlying values and culture. The company’s true innovative capability is rooted and embedded in that culture, allowing it to reconcile the need for stability and control with the recognition that uncertainty and risk are inevitable in the exploration of new strategic directions. The company could be considered as an ambidextrous organization: it ‘is able to compete successfully by both increasing the alignment or fit among strategy, structure, culture, and processes, while simultaneously preparing for the inevitable revolutions required by discontinuous environmental change’ (Tushman & O’Reilly, 1996, p. 11). In other words, the company has succeeded in making innovation systemic: innovation has become a corporate capability integrated in the entire organization (Välikangas, 2003). Innovation ís the strategy of DSM and its ‘goal is [to be] an organization that is constantly making its future rather than defending its past’ (Hamel & Välikangas, 2003, p. 2).
Discussion and Conclusion This paper focuses on the question of how companies can achieve competitive advantage in new and attractive business areas when this requires the development of new (technological) competencies and a shift in corporate strategy. We have argued that most successful companies build new competencies through a sequence of corporate venturing initiatives (Dougherty, 1995; Leonard-Barton, 1992). The creation of new business based on new technologies forces companies to extend existing competencies and to build new ones. In other words, corporate venturing can be considered as an ‘organizational carrier’ to build competencies. Competence building and corporate venturing are at the same time intrinsically related to corporate strategy making. The relationship between corporate venturing and corporate strategy is typically a dynamic one: corporate strategy may activate and direct new business development and the accompanying competence building, but the latter also drives and refines the former. On the one hand, a ‘strategic vision’ challenges the organization by creating a misfit between what the company is and what it intends to become, by showing the gap between the existing resources and those required to live up to its ambitions. On the other hand, new competence building also drives and refines the cognition of corporate
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strategy (Itami & Numagami, 1992). Competencies and corporate strategy co-evolve and, consequently, a strategic vision can be considered a ‘moving target’ for innovation. Managing that iterative process whereby strategy drives competencies and competencies drive strategy poses a major organizational challenge to the innovating company. Successful innovation should provide the firm with a competitive edge in extant or new markets or industries. We identified the integrative management of innovation, whereby innovation becomes a dynamic capability, systemic to the organization, as the key to sustainability. Innovation is no longer merely a tool for the implementation of the strategy but it actually is strategy. This implies that a firm manages to reconcile apparent paradoxes between strategic fit and the need for reinventing itself in view of a changing technology or market context. An ambidextrous organization possesses that ability, and we observed how the integrative management of innovation – new business development in particular – offers a suitable organizational framework in which the multiple and often contradictory demands of mainstream businesses and the new business development activities of the company can not only coexist but do actually nurture the innovative capability of the firm. This has been illustrated by the continuous corporate change process within DSM. In this company, strategy making is intertwined with new business development initiatives and competence building. The strategic vision on the corporate level legitimizes entrepreneurial activities throughout the company and provides criteria to select new initiatives. The corporate strategy at DSM facilitates the participation of managers and employees from virtually all hierarchical levels within the company to participate in the planning process. This, in turn, spurs creativity and facilitates the recognition of new business opportunities. Mainstream businesses recognize these opportunities based on current market needs or existing technological capabilities in the company. The corporate venturing unit on the contrary starts from business opportunities that require new competence building or the exploration of new markets. When the company builds new competencies as a result of its corporate venturing activities, managers also become aware of new strategic opportunities. Corporate venturing activities drive researchers and engineers to explore novel technologies, such as ‘bioterials’ in the case of DSM. The increasing acquaintance with the new technological fields drives in its turn the cognition of new strategic
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opportunities. In this way, the corporate venturing unit plays a potentially crucial role in the dynamics of corporate strategy. However, these new ideas can only be integrated into the heart of the corporate strategy when there exist organizational routines that allow other parts of the company to become convinced of their value. This has not come automatically given the fundamentally different objectives of mainstream and new stream businesses (Chesbrough, 2003). In most companies these new strategic opportunities get suffocated by the ‘dominant logic’ of the mainstream businesses. But DSM installed different organizational routines and procedures – with the ‘Corporate Strategic Dialogues’ as the most important one – assuring that new ideas from different parts of the company could be discussed as potential building blocks for the future corporate strategy. At DSM, corporate venturing is a practice that forces the firm to adapt its competencies over time and acts as a catalyst to recognize new strategic options. Corporate entrepreneurship is traditionally considered as an organizational instrument to generate new business opportunities. Dougherty (1995) argued that it also plays a crucial role in competence building and that venturing and a firm’s core competencies are mutually constitutive. In this paper, we have provided some evidence that the full potential of corporate venturing can only be understood if one relates it not only to competence building but also to corporate strategy-making processes.
References Ahuja, G. and Lampert, C.M. (2001) ‘Entrepreneurship in the large corporation: A longitudinal study of how established firms create breakthrough inventions’, Strategic Management Journal, 22, 521–43. Bachman, R., Bastianelli, E., Riese, J. and Schlenzka, W. (2000) ‘Using plants as plants’, McKinsey Quarterly, 93–9. Bakker, H., Jones, W. and Nichols, M. (1994) ‘Using core competencies to develop new business’, Long Range Planning, 27(6), 13–27. Barringer, B.R. and Bluedorn, A.C. (1999) ‘The relationship between corporate entrepreneurship and strategic management’, Strategic Management Journal, 20, 421–44. Benner, M.J. and Tushman, M.L. (2003) ‘Exploitation, Exploration, and Process Management: The Productivity Dilemma Revisited.’ Academy of Management Review, 28(2), 238–56. Benner, M.J. and Tushman, M.L. (2002) ‘Process Management and Technological Innovation: A Longitudinal Study of the Photography and Paint Industries,’ Administrative Science Quarterly, 47, 676–706.
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Block, Z. and MacMillan, I.C. (1995) Corporate venturing. Harvard Business School Press, Boston. Blyler, M. and Coff, R.W. (2003) ‘Dynamic capabilities, social capital, and rent appropriation: ties that split pies’, Strategic Management Journal, 24, 677–86. Bower, J.L. and Christensen, C.M. (1995) ‘Disruptive technologies: Catching the wave’, Harvard Business Review, January–February, 43–53. Brown, S.L. and Eisenhardt, K.M. (1997) ‘The art of continuous change: Linking complexity theory and time paced evolution in relentlessly shifting organizations’, Administrative Science Quarterly, 42, 1–34. Burgelman, R.A. (1983) ‘A process model of internal corporate venturing in the diversified major firm’, Administrative Science Quarterly, 28, 223– 44. Burgelman, R.A. (1986) Managing corporate entrepreneurship. In M. Horwitch, (ed.), Technology in the modern corporation. Pergamon Press, New York. Burgelman, R.A. (1995) Strategic management of technology and innovation. Irwin, Boston. Chesbrough, H. (2003) Open innovation. Harvard Business School Press, Harvard MA. Chesbrough, H. and Rosenbloom, R.S. (2002) ‘The role of the business model in capturing value from innovation: evidence from Xerox Corporation technology’, Industrial and Corporate Change, 11(2), 529–55. Christensen, C.M. (1997) The innovator’s dilemma: When new technologies cause great firms to fail. Harvard Business School Press, Boston MA. Christensen, C.M. and Raynor, R.E. (2003) The innovator’s solution: creating and sustaining successful growth, Harvard Business School Press, Boston, MA. Cohen, W.M. and Levinthal, D.A. (1990) The innovator’s solution: Creating and sustaining successful growth, Harvard Business School Press, Boston MA. Dess, G.G., Lumpkin, G.T. and McGee, J.E. (1999) ‘Linking corporate entrepreneurship to strategy, structure, and process: Suggested research directions’, Entrepreneurship Theory and Practice, 23(3), 85–102. Dougherty, D. (1995) ‘Managing your core uncompetencies for innovation’, Entrepreneurship Theory and Practice, 19(3), 113–135. Dougherty, D. and Heller, T. (1994) ‘The illegitimacy of successful product innovation in established firms’, Organization Science, 5(2), 200– 18. Dougherty, D. and Hardy, C. (1996) ‘Sustained product innovation in large mature organizations: overcoming innovation-to-organization problems’, Academy of Management Journal, 39 (5), 1120–53. Duysters, G. and Hagedoorn, J. (2000) ‘Core competencies and company performance in the world-wide computer industry’, Journal of High Technology Management Research, 11(1), 75–91. Eisenhardt, K.M. and Martin, J.A. (2000) ‘Dynamic capabilities: What are they?’, Strategic Management Journal, 21, 1105–21.
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Ellis, R.J. and Taylor, N. (1987) ‘Specifying entrepreneurship’. In Churchill, N.C., Hornaday, J.A., Kirckoff, B.A., Krasner, O.J. and Vespers, K.H. (eds), Frontiers of entrepreneurship research. Babson College, Wellesley, MA, 527–42. Fast, N.D. (1978) ‘New venture departments: Organizing for innovation’, Industrial Marketing Management, 7(2), 77–97. Floyd, S.W. and Wooldridge, B. (1999) ‘Knowledge creation and social networks in corporate entrepreneurship: The renewal of organizational capability’, Entrepreneurship Theory and Practice, Spring, 123–43. Garud, R. and Karnoe, P. (2001) ‘Path creation as a process of mindful deviation’. In Garud, R., Karnoe, P. (eds.), Path dependence and creation, Lawrence Earlbaum Associates, London. Ghoshal, S. and Bartlett, C.A. (1997) The individualized corporation. HarperCollins, New York. Glaser, B.J. and Strauss, A.L. (1967) The discovery of grounded theory. Aldine, Chicago. Gomes-Casseres, B. (1989) ‘Joint ventures in the face of global competition’, Sloan Management Review, 30(3), 17–27. Granstrand, O., Bohlin, E., Oskarsson, C. and Sjöberg, N. (1992) ‘External technology acquisition in large multi-technology corporations’, R&D Management, 22(2), 111–33. Hamel, G. (2002) Leading the revolution: How to thrive in turbulent times by making innovation a way of Life. Plume, New York. Hamel, G. and Välikangas, L. (2003) ‘The Quest for Resilience’, Harvard Business Review, September, 2–63. Hamel, G. and Prahalad, C.K. (1994) Competing for the future. Harvard Business School Press, Boston MA. Hansen, M.T., Chesbrough, H.W., Nohria, N. and Sull, D. (2000) ‘Networked incubators: Hothouses of the new economy’, Harvard Business review, 78(5), 74–84. Helfat, C.E. (1997) ‘Know-how and asset complementarity and dynamic capability accumulation: the case of R&D’, Strategic Management Journal, 18(5), 339–60. Helfat, C.E. and Raubitschek, R.S. (2000) ‘Product sequencing: co-evolution of knowledge, capabilities and products’, Strategic Management Journal, 21, 961–79. Henderson, R.M. and Clark, K.B. (1990) ‘Achitectural innovation: The configuration of existing product technologies and the failure of established firms’, Administrative Science Quarterly, 35, 9–30. Hitt, M.A., Ireland, R.D., Camp, S.M. and Sexton, D.L. (eds.) (2002) Strategic entrepreneurship: Creating a new mindset. Blackwell: Oxford. Hoskisson, R.E. and Busenitz, L.W. (2002) ‘Market uncertainty and learning distance in corporate entrepreneurship entry mode choice’. In Hitt, M.A., Ireland, R.D., Camp, S.M. and Sexton, D.L. (eds.), Strategic entrepreneurship: Creating a new mindset, Blackwell, Oxford, pp. 151–72. Itami, H. and Numagami, T. (1992) ‘Dynamic interaction between strategy and technology’, Strategic management Journal, 13, 119–35.
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Kazanjian, R.K., Drazin, R. and Glynn, M.A. (2002) ‘Implementing strategies for corporate entrepreneurship: A knowledge-based perspective’. In Hitt, M., Ireland, R.D., Camp, M.S. and Sexton, D.L. (eds.), Strategic entrepreneurship: Creating a new mindset, Blackwell, Oxford, pp. 173–99. Kogut, B. (1988) ‘Joint ventures: theoretical and empirical perspectives’, Strategic Management Journal, 9(4), 319–32. Kuratko, D., Montagno, R. and Hornsby, J. (1990) ‘Developing an intrapreneurial assessment instrument for effective corporate entrepreneurial environment’, Strategic Management Journal, 11, Summer, 49–58. Lambe, C.J. and Spekman, R.E. (1997) ‘Alliances, external technology acquisition, and discontinuous technological change’, Journal of product innovation management, 14, 102–16. Lane, P.J. and Lubatkin, M. (1998) ‘Relative absorptive capacity and interorganizational learning’, Strategic Management Journal, 19, 461–77. Leifer, R., McDermott, C.M., O’Connor Colarelli, G., Peters, L.S., Rice, M. and Veryzer, R.W. (2000) Radical innovation: How mature companies can outsmart upstarts. Harvard Business School Press, Boston MA. Lengnick-Hall, C.A. (1992) ‘Strategic configurations and designs for corporate entrepreneurship: Exploring the relationship between cohesiveness and performance’, Journal of Engineering and Technology Management, 9(2), 17–154. Leonard-Barton, D. (1992) ‘Core capabilities and core rigidities: A paradox in managing new product development’, Strategic Management Journal, 13, 111–25. Levinthal, D.A. and March, J.G. (1993) ‘The myopia of learning’, Strategic Management Journal, Winter special issue, 14, 95–112. Lynn, G.S. (1998) ‘New product team learning: Developing and profiting from your knowledge capital’, California Management Review, 40(4), 74– 93. March, J.G. (1991) ‘Exploration and exploitation in organizational learning’, Organization Science, 2(1), 71–87. Peteraf, M.A. (1993) ‘The cornerstone of competitive advantage’, Strategic Management Journal, 14(3), 179–91. Porter, M.E. (1985) Competitive advantage: Creating and sustaining superior performance. The Free Press: New York. Prahalad, C.K. (1998) ‘Managing discontinuities: The emerging challenges’, Research – Technology Management, May–June, 14–22. Prahalad, C.K. and Bettis, R.A. (1986) ‘The dominant logic: a new link between diversity and performance’, Strategic Management Journal, 7, 485–511. Prahalad, C.K. and Hamel, G. (1990) ‘The core competence of the corporation’, Harvard Business Review, 68(3), 79–91. Roberts, E.B. and Berry, C.A. (1985) ‘Entering new business: selecting strategies for success’, Sloan Management Review, Spring, 3–17. Schoonhoven, B.C. and Jelinek, M. (1990) ‘Dynamic tension in innovative, high technology firms: managing rapid technological change through
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organizational culture’. In Tushman, M. and Anderson, P. (eds.) Managing strategic innovation and change. Oxford University Press, Oxford. Teece, D., Pisano, G. and Shuen, A. (1997) ‘Dynamic capabilities and strategic management’, Strategic Management Journal, 18(7), 509–33. Thornhill, S. and Amit, R. (2000) ‘A dynamic perspective of internal fit in corporate venturing’, Journal of Business Venturing, 16, 25–50. Tidd, J., Bessant, J. and Pavitt, K. (2001) Managing innovation: Integrating technological, market and organizational change, 2nd edn. Wiley, Chichester. Tushman, M. and Anderson, P. (1986) ‘Technological discontinuities and organizational environments’, Administrative Science Quarterly, 31, 439–65. Tushman, M. and Nadler, D. (1986) ‘Organizing for innovation’, California Management Review, 3(1), 73–84. Tushman, M. and O’Reilly III, C.A. (1996) ‘Ambidextrous organizations: managing evolutionary and revolutionary change’, California Management Review, 38(4), 8–30. Välikangas, L. (2003) ‘Manage Innovation as a Corporate Capability’, Chemical Engineering Progress, January, 64–9. Volberda, H.W., Baden-Fuller, C. and van den Bosch, F.A.J. (2001) ‘Mastering strategic renewal: mobilising renewal journeys in multi-unit firms’, Long Range Planning, 34, 159–78. Von Hippel, E. (1988) The sources of innovation. Oxford University Press, New York. Zahra, S.A. and Covin, J.G. (1995) ‘Contextual influences on the corporate entrepreneurshipperformance relationship: A longitudinal analysis, Journal of Business Venturing, 10(1), 43–58. Zahra, S.A., Nielsen, A.P. and Bogner, W.C. (1999) ‘Corporate entrepreneurship, knowledge, and competence development’, Entrepreneurship Theory and Practice, 23(3), 169–89. Zajac, E.J., Kraatz, M.S. and Bresser, R.K.F. (2000) ‘Modeling the dynamics of strategic fit: A normative approach to strategic change’, Strategic Management Journal, 21, 429–53.
Wim Vanhaverbeke is at the Department of Business Studies – Limburg University Centre, and Eindhoven Centre for Innovation Studies – Eindhoven University of Technology. Limburg University Centre, Department of Business Studies, Universitaire Campus, building D, 3590 Diepenbeek, Belgium and Eindhoven Centre of Innovation Studies, Eindhoven University of Technology, P.O. Box 5135600, MB Eindhoven, The Netherlands. e-mail:
[email protected] Nico Peeters is at the Eindhoven Centre for Innovation Studies – Eindhoven University of Technology.
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Towards a Guideline for Design of a Corporate Entrepreneurship Function for Business Development in MediumSized Technology-Based Companies Boaz Uittenbogaard, Lute Broens and Aard J. Groen The speed with which global high-technology markets evolve makes companies recognize that an effective innovation process is the best way to guarantee competitiveness. However, when (medium-sized) companies then wish to set up a corporate entrepreneurship function to enhance business development processes, they can find little material available in literature to assist in such processes. In this article we have described a guideline and some backgrounds for creating a corporate entrepreneurship function to realize business development in a hightech context.
t this moment, there is no general guideline on how to develop an effective corporate entrepreneurship function (CEF) in a medium-sized technology-based company available in literature. So, the first contribution is to construct such a guideline based on elements of the body of knowledge in this area. In this article we touch upon the construction process of such a guideline. Using as a basis the 4S social system perspective, adding several literary sources for further operationalization of elements, and data on five large hightech companies, we found a list of success and fail factors for creating a CEF. The empirical study by Leleux, Tindemans and Gosselin (2001) corroborated most findings. Based on five cases used for developing the guideline it should be noted that the business processes and competitive environment are different in every organization. Still, the communalities in the cases and elements found in literature make it justifiable to assume that the presented guideline contains elements that are crucial in every ‘process of structuring innovation’. The case study of Process™ shows that also in this case all elements point out relevant questions for the management of the CEF. Although only applied to this one case, the theoretical background and the results in this case suggest that this guideline can also be applied to other medium-sized or large com-
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panies that wish to create structured business development processes. However, this guideline is neither a ‘10 steps to success’ – model, nor a summary of ideas that business development managers can interpret any way they want to. It shows a sequence of factors that has to be considered in the process of implementing a suitable business development process and matching environment.
Introduction From Schumpeter (1934) to contemporary theorists such as Christensen (2003), claims have been made that innovation is a crucial process for economic development. The seminal work of these authors, and work of many others, has shown that new technology is a resource for innovation and business development. In this article we will address contemporary approaches of organizations trying to create an innovative organization where new business is developed. Whereas in management of technology literature much attention has been paid to R & D organization, little attention has been paid to the organization of business development or as it also referred to, of corporate entrepreneurship. We notice in practice that in the past few years large multinational companies have © Blackwell Publishing Ltd, 2005. 9600 Garsington Road, Oxford OX4 2DQ and 350 Main St, Malden, MA 02148, USA.
GUIDELINE FOR DESIGN OF A CORPORATE ENTREPRENEURSHIP FUNCTION
acknowledged the need for structured innovation and have created separate business development departments to fulfill this need. Examples of such departments in Dutch multinational companies can be found at DSM (DSM Venturing & Business Development) and Philips (Philips Corporate Incubator). The purpose of these departments is to maintain and improve competitiveness through the development of new product-market combinations or in other words to stimulate corporate entrepreneurship. Medium-sized companies also begin to realize that organized innovation is the key to success in today’s quickly developing high-tech markets and find that corporate entrepreneurship and business development are the concepts that should lead them to the status of ‘innovator’. In this article we will focus on a company, Process™, that has expressed the desire to become market leader through innovation, but is experiencing difficulties in how to establish the right balance between managing the ‘everyday business’ and creating a highly innovative environment that will lead them to the ‘top’. The company aims to establish this balance through the creation of a business development function. The goal of this article is to contribute to (design) knowledge on organizing a corporate entrepreneurship function in medium-sized companies. The principal research question is: how can an effective corporate entrepreneurship function (CEF) be developed in a medium-sized technology-based company? The research performed to answer this question entailed first a literature study and an analysis of five cases in Dutch multinational firms. We will only summarize this in the first part of this article, the ‘background study’, because of place restrictions. In the second part of the article a ‘Guideline for structured innovation’ will be presented that combines the findings of our literature study and our research outcomes into a toolset for Process™. This guideline will be applied in the third section: the case study. The conclusion and discussion is subject of the last part.
Background Study In this part we present our conclusions from a literature search looking for the body of knowledge on organizing the corporate entrepreneurship function. Definitions of business development and corporate entrepreneurship functions will be given, and some important aspects of corporate entrepreneurship will be presented, as well as some success and failure factors found in literature. The second part of the background is based on an analysis of five
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cases of large firms organizing the corporate entrepreneurship function.
Developing a Framework of Corporate Entrepreneurship We start by presenting definitions of the terms ‘business development’ and ‘corporate entrepreneurship function’ as they will be used here. Since both terms have many interfaces in the way they are used by various authors, it is important to understand the differences and the relation between them. Based on various definitions (for example, Badguerahanian & Abetti, 1995; Barringer & Bluedorn, 1999; Saly, 2001; Thornberry, 2002), the following relation between business development and the corporate entrepreneurship function can be defined: business development involves the actual development of product-market combinations, in other words it involves the ‘execution of the innovation process’. It could be organized as a dispersed process throughout the company. The corporate entrepreneurship function (CEF) involves the way the organization is shaped around the innovation process in order to create, maintain or improve innovativeness and business development. In the CEF, companies organize the process to deal with the tensions between exploitation and exploration (March, 1991) or, in other words, firms create the necessary strategic flexibility while maintaining operational effectiveness (Groen, During & Weaver, 2002; Weerd-Nederhof, 1998). The Weerd-Nederhof’s (1998) framework for analysing the value of R&D is also applicable for analysing the performance of the corporate entrepreneurship processes. It is inspired by social system theory on creation and maintenance of sustainable ‘units’ in a space of connected functionalistic actors. In this article the focal unit is a firm. The social system perspective focuses attention on four dimensions: goal attainment (strategy), pattern maintenance (skills, values, arrangements), adaptation for efficiency (scale) and integration into networks with other actors (social networking) (see also Groen, 2005). Combining this with different emphases of a number of authors on both business development and corporate entrepreneurship issues, the following aspects seem to be important. Strategic Issues Related to Goal Attainment: Business Development Mission This aspect refers to the desired level of impact of the company’s entrepreneurial activities on the organization and industry. Both Rip and Groen (2001) and Thornberry (2002) distin-
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Skills&Values
Organization
Social networking
Goal: From idea to strategy
Business Development
Scope
Financial Means
Networkcontacts
Scale
Figure 1. the 4S Social System Model of the Firm (see: Groen c.s. 2002, Groen, 2005) guish between the levels ‘Value creation within the organizational boundaries’ – also referred to as corporate venturing or intrapreneuring, ‘transformation of the corporate regime’ – and ‘transformation of the sociotechnical landscape’ or ‘industry rule breaking’. Although Thornberry describes the different levels as four individual, different types of entrepreneurship, it can be noted that the different levels describe more of a development process. Pattern Maintenance: Skills, Values and Arrangements Determining Organizational Characteristics Depending on the speed of developments in the market and the level of competitiveness a number of (non-fixed) organizational characteristics will need to be adapted to create a suitable entrepreneurial environment around the CE function. To evaluate the level of entrepreneurial attitude in the organization around the Business Development function, the present and required level of risk attitude, innovativeness and proactiveness will be determined, which combine into the level of entrepreneurial intensity (Saly, 2001). Furthermore, when looking at technology-based companies, patterns of behaviour are influenced by the state of development of the technology. Business development based on a novelty is different from settings where technology belongs to a dominant regime. The labelling of novelties as ‘hopeful monstrosity’ (Mokyr, In Rip & Groen, 2001) illustrates difficulties of creating a sustainable system based on new technologies. Venturing Structures, Searching for Efficient Investment Structures Since companies have many types of venturing activities to choose from in order to
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maximally exploit the collected business opportunities, a strategy must be found to choose which type of venturing is most suitable for the corporate entrepreneurship function. Integration of CE in Dynamic Networks This aspect refers to the process of structuring the environment to generate sufficient opportunities for product-market combinations (Groen, During & Weaver, 2002). Issues at hand here are the creation and maintenance of network relations. Choices have to be made on how intensive relations should be, and which position one would like to take in the network structure creating the path to the market (AOM, 2005; Burt, 1992; Granovetter, 1973). With regard to the fourth dimension, Leleux, Tindemans and Gosselin (2002) have described seven venturing types: investments in independent venture capital funds; corporate venture capital; mentor capital (external entrepreneurs get seconded by corporate specialist); venture partnering; venture spin-offs; corporate incubators; and internal new ventures. The first four types focus on external development, whereas the last three types focus more on internal development. In a survey conducted in co-operation with Flanders Business School in around 500 Belgian companies, they investigated the links between these venturing types and the matching organizational structures and culture in a number of Belgian organizations. In this process, the following aspects were considered: size of bets, financial success metrics, funding, incentive system, strategic focus, goal, portfolio strategy, focus of work, decision-making, entrepreneurial culture and governance. In Figure 2, the conclusions of their survey are summarized, presenting the different venturing types and the matching characteristics. The ‘venturing paths’ on the right-hand side of the figure can be placed over the characteristics on the left-hand side, to match the different venturing strategies with the organizational characteristics. Many reasons are presented in literature for failure of innovation processes. All of these ‘reasons for failure’ present warnings for companies that wish to create a corporate entrepreneurship function for business development. As larger companies often have to deal with many parties and bureaucratic rules, execution of new projects as well as implementation of a new business function will take a great deal of time and effort (Tidd, Bessant & Pavitt, 2001) and hence require the full attention of everyone involved, including the top management of the company. In addition, inertia in
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Characteristic Internal Ventures Size of bets Financial success metrics Funding
Larger bets
Smaller bets
Revenues and profits
Realized IRR to exit/sale
Corporate budgets
Incentive system
Corporate compensation
Strategic focus
Strategic opportunities New business creation Fewer managed successes Business development
Goal Portfolio Strategy Focus of Work Decision-Making Entrepreneurial culture Governance
Venture Capital
Traditional corporate process Important Traditional business hierarchy
1
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3 2
5 4
Syndicate investments Equity risk/reward Many investments across markets Market value Few big hits, many misses Due diligence Faster, more frequent decisions Not an organizational priority
1: Path of Corporate Incubation 2: Path of Venture Spin-offs 3: Path of Venture Partnering
4: Path of Mentor Capital 5: Path of Corporate Venture Capital
Partnership and venture boards
Figure 2. Venturing Strategies and Matching Characteristics
both the business processes and the decision processes, often sided by a mistaken sense of self confidence caused by former successes, heavily slow down the speed and flexibility of an organization (Stropford, 1994). Lastly, uncertainties at the front end and in the course of the innovation process might cause organizations to make wrong decisions or worse: not to take any decision at all (Lint, 2001). It is obvious that, in the process of setting up a corporate entrepreneurship function, these warnings should be considered carefully.
these interviews, literary sources containing information about the companies were studied (annual reports and Internet sources) and the outcomes of the interviews were discussed during a second meeting at which the business development directors, as well as a number of authors and professors on the field of business development, networking theories and research and development were present. The feedback from this session has been included in the research outcomes.
Summarizing the Analysis of CE Functions in Five Large Firms
Results of Preliminary Cases
To further develop a guideline for structuring corporate entrepreneurship we have carried out comparative research in five multinational high technology companies, all containing a separate Corporate entrepreneurship function to steer business development. As ‘corporate entrepreneurship functions in organizations’ is a relatively unexplored field in literature, we found this methodology most suitable for our research. The studied companies operate in the chemical sector, electronics sector, processtechnology sector and food industry. At these companies, we analysed the different business development functions on the aspects mentioned above. To gather sufficient information for the analyses we interviewed the business development directors of the five companies. During these (semi-structured) interviews several topics were discussed, corresponding to the different elements of the 4S Model. In addition to
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From the analysis of the five different companies and our literature study, we have extracted four different types of business development: network-oriented business development, internally oriented business development, R&D-oriented business development and business development with ad hoc idea generation. Between these types fundamental differences exist on the input side of the business development process (the process of idea generation). In network-oriented business development, market opportunities are spotted through the use of networks. These networks are used to simplify the environment in which opportunities are spotted in order to keep this process manageable. The more diversified and extended these networks, the closer this simplified environment approaches the actual one and the larger the chance to sport business opportunities. In internally oriented business development, opportunities are spotted through the other business units and the marketing department by using their contacts with the
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organizational environment. In R&D-oriented business development, opportunities are created through the development of technological innovations, for which market possibilities have to be found. The last type, business development with ad hoc idea generation, can be described as ‘market oriented without an actual idea generation strategy’. Spotting opportunities happens without a clear strategy, resulting in the fact that only a very small part of the actual business environment is scanned. Each business development type has different features, uses a different networking strategy and requires different aspects to be present in the business configuration. By using these features and required aspects as a comparison tool, this typology turns into an instrument for the identification of problem causes in the CEF. Table 1 presents an overview of characteristics and crucial factors for each of the four types. The company analyses revealed that a performance fit was present at three of the five companies and was not present (yet) at the other two. At the companies where the performance fit was absent, we have identified the following problems:
3. Short-term financial performance measurement in combination with a high level of ‘desired impact’ negatively influences the chances to reach the mission and limits possibilities for radical innovation projects. 4. The positioning of the corporate entrepreneurship function under a specific business unit may result in conflicts of interest and limit innovativeness. 5. An investment portfolio that consists of a large number of smaller investments when a high-risk attitude is required decreases the chance to reach this level of risk attitude. 6. Lack of top management support in combination with an internally oriented business development strategy causes a lack of understanding in the organization, leading to conflicts of interest. 7. Inadequate communication structure in combination with an internally oriented strategy causes a lack of entrepreneurial culture and understanding in the organization, also leading to conflicts of interest.
1. The absence of a clear networking strategy and its recognition as a formal CEF role causes lack of structural idea generation and thus limits proactiveness. As a result, only a small part of the opportunities existing in the market can be captured. 2. Insufficient analysis of environmental developments limits proactiveness.
1. The definition of explicit business development goals and a clear strategy. 2. Creating alignment of individuals and enabling progress control and preemptive corrections. 3. Periodical progress control decreases risk. 4. Decentralization of the decision process creates speed and flexibility.
The success factors that have been identified, based on situations where a performance fit was present, are as follows.
Table 1. Summary of Business Development Types Type of BD process
Characteristics of BD function
Crucial factors
Network oriented
Central or integrated position, self-created and managed network
Internally oriented
Decentralized position, network structure ‘borrowed’ from other business functions ‘New to the world’ – technology oriented
Networking is considered a formal role, a network strategy is formulated, a strong reputation is favorable Good communication structure, sufficient power and top – management support are required An extensive R&D staff, a large R&D budget, a wide technological network, sufficient patents and large target markets are required
R&D oriented
Ad hoc idea generation
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No clear idea generation strategy, inertia present or in transition phase
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GUIDELINE FOR DESIGN OF A CORPORATE ENTREPRENEURSHIP FUNCTION
5. A strong reputation attracts possible partners and improves the idea generation process. 6. Clearly identified and specified competencies and skills excludes the HRM policy as a bottleneck for ‘best possible results’. 7. Partnerships with customers stimulate idea generation and ‘guarantee’ a market for newly developed products. As a part of the analyses, we have compared the study by Leleux, Tindemans and Grosselin (2001) with the outcomes of our own research findings. Overall, the findings of both studies coincided. However we have spotted a few differences, presented in Table 2. The most striking difference concerns the perception of entrepreneurial culture: the interviewed companies that use a strategy of corporate incubators consider an entrepreneurial culture important, whereas Leleux, Tindemans and Gosselin found the opposite. Further on, the companies that have a ‘performance fit’ (Chem1, ElecT and AquaP) link a strategy of venture spin-offs to a system of realized IRR to exit/sale as financial success metrics. They also link a strategy of internal ventures and venture partnering to fast and frequent decision-making and to partnerships and venture boards for governance.
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Guideline for Structured Innovation Based on the identified aspects of the Business Development environment the uncovered problem causes and success factors for the ‘gaps’ in the performance fits of the studied companies, the definition of the four business development types and the results of the survey by Leleux, Tindemans and Gosselin (2001), we have constructed a guideline. This ‘guideline for structured innovation’ is depicted in Figure 3. The top centre of the guideline is formed by the factor ‘CE intensity’. As described in the theoretical background section, this factor represents the desired and actual level of innovativeness, proactiveness and risk attitude. The CE intensity is influenced by the business development mission, the organizational environment and the organizational characteristics. The aspects of the business development mission that influence the CE intensity are the level of ‘desired impact of the developed innovations’ and the time horizon that the mission covers (short term/long term). In general, the more ambitious and long term the mission, the higher the required level of CE intensity. Shorter-term missions with a lighter desired impact are usually focused on short-
Table 2. Identified Links between Innovation Strategies and Organizational Characteristics Company
Venturing strategy
Organizational characteristic
Suggestion Tindemans et al.
Identified characteristic
Case 1
Corporate incubators Corp. venture capital Venture spin-offs
Success metrics
Revenues & Profits
Entrepreneurial Culture Incentive system
Not an organizational priority Equity risk / reward
Realized IRR to exit / sale Important
Scope
Strategic opportunities
Entrepreneurial Culture Entrepreneurial Culture Scope
Not an organizational priority Not an organizational priority Strategic opportunities
Goal Decision-making
New business creation Traditional corporate process Traditional hierarchy
Case 2
Case 3 Case 4
Case 5
Corporate incubators
Corporate incubators Internal ventures, Corporate incubators Internal ventures, Venture partnering
Governance
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Corporate compensation Many investments Important Important Many investments Market value Fast, frequent decisions Partnerships and venture boards
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BD Mission
Organizational environment
Level of desired impact Short term / long term
Speed of developments Density of competition
Organizational characteristics Business structure Entrepreneurial environment Available resources R&D characteristics Technology / Market focus Available networks
CE Intensity Desired vs. Actual level Innovativeness Proactiveness Risk taking attitude
Venturing portfolio
BD type Network oriented Internally oriented R&D oriented
Independent VCF Corporate VC Mentor capital Venture partnering Venture spin-offs Corporate incubators Internal new ventures
BD characteristics Scope Skills Social Networking Scale
Structured Innovation
Figure 3. Guideline for Structured Innovation
term financial goals, and require a lower level of innovativeness and risk attitude. The aspects of the environment that have an impact on the CE intensity are the speed of developments (dynamic aspects) and the density of competition that the organization has to deal with. The stronger both aspects, the higher the level of required innovativeness and proactiveness. The organizational characteristics that influence the CE intensity are the aspects that determine the limiting conditions for the business development environment. These aspects are (to a certain extent) the business structure, the available resources and the R&D characteristics (focus of research). The focus on technological or market-oriented innovation, the availability of networks and the presence of an entrepreneurial environment are also aspects that influence the CE intensity. These aspects are part of the fixed organizational characteristics,
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as it is very difficult to change them completely, and therefore they influence the realizable level of CE intensity. To determine the required level of CE intensity, all three of these factors need to be considered, and no problems should be caused by contradictory aspects. As an example, at one of the companies we analysed, the business development mission requires a level of CE intensity that is appropriate for the creation of innovations that have an impact of ‘organizational transformation’. In the current business structure however, the business development function is placed under a business unit whose mission is defined as to ‘concentrate on improving returns and cash flow’. This causes a conflict regarding the aspect short term/long term. With the information about the organizational characteristics, the most suitable business development type can be determined. As
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described in Table 1, the suitability of the type depends on the position of the function in the organization, the available network structures, the R&D characteristics and the available resources. Based on these aspects, the company can choose to implement a structure that resembles either the network oriented, internally oriented, R&D oriented or ad hoc oriented business development model. The next step in the process is to determine an appropriate venturing portfolio. Considering the identified differences between the outcomes of the interviews and the results of the survey conducted by Leleux, Tindemans and Gosselin (2001), the following modifications to the Venturing Strategies model (Figure 2) are suggested: • corporate incubators should be linked to an emphasis on entrepreneurial culture; • venture spin-offs could be linked to a system of realized IRR to exit / sale as financial success metrics; • internal ventures and venture partnering could be linked to fast and frequent decision-making, as well as to partnerships and venture boards for governance. Since the first suggestion is supported by all three of the companies with a ‘performance fit’, we can be more certain about modification of the model than we can be for the other two suggestions. For all three suggestions however, more research is needed to confirm them. Keeping these three suggestions in mind, and the fact that the other links between innovation strategies and organizational characteristics (as suggested by Leleux, Tindemans and Gosselin) are supported by the outcomes of this research study, this model can be used as a tool for generating advice for the composition of the innovation portfolio and the way the organization should support the venturing strategy. As a final step in the guideline, the composition of the venturing portfolio combined with the choice of business development type and the identified problem causes and success factors can be used to present recommendations regarding the characteristics that should be present in the business configuration. In the next section, this ‘guideline for structured innovation’ is applied on the company of our study: Process™.
Case: Process™ Introduction Process™ is a medium-sized company that operates worldwide in the development and
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application of process technologies. It supplies products, installations and services for, amongst others, the food and beverage industry, automotive industry, chemical industry, pharmaceutical industry and water industry. In the served market segments, Process™ owns large market shares. Process™ has an annual turnover of a few hundred million euros, and production and construction facilities in several countries throughout the world. With sales offices and a distribution network in more than 100 countries a global coverage is provided. In its mission statement, Process™ focuses on developing and applying state-ofthe-art technologies to create innovative products, systems and technological solutions to help society – through its clients – to meet environmental and health and safety challenges. Through relationships with customers, world-class employees and access to the leading process technologies across the world, Process™ achieves long-lasting leadership for its customers and world leadership in the global processing industry. This mission statement shows both the company’s goal (global leadership in the served markets) and its strategy (developing technological solutions through customer orientation) as well as its core assets (state-of-the-art technology and the use of world-class employees). As mentioned in the introduction, the company has recently expressed the need for a separate business development function and by following the guideline we will present recommendations on how to create this function in a matching organizational environment. Data on the current state of affairs is generated by secondary analysis of documents and interviews with key employees as well as regular discussions with the business development director. The current business development activities of Process™ can be described, using the 4S social system model. This description includes (as described above) information about goals and strategies, skills, routines and competencies, internal and external network partners and financial control. Aware of the fact that global competition is increasing every year, the general management of Process™ has created a budget for ‘business development’ in order to create an effective corporate entrepreneurship function. The goal of the CEF is to ‘assure revenues and profits in the long term’ and to ‘maintain global leadership’. This task has been put in the hands of the Business Development Director. Since the Business Development Director manages the waterprocessing activities of Process™ at the same time, the business development activities are primarily focused on this industry, and
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include a number of activities: based on the input that is received from the market a homogeneous opportunity is spotted, which is evaluated on three points: market attractiveness, fit with core competencies and fit with company strategy. After the opportunity has passed these three ‘tests’, a project team is formed, and the idea is taken into the development stage. Often development takes place in close contact with customers. No explicit goals have been formulated for the corporate entrepreneurship function, so it is not clear forehand which outcomes of the business development processes are aimed for. When opportunities are spotted and evaluated, they are presented to the general management, which gives its (dis-)approval. Out of each ten ideas that are presented, around six are approved. With the exception of this approval phase, general management has no real involvement in the business development process; moreover, it has no clear vision of which activities the business development process contains. Contact with general management and other departments is mostly informal, and although regular contact exists with Marketing & Sales and R&D, they have ‘no real idea’ what business development involves. As mentioned, the technological knowledge that is present in the company is a unique skill that provides a competitive advantage and can insure competitive sustainability in the future. Being a technology driven company, many opportunities arise from the R&D department. However, the largest percentage originates at the market side and reaches Process™ through several networks. Networking takes place both in a structural way and on an ‘ad hoc’ basis. Through participation in several networks and through ‘active environmental scanning’ opportunities are spotted. The tools that are used for environmental scanning are trend analysis, scenario analysis and general scanning of market developments. The only economic income of the business development function is the budget that has been made available by top management. This budget however, is relatively small. No specific method is used for financial control. To summarize, the characteristics of the business development function can be described with the following key words: a small number of large-sized bets, looking for strategic opportunities, revenues and profits as financial success metrics, corporate funding as sole economic income, a mixture between corporate compensation and equity risk/ reward as an incentive system, a focus on market value instead of new business creation,
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fast decision-making and a mixture between traditional hierarchy and venture boards for governance.
Evaluation of the CE Function Through the ‘guideline for structured innovation’, an analysis of the (f)actors and relationships within Process™ will lead to recommendations concerning the creation of an effective business development function in an entrepreneurial environment. In this process, the following steps will be taken: 1. Definition of the business development mission; 2. Description of the organizational environment; 3. Definition of relevant organizational characteristics; 4. Determination of the required and current level of CE intensity; 5. Determination of the appropriate business development type; 6. Determination of the appropriate venturing strategy; 7. Presentation of recommendations for required characteristics of the business development function.
Step 1-2-3: Mission, Environment and Organizational Characteristics In terms of the guideline, the Mission of Process™ can be described on the basis of ‘level of impact’ and ‘space of time’. As described, the mission of Process™ contains the goal of ‘global leadership’ and management has indicated a time-scale of around five to seven years. Figure 4 presents the current and desired situation. It shows which routes newly developed technologies can take and which impact on their environment they can have (Rip & Groen, 2001). In this figure is illustrated that the following years may be crucial to whether Process™’s technologies will modify the process technology landscape (third layer). This statement is supported by the fact that water processing is currently a ‘hot topic’ and receives a lot of attention throughout the world. In the past it has occurred many times that evolving (high technology) markets adopt one main technology and other technologies have to struggle for survival. Another aspect of the organizational environment is the fact that the lifecycle of waterprocessing systems is relatively short. Once implemented however, a customer is not likely to switch suppliers very easily. Also, global competition is increasing, meaning that
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1. 2.
1
3.
Novelty, shaped by existing regime Evolves, is taken up, may modify regime Landscape is transformed
5 to 7 years
Process Figure 4. Routes of Newly Developed Technologies
customers have an increasing number of options. Based on these two facts, the discovery of new markets can be very lucrative (firstmover advantage). The following relevant organizational characteristics can be extracted from the information, presented about Process™: in the organizational structure, the business development function is divided under the division that focuses on water processing, R&D activities are focused around a number of technology platforms, business development activities are both R&D and market oriented, the business development function has created its own network environment, based on contacts with existing partners and through developing new links on an ad hoc basis (no network strategy is present). The organizational culture can be described as ‘moderately innovative’: the need for innovation has been acknowledged but the business development function is hardly facilitated.
Step 4: Required and Current Level of CE Intensity The next step in the process of creating a CEF is the definition of the desired and present level of intensity of corporate entrepreneurship. First, however, possible internal conflicts in the current situation should be identified. In the case of Process™, a conflict could be caused by the goals that top management has set when the budget for business development has been created. ‘Assuring revenues and profits in the long term’ and ‘global leadership’ are goals that can be achieved together, but may require two different levels of risk attitude. Next, the fact that the business development function is currently placed under a specific division limits the business development activities to the field of water processing
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and it will be difficult to expand to other fields of technology in the current structure. The required level of CE intensity influences the decision-making process concerning the configuration of the business development environment. Based on the characteristics of the mission, the environment and the organization, the required CE intensity can be determined. The mission statement clearly states that Process™ wishes to achieve and/or maintain world leadership with its technologies. The environment has been defined as highly competitive with high ‘switch-over’ boundaries. This means that a high level of proactiveness concerning both potential customers and environmental developments is needed in order to observe the actions of competitors and develop new market segments. The required level of innovativeness is medium to high, to stay ahead of competitors and to serve a growing number of market segments, based on the existing technology platforms. As stated above, the goals for business development ‘global leadership’ and ‘long-term revenue guarantee’ require two different levels of risk attitude. However, when a certain risk is accepted for the goal ‘revenue guarantee’ the two goals can be combined. Combined with the fact that Process™ is a medium-sized company, operating in a rapidly growing environment, the required risk attitude can be defined as medium to high. To determine the actual levels of innovativeness, proactiveness and risk attitude, the current configuration and business practices are reviewed. The foundation of the business development function and the several innovative projects show that innovative behaviour is present, but the lack of communication with top management and other business functions, together with the low level of compre-
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hension of the business development activities make clear that innovativeness is not integrated throughout the company yet. Therefore, the level of innovativeness is defined as medium to low. The continuous scouting for network opportunities by the business development function to develop market opportunities show that ‘being proactive’ is recognized as important by the business development function. However, no real network strategy has been defined, neither has networking been recognized as a formal role by top management. Concluding, proactiveness is defined as medium to low. The current venturing strategy can be described as a small number of large-sized bets, in search of strategic opportunities. Top management demands little control concerning innovative investments, but new opportunities have to match with the current business strategy. Based on these facts, risk attitude can be defined as medium to high. When we compare the actual level of CE intensity with the required level, it can be concluded that the levels of both innovativeness and proactiveness need to increase. The implications of this conclusion for Process™ will be discussed later.
Step 5: Business Development type To determine which business development type is most suitable for Process™ and which crucial factors should be present at the business development function, the organizational characteristics are compared to the characteristics of the different business development configurations. Since the R&D function at Process™ does not produce a continuous flow of ‘new-to-theworld’ technologies on which the company’s innovation policy is (or can be) based, the R&D oriented Business Development is not suitable for Process™. The network-oriented type on the other hand, like Process™, focuses on the creation of new market opportunities. The business development function of Process™ creates and manages its own network, which has been listed as a demand for network-oriented business development. However, since the business development function has been placed under the water-processing division, the field of innovation is restricted to water-processing technology. If the business development function wishes to expand its activities with the current position in the organizational structure, it will need to communicate much stronger with other divisions: however, a more central position in the organization is preferable. Lastly, since a strong focus is put on ‘customer-oriented’ innova-
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tions, the business development function needs to communicate structurally with the sales and marketing business functions. It can be concluded that the business development configuration should be a combination of network-oriented and internally oriented business development. As presented in Table 1 the crucial factors for these two types are: • • • •
networking is considered a formal role; a network strategy is formulated; a strong reputation is favorable; a good communication structure is required; • the business development function must have sufficient power to execute projects among the ‘everyday business processes’ of the other organizational parts; • top management support should provide this power.
Step 6: Venturing Strategy Currently, the venturing strategy of Process™ focuses on internal ventures. For this type of venturing, the innovation process must be carried out among the everyday business processes. This requires a great deal of understanding and support by the entire organization. In the current configuration of Process™, this understanding and support is absent. Combined with the fact that no system has been created for financial control of the business development activities, the mediumto-high risk attitude is not controlled, and this creates uncertainty. At the same time, top management will have difficulties in keeping a view of the total situation, and knowledge management (and knowledge delegation to successors) is obstructed. A type of venturing that needs less integration in the organization is corporate incubation, whereby new ventures are provided sufficient leeway to operate relatively independent in a ‘cocoon’ of corporate support and services. This description seems less far from the current situation, but still requires top management support, and moreover a larger budget to pursue different opportunities. Observing the characteristics that are commonly used for both types of venturing (according to the study by Leleux, Tindemans and Gosselin (2001), with the proposed changes taken into account), it can be concluded that the current business configuration more closely resembles the characteristics of corporate incubation than those of internal venturing. This is shown in Figure 5, in which the thin line represents the characteristics, belonging to corporate incubation and the thick line represents the current characteristics
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Internal ventures Size of bets Financial success metrics Funding Incentive system Strategic focus Goal Portfolio strategy
Focus of work Decision-making Entrepreneurial culture Governance
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Venture capital
Larger bets
Smaller bets Realized IRR to exit/sale Syndicate investments
Revenues and profits Corporate budgets Corporate compensation Strategic opportunities
Equity risk/reward Many investments across markets
New business creation
Market value
Fewer managed successes
Few big hits, many misses
Business development
Due diligence
Traditional corporate process
Faster, more frequent decisions
Important
Not an organizational priority
Traditional business hierarchy
Partnership and venture boards
Figure 5. Business Development Characteristics of Process™ of Process™. The left-hand side of the figure belongs to internal venturing. This figure can function as a tool for the decision between the two innovation strategies.
Step 7: Recommendations Following the structure of the ‘guideline for structured innovation’, the analysis of Process™’s Business Development function has resulted in a number of issues regarding the creation of an entrepreneurial environment. First of all, the question should be asked whether the business function should be placed under a specific division or should be given a more central position in the company. Next, the level of innovativeness and proactiveness has to increase. The relationships with top management and the other business functions have to be reviewed and adapted and the ‘crucial factors’, mentioned in the analysis of business development types need to be present in the configuration. Lastly, a decision has to be made concerning the type of venturing and the implications for the configuration that follow from this decision have to be dealt with. To increase the level of proactiveness, a specific network strategy has to be defined. This strategy should include information about which network partners are relevant, how these networks will be created and which ties must be kept strong/weak. A budget has to be
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available for networking, recognizing it as a formal task. Periodically, progress should be reviewed. To increase the level of innovative behavior, top management needs to be well informed about Business Development activities and should be involved in the creation of a business development strategy for the coming five years. By planning periodical progress reviews, top management will stay informed. Based on these reviews, appropriate budgets can be assigned. The uncertainty, following from the high level of risk, can also be controlled through these reviews. ‘Public’ support by top management and an appropriate communication structure will create understanding for business development activities throughout the company and will support both the creation of opportunities and co-operation for innovation projects. By implementing these changes, all of the ‘crucial factors’ for the described business development type will be present. To create a ‘strong reputation’ in the relevant environment, networking and marketing are the appropriate instruments. Extra aspects of the business configuration that will have a positive effect on the performance of the business development function, following from the identified success factors, are the formulation of explicit business development goals and strategy, combined with periodic progress reviews, a suitable financial control system
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and sufficient sources of economic income, a large pool of available experts and clearly identified skills and competencies of project team members. Based on the observation that the current business development configuration has more similarities with the recommended configuration for corporate incubation than for internal venturing, the first option is recommended as venturing strategy. This means that the business development function should create fairly independent project teams for innovation projects. These project teams have to be fully supported by corporate management and be provided with sufficient leeway to perform their tasks.
applied to other medium or large-sized companies that wish to create structured business development processes. However, this guideline is neither a ‘ten steps to success’ – model, nor a summary of ideas that business development managers can interpret any way they want to. It shows a sequence of factors that have to be considered in the process of implementing a suitable business development process and matching environment. Still more research is needed to test validity and reliability of the proposed guideline. Indepth data on more companies will have to be found in next studies. In these studies further theoretical developments will also be made to develop a more specified multi-dimensional and network management-oriented analytical tool including a performance measurement.
Conclusions In this article we have described a guideline and some background for creating a corporate entrepreneurship function in order to realize business development in a high-tech context. It was illustrated using the case of the company Process™, which has expressed to desire to become market leader in their market through innovation. Our research question was: how can an effective corporate entrepreneurship function (CEF) be developed in a medium-sized technology based company? At the moment, there is no general guideline available in literature. So the first contribution of the research supporting this article was to construct such a guideline based on elements of the body of knowledge in this area. Using as a basis the 4S social system perspective (Groen, 2005; Groen, During & Weaver, 2002), adding several literary sources for further operationalization of elements, we found a list of success and fail factors for creating a CEF. The empirical study of Leleux, Tindemans and Gosselin (2001) corroborated most findings. Based on the five cases used for developing the guideline it should be noted that the business processes and competitive environment are different in every organization. Still, the communalities in the cases and elements found in literature make it justifiable to assume that the presented guideline contains elements that are crucial in every ‘process of structuring innovation’. Through the use of examples of the research outcomes it has been shown in which way the guidelines are linked to the organizations. The illustrative case study of Process™ shows that also in this case all elements point out relevant questions for the management of the CEF. Although only applied to this one case, the theoretical background and the results in this case suggest that this guideline can also be
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Reference Badguerahanian, L. and Abetti, P.A. (1995) ‘The rise and fall of the Merlin-Gerin foundry business, a case study in French corporate entrepreneurship’, Journal of Business Venturing, 10, 477–93. Barringer, B.R. and Bleudorn, A.C. (1999) ‘The relationship between corporate entrepreneurship and strategic management’, Strategic Management Journal, 421–44. Christensen, C.M. (2003) The Innovator’s Dilema, Harvard Business Press, Harvard. Groen, A.J., de Weerd Nederhof, P.C., Kerssens-van Drongelen, I.C., Badoux, R.A.J. and Olthuis, G.P.H. (2001a) ‘Leveraging Research and Development. Creating and Justifying Added Value’. Proceedings of ‘Leveraging R&D’ R&D Management Conference, New Zealand, 8–9 February. Groen, A.J., de Weerd Nederhof, P.C. and Kerssensvan Drongelen, I.C. (2001b) ‘Leveraging Research and Development, using the 4S model’. Proceedings, EIASM Conference on NPD. Groen, A.J., During, W.E. and Weaver, K.M. (2002) ‘Alliances between HTSF’s and their partners: a multidimensional process approach’. In Oakey, R., During, W.E. and Kauser, S. (eds), New technology-based firms in the new millennium – volume II, pp. 197–217. Groen, A.J. (2005) ‘Knowledge Intensive Entrepreneurship in Networks: A Multi-level / multi dimensional approach based on social system theory’, Journal of Enterprising Culture, March. Leleux, B., Tindemans, B. and Gosselin, D.P. (2001) Bringing Entrepreneurship Inside: Venturing for Growth. Working Paper, Flanders Business School – IMD Lausanne. Lint, O. (2001) Measuring and Managing R&D Option Value. Ridderkerk: Offsetdrukkerij Ridderprint B.V. Rip, A. and Groen, A.J. (2001) Many visible hands. In Cooms, R., Green, K., Richards, A. and Walsh, V. (eds), Technology and the market. Demand, user and innovation, pp. 13–37. Saly, A.W. (2001) Corporate Entrepreneurship, antecedents and consequences of entrepreneurship in large
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established firms. Rotterdam: Tinbergen Institute Research Series. Schumpeter, J.A. (1934) The theory of economic development. Harvard University Press, Cambridge, MA. Stropford, J.M. (1994) ‘Creating Corporate Entrepreneurship’, Strategic Management Journal, 15(7), 521–36. Thornberry, N.E. (2002) ‘Corporate Entrepreneurship: teaching managers to be entrepreneurs’, Journal of Management Development, 22(4), 329–44. Tidd, J.K., Bessant, J. and Pavitt, K. (2001) Managing Innovation, 2nd edn. John Wiley & Sons Ltd, Chichester. Weerd-Nederhof, de P.C. (1998) Operational New Product Development Systems. Operational Effectiveness and Strategic Flexibility. Unpublished thesis, University of Twente, Enschede.
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Aard Groen is institute director of NIKOS, the Dutch Institute for Knowledge Intensive Entrepreneurship, and associate professor at the University of Twente and Saxion professional University. His research is focused on knowledge intensive entrepreneurship in networks, studied using a social system theoretical perspective. Groen chairs the High Tech Small Form conference bi-annually in Enschede, and is member of several entrepreneurship committees at the EFMD, European Foundation for Management Development, ECIU, European Consortium of Innovative Universities and BEPART, the Baltic Entrepreneurship Partnership. He received his master on public administration from the University of Twente, and his PhD on business administration from the University of Groningen. Groen has published several articles and chapters on innovation and entrepreneurship. Lute Broens is business development manager of NORIT, in the area of membrane technology for water purification. Before working for NORIT he started companies in membrane technology and other fields of high-tech business. Currently he is also involved in a worldwide network of water-related industries and NGOs. Boaz Uittenbogaart studied industrial engineering and management at the University of Twente. For his masters thesis he performed (under the supervision of Professor Groen) the study that is basis for this article. Currently he works as a financial analyst for a large retail bank in the Netherlands.
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Characteristics of Innovative Companies: A Case Study of Companies in Different Sectors Carmen Cabello Medina, Antonio Carmona Lavado and Ramón Valle Cabrera The literature on new organizational forms offers an up-to-date picture of organizations that combines traditional variables with new ones, and contributes to a more productive analysis of the relationship between organization and innovation. Our review of the literature highlights several research topics dealing with new organizational forms and innovation, such as strategic flexibility (in the form of customization of output, subcontracting or outsourcing and the use of contingent workers), informal communication throughout the entire organization made feasible by information technology and collaboration with other organizations and institutions. These topics have been analysed in a study of four companies that differ in size and sector, but that have all been classified as innovative. This article confirms the existence of certain factors that operate as described in the literature, and reveals other factors that have to be taken into account because they contribute to a better understanding of how innovation takes place in the four companies.
Introduction nnovative activities of organizations have attracted the attention of many researchers who try to identify the factors that promote innovation (Damanpour, 1988, 1991; Damanpour & Gopalakrishnan, 1998; Wolfe, 1994). From a review of a relatively large body of literature it becomes clear that there are a variety of concepts and types of innovation that researchers have attempted to relate to a wide variety of organizational variables. A recurring theme in the research literature on innovation is the role of organizational structures and management processes. These factors are considered to be the major determinants of innovative activity (Damanpour, 1988, 1991; Kim, 1980; Kimberley & Evanisko, 1981; Wolfe, 1994). This line of research has been characterized by the use of classic structural dimensions (complexity, formalization, centralization and level of differentiation). Recently, however, new forms of organization have received attention as well, and the study of these new forms calls for considering a number of new variables involved in the innovation process itself. Although the literature
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provides sufficient theoretical arguments for a belief that these new organizational forms favour innovation (Daft & Lewin, 1993; Hitt, Keats & DeMarie, 1998; Ruigrock et al., 1999), empirical evidence is still relatively scarce. The fundamental objective of our study is to build theory from this new perspective and, from an empirical standpoint, explore the existence and essence of these new organizational forms in different types of innovative companies. We also propose possible relationships (1) between type of company and the variety of these forms and (2) among the various new organizational forms. To this end, we seek to study whether the innovative organizations in our case studies present the identifiable features cited in the literature with respect to: organizational flexibility (customization, employment of contingent workers and subcontracting or outsourcing), formalization of internal communications processes and significant collaboration agreements with other entities. These are some of the variables highlighted by Hitt, Keats and DeMarie (1998), Whittington et al. (1999) and Ruigrock et al. (1999), offering an integrative view on the dimensions of these new organizational forms, and the mecha© Blackwell Publishing Ltd, 2005. 9600 Garsington Road, Oxford OX4 2DQ and 350 Main St, Malden, MA 02148, USA.
CHARACTERISTICS OF INNOVATIVE COMPANIES
nisms in place within the organizations which facilitate innovation. The research methodology adopted is the case study, best suited in our opinion to the objectives of our study: constructing theoretical approaches and revealing still relatively unknown aspects of the relationships being studied (Eisenhardt, 1995; Lee, 1999). To this end we have selected four innovative companies, of different size, belonging to different sectors of the business world. In the first two sections we synthesize the current positions and concepts in the innovation literature. In the third section, we focus in on the structural characteristics of innovative organizations and conclude with an outline of what a basic innovative company case study should reveal. The fourth section profiles the four companies, presents our empirical work and the subsequent findings. The final section is devoted to analysis, conclusions and limitations.
Some Issues in the Study of Innovation The first problem we face when studying innovation is its conceptual and typological essence. The epistemological meaning of ‘innovation’ is clear: making something new (Tidd, Bessant & Pavitt, 1999). However, the variety of ways in which innovation has been addressed in the literature demonstrate the need to specify which definition of the term is being used (Cumming, 1998; Escorsa & Valls, 2000; Gopalakrishnan & Damanpour, 1997; Tidd, Bessant & Pavitt, 1999). In the next part of this study we present several authors’ approaches to innovation, and state the perspective that we have adopted. Innovation is widely understood to be related to the implementation of new ideas or original solutions (Camisón-Zornoza et al., 2004; Damanpour, 1991, 1996; Escorsa and Valls, 2000; Quinn, 1979; Tidd, Bessant & Pavitt, 1999). It means the introduction of significant technical or technological changes (product or process) or changes in other areas such as commercial, marketing, financial, social (e.g. human resources), and organizational structures or administration. Each of these areas can give rise to different types of innovation (Frascati Manual of the OECD, as discussed by De Oyarzábal, 1985; Damanpour, 1991, 1996; Fernández & Fernández, 1988; Kanter, 1984; Pavón & Goodman, 1981; Sánchez & McKinley, 1998; Yamin, Gunasekaran & Mavondo, 1999; Wolfe, 1994). Taking the company as the unit of analysis, this study is centred on technical or technolog-
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ical innovation. Together with administrative innovation, technological innovation is one of the types most frequently considered in other studies in this line of research (CamisónZornoza et al., 2004; Damanpour, 1991; Gopalakrishnan & Damanpour, 1997; Kimberly & Evanisko, 1981; Yamin, Gunasekaran & Mavondo, 1999). In our review of the literature, we have identified two general, somewhat contradictory, positions on when innovation should be understood as having taken place. The first position subsumes two basic criteria. On the one hand, innovation simply involves the introduction of a new (or significantly improved) product or service in the marketplace or the implementation of a new (or significantly improved) process (Audretsch & Acs, 1991; González, Jiménez & Sáez, 1997; OECD/Eurostat, 1997; Sanchez & McKinley, 1998). On the other hand, it is also vital that such introduction or implementation of something new be successful. In the case of new products and services, this normally means commercial success, as proposed in several studies (Cumming, 1998; Escorsa & Valls, 2000; Guellec, 1999; Morcillo, 1997; Pavitt, 1984; Pavón & Goodman, 1981; Sidro, 1988). Burgelman and Sayles (1986) consider that the criteria for success in innovation are commercial, while for invention they are technical. The second position we have detected regarding when innovation should be understood as having taken place is defined by the entities for which the innovative product or process should be considered as new. In the view of the majority of authors, for innovation to occur, it is sufficient that the corresponding product, service or process be classed as new (or improved) for the company or business unit being considered, and not necessarily so for the industry, the market, or the world (Damanpour, 1991; Johannessen, Olsen & Lumpkin, 2001; Nelson & Rosenberg, 1993OECD/Eurostat, 1997; Sánchez & McKinley, 1998; Tushman & Nadler, 1986). Other studies, in contrast, define innovation more restrictively. For example, according to Cumming (1998, p. 22), innovation is ‘the first successful application of a new product or process’, and Pavón and Goodman (1981) write of the successful first-time introduction to the market of new or improved products or services. The extent to which a product or process is considered to be new (in the firm, market, industry or the world) is employed as a criterion for classifying innovations as a function of their degree of novelty (Brouwer & Kleinknecht, 1999; Guellec, 1999; Johannessen, Olsen & Lumpkin, 2001; OECD/Eurostat, 1997).
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The position taken in this paper with respect to these two preceding questions is essentially to adopt the definition of the Oslo Manual: Technological product and process innovations (TPP) comprise implemented technologically new products and processes and significant technological improvement in product and process. A TPP innovation has been implemented if it has been introduced on the market (product innovation) or used within a production process (process innovation). (OECD/Eurostat, 1997, p. 47) We should add here that technological innovation can be classified and analysed not only according to basic purpose (innovation in product/service and in process) but also according to the degree of novelty involved (the extent of the change), ranging from incremental innovations to radical innovations (e.g. Damanpour, 1991; Dewar & Dutton, 1986; Ettlie, Bridges & O’Keefe, 1984; Green, Gavin & Aiman-Smith, 1995). We have also briefly discussed this dimension in the case descriptions.
Innovation and Organizational Characteristics A large number of organizational variables that could be related to the innovative capacity of a given company can be found in the literature. Several researchers have concluded that structural variables are a major determinant of innovation (Damanpour, 1988, 1991; Kim, 1980; Kimberley & Evanisko, 1981; Wolfe, 1994). This explains the considerable efforts that researchers devote to specifying the particular organizational variables and management processes that promote or hinder innovation. The traditional approach, born mainly from studies of big manufacturing companies in traditional industries, still enjoys a following among many authors (Damanpour, 1991; Damanpour & Gopalakrishnan, 1998). It focuses on the type of structure (organic versus bureaucratic or mechanistic, using the terminology of Burns & Stalker, 1961) considered to promote particular types or stages of innovation (technological versus administrative, radical versus incremental, initial stage versus implementation). Nevertheless, the natural evolution of organizations – constantly seeking greater competitiveness – together with the development of information technologies has substantially modified intra-organizational and interorganizational relationships and communication types. This has led researchers to investigate new organizational characteristics and new
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conceptions of traditional parameters, giving rise to a great number of somewhat overlapping terms to characterize the new organizational forms. In this study we aim to incorporate some of the factors emerging in the literature on new organizational forms in the study of the relationships between organizational structure and innovation. Choosing key topics for study is not an easy task, given the abundance of perspectives in the literature on new organizational forms (Daft & Lewin, 1993; Langlois & Robertson, 1992; Miles et al., 1997; Sanchez & Mahoney, 1995; Schilling & Steensma, 2000; Volberda, 1998; Whittington et al., 1999). An example of one attempt to adopt a more integrative approach is the cross-national research carried out by Whittington et al. (1999), which highlights that European firms are evolving along several trajectories that shape the new organizational forms. Another seemingly comprehensive listing of organizational actions designed to achieve strategic flexibility is presented by Hitt et al. (1998). Strategic flexibility here is the capability of the firm to respond quickly to changing competitive conditions, in a new competitive landscape characterized by an increasing focus on innovation. In most of the above-mentioned literature on new organizational forms, these new designs are presented as scenarios that stimulate innovative activity, albeit only from a theoretical and intuitive perspective. Nevertheless, the arguments generally suggest that some of these characteristics can be expected to be present, at least to some degree, in contemporary innovative companies. Currently, of these various emerging organizational trends, self-managing teams seem to be studied quite extensively. Some other hypothesized forms of organization are troublingly difficult to define, hindering a simple, effective and conclusive selection of cases. Given such practical prerequisites (newness and ease of definability for operational purposes) we have selected the following aspects from the sets of organizational forms in Whittington et al. (1999) and Hitt et al. (1998) for our analysis: strategic flexibility factors (subcontracting, use of contingent/temporary workers and customisation), communication processes and the use of IT and strategic alliances and collaboration agreements. All items are defined conclusively enough for case study purposes and have yet to be exhaustively researched.
Strategic Flexibility As noted, Hitt et al. (1998) include outsourcing, the utilization of contingent workers, and the use of special production systems that
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facilitate customization among actions related to greater strategic flexibility. By means of outsourcing and contingent workers, companies maintain a reduced permanent workforce, which increases their ability to make strategic moves more quickly, thus facilitating broader commitment to unavoidable changes. Schilling and Steensma (2000) consider outsourcing and alternative work arrangements essential features of modular systems featuring components that can be separated and recombined to form new configurations with little loss of functionality. Outsourcing and contingent workers represent two essential features of virtual organizations, which focus on one particular segment of its value chain, and entrust ‘partners’ (suppliers or distributors) with the carrying out of other stages in this value chain (Denison, 1997). The prevailing approach to virtual con uration suggests that this configuration allows companies to concentrate resources in activities where corporate capabilities can best be exploited, encouraging specialized knowledge-building and innovation. In this regard, Storey et al. (2002) have examined the relationships between the use of various forms of ‘flexible employment contracts’ and the incidence of product and process innovation. Among other arguments, they consider that the internal labour market model (incorporating vertical integration, formal contractual relationships and life-long employment) could be ill-suited to the needs of innovative companies facing rapidly changing markets. Nevertheless, literature on virtual organization poses the question of whether configuration flexibility is beneficial in all cases. Chesbrough and Teece (1996), who have criticized the simplicity of such a premise, state that depending on the type of innovation in question, either a virtual or an integrated configuration model may be more suitable. Consequently, it is worth studying which kinds of innovative companies present such features. Customization, the third factor that we are considering, is the degree to which a product is produced in accordance with customer specifications. When a company tailors the manufacturing process to meet the specific needs of a given client, an increase in investment is inevitable in order to cover the cost of redesigning procedures and frequent production changes. Sanchez and McKinley (1998) state that companies that customize have sufficient capabilities and resources to make the modifications necessary for the development of such ideas into concrete products, and that those modifications in the production process in turn increase the possibilities for introducing new products. Furthermore, customization also depends, to a great extent, on the com-
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pany’s ability to redefine the roles and responsibilities of both individual employees and teams. Along these lines, Hage (1999) has highlighted the importance of the complexity of the job for stimulating innovation. Likewise, research on flexible production processes reveals that it is the complexity of the job itself which allows employees to obtain the expertise required to diagnose problems, generate innovative solutions and implement these solutions more quickly than if problems had to be resolved via hierarchical models (Zammuto & O’Connor, 1992). This statement is quoted as one of the principles of innovative company design (Dougherty, 1992), and provides a context for promoting the generation, exchange and use of knowledge. It is clearly related to the broadly accepted and empirically demonstrated premise that organic organization models, with broadly defined and less formalized jobs, encourage innovation. The literature discussed above would, in our opinion imply, either directly or indirectly, that companies that work mainly by following the specifications of the client and using contingent hiring and subcontracting are in a good position to achieve the organizational flexibility required for innovation.
Communication and Use of IT A second characteristic that has merited the attention of researchers on innovation and represents one of the defining features of the new organizational forms is the means by which communication takes place in the organization. Given that innovations are typically initiated by one or more members who must then convince their colleagues to support them and participate in their implementation, effective communication is essential in getting managers to be favourably disposed towards any specific innovation (Johnson, 1990). Several authors have highlighted the importance of formal mechanisms of communication when, in certain conditions of uncertainty, objective and formal information is required (Daft & Lengel, 1986) or when the background, the perspective or the language of the people is different (Tushman, 1978). Nevertheless, most researchers has emphasised the effectiveness of interpersonal channels for building confidence in the results of a particular innovation. The greater the risk, the uncertainty, the technological novelty and the complexity associated with innovation, the more effective the informal channels of internal communication are (Fidler & Johnson, 1984; Johnson, 1990; Tatikonda & Rosenthal, 2000). Because this type of communication can meet specific needs and concerns, as well as
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provide immediate feedback, uncertainty is reduced and the understanding of innovation is improved. Communication is clearly a feature linked to flexibility because flexibility, by definition, requires that many organizational processes should be loosely formalized and thus continuously fine-tuned for each task at hand by communication. The basic idea here is that an excessively formal communication system can hinder the development of solutions for problems and ideas for innovations that require cooperation among different functional areas (Von Hippel, 1998) or innovative approaches that go outside the task definitions of the individuals. Therefore, innovative companies tend to allow procedures and routines to extend beyond the boundaries established by the organizational structure (Pitt & Clark, 1999). Much of the literature quoted above leads us to conclude that, in order to facilitate innovation in the current rapidly changing environments, the traditional ways of creating, sharing and controlling information must also be changed. Information, used in the past as a limited resource in a tightly controlled way, as a means of exercising power, has to become a more effective instrument of knowledge exchange to be extended throughout the entire organization and made available electronically (Daft & Lewin, 1993). Indeed, the new information technologies have raised communication processes to a new dimension, and they have facilitated the effective formation of so-called ‘virtual teams’ comprised of individuals in different locations. These distributed specialists can function thanks to instant communication via Internet, intranet, videoconferencing and so on (Hitt, Keats & De Marie, 1998). Undoubtedly, these new forms of communication in the innovative company also reciprocally serve to further strengthen and create a new work paradigm where work is perceived as a social, collaborative process. According to such a model, people in different functions and/or locations interact continuously yet informally, and every individual should have a clear vision of the global project (Dougherty, 1992). Therefore, the existence of informal communication processes (made possible by new IT resources available to most of the members of the organization) should be considered a characteristic of today’s innovative companies.
Strategic Alliances and Collaboration Agreements Communication can also spread and become less formal in arenas beyond the company.
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Recently, one of the most relevant recent features of organizational design has been the progressive blurring of company boundaries and the creation of inter-organizational value networks and strategic alliances. Such networks and alliances have merited the attention of researchers in recent years. However, the vast body of literature that has emerged is very fragmented, encompassing a wide range of perspectives (Hagedoorn, 2002; Tracey & Clark, 2003). Not all networks are designed with innovation in mind, although all of them involve, at the very least, a desire to access new skills and areas of expertise (Hage, 1999). In any case, the literature offers more than enough arguments highlighting the importance of networks for learning and innovation, given such potential benefits as better access to information, knowledge, skills and experience, new complementary capabilities and technology and the possibility of sharing resources and reducing costs, among others (Hagedoorn, 1993; Hotz-Hart, 2000). And there is enough empirical evidence about the positive effect of the inter-organizational collaboration on innovation (Chang, 2003; Faems, Van Looy & Debackere, 2005; Luke et al., 2004). Nevertheless, research on networks does not always consider these arrangements as innovation-fostering mechanisms. Inkpen (2001) exposes several costs of alliances strategies: the costs of co-ordinating the often divergent interests of the partners, the potential to create competitors, the possibility of creating an adverse bargaining position when one partner captures a disproportionate share of the value created by an alliance. Probably, these problems become worse when the aim of the alliance is innovation. Hobday (1994), whose research focused on the Silicon Valley network, has highlighted its disadvantages. Hobday affirms that, on the one hand, small companies in the network lack the complementary assets needed to exploit new mass market innovation. On the other hand, large firms are unlikely to distribute their core capabilities within a network for economic, technological and strategic reasons, because the network would expose them to predatory behaviour from other large companies. Furthermore, the participation of the large firm in the network would end where their core assets and advantages begin. Similarly, Lei, Hitt and Goldhar (1996) consider that firms belonging to the network find themselves obliged to share information among themselves. For each one this situation raises the dilemma of how much knowledge can be shared with the other companies without taking a high risk of loss of key competencies.
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As a result of the general lack of consistency of the above arguments, Hage (1999) considered this topic one of the new areas for research in the field of organizational innovation. Based on the discussion above, we have to examine the involvement of innovative companies in networks and alliances and their collaboration agreements with other organizations, which could imply the transmission of information relevant to innovative activity.
Case Study With this study, we would like to contribute to the theory about the relationships between organization and innovation, to study further the theoretical approaches discussed above concerning the relationship between innovation and the new organizational forms. The case-study approach is considered a suitable research methodology for this type of inquiry. It not only enables a situation to be described and explained, but also allows a theory to be developed, constructed, and tested (Lee, 1999). In this respect, we think that the traditional approach in the study of organization and innovation (based on the consideration of the organic and bureaucratic models) needs to be examined and enriched with the new perspective offered by the literature about the new organizational forms. Following the literature review above, it seems that a company that tries to maintain the innovative edge in the contemporary rapidly changing, globalized environment should • work mainly by following the specifications of the client and using contingent hiring and subcontracting; • utilize mainly informal communication processes (relying on the new information technologies available to most of the members of the organization); • be involved in networks of companies and collaboration agreements with other organizations. The existence of these stated relations, as well as the forms in which they exist, are the main focus of our case design. Basically, one case would be enough, but we would also like to study the differences in a contingent way. Thus, we have preferred the multiple-case study to the single-case study. By comparing and contrasting several cases, we can examine common patterns and reach sounder conclusions, therefore increasing their external validity. This option identifies similarities and differences in a group of cases.
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Two theoretical criteria, company size and activity sector, were thus used to select the cases, because these are thought to be variables that have a significant impact on innovation (Gopalarishnan & Damanpour, 2000). We wanted to standardize the size to similar ‘average’ companies, because the organizational forms should be consciously planned; in ten-person start-ups, especially the innovative ones, the organizational structure often is ‘undefiniable’ as discussed above, and in huge conglomerates it may be difficult to implement the latest ideas of organizational design (especially concerning flexibility). On the other hand, we wanted to have companies that were considered to be market leaders in innovation, but showing differences in market orientation, industry maturity, technologies used and the types of innovation they are involved in. Because the earlier literature does not give any indication on how these kinds of factors might affect the existence of the new organizational forms, we selected four different sectors in the hope of achieving enough differences between the cases. We used a list of companies belonging to the Network of Andalusian Innovative Companies (http://www.andalucia-innovacion.net). This network is promoted by the Instituto Andaluz de Tecnología (IAT), which facilitates access to information and promotes co-operation among them. A manager of IAT was asked to indicate the four most innovative organizations that fulfilled the above-mentioned criteria. The four companies, all of which operate in international markets, are below referred to as Fruit, Elevator, Lighting and Energy. These names refer to their industry sectors but attempt to keep the companies otherwise unidentifiable. We have used different sources to gather information: interviews, documents and questionnaires. First, we telephoned the companies and asked them for their collaboration. We conducted personal interviews with the managers directly concerned with the innovative activity of the firm being studied. Before visiting the company for the interview, we examined the documentation available (web pages, reports, media articles and so on) to obtain the necessary background information on their activities, products and so forth. In the personal interviews, we followed a list of themes that had been pre-decided on the basis of what had to be found out in each interview (Yin, 2003, pp. 67–70). In some cases, apart from the notes taken, we recorded the interview. We also distributed a number of questionnaires in each company, that were addressed to the chairman, the R&D director and/or operations managing director, and to other func-
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tional directors. The questionnaires contained questions about general facts, outputs and inputs of the innovative activity, organizational characteristics, incentives for innovation, working systems, human resources management, strategic vision and so on. At the end of the interviews, we visited the factory to observe and gain an understanding of the company’s productive process. We also reviewed the reports and other material that we had been given during our visits to the company or that had been sent to us. Lastly, we also held a number of telephone conversations to resolve specific questions that did not come through in the earlier interventions.
Description of the Activity and Sector of the Companies Fruit A co-operative society founded in the 1960s, Fruit processes citrus and other fruits, producing derivatives in the form of pulp, essential oils, purée, peels and juice for marmalade and concentrates. They also transform red pepper into paste and they stuff olives, and sell fresh products (sweet oranges, mandarins, peaches, nectarines, plums, tomatoes, peppers and cucumbers) wholesale and through a shopping centre open to members as well as nonmembers. Fruit exports almost all it produces to countries within Europe, operating in a very small specialized sector. One of our informants stated that there are only five companies that compete in the citrus market at the international level. Competition is mainly based on price, because the quality of the product is taken for granted. The company is involved in both product and process innovation. Product innovation derives from market demand. They only manufacture when there is an order and according to the specifications of the client. The products introduced are new to the company, but not to the market. However, in the last three seasons they have tried new products and varieties, some of which could be considered to be new products also in the whole market. Elevator This is a group of companies created of individual companies in the last years of the 20th century. There are seven business sections: elevators, environment, productivity, mechanical components, industrial services, syncros and systems. Currently, it mainly concentrates on the design and manufacture of elevators. Elevator produces almost every component of an elevator, and is the only company in the world
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that sells entire elevators. It operates in many countries (in Europe, Southern America and Africa) and also has assembly plants in some of these countries. The elevator sector is relatively concentrated – 70 percent of the market is controlled by multinationals such as Otis, Schindler, KONE, Thyssen and so on. Elevator’s clients are small installation companies who service construction companies and communities of property owners. According to the executive interviewed, the company’s market share for elevators in the international market is about 2 percent. Last season, its turnover was between €50 and 100 million, of which 50 percent was exported. The large lift manufacturers provide installation and maintenance, while Elevator does not. In Elevator, we find product innovation. The ideas that lead to innovation come from different sources: the trade department tries to improve the product by observing and studying the needs in the market; the production department helps to redesign the product; the R&D department produces and improves control chips; and general management contributes diverse ideas. Lighting Lighting was founded in the late 1970s. It works in the electricity and electronic sector where it manufactures installs, and maintains lighting systems for urban as well as airport and heliport use. Later additions to product lines include products for control of presence and access. It also manufactures various related products that constitute a certain degree of synergy among its different activities. Its clients are mainly central, regional and local public administrations, and large construction and industrial companies. In 2000, its turnover was between €10 and 20 million. Lighting launched one new product every year between 1997 and 2000; in 1999, the company launched two ‘radical product innovations’. They manufactured one improved product in 1998 and 1999, and two in 2000 (‘incremental product innovations’). These products are relatively new in the market, but not in the world. They include new technologies or a combination of existing technologies, new functions or new components. Process innovation is reflected in Lighting’s need to develop its own technology because this cannot be purchased in the market. As regards the resources used for product innovation, between 1996 and 2000, 5 percent of its sales were spent on R&D activities. This percentage rises to 6.5 percent if total spending on innovation is considered. The impact on sales
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of both new and improved products was 5 percent. A new Lighting product can emerge in very different ways: from previous projects undertaken by new employees, identification of possible problems or improvements that could be added to a lighting or traffic regulating system, and so on. In this way, they have developed projects of relatively independent technologies, such as computers for a large national railway company in Europe, datacollection systems to supervise vehicles crossing a frontier, wireless communication systems for trains, runway lights (to automate air traffic) and so on. Energy This company was created in 1990s as a spinoff of a technical university, and now belongs to an international company. It works in the solar energy sector, specifically photovoltaic and thermal energy, the latter representing 10 percent of the business. According to Energy’s R&D manager, it is the second-largest company of this sector in Europe, and it hopes to soon be the leading company. It competes against large multinational corporations like Mitsubishi, Siemens, Shell, BP and Sanyo, among others. It focuses mainly on two markets: the professional market, whose clients are in the communication sector (solar energy for radio stations, cellular phone antennas etc.) and the electrification market in developing countries and in rural areas of developed countries. The company is expanding thanks to strong growth in demand for its products. Production has increased seven-fold, and the staff threefold in the last four years. Energy, unlike its competitors, has a very good trade network where they sell only solar energy, but no other products (such as fuel). This is a very important competitive advantage, according to one marketing person we interviewed. Energy has not introduced product changes, except for some design modifications (mainly, panels with more cells). Instead, it develops important process innovations, mainly by manufacturing its own production equipment at a lower cost than elsewhere in the market. Recently, the sector has gone through a large expansion. Before that, there were no suppliers of production equipment, meaning it was necessary to manufacture them. Energy has also further simplified the production process to increase its efficiency. In 1985, the process was divided into 24 steps, obtaining cells with an efficiency of about 12 percent to 13 percent, and solar arc technology. In contrast, today the process is divided into six steps and cells have an efficiency rating of 15 percent.
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Ideas for improving Energy’s production systems arise partly from examining what suppliers offer – i.e. what is available in the market. As for process improvements, the R&D manager attends meetings, conferences and so on to get ideas; the company is also interested in suggestions from the employees. Energy has a good relationship with the local university, which provides another source of ideas, specialized personnel and funding possibilities. The R&D strategy of Energy is linked in some way to several universities. This company takes part in various long-term projects of a more strategic nature that, if successful, could generate a completely new product. They also study the use of alternative materials that might lead to radical product innovations.
Organizational Characteristics: Flexibility (Customization, Contingent Worker and Subcontracting), Informal Communication and Collaboration with Other Organizations In Fruit, 75 percent of total sales correspond to products manufactured to customer specifications. The management team consists of only three people: a manager (agricultural engineer, BSc), a factory director (agricultural engineer, BSc), and a quality manager (industrial engineer, MA).1 The co-operative comprises 50 permanent workers or intermittent workers.2 These workers are not highly skilled and their tasks are defined in a flexible way. Temporary workers, mainly women, can number between 350 and 400. An external accountant/auditor is in charge of financial matters. This company is characterized by high flexibility in the production process. Machinery is quickly adapted to the new products that are introduced or processed. The employees are very versatile and the management members interchange tasks. Particularly notable features are their informal communication and the speed with which the three members of the management team take and implement decisions about the introduction of new products or the improvements needed in the production process. The communication between the management team and the workers is fluid, which could partly explain the absence of working groups. They do not have an intranet
1 A retired chemist uses its facilities to develop new products, but so far, FRUIT has not profited from this activity. 2 The price that the members receive for their crop depends on its quality, which is usually above that of the market. Only one member works for the cooperative.
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and do not have special collaborations or links with other companies or institutions. Elevator has 800 workers; around 550 of them work for the elevators division. A significant part of its total sales (although the managers were not able to state how much) corresponds to products manufactured to customer specifications. There are three levels in Elevator’s organizational structure: senior management, functional management and the other staff. Their relationships are informal; the chairman often communicates directly with the personnel. Forty people work in the R&D department. Surprisingly, Elevator does not have a human resources department. They do not normally use subcontracting for manufacturing activities (they have their own manufacturing plants for all their components), but they have outsourced other activities in their value chain. Their clients are small installation companies who work for construction companies and communities of property owners. The relationship between Elevator and its clients is very close (the R&D personnel and the clients are in constant and direct contact). The client is in charge of the installation and maintenance of Elevator’s products. There are also collaborations with two named universities. They do not usually resort to temporary employment contracts. They have an intranet, although only some of the staff have access to the information therein. In Lighting, the percentage of customized sales is about 15 percent of the total. There were 253 workers in Lighting in 2000; 11 percent comprised the management and administration, 60 percent production, 14 percent sales and 15 percent R&D. Permanent employees make up 65 percent of the total, with 35 percent being temporary. In 2001, 25 people worked in the R&D department, mainly industrial and telecommunications engineers, physicists and computer specialists. It is a loosely structured department and communication is very informal. There is strong communication among the different departments and the workers carry out varied activities; for instance, development personnel can work on the improvement or installation of a product, and the lighting personnel can work on traffic activities. Therefore, we could state that the company is not highly formalized. There are working groups for the development of projects, and these include participation by other firms. Lighting relies to a large extent on external collaboration. For example, the basic research of the university’s engineering school has proved to be very useful. This research is assessed by Lighting to test the technical and commercial feasibility of the various products. Through consortia, they get the
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collaboration of other companies, which promotes the development of projects (for instance, they are considering forming a consortium for runway lights). Lighting resorts to subcontracting in some stages of the production process, such as assembly and welding. It is also flexible to some extent in its installation and maintenance activities, where it uses seasonal contracts. They are equipped with an intranet and most of the employees have access to it. There are four loosely structured hierarchical levels. Energy is the only one of the four companies that does not customize its output. Customer specifications are only followed in detail on very specific aspects related to the design of the products. The company is comprised of 300 employees. Decision-making is quite decentralized in the management department. Decisions can be made, for example, by the operations director and the R&D manager without having to report to the chairman, who is informed at the next meeting. This decentralization translates into speedy decisionmaking, which represents one of the competitive advantages of Energy. This company is distinctive in the close collaboration among its various departments. The R&D management works closely with the technical office management (both are part of the operations department). For instance, part of the technical office director’s time is devoted to projects for the R&D director. The technical office management is in charge of the development of production equipment. This activity must be co-ordinated with the process improvement work of the R&D management. The personnel of those departments comprise physicists and industrial and telecommunications engineers. Reports on the company’s performance are provided to the managers (down to a given level) during an annual convention, and the managers transmit this information to the members of their units. Energy is equipped with an intranet, but only the directors and managers have access to it. This company’s subcontracting policy is similar to that of Elevator. Installation activities are performed by local installation companies. It has close collaborative agreements with those companies and with several universities.
Analysis of Results Individual Discussion on the New Organizational Forms in the Cases Analysis of the information presented above in a brief format reveals that all the companies,
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except Energy, manufacture to customer specifications, albeit in differing proportions of total output. It seems logical that such customization, and the flexibility in production that is derived from this practice, should create conditions favourable to innovation (Hitt, Keats & DeMarie, 1998; Vickery, Calantone & Droge, 1999). However, one question that follows from this is whether the fact of customizing output (or not) is associated more with a particular type of innovation, process or product, or both. On the one hand, the three companies that produce to customer specification (Fruit, Elevator and Lighting) innovate in both product and process (particularly in the case of Fruit, to a proportion of 75 percent of total sales). This suggests that customization could be related, first, with innovation in product (in order to meet specific requirements of customers) and, second, with innovation in processes, to the extent that processes must be adapted or reconsidered (in order to introduce the new or improved products). On the other hand, it may be significant that Energy, the only one of the four companies that manufactures standardized products not adapted to customer specifications, only reports making process innovations; and in this case with the very different objective of reducing costs. Therefore, it could be thought that those companies that compete with standardized products concentrate mainly on developing and implementing process innovation. These comments with respect to customization suggest future lines of work to research more deeply the questions that emerge from the case studies. First, an analysis could be made of the two distinctive objectives that might be driving process innovation: the need to increase production efficiency (as in the case of Energy) or as a necessary condition for implementing innovation in products, whether to manufacture a new product or to adapt an existing product to the customer’s specifications (as occurs in Fruit). Second, we could study whether the nature of the company’s manufacturing activity (standardization versus customization) favours one type of innovation over another (product versus process). The information gathered on outsourcing also reveals that the four companies studied resort to subcontracting, or to contracting temporary employees, for diverse activities (production in Fruit, product installation in Elevator and Energy, and assembly and welding in Lighting). Both these practices have been considered relevant dimensions for the study of flexibility as a feature of the new organizational forms. It seems that innovative compa-
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nies, independently of the type of innovation, company size, or activity sector, resort to the practices described. We are reminded by the literature that such practices can improve the innovative capacities of companies by facilitating the implementation of strategic and organizational changes. It is also recognized that the search for greater flexibility implied by subcontracting and use of temporary employees has become a common practice adopted generically by all kinds of companies, with the objective of improving their structure of costs, independently of whether they innovate or not. Clearly, this means that subcontracting and the like cannot be considered as determining factors of innovative behaviour. Given this, we believe that the relationship proposed merits deeper analysis in subsequent studies to identify the specific activities outsourced or developed by temporary workers in the innovative companies. With regard to communications processes, these are observed to operate very informally in the four companies, both vertically and horizontally, as described by their managers. The reason for this appears to be a consequence of the need for close and well-informed interaction among individuals and/or units within the organization, as well as the need for decisions to be made quickly, particularly those related to changes in products and processes. Nevertheless, certain differences between the companies can be discerned. It will be recalled that Energy is the only one of the four companies analysed that manufactures highly standardized products not requiring adaptation to the specifications of individual customers. This implies that at the basic operative level, the work of employees is characterized by considerable formalisation and standard routines; this therefore would make it unnecessary to foster a high degree of informal communication at the lower levels of the hierarchy. In this company, which implements mainly innovation in processes, the proposals for such innovation generally originate at the management level, and come only to a minor extent from the rest of the employees. This explains why the processes of communication are described as informal and fluid only at the upper and intermediate levels of the company. The other three companies, obliged to introduce frequent changes in products and processes to meet the specifications of customers, need to seek effective interaction among personnel at all levels, including that of the factory operatives. Therefore, although the literature on new organizational forms suggests that information is spread throughout an entire organization, it is likely that this does not happen homogeneously at all levels. This
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leads us to think that these questions need to figure in future studies designed to distinguish how the process of communication actually takes place not only at the top of the organization, but also at lower operating levels, according to the different innovation scenarios analysed such as innovation in process, innovation in product, standardization of activities, customization and so forth. Regarding the use of information technology to achieve communication objectives, it seems logical to assume that this aspect reflects the questions dealt with in the preceding paragraphs. If communication fluidity is only needed at certain management levels, it is likely that access to the company intranet to keep in touch with current developments and the progress of the business should also be limited to certain levels. Of the three companies that have their own intranet, two (Elevator and Energy) demonstrate this behaviour, whereas in Lighting most of the employees can access information through this medium. The small size of the management team and uneducated workforce of Fruit is said to be the reason why it does not have an intranet. The last of the questions posed in the third sections deals with the degree of involvement of innovative companies in networks with other organizations or in collaboration agreements. For this aspect, the information from the case studies reveals that the three companies in the high technology sectors (Energy, Lighting and Elevator) have collaboration agreements with other organizations; among these, those with universities should be emphasized because of their claimed capacity for generating innovations and testing ideas. This tendency has also been observed in other research studies in which university–company collaborations have also been specifically analysed (Bayona, García & Huerta, 2002; Etzkowitz et al., 2000; Gomes, Hurmelinna & Amaral, 2004; López-Martínez et al., 1994; McMillan, Narin & Deeds, 2000). It is also interesting to note that it is the three companies competing in sectors of higher technological levels that enter into this type of agreement. Logically, the complexity of knowledge handled within these organizations obliges them to develop collaborative projects of this type, in which complementary capacities can be combined to mutual benefit. The reflection suggested to us by the relationships found is that the existence of agreements may be a feature associated with the technological complexity of a company rather than with the type of innovation made (product or process).
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The Causalities Between the New Organizational Forms A widely accepted approach by Miles and Snow (1978, p. 24) states that the basis of managerial decision-making and planning is the choice of product-market domain, and the process and administrative decisions would follow from this first decision (‘adaptive cycle’). If the idea of companies existing to serve their customers (either without any other back-thoughts or as a tool for generating wealth) is accepted, it indeed is reasonable to accept that the (successful) companies first take the markets’ requirements into account and then adapt their processes and organization to these. This would also lead to the proposal that the customization requirement would precede the other factors here called ‘new organizational forms’ and be, in essence, a contingency factor rather than an organizational form. Table 1 presents the findings concerning these organizational forms in the four case companies. As customization is basically continuous innovation required by customers (making it more turbulent and less foreseeable than innovation launched by management), it could be assumed that the innovative companies that live by customizing must have a structure that is even more flexible and information flows that are even more informal than the traditional types of innovative companies. In our four case-study companies, this proposition would seem to hold (see Table 1; the customization degree diminishes from left to right). We can thus propose this theoretical connection (customization degree correlates to informality of communication and flexible structure) to be tested in further studies. Another possible causality – still following the idea that markets are the drivers the organizational forms – arising from the findings seems to be that the companies with less customization have a higher degree and variety of inter-organizational collaboration ties, and these also tend to be of more strict nature (written long-term agreements). This might be explained with reasoning opposite to the one above; in innovation projects started by the management, the product trajectories and also the project portfolios can better be planned and foreseen (and also maybe be more diverse) than what is the case when customers require the innovations for their purposes. Christensen (1997) explains that companies tend to serve their current customers with current technologies, the very same that have made the companies able to retain the customers.
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Table 1. New Organizational Forms in the Four Innovative Companies Studied Fruit Innovation in both product and process.
Elevator
Lighting
Energy
Innovation principally in product, together with the innovation in process necessary to implement changes in the products. A ‘significant part’ (probably majority) of products customized
Innovation in both product and process.
Principally innovation in process. Innovation in product, as long-term projects of radical character.
About 15% of the products customized
65% of the 250 workers permanent, the rest temporary; about 35 staff in R&D
High flexibility, highly adaptable machinery; no outsourcing
Small management group, no temporary workers, a 40-person R&D dept. Total number of staff about 550 (in the elevator ‘division’) Outsourced some parts of value chain, but not the manufacturing
Customisation nearly non-existent (only in small details of the product) 300 persons; practically no temporary workers
Subcontracting of some non-central activities (welding, installation)
Installation subcontracted
Quick, informal communication and speedy decisionmaking
Typically lots of informal communication between all levels
R&D department very informal, and also circulate to other departments quite often
Centralized decisionmaking; R&D connections between departments close, economical and other information formally distributed
Low hierarchy
Low (3-level) hierarchy
‘Typical’ industrial organization with strong administration and sales departments; four levels
‘Typical’ industrial organization with strong administration and sales departments; four levels
No intranet /IT communication network
Intranet, but access only by a part of the staff
Intranet fully in use
Intranet only for the management
No innovation cooperation ties with other organizations
Close co-operation with customers; also agreements with two universities
Consortia (including universities) for R&D in some key product areas
Close collaborative agreements with installation companies and with several universities
75% of production customized
Small (three-person) management group; 80% of the about 450 workers temporary
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According to Christensen, the strict currentcustomer orientation forces companies to make only the changes required by the customers, thus leading to smaller product development projects, often within known technologies (and being caught by surprise by ‘disruptive’ technologies being developed in other fields or for other markets). Following the logic, it would be possible that the strictly current-customer-oriented companies indeed do not need to expand their R&D networks to other areas of technologies, making it possible to do most of the R&D in-house. Opposite to this, a longer-term orientation that is aimed towards satisfying needs of new customers or starting completely new businesses (then, possibly also with foreign or future technologies) would require broader research collaboration. This, again, might require more mutually binding forms of alliances, because the benefits and customers of the technology maybe are not known, the move to these new areas is more strategic, investments may be bigger, and maybe more secrecy is required to keep the competitive edge. These proposals arising from the four cases would also, to our opinion, be a promising starting point for a large-scale empirical study.
Conclusions and Limitations of the Study In conclusion, the findings that seem to arise from our study of the four innovative companies are: • Companies currently held as being innovative seem indeed to contain a variety of the new organizational forms that are presented in literature. However, the variety is not similar in different companies. • The differences in the organizational forms existing in these four companies might have a connection to the nature of innovation the company is involved in, that can again be a feature of the stage in the lifecycle of the company or its products, (complexity; internal factor) or the development speed of the industry (uncertainty, external factor) or the degree of customization required (uncertainty; external factor). • Subcontracting some of their non-core or ancillary activities is a tactic that innovative companies use to improve flexibility, but might be rather a way to free resources to the innovation activity than innovation activity itself when non-core activities are subcontracted; strategic alliances and temporary help in installation are not the same thing.
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• Independently of the type of innovation, there is a tendency to make effective use of informal communication systems, but the use or non-use of information technology seems to rather be a function of how well the communication can be arranged without it (maybe driven by other organizational decisions and capabilities, possibly also by the amount of hierarchical levels). From further discussion concerning the internal dynamics between these new organizational forms, the following can be proposed: • Customization, as opposed to innovation originated internally by the management, might be connected to more organizational flexibility and more informal communication. The study we carried out makes us conclude that there is a variety of characteristics proposed in the literature as ‘the new forms of organization’ that can typically be found in innovative organizations. The case studies suggest that several of these characteristics may be more strongly associated with one type of innovation (product or process), although this needs to be approached in more depth in future research. The study also proposes that the customization, listed currently among these ‘new forms of organization’ may actually be a contingency factor that drives organization development decisions. Among the more important limitations of our study are those implicit in the actual methodology utilized, which firstly prevents us from generalizing the results to a population of companies different from those analysed and making statements that verify any of the proposals described above. Thus, they are proposed as theoretical constructs to be studied further with other research designs. Furthermore, the selection of cases can always be criticized and is at best, even if based on the theoretical background, difficult to control for all possible background variables that may affect the findings; another possible way to continue after this study would thus be to duplicate the case study with a sample selected along the same criteria (Eisenhardt, 1985), for example in another part of the world, and see if similar connections between the type of company and between the organizational forms would be found. Lastly, we acknowledge that the fact that any non-innovative company has been studied prevents us comparing the features of innovative and noninnovative companies; thus, we cannot conclude in the opposing direction that these new organizational forms would be in any way obligatory requirements for innovative capacity.
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Rather, from the variety present already in this study of four cases we still believe that innovative action can still also take place, in certain types of companies and businesses, without the aid of these new organizational forms.
Note The authors acknowledge the helpful comments and suggestions of Professor Tauno Kekäle, and the anonymous reviewers. Financial support for this article was provided by the Ministerio de Educación y Ciencia, Plan Nacional de I+D+I (SEC 2003–07741).
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Green, S.G., Gavin, M.B. and Aiman-Smith, L. (1995) ‘Assessing a multidimensional measure of radical technological innovation’, IEEE Transactions on Engineering Management, 42(3), 203–214. Guellec, D. (1999) Économie de l’innovation. Éditions el Découverte, Paris. Hage, J.T. (1999) ‘Organizational Innovation and Organizational Change’, Annual Review of Sociology, 25, 597–622. Hagedoorn, J. (1993) ‘Understanding the Rationale of Strategic Technology Partnering: Interorganizational Modes of Cooperation and Sectorial Differences’, Strategic Management Journal, 14(5), 371–85. Hagedoorn, J. (2002) ‘Inter-firm R&D Partnerships: an overview of major trends and patterns since 1960’, Research Policy, 31(4), 477–92. Hitt, M., Keats, B. and DeMarie, S. (1998) ‘Navigating in the new competitive landscape: Building strategic flexibility and competitive advantage in the 21st century’, Academy of Management Executive, 12(4), 22–42. Hobday, M. (1994) ‘The Limits of Silicon Valley: a Critique of Network Theory’, Technology Analysis & Strategic Management, 6(2), 231–44. Hotz-Hart, B. (2000) ‘Innovation Networks, Regions and Globalization’. In Clark, G.L., Feldman M.P. and Gertler M.S. (eds.), The Oxford Handbook of Economic Geography. Oxford University Press, Oxford. Inkpen, A.C. (2001) ‘Strategic Alliances’. In Oxford Handbook of International Business. Oxford University Press, Oxford, pp. 402–29. Johannessen, J-A., Olsen, B. and Lumpkin, G.T. (2001) ‘Innovation as newness: what is new, how new, and new to whom?’, European Journal of Innovation Management, 4(1), 20–31. Johnson, J. (1990) ‘Effects of communicative factors on participation in innovations’, The Journal of Business Communication, 27, 7–23. Kanter, R.M. (1984) The change masters: Innovation and entrepreneurship in the American corporation. Touchstone, Simon & Schuster, Inc., New York. Kim, L.K. (1980) ‘Organizational innovation and structure’, Journal of Business Research, 8, 225– 70. Kimberley, J.R. and Evanisko, M.J. (1981) ‘Organizational innovation: The influence of individual, organizational, and contextual factors on hospital adoption of technological and administrative innovations’, Academy of Management Journal, 24, 689–713. Langlois, R. and Robertson, P. (1992) ‘Networks and innovation in a modular system: Lessons from the microcomputer and stereo component industries’, Research Policy, 21, 297–313. Lee, T. (1999) Using Qualitative Methods in Organizational Research. Sage Publications, Thousand Oaks CA. Lei, D., Hitt, M. and Goldhar, J. (1996) ‘Advanced manufacturing technology: organizational design and strategic flexibility’, Organization Studies, 17, 501–23. López-Martínez, E., Medellín, E., Scanlon, A.P. and Solleiro, J.L. (1994) ‘Motivations and obstacles to university-industry cooperation (UIC): a Mexican case’, R&D Management, 24(1), 17–31.
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Luke, P., Robertson, M., Munir, K. Denyer, D. and Neely, A. (2004) ‘Networking and Innovation: a systematic review of the evidence’, International Journal of Management Review, 5/6(3/4), 137–68. McMillan, G.S., Narin, F. and Deeds, D.L. (2000) ‘An analysis of the critical role of public science in innovation: The case of biotechnology’, Research Policy, 29, 1–8. Miles, R. and Snow, C. (1978) Organizational Strategy, Structure and Process. McGraw-Hill, New York. Miles, R., Snow, C., Mathews, J.A., Miles, G. and Coleman, H. (1997) ‘Organizing in the knowledge age: Anticipating the cellular form’, Academy of Management Executive, 11(4), 7–20. Morcillo Ortega, P. (1997) Dirección estratégica de la tecnología e innovación. Editorial Civitas S.A., Madrid. Nelson, R.R. and Rosenberg, N. (1993) ‘Technical innovation and national systems’. In Nelson, R.R. (ed.) National Innovation Systems. A Comparative Analysis. Oxford University Press, New York. OECD/Eurostat (1997) Oslo Manual. Proposed Guidelines for Collecting and Interpreting Technological Innovation Data. Head of Publications Service, OECD, Paris. Pavitt, K. (1984) ‘Sectorial patterns of technical change: Towards a taxonomy and a theory’, Research Policy, 13, 343–73. Pavón, J. and Goodman, R. (1981) Proyecto MODELTEC. La planification del desarrollo tecnológico CDTI-CSIC, Madrid. Pitt, M. and Clark, K. (1999) ‘Competing on competence: A knowledge perspective on the management of strategic innovation’, Technology Analysis and Strategic Management, 11(3), 301–16. Quinn, J.M. (1979) ‘Technological innovation, entrepreneurship, and strategy’, Sloan Management Review, 20(3), 19–30. Ruigrok, W., Pettigrew, A., Peck, S. and Whittington, R. (1999) ‘Corporate restructuring and new forms of organizing: Evidence from Europe’, Management International Review, 39, Special Issue, 41– 64. Sanchez, C.M. and McKinley, W. (1998) ‘Environmental regulatory influence and product innovation: The contingency effects of organizational characteristics’, Journal of Engineering and Technology Management, 15, 257–278. Sanchez, R. and Mahoney, J.T. (1995) ‘Modularity, flexibility and knowledge management, in product and organization design’. University of Illinois Working Paper 95–0121. Schilling, M. and Steensma, H.K. (2000) ‘The use of modular organizational forms: An industry-level analysis’. Working Paper, Boston University. Sidro, V. (1988) Gestión tecnológica de la empresa, Manuales ImpI, no. 21, ImpI, Madrid. Storey, J. Quintas, P., Taylor, P and Fowle, W. (2002) ‘Flexible employment contracts and their implications for product and process innovation’ International Jpurnal of Human Resource Management, 13(1), 1–18. Tatikonda, M. and Rosenthal, S. (2000) ‘Successful execution of product development projects:
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Zammuto, R. and O’Connor, E.J. (1992) ‘Gaining advanced manufacturing technologies’ benefits: The roles of organization design and culture’, Academy of Management Review, 17(4), 701–28.
Carmen Cabello-Medina has a PhD in the field of Business Administration from the University of Cádiz. Currently, she is Associated Professor at the Business Administration Department of the Pablo de Olavide University of Sevilla (Spain), and she teaches Organisational Theory. Her main research area is the organisational design and its relationships with the innovation. She is member of a National Research Project focused on organisational innovation. E-mail address for correspondence:
[email protected] Antonio Carmona-Lavado has been at the Universidad Pablo de Olavide since 1997 as teacher assistant. He holds a degree in Business Administration, and he is currently finishing the Ph.D. Member of the research project “Effects of the firm capabilities, new organizational structure and human resources architecture on product and process innovation,” funded by the Spanish Ministry of Education. E-mail address:
[email protected] Ramón Valle-Cabrera has a PhD in Business Administration from Seville University. He is professor at the Business Administration Department of the Pablo de Olavide University (Sevilla, Spain). His main research areas are the Strategic Human Resource Management and Innovation Management. He is responsible researcher of a National Research Project on organisational innovation. E-mail address for correspondence:
[email protected]
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Spaces for Creativity and Innovation in Two Established Organizations Udo-Ernst Haner Organizational work environments are increasingly strategically designed to support creativity and innovation processes, although a consistent theoretical frame for such an endeavour has not been developed yet. Creativity- and innovation-oriented design of work environments requires an understanding of the principles of the underlying processes and their spatial implications. Both creativity and innovation processes are complex and display in different phases convergent and divergent characteristics. The processes are dependent on both individual and group effort. In this article these dimensions are discussed from a theoretical perspective and are used for evaluating the two cases presented here. The first case, the Interactive Creativity Landscape as integral part of the Fraunhofer Office Innovation Center in Germany has been designed interpreting the convergent and divergent phases of creative processes. The second case, the Learning Garden of a Scandinavian financial institution has been designed having de Bono’s procedure in mind. The article concludes with the suggestion that increasingly organizations will offer diversity for spatially supporting creativity and innovation processes; solutions will be manifold but will follow certain principles – some of which are discussed here.
The unforeseen dividend of having Jerry [Donohue] share an office with Francis [Crick], Peter [Pauling], and me [i.e. James D. Watson], though obvious to all, was not spoken about. J. D. Watson in The Double Helix (1968)
Introduction
E
ver since the seminal Hawthorne experiments of Mayo in the 1930s (Roethlisberger & Dickson, 1939) the issue of work environments and its impact on work performance, creativity, and innovation has been discussed in different fields in academia, e.g. ergonomics, environmental psychology, sociology, architecture, management in general and that of human resources or that of creativity and innovation in particular. So far, the issue has not been resolved to a satisfactory degree: ‘The direct link between the design of physical space and creativity is unproven’ (Leonard & Swap, 1999, p. 137). In practice, companies are seeing real estate – and the work environments therein – as
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enabler of strategic action (O’Mara, 1999, p. 5) and strive for transforming them into centres of creativity and innovation (Bauer, 2004, p. 7). This holds particularly true for established firms that have the size to benefit from customization of their work environments while facing a significant degree of strategic uncertainty (O’Mara, 1999, p. 21). In fact, work environments have become integral parts of innovation strategies, as in the case of a large telecommunication company in Scandinavia that prepared for the uncertain future by offering a modern and flexible headquarters to its workforce of about 7,500, which is proven to support creativity and innovation-oriented behaviour (cf. Haner & Bakke, 2004). In addition to such encompassing approaches to creativity and innovation through real estate, established organizations are implementing ‘Organizational “innovation laboratories”, dedicated facilities for encouraging creative behaviours and supporting innovative projects’ (Lewis & Moultrie, 2005, p. 73). Some of these facilities – like the two presented in this article – have been designed based on a particular interpretation of creativity and innovation. © Blackwell Publishing Ltd, 2005. 9600 Garsington Road, Oxford OX4 2DQ and 350 Main St, Malden, MA 02148, USA.
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Despite this reality, it is possible to argue that because of the uniqueness of creative events ‘probably there never will be [evidence] to prove that a delightful setting induces creativity’ (Csikszentmihalyi, 1996, p. 135). However, a truly spatial analogy can explain the motivation to explore the role of space and other aspects of work environments for creativity and innovation: we might never learn what happened during the very moment of the Big Bang or how it came into being, but our understanding might get fraction by fraction of a second closer to it, thereby learning about the fertile conditions of its evolvement. This article contributes to tackling the issue of work environments and creativity and innovation in a similar way. In the following section, creativity and innovation processes will be briefly discussed to provide one possible theoretical perspective for the comparison of the two cases presented in this article. The focus will be on the common characteristic of creativity and innovation processes of having phases during which divergent or convergent behaviours can prevail, as well as on the role of individual and team efforts for these processes. In the third section, the spatial dimension of creativity and innovation support is discussed, highlighting particularly the aspect of building and layout. In the fourth section, the two cases for built environments to support creativity and innovation are presented and discussed, referring to the theoretical frame developed earlier. The article concludes with managerial and research implications.
Processes of Creativity and Innovation In a simplifying manner, both the process of creativity and the process of innovation are often assumed to be linear in nature, consisting of discernible, distinguishable, and sequential phases. Following Wallas (1926), the process of creativity is typically depicted as consisting of the phases termed ‘preparation’, ‘incubation’, ‘insight’ and ‘elaboration and evaluation’. The linear models of the innovation process show a higher variability in the terminology – depending on the definition of innovation and the focus of the argument to be made – but basically they all start with ‘discovery’ or ‘idea’, continue possibly with ‘definition’, ‘research’, ‘development’, and ‘validation’ and end with ‘market launch’ or ‘diffusion’ (e.g. Cooper, 1990 and evolutions of the stage-gate model). While the phases of these models have been broadly accepted, the critique is focusing on
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their linearity and strict sequential characteristic. Both creativity and innovation processes need to be seen as complex, partly iterative and partly simultaneous efforts. For example, Amabile’s revision of her componential model of creativity particularly considers and highlights the iterative and nonsequential characteristic of creativity processes (Amabile, 1996). Van de Ven et al. (1999, p. 16) describe their empirical accounts of innovation ‘journeys’ as ‘messy and complex progressions’, each of which is ‘a nonlinear cycle of divergent and convergent activities that may repeat over time . . .’.
Convergence and Divergence In social sciences, ‘convergent’ and ‘divergent’ are attributes of conceptualizations of thinking styles or of behaviours. Both creativity theory literature and research work in innovation management are relating to them. In literature on creativity, convergent thinking is seen as a single-focus activity or as ‘thinking that proceeds toward . . . a single answer’ (Thompson, 2003, p. 98), while divergent thinking – also termed ‘lateral’ thinking (de Bono, 1985) – is a multi-focus activity that allows for ‘conflicting ideas, paradoxes, ambiguity, and doubt’ (Thompson, 2003, p. 98). In innovation management literature, divergent behaviour is described as being explorative and expansive; it increases complexity of a system and ‘tends to follow a random or chaotic process’ (Van de Ven et al., 1999, pp. 184 ff). In contrast, convergent behaviour is integrative and exploitative in nature; it reduces the dimensions and thereby the complexity of a system and ‘moves it toward a periodic pattern of quasi equilibrium’ (Van de Ven et al., 1999, pp. 184 ff). These attributes, ‘convergent’ and ‘divergent’, can be used to describe phases in both, in the creativity process and the innovation process. In the creativity process convergence is seen to be prevailing in the preparation phase as well as in ‘elaboration and evaluation’; divergence is considered the main characteristic of the incubation and insight phases. Similarly, in innovation management divergent behaviour is seen to prevail at the ‘fuzzy-front-end’ of innovation in the idea generation phase and convergent behaviour in the phase of concept validation. It seems mandatory to stress the notion of prevalence, since these attributions depend on the level of granularity used in assessing the processes and their phases: while validation itself is a convergent activity, the search for the right validation method can be considered to be a divergent activity. In addition it is
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noteworthy that these attributions have been made independent of the number of persons carrying out the different activities. Notwithstanding these aspects, it can be concluded that creativity processes and innovation processes are indeed different, but they display common characteristics and patterns that allow for joint reflection (see below). In consequence, it can be argued that successful realization of creativity and innovation processes depends on some not-well-formalized mixture of mastering convergence and divergence, as well as the transition from convergence to divergence and vice versa.
Individual and Team Efforts Individual persons initiate, contribute to and evaluate all parts of creativity and innovation processes. Their individual efforts and achievements are the basis for creativity and innovation. In literature there is a plenty of anecdotal evidence for the significant roles of individuals in innovation processes (e.g. Iaccoca & Novak, 1984; Pinchot, 1985). However, the exponential growth of knowledge – leading to an increasing number of specialized domains and fast-paced developments therein – poses challenges to an individual’s learning capacity and ability to be the only creative nucleus and carry out the whole innovation process. Today, learning in organizations entails the acquisition of diverse information as well as the ability to share a common understanding within the organization in order to exploit it (cf. Fiol, 1994). Hence, despite the documented contributions of individuals to innovation success the concept of mono-personal innovation is being challenged: ‘the innovation journey will not likely achieve its desired destination if undertaken by a single entrepreneur’ (Van de Ven, 1999, p. 208). It is particularly reconsidered in the context of established firms (e.g. Bennis & Biederman, 1997; Hargadon & Sutton, 2000; Thamhain, 2003) that might ‘find it hard to innovate because of structural and cultural inertia . . . and a general lack of incentive to abandon a certain present . . . for an uncertain future’ (Markides, 1998, p. 33). According to Robinson and Stern ‘The age of the lone heroic inventor is over’ (1997, p. 19) and in fact, it is a structural advantage of established firms to have the opportunity for intellectual resource combination. There an individual’s entrapreneurial activity towards innovation is more often than not combined with the efforts of others in form of teamwork. There is a rich literature describing labour division and collaboration in innovation processes. Therein, at least two different streams
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of research can be identified. One stream is focusing on the role of individuals as part of a group as well as on their specific contribution to innovation processes (for an overview see, for example, Hauschildt, 1997, p. 158). The second stream of research is focusing particularly at innovation teams – be they collocated (e.g. Clark & Wheelwright, 1992), or virtual (e.g. Gassmann & von Zedtwitz, 2003; Leonard et al., 1998). Teams can excel because of their ‘collaborative advantage’ (Bennis & Biederman, 1997). Collaboration is an organizational ‘meta-capability’ (Miles, Snow & Miles, 2000) and the absence of this capability can lead to a collaborative disadvantage, for example when opponents to the innovation effort prevail. A similar evolution to that in innovation management can be noticed in creativity theory, where the concept of creativity is being increasingly recognized as having its ‘social side’ (Perry-Smith & Shalley, 2003). Creativity can be interpreted as an interaction between an individual and the immediate sociocultural context (Csikszentmihalyi, 1996), therefore being an interpersonal phenomenon. The beneficial or detrimental aspects of social facilitation (or inhibition) of creativity are situational, but it seems clear that the presence and behaviour of others is having an effect on creativity and its benefit. For example, in some previous studies social facilitation has been linked to the quantity and quality of ideas (cf. Amabile, 1996, p. 182ff and literature quoted therein). Also, a relationship between group coordination and the pay-off from creative ability has been found favouring less coordination (cf. Pelz & Andrews, 1966). It is the aspects of complexity mastering and potential mutual stimulation that are leading to the (perceived) need for interaction, cooperation and collaboration. Adjacent to a focus on the creative and innovative individual, a group or team focus has been established in research and practice. Therefore, it needs to be stated, that supporting creativity and innovation means providing support for individual efforts, but also for team efforts.
Supporting Creativity and Innovation Processes As a result of the sections above, supporting creativity and innovation processes means (simultaneously) providing support for individuals and for teams, as well as for convergence and divergence. While single aspects of this requirement have been focus in literature before, the breadth of the requirement is uncommon. While convergence and divergence are, for example, generally accepted as integral concepts of individual creativity, they
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are not self-evident in team-level processes. In fact, Fiol (1994, p. 404) refers even to a paradox in collective learning – a significant part of team innovation processes – which ‘by definition, encompasses both divergence and convergence of the meanings that people assign to their surroundings’. Particularly innovative efforts can be associated with simultaneous agreement and disagreement in the organization (cf. Fiol, 1994, p. 403). The apparent tension is resolved by distinguishing consensus on content and consensus on approach. In order to further the innovation process, agreement in one dimension is sufficient (Fiol, 1994, p. 405). In practical terms, providing support for creativity and innovation processes means facilitating activities carried out during those processes, which might be convergent or divergent in nature and individual or team efforts. Relating to Fiol (1994), activities that are characterized by consensus on approach are open to new content and therefore for new solutions (divergent activities) and activities that are characterized by consensus on content are ambiguous on the approach or method (convergent activities). Examples of such activities are provided in the matrix of Figure 1. Based on definitions of divergence and convergence in the section above, browsing and brainstorming can be considered to require divergent thinking since they are multi-focus activities that require a certain openness of the state of mind regarding the content. Accordingly, analysing and deciding are very much single-focus activities requiring convergent behaviour by trying to find an appropriate approach to a certain matter. The assignment of the activities on the individual/team dimension of the matrix is not necessarily unequivocal, but here not arbitrary either. While browsing can be a joint activity, it typically is an individual one. The same holds true for analysing, because logical processing is required on the individual level. On the contrary, brainstorming is something performed
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in groups; otherwise we might refer to it simply as thinking. Deciding can be a process on both an individual and a team level, but when it comes to decision-making on the issue of creativity and innovation, e.g. when evaluating ideas or project proposals, it often is on a team level. In the following sections, it will be argued that the support of creativity and innovation processes has a spatial dimension. Spatial arrangements in work environments – together with appropriate information and communication technologies (ICT) – can support these and other activities through an appropriate design of the socio-spatiotechnical ensembles of work spaces, or what has been called the ‘hybrid infrastructures for knowledge work’, where ‘hybrid’ refers both to the physical and ICT support for work (cf. Bakke & Yttri, 2003).
Organizational Spaces Supporting Creativity and Innovation The spatial dimension has been largely neglected in the literature when focusing on creativity or innovation. Amabile rightfully states ‘there is almost no empirical research on the effects of work environments on creativity’ (Amabile 1996, p. 210). As a consequence, ‘there is limited knowledge on how the physical space actually enhances creativity’ (Kristensen, 2004). Interest in this perspective is justified, because situational explanations seem appropriate for understanding the nature of creativity and innovation in real settings. Such an approach is basically following the ‘interactionist model’ of Woodman and Schoenfeldt (1990, p. 10), which calls for considering the ‘organism-in-its-environment’, thereby including the physical environment as a contextual factor. Hatch (1997) is explicitly linking physical structure to organizational issues in general, by distinguishing three different levels: a geographical level, a level relating to buildings
Figure 1. Sample Activities to be Supported in Creativity and Innovation Processes
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and their layouts, and a style level which refers to design and décor. While adopting this categorization, this article focuses on the level of building and layout. However, there are a few comments to make regarding ‘location’ and ‘style’, since they incorporate aspects that are related to the level of ‘building and layout’.
Location The deployment of increasingly powerful information and communication technology requires the consideration of the potential for virtualization. In E-topia ‘electronic interconnection dissolves the traditionally tight spatial relationships’ (Mitchell, 2000, p. 107). However, the consequence is not the ‘purgation of corporeality’ (Strati, 1999); virtual organizations and virtual teams are not out of this world and ‘Innovation processes, like any other inter- and intra-organizational processes, do not happen in a void but are carried out somewhere – they literally take place’ (Haner & Bakke, 2004, p. 5). This place might even be decentralized – as in the case of virtual teams. However, research suggests that certain tasks like creative work require face-to-face-communication (cf. Leonard et al., 1998) and that periodic collocation of the members of a virtual team enhances cohesion among its members and is beneficial to innovation project success (cf. Gassmann & von Zedtwitz, 2003). As a consequence, the physical work environment of these teams needs to facilitate communication and interaction – a challenge for the building (and its layout).
Style When studying distinguished creative personalities, Csikszentmihalyi (1996) has not revealed any particular pattern of work environments that could serve as a guideline for spatial support for creativity. However, when referring to the style of personal work environments, their individualistic and partly private characteristic was stressed. The findings of Bennis and Biederman (1995) are similar to those of Czikszentmihalyi’s: they looked at a limited number of successful teams that were temporarily ‘on a mission’ and dissolving afterwards. They found that the teams’ physical work environments were in general sparse and of low attractiveness. Opposing these notions are the findings of Ehlers et al. (2004), who have shown in an empirical study on the role of ‘soft factors’ on office performance that ‘office attractiveness’ is the most important single item contributing
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to the perceived well-being in office environments. ‘Office attractiveness’ is not to be mistaken for ‘decoration’, an item defined as personalization and decoration with personal belongings and found at the other end of the scale showing no significance in relation to well-being (Ehlers et al., 2004). Consistent with these findings, Amabile (1996, p. 249) states that ‘Physical environments that are engineered to be cognitively and perceptually stimulating can enhance creativity’. According to Haner and Bakke (2004) the ‘style’ of a work environment – including the building and the layout – can be inspirational and motivational to people, can symbolize innovation and signal creativity, simply by being perceived as attractive.
Building and Layout ‘For corporate creativity the work environment is the dominant factor’ (Robinson & Stern, 1997, p. 39). In this section the focus is on the immediate physical part of the work environment (i.e. building and layout), which through its structuring can affect individuals and teams and their performance in creativity and innovation processes. According to the constructivists perspective, this is because cognition processes are a result of emergent relationships of persons with their ‘hybrid infrastructures for work’ (Bakke & Yttri, 2003). Hybrid infrastructures represent the spatiotechnical side of organizations, and are facilitating or inhibiting activities and processes therein. As stated in the sections above, facilitating creativity and innovation means supporting convergent and divergent behaviours as well as sustaining individual and group activity. This in turn means that spaces for creativity and innovation need to support communication and interaction in times of collocation as well as allowing for privacy in other times. Providing spatial support for formal and informal communication and interaction aims at allowing ‘creative spirits’ to get together (Hauschildt, 1999). Evaluating a series of laboratories Pelz and Andrews (1966, p. 41) found that the performance of a laboratory employee – researcher or engineer – is with minor exceptions increasing with the size of the person’s immediate group of co-workers. In addition, the same relationship was found when looking at the number of colleagues outside the own group but within the organization. Allen (1977) found that ‘increasing the number of colleagues with whom an engineer consults contributes independently to performance, [and without] constantly importing new information from the outside world’
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(Allen, 1977, p. 123) a project group is not selfsustainable in its quest for results. These findings cannot be explained only by social facilitation, which accounts for effects relating to mutual competitiveness or mutual reinforcement (e.g. Amabile, 1996). Rather, a focus on mutual support and knowledge sharing is required. It is therefore no surprise that the frequency of interaction is also crucial to innovation project success (cf. Ebadi & Utterback, 1984; Pelz & Andrews, 1966). The frequency and the likeliness of communication and spontaneous face-to-face interaction were found to be crucially dependent on the physical distance between communication partners (Allen, 1977) – a strong implication for the design of the building and layout. The potential opportunities for interaction can be built into work environments. For example, mediating factors of (perceived) proximity are physical accessibility and the amount of visual contact. Allen (1977) points rightly out that staircases, for example, increase perceived distance, since required efforts for walking in a plane and climbing stairs are different. The same holds true for visual contact. Glass as a building material has, in this respect, the advantage over brick or concrete. Even with an open-door policy, which can be conducive to innovative team performance (Thamhain, 2003), ‘pigeon-holes’ – as Allen (1977) calls the linear, cellular office layout – are with respect to visibility, underperforming in comparison to a more open and diverse work environment. Visibility is a central variable for the interpretation of the physical work environment (e.g. Stryker & Farris, 2004), and in particular for the perception of others and their activities within that environment. Workstation visibility was empirically found to be promoting both team communication and in inter-team interaction (Stryker & Farris, 2004). Seeing each other allows for assessment of the other’s engagement in activities and the opportunity for personal interaction. This is in accordance with the findings of ethnographic studies. As Backhouse and Drew (1992, p. 580) note, ‘what an individual can see will condition his or her entry into, and the extent of, collaborative participation’. Of the face-to-face interactions observed, the majority were not planned in advance and could not be immediately expected. Interaction took place when people were seeing each other: ‘They were usually the product of opportunity or chance created by incidental proximity’ (Backhouse & Drew, 1992, p. 579). Enhancing physical proximity can be achieved through an increase of the headcount density in work environments and
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requires either physical or temporal alterations. Physical alteration, as interpreted here, means reducing the floor space per workstation. In combination with providing additional places for informal communication, this strategy of ‘physically’ increasing headcount density has indeed a significant positive effect on team communication (Stryker & Farris, 2004). Temporal alteration is understood as increasing headcount density through ensuring higher and more frequent usage of workstations in a given space. This can be achieved through introducing non-territorial working, i.e. individuals do not have personally allocated work stations. The task at hand and related requirements are the decisive factors for work-space selection. Research indicates, that the ‘nonterritorial idea works’ (Allen, 1977, p. 290), although not in every instance (e.g. Schoch, 2001). Therefore, at this point in time, an unconditioned vote in favour of nonterritorial working in the context of creativity and innovation processes is as inappropriate as the suspicion that non-territoriality will automatically lead to a ‘sterile work environment that inhibits imagination’ (Kristensen, 2004). Major factors for success are the process of implementation (e.g. Schoch, 2001), the way the principle is adopted in daily work life (for industrial examples: e.g. Spath & Kern, 2004), and the quality and diversity of the hybrid infrastructure offered to the users. A potentially adversarial aspect of enhanced communication and interaction is a (perceived) loss of privacy. As visibility can enhance group activity, a loss of privacy can be detrimental to concentration and personal comfort, and therefore to individual creative performance. The mere presence of others can impair the creative output (Amabile, 1996). Consequently, work environments supportive to creativity and innovation will have to provide for opportunities for (temporal) privacy, for example, through an appropriate office type mix. This can also be implemented in the context of non-territorial working. The relevance of spatial diversity for office performance has been shown by Ehlers et al. (2004). There, empirical evidence indicates that the availability and individual accessibility of a mix of office types within the organization is positively correlated with ‘motivation’, ‘attractiveness of the work environment’, ‘well-being’ and overall with ‘office performance’. The diverse office types need to be distinguished not only by the seating arrangements, but also for example by their technological equipment. This, however, would be beyond the scope of this article.
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Built for Creativity and Innovation – Cases The two cases to be presented in the following subsections have been selected because of their interesting characteristics: the two work environments can be considered as organizational innovation laboratories in established organizations. They were specifically designed having a particular interpretation of creativity and innovation processes in mind and aiming to support these directly or indirectly. Furthermore, both are used in daily work life, although with completely different usage patterns. The first, although prototypical in nature, is an integral part of a research laboratory in Germany. The second is a special work and learning environment of a financial institution in Scandinavia.
Interactive Creativity Landscape The Interactive Creativity Landscape (ICL) is an office setting that was particularly designed as a prototype for a work environment supportive to creativity and innovation. The ICL is an integral part of the Fraunhofer Office Innovation Center in Stuttgart (OIC), Germany, and was conceived in the context of the flagship project OFFICE 21®. At the OIC, the future of work is being researched, lived and demonstrated. Prototypical solutions for the office world of tomorrow are explored integrating human, organizational, spatial and technological aspects. The OIC, including the ICL, is a non-territorial working environment (with clean-desk policy) for up to thirty researchers. The motivation for implementing the experimental setting of the ICL has been derived
from the assumption that knowledge work is to a large extent location-independent. Why would there still be a need for office buildings in the future if there was not a need for knowledge-sharing and creativity (Bauer, Haner & Rieck, 2001) and hence for group or team activity? The basis for the development of the spatial layout of the ICL was the phases of the creativity process. Spatial interpretations for each of them have been developed following their respective requirements. The preparation phase should support information access and communication using a wide range of channels. The phases of incubation and insight should allow for diversion, playfulness and border crossing. The phase of elaboration and evaluation is supposed to support primarily documentation, visualization, discussion and collaborative work. It has been recognized that while ‘preparation’ and ‘elaboration and evaluation’ are dominated by convergent activities, ‘incubation’ and ‘insight’ are consisting of rather divergent activities. In response to the specific requirements different zones have been implemented within the ICL: an action zone, an interaction zone and a retreat zone (Bauer, Haner & Rieck, 2001) – see Figure 2. The action zone, aimed at supporting divergent activities, is the most open part of the ICL. Here a wide variety of information sources and communication channels are available, supporting information retrieval and knowledge sharing. They are located at or very near the ‘piazza’ – the main gathering point, where informal face-to-face communication prevails. The interaction zone of the ICL, aimed at supporting more planned and co-ordinated interaction, particularly facilitates team efforts. The infrastructure
Figure 2. Original Concept of the ICL Source: Bauer, Haner & Rieck, 2001.
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consists of smart furniture, various visualization (including 3D) and interaction devices. An unusual, i.e. free-formed and orange seating opportunity, termed ‘frozen cloud’, adds to this infrastructure. The retreat zone of the ICL has been conceptualized as a separated, individually adjustable (soon to be adjusting) cocoon-like space that aims at providing privacy to the individual user. Light, acoustics, projection opportunities are but a few environmental factors that can be individually manipulated by users in their quest for divergence. Throughout the ICL, particular emphasis was put on soft factors. Materials, colours, light and furnishing were chosen to enhance well-being, but not necessarily comfort. Today, there is a variety of usage patterns to be found in the ICL, each of which matches with the original usage concept to a different degree. Small groups are using the environment for their formal meetings as well as for their informal and explorative ones. The space is also used for project work by the project teams. In addition, individuals are occasionally choosing that environment as their temporal workspace, enjoying the atmosphere – and the great view over the city.
Learning Garden A Scandinavian financial institution had decided to improve its internal competence development by introducing a new in-house learning approach. This was to be done by applying new pedagogical methods to increase the degree of learning. Simultaneously it aimed at triggering creativity and support for non-routine work processes. The frame for this competence development approach was to be the Learning Garden – an environment different in physical terms, and exciting to work in. The environment would be structured around processes and towards decision-making, ‘ensure creativity’ and stimulate the ability to co-operate. The concept of the Learning Garden is founded on the principles of project-based learning and group work. Therefore the usage of the environment is bound to a dedicated content issue, used by groups of up to 15 people, and by default involving a facilitator. The environment itself is consisting of five different spatial elements: a process arena, an exploration space, a creativity garden, a consensus court and a production studio. The following description of the five elements will remind of De Bono’s thinking hats – though not matching – and of Wallas’ linear model of creativity. The particularity of the space: when using it, a physical move is required in
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addition to a mental one – since users are progressing through the elements. The process arena is the anchor of the environment and of the processes taking place therein. It resembles a round-shaped meeting room in which issue specification, initial process orientation and team-settling are taking place. Yellow is the colour of choice – aimed at providing a positive feeling. The exploration space is white, not to say blank – demanding for information. In fact, the space is equipped to provide for communication, information retrieval, knowledge-sharing and collaborative work in small groups. The creative garden – emotionalized by the colour red – is meant to provide for flexibility and stimulation. Here ideas and proposals are to be generated, also through the help of games. The infrastructure within this zone is aiming at easy-going and fast documentation. The consensus court is where decisions are to be made. Since no regular seating opportunities are available, decision-making has to be well prepared in advance. However, decision-making tools are available. The dark grey colour should symbolize neutrality but also formality. The final element is the blue, efficiency-oriented production studio. Leveraging individual skills the decisions made are refined and documented, and further work is organized. This – on a national-level a human-resource award-winning – Learning Garden has become popular. Not only has it been accepted by the employees for learning purposes, but the experiences made therein have motivated employees to take advantage of the facility when looking for new solutions or when encountering business challenges. On top of that, service development meetings with prime customers are taking place in the Learning Garden – building on creativity support.
Discussion When comparing the presented cases, it can be seen that they have several things in common. Both Interactive Creativity Landscape and Learning Garden, have been conceptualized and built to support primarily creativity, but also innovation and learning. Both relate directly or indirectly to the sequential model of creativity. Both are offering different settings with different qualities of hybrid infrastructures for work. Also, in both cases, special attention is paid to the soft factors – colour and materials in particular. In both cases the spatial environment allows for activities requiring convergence and for those requiring divergence. The former are to be carried out in interaction zone of the ICL and the consensus court, as
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Figure 3. Comparison of the ICL and the Learning Garden
well as the production studio of the Learning Garden; the latter are meant to be carried out in the action zone and the retreat zone of the ICL, and the exploration space as well as the creative garden of the Learning Garden. The process arena in the second case cannot be attributed unambiguously to any class in the convergence/divergence categorization. In fact it rather seems to be a transitional space between the realms. The two cases differ, however, in at least as many aspects which is primarily derived from their usage patterns. The Learning Garden is not part of any team’s ‘home turf’ and is used on demand and in co-ordination with other users and their purposes: users have to plan to go there. The Learning Garden is used in a group context only; individual use is not planned for. In addition, because of the sequential approach, an agreement on the ‘rules of the game’ among the participants is necessary. Physical movement through the different elements needs to be co-ordinated. Also, since the intended use is strongly manifested in the environment, preparation is required, for example, engaging the facilitator and strictly defining the content issue to be resolved. Because of the usage pattern, users are permanently collocated in the same room. Accordingly, visibility among team members is permanently high and privacy rather low. The Interactive Creativity Landscape, in contrast, is part of a research department’s neighbourhood, and an integral part of their non-territorial working environment. With the exception of a few scheduled meetings, the ICL is free for use for anybody on a firstcome-first-serve basis – as an individual or in groups. Usage is intuitive; usage patterns evolve and are not planned for. Flexibility is the rule; switching from one activity type to the next is seamlessly possible. Although the ICL is predominantly open structured space, visibility is mixed: some settings of the ICL provide for visual contact from and to the outside; others – both for single and group usage – only from within the landscape. In consequence, privacy varies depending on the particular zone in use.
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As shown, the two environments differ in their approach to support creativity. While the particular strength of the approach chosen in the Interactive Creativity Landscape is to provide opportunities without suggesting procedural issues – to a large extent relying on self-organization of its users – the Learning Garden, through its well-structured approach, can support group cohesion among its users and therefore enhance collaboration. Both approaches deserve their merits, however, only in-depth user studies can reveal the distinct impact of each of these environments. Figure 3 summarizes the findings of the cases in terms of the frame described above.
Managerial and Research Implications In light of the research, literature, and argument presented in this article, it is suggested that organizations will need to purposefully address the issue of spatial support to creativity and innovation. This means that the physical work environment will have to provide for individual and group activities, as well as for activities requiring convergent or divergent approaches. In the best case, the usage pattern of such spaces will be accounted for in advance. Traditional work environments have typically favoured one particular setting (e.g. open-plan offices or cellular offices). By default, such work environments cannot provide support for all phases of creativity and innovation processes, since they typically favour individual or group processes, but hardly ever support both, considering the need for communication and interaction and allowing for privacy. As a consequence it is to be expected that offices offering hybrid infrastructure diversity will become more popular in organizations. This expectation is supported by some empirical findings in the real estate domain (DEGI, 2003) showing a rise of multi-space office environments. When considering the two cases presented in light of their success in usage terms and as role models for other implementations in
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industry, it can be expected that spaces for creativity and innovation will differ in appearance but – so the author suggests – will follow certain principles – some of which have been discussed in this article. Further research is necessary to better understand the (potentially latent) principles according to which organizational innovation laboratories can be conceptualized and designed. A thorough comparison of original aims and actual usage patterns is also needed to understand how well such facilities are adopted by user, with what kind of intentions and with what kind of outcome. One anonymous reviewer of this article expressed the need to go beyond the mere physical mirroring of distinct activities by elucidating in detail the (direct) ‘relationship between creative processes and the physical surroundings in which they unfold’. A first step in that direction is the development of a coherent and encompassing framework for research in spatial support to creativity and innovation – an effort that is already underway.
Acknowledgements An earlier, anonymously reviewed version of this article was presented at the first Creativity and Innovation Community Workshop in Oxford (March 2005). This version has benefited further from additional and very valuable comments by one of the earlier anonymous reviewers and from participants’ feedback at the workshop. I thank them all and would like to particularly recognize and thank John Willy Bakke of Telenor for numerous discussions and insights at the early stages of the paper, Kenneth Winter of Semco for sharing information on the second case, and Torfinn Slåen of Innomieli for directing my attention to it. Also, I would like to thank Petra de WeerdNederhoff for her encouragement and patience in the publication process.
References Allen, T.J. (1977) The flow of technology. MIT Press, Cambridge MA. Amabile, T.M. (1996) Creativity in Context. Westview Press, Boulder CO. Backhouse, A. and Drew, P. (1992) ‘The design implications of social interaction in a workplace setting’, Environment and Planning B: Planning and Design, 19, 573–84. Bakke, J.W. and Yttri, B. (2003) ‘Hybrid Infrastructures for Knowledge Work’. Proceedings of the Fourth International Space Syntax Symposium, London 17–19 June 2003.
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Bauer, W., Haner, U.-E. and Rieck, A. (2001) ‘OFFICE 21® – Inventing an Interactive Creativity Landscape’. In Smith, M., Salvendy, G., Harris, D. and Koubek, R. (eds.) Proceedings HumanComputer-Interaction International Conference 2001, Vol. 3. Lawrence Erlbaum Associates Publishers, Mahwah, pp. 658–62. Bauer, W. (2004) ‘Innovations in Office Design as a Strategy for Survival’. In Spath, D. and Kern P. (eds.) Office 21® – Push for the Future. Better Performance in innovative working environements, 6–11, Egmont vgs, Cologne/Stuttgart. Bennis, W. and Biederman, P.W. (1997) Organizing Genius. Addison-Wesley, London. Clark, K.B. and Wheelwright, S.C. (1992) ‘Organizing and Leading “Heavyweight” Development Teams’, California Management Review, Spring 1992. Cooper, R.G. (1990) ‘Stage-Gate Systems: A New Tool for Managing New Products’, Business Horizons, 33(3), 44–54. Csikszentmihalyi, M. (1996) Creativity: Flow and the psychology of discovery and invention. Harper Collins Publishers, New York. De Bono, E. (1985) Six Thinking Hats. Key Porter Books, Toronto. DEGI Deutsche Gesellschaft für Immobilienfonds mbH (2003) Zukunftsorientierte Bürokonzepte – Eine Betrachtung aus Sicht der Immobilienentwicklung. DGI, Frankfurt am Main. Ebadi, Y.M. and Utterback, J.M. (1984) ‘The Effects of Communication on Technological Innovation’, Management Science, 30(5), 572–85. Ehlers, I.L., Greisle, A., Hube, G., Kelter, J. and Rieck, A. (2004) ‘Crucial Influences on Office Performance’. In Spath, D. and Kern, P. (eds.) Office 21® – Push for the Future. Better Performance in innovative working environements, 54–168, Egmont vgs, Cologne/Stuttgart. Fiol, C.M. (1994) ‘Consensus, Diversity, and Learning in Organizations’, Organization Science, 5(3), 403–20. Gassmann, O. and von Zedtwitz, M. (2003) ‘Trends and determinants of managing virtual R&D teams’, R&D Management, 33(3), 243–62. Haner, U-E. and Bakke, J.W. (2004) ‘On how Work Environments influence Innovation – A Case Study from a large ICT Company’. CD-ROM Proceedings of the XV Annual Conference of the International Society for Professional Innovation Management (ISPIM), Oslo 20–24 June 2004. Hargadon, A. and Sutton, R.I. (2000) ‘Building an Innovation Factory’, Harvard Business Review, May–June pp. 157–166. Hatch, M.J. (1997) Organization Theory – Modern, Symbolic, and Postmodern Perspectives. Oxford University Press, Oxford. Hauschildt, J. (1997) Innovationsmanagement. Vahlen, Munich. Hauschildt, J. (1999) ‘Promotors and champions in innovations – development of a research paradigm’, in Brockhoff, K., Chakrabarti, A.K. and Hauschildt, J. (eds.) The Dynamics of Innovation – Strategic and Managerial Implications. Springer, Berlin. Iacocca, L. and Novak, W. (1984) Iacocca – An Autobigraphy, Bantam Books, New York.
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Kristensen, T. (2004) ‘The Physical Context of Creativity’, Creativity and Innovation Management, 13(2), 89–96. Leonard, D.A., Brands, P.A., Edmondson, A. and Fenwick, J. (1998) ‘Virtual Teams: Using Communications Technology to Manage Geographically Dispersed Development Groups’. In Bradley, S.P. and Nolan, R.L. (eds.) Sense and Respond: Capturing Value in the Network Era. Harvard Business School Press, Boston, pp. 285–98. Leonard, D. and Swap, W. (1999) When Sparks Fly: Igniting Creativity in Groups. Harvard Business School Press, Boston. Lewis, M. and Moultrie, J. (2005) ‘The Organizational Innovation Laboratory’, Creativity and Innovation Management, 14(1), 73–83. Markides, C. (1998) ‘Strategic Innovation in Established Firms’, Sloan Management Review, Spring, 31–42. Miles, R., Snow, C.C. and Miles, G. (2000) ‘The Future.org’, Long Range Planning, 33, 300–21. Mitchell, W.J. (2000) E-topia: “Urban life, Jim – but not as we know it”, MIT Press, Cambridge MA. O’Mara, M.A. (1999) Strategy and Place. Free Press, New York. Pelz, D.C. and Andrews, F.M. (1966) Scientists in organizations – Productive Climates for Research and Development. John Wiley & Sons, New York. Perry-Smith, J.E. and Shalley, C.E. (2003) ‘The Social Side of Creativity: A Static and Dynamic Social Network Perspective,’ Academy of Management Review, 28(1), 89–106. Pinchot, G. (1985) Intrapreneuring: Why you don’t have to leave the corporation to become an entrepreneur. Harper & Row, New York. Robinson, A.G. and Stern, S. (1997) Corporate Creativity: How Innovation and Improvement Actually Happen. Berret-Koehler Publishers, San Francisco. Roethlisberger, F.J. and Dickson, W.J. (1939) Management and the Worker. Harvard University Press, Cambridge, Mass., USA. Schoch, R. (2001) ‘Einführung eines flexiblen DeskSharing-Modells – Post-Merger-Kulturschock
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am Beispiel der Compaq Computer (Schweiz) GmbH’, io management, 9, 84–90. Spath, D. and Kern P. (2004) Office 21® – Push for the Future. Better Performance in innovative working environments. Egmont vgs, Cologne/Stuttgart. Strati, A. (1999) Organization and aesthetics. Sage, London. Stryker, J. and Farris, G. (2004) ‘Designing the Workplace to Promote Face-to-Face Communication in R&D Project Teams: A Field Study’. Working paper based on Stryker’s unpublished dissertation, Rutgers University. Thamhain, H.J. (2003) ‘Managing innovative R&D teams’, R&D Management, 33(3), 297–311. Thompson, L. (2003) ‘Improving the creativity of organizational work groups’, Academy of Management Executive, 17(1), 96–109. Van de Ven, A.H., Polley, D.E., Garud, R. and Vankataraman, S. (1999) The Innovation Journey. Oxford University Press, Oxford. Wallas, G. (1926) The Art of Thought. Harcourt Brace Jovanovich, New York. Watson, J.D. (1968) The Double Helix – A Personal Account of the Discovery of the Structure of DNA. Mentor Science, New York. Woodman, R.W. and Schoenfeldt, L.F. (1990) ‘An interactionist model of creative behaviour’, Journal of Creative Behaviour, 24, 10–20.
Udo-Ernst Haner lectures on innovation and technology management at the University of Stuttgart, Germany. He is researching and consulting in the context of the Fraunhofer Office Innovation Center in Stuttgart. His research focus is on holistic innovation approaches and on innovation support. (
[email protected]).
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An Empirical Study of Individual Competencies in Distribution Centres to Enable Continuous Innovation Claudine A. Soosay Individual competencies are the complex combination of knowledge, skills and abilities demonstrated by employees that are critical to the effective and efficient functioning of the organization. As firms pursue strategies and commitment to continuously innovate, the major resource to enable this process lies in the people within the organization. Logistics firms in developed economies such as Singapore and Australia are embarking on these strategies to remain competitive. The key objective of this paper is to investigate the competencies that are inherent in employees of distribution centres as part of the logistic function that are rapidly growing and innovating. The study adopts an iterative process of data collection by conducting ten case studies in Singapore and Australia and interviews with senior managers. The findings show several competencies apparent in employees of the firms studied. These underpinned collective behaviours and organizational capabilities needed for continuous innovation. This study provides important lessons for managers in logistics organizations in Australia and Singapore and demonstrates how differing extents of competencies and behaviours of employees can impact on the operations of firms and their capacities to innovate.
Introduction his paper is based on a study of continuous innovation in the supply chain using a model that was adapted from the Continuous Improvement and Innovation Management (CIMA) model developed in a joint study of continuous innovation in new product development funded by the European Union.1 The CIMA model was created from a research study by Australian and European institutions for product innovation process in various manufacturing companies and measures how effectively firms continuously innovate by using various variables. This model was
T
1
The project involved researchers from University of Western Sydney, Monash University, and Edith Cowan University in Australia; along with researchers from the European Universities or research institutes of Trinity College, Dublin, Ireland; Brighton University, England; Chalmers University, Sweden; University of Twente, The Netherlands; and Politechico Milano, Italy. © Blackwell Publishing Ltd, 2005. 9600 Garsington Road, Oxford OX4 2DQ and 350 Main St, Malden, MA 02148, USA.
designed for researchers, acting as facilitators to help companies foster and sustain the process of continuous learning in product innovation. The methodology helps to identify actions to foster and sustain improvement activities, and describes the process of continuous learning within product innovation using various interrelated variables. These variables refer to organizational capabilities, learning behaviours of individuals, mechanisms for organizational control and contingencies related to the environment and internal company characteristics. However, since it was applicable for manufacturing industries with new product development, the study adopted a modified version of this model and examined whether these factors may also apply to improvements in the service sector for supply chain management. A new model was designed and adapted from the CIMA model to investigate continuous innovation in distribution centres in the logistics industry that are service oriented. Logistics is an essential function in many firms and an extension of physical-distribution manage-
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CONTINUOUS INNOVATION Organisational Capabilities
Drivers Learning Behaviours
Performance Measures
Individual Competencies
Contingencies
Figure 1. Framework for Study Based on the CIMA Model
ment; and usually pertain to the management of the materials and information stream of a business, down through a distribution channel, to the end customers. Logistics management basically concerns the physical distribution of raw materials and, ultimately, finished products (Slack et al., 1999). The variables used for logistics (a service function) differed slightly than that of manufacturing or new product development. This new model is shown as Figure 1. It shows variables such as drivers for innovation, behaviours, competencies, capabilities, contingencies and performance measures. This paper focuses only on the competencies that employees possessed – a critical factor that enabled them to display innovative behaviours and ultimately build into firm capabilities as a result.
Continuous Innovation There are many definitions of innovation by various authors in the plethora of literature. However, researchers and academics in the Continuous Innovation Network (CINet) have defined the concept of continuous innovation as a process of successively applying new ideas and methods of improvement in the organization requiring a methodical, programmed, incremental or radical approach throughout the company involving all employees in the organization (Soosay, 2003). Continuous innovation constitutes a substantial range of opinions and ideas and also concerns the learning and improvement of individuals and groups – how knowledge can be acquired, created, diffused, consolidated and then applied in the organization (Boer et al., 2001). The learning and improvement not only involves organization processes; but covers additional areas such as the products,
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technology, system, and all other aspects of the business, including radical innovation as well. It creates a product-market-technologyorganization-combination that is new to an individual, a group of people, an organization, a market sector, or even society as a whole (Coughlan et al., 2000). There is ongoing interaction between operations, incremental improvement, learning and radical innovation aimed at effectively combining operational effectiveness and strategic flexibility, exploitation and exploration (Boer, 2002).
Competencies Supporting Innovative Behaviours The competencies of individuals are an important aspect, because they focus on meaningful change management conducive for continuous innovation. According to the research framework of this study, the competencies support innovative behaviours in individuals and form organizational capabilities as a result. Employees exhibit and apply the identified competencies that depict innovative behaviours. These then form organizational capabilities. A list of these competencies, behaviours and capabilities identified for this study is shown in Table 1. These were derived from various literature reviews and pilot studies. According to Doyle (1995), the organization’s effectiveness in developing systems and implementing strategy depends on the commitment and skills of its employees (Doyle, 1995). Nurturing these competencies relies on the ability to communicate an inspiring vision of the innovative organization and commitment to customers, but it also means selecting and training people, who can share this vision, and be dedicated to implementing it. Therefore management needs to discern the
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Table 1. The Link between Competencies, Behaviours and Capabilities for Continuous Innovation
Individual competencies
Creativity
Effective Communication
Learning
Adaptiveness To Change
Skills Flexibility
Empowerment & Teamwork
Role of Management
Supporting/learning behaviours Maintaining customer satisfaction Collecting information to anticipate future needs of customers Identifying new and different ways to satisfy customers Being flexible and adaptive to unique requests Accommodating unexpected situations Forecasting future demand Ensuring appropriate levels of safety stock Customizing services for customers Streamlining the vision and mission of the organization Imposing standardized policies and procedures Having cross-functional unification across departments Streamlining operations and managing efficiency Provision for growth and expansion Restructuring the organization Maintaining standardized operations Joint planning with customers and suppliers Sharing information with customers and suppliers Sharing processes with customers and suppliers Joint investing with customers and suppliers Synchronizing and interfacing with customers and suppliers Automating in operations Maintaining information and communication systems Perceiving change Adapting to changes Minimizing resistance to change Developing and maintaining measurement systems Assessing strategic performance Reviewing Performance Indicators
competencies of their employees, and their strategic commitment to innovation. The skills and motivation of employees can be seen as imperative strategic aids in realizing the firm’s objectives. Authors such as Quinn (1985) and Bergenhenegouwen (1996) have supported the view that the competencies of individuals are concerned with fundamental personality characteristics intrinsic in employees in relation to their work functions. They state that individ-
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Organizational capabilities
Satisfying customers
Integrating internal operations
Collaborating with partners in the supply chain
Managing technology Managing change Reviewing performance
uals should possess characteristics and factors that are crucial to the success of organizational innovation.
Case Study Methodology The study adopted an iterative process of data collection by conducting ten case studies comprising interviews with twenty-three manag-
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ers and visits to observe the operations of the distribution centres. This paper distinguishes the competencies in employees, the issues faced and their importance for successful innovation. The firms have been identified as Firms A–E, in Australia, and Firms F-J, in Singapore. The case study approach was adopted because it is exploratory in nature. According to Yin (2003), the research must identify some situations in which all research strategies might be relevant. The ‘how’ and ‘what’ questions are asked about a contemporary set of events over which the investigator has little or no control. The study investigated the competencies were evident in individuals and the issues they faced. As the study seeks to address research questions, this suggests the adoption of an exploratory approach (Yin, 2003). Consequently, the data was collected from participants in their working environment using semi-structured interviews. This method allowed the capture of data rich in detail about the research problem; and gave the researcher the flexibility to explore additional issues raised by participants. The exploratory study gains some originality and new knowledge, consequently adding to the body of literature. One unit of analysis from the model, which was the competencies of employees, was carefully constructed drawing on the plethora of literature and initial field studies. The research into the relationship between the factors was essentially exploratory, in the sense that the main objective was the refinement of a research model to facilitate further research (Kervin, 1992). The ten organizations examined were regarded as units with strong interrelationships between internal functions and aspects deployed within. A multiple case-study approach allowed the researcher to test the congruency or fit of the ‘real world’ to the factors identified. Such a measure helped to ensure the reliability of cross-organization and cross-site comparisons between Singapore and Australia, as well as of analysis. The use of multiple sites could also contribute to the reliability of the findings (Brannick & Roche, 1997). Yin (2003) supported the use of multiple cases with the argument that the evidence from multiple cases is often considered more compelling, and the overall study is therefore regarded as being more robust.
Summary of Findings The competencies of individuals in the ten logistics firms refer to creativity, effective communication, learning, teamwork and empow-
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erment, skill flexibility, adaptiveness to change and the role of management. These are explained and further supported by the literature as follows.
Creativity The managers interviewed affirmed the creative characteristics of their employees. They agreed that organizations have to tap into this characteristic with encouragement and motivation in order to be innovative. It was found that creativity occurred when motivational levels were high, and that teamwork or small group improvement activities were the main methods to access the creative skills. Some companies adopted Quality Control Circles (QCC) or Work Improvement Teams (WIT), where employees got together in small groups of four or five periodically to brainstorm and find solutions to work problems. The study found that through teamworking, there were more informal communication in firms D, E and F. Firm C implemented suggestion schemes to draw on creative abilities and encourage employees to put forward their ideas. The supervisors and managers in this firm demonstrated openness, approachability and receptiveness to new ideas and suggestions. The human resource manager in Firm E acknowledged that by establishing an environment conducive to learning and sharing, employees became more motivated. These firms’ strategies coincide with theory from various authors, such as Amabile (1996), Majaro (1988), Cumming (1998), Cooper (1998), and McAdam and McClelland (2002). Roffe (1999) asserted the requirement for managers to create a climate open to creativity and this is possible when they show characteristics of open-mindedness, flexibility, group involvement, respect, perceptive, motivating the expression of ideas and finding answers creatively (Roffe, 1999). Brooking (1996) mentioned the role of managers in organizing and motivating the human resource development to support innovation and creativity (Brooking, 1996). As discovered in Firm J, the employees were able to set their annual work and personal development goals. Similarly, other authors also support that creativity is essential to innovation (Gundry, Prather & Kickul, 1994; Pascale, Carland & Carland, 1997; Perry, 1995; Ramsey, 1997). From the findings in the case studies, it can be established that the employees in the firms interviewed possessed this competency, which contributed to innovative efforts. This was enhanced by the fact that management fostered an environment conducive to exploiting
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the creative skills in them. The findings supported the conclusion that creative characteristics of employees led to productivity and innovative success in the organizations studied.
Effective communication Six of the firms studied adopted an open-office concept. Workstations were visible and accessible with no partitions, allowing for interaction and cross-functional communication. Managers tried to minimize bureaucratic hierarchical structures and encouraged employees to communicate. The regional manager in Firm B commented that cross-functional communication enabled employees to be more innovative. They had a broader view about other departments and work functions enabling them to understand the operations of the organization; and communicated more effectively. The managers believed they had flexible organizational structures to allow for communication to all levels quickly, and that communication was a two-way activity, both imparting and receiving knowledge and information. In relation to theory, Roffe (1999) and Drucker (1992) illustrated cross-functional communication where the increase in quantity and quality of information helps employees to gain different perspectives for innovative ideas. In Firms B, D and E, some of the managers’ offices were located in the warehouse at the distribution centres to enable closer proximity to the operations and employees. They could understand and manage operations better. The other firms did not have many opportunities for cross-functional communication with the administration or office departments because of different locations. To overcome this, Firms G, I and J adopted a central cafeteria or interaction area, which facilitated formal and informal activities to increase morale and participation between employees. Additionally, the employees in Firms A, J and F worked with other departments in improvement projects. Firms C, F, H and J were multinational corporations with separate office locations internationally. These managers illustrated minor difficulties in communicating with the other employees overseas because of different time zones and operating hours. There was little communication besides emails and by facsimile. The findings show that the firms had efficient networks or systems set in place facilitating channels of communication to all levels. The comments made by managers were affirmative that the communication system allowed openness, sharing
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and knowledge transfer for the purpose of innovation.
Learning Learning for innovation involves both individual and organizational learning. It encompasses a broad range of concepts such as communication, sharing, diffusing knowledge, culture and solving problems for improvement. Sloan and Hyland (2000) stated that learning in the organization consists of more than just individuals gaining knowledge. The knowledge captured has to be shared, disseminated throughout the organization and applied, creating a culture embracing constant change. Companies that possess such learning strategies will gain a competitive advantage in the innovation process. The findings on learning are further categorized into three areas: diffusing knowledge, upgrading skills and knowledge; and problem-solving and work improvement. Diffusing Knowledge Knowledge refers to information that is enhanced and used efficiently to benefit the organization. The managers disclosed that they made attempts to translate knowledge and improvement activities within their firms. The diffusion of knowledge is dependent upon the communication channels and system that the firm possesses. The case studies found that knowledge was shared most of the time during departmental meetings. The managers communicated with other managers whatever information they gained in their own departments. Other methods of diffusion were through emails, databases, reports, newsletters, bulletin boards, training programmes and through new process standards. Similarly, Schein (1985) wrote that there must be the internal integration of individuals, and knowledge must be readily available. Tacit knowledge on the other hand was shared through the social system or through informal means. The managers explained the importance of informal social events, gatherings, meetings and training programmes, or through small group improvement activities where employees interacted with one another. The general manager in Firm H noted that since intangible knowledge came informally, it was necessary for managers, supervisors and team leaders to capture it and share with management. In Firm B, motivated work teams independently organized among themselves to work more efficiently and flexibly to complete the job quickly. The teams took the
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initiative to communicate with each other, and perform other teams’ tasks to cut down work processes and be more efficient. In this way, there was job rotation as they widened their job scope. There were also opportunities for employees to demonstrate new knowledge or innovative methods from external sources. New employees from six firms were encouraged to share new knowledge such as their experiences and systems used at their previous workplace. They brought in fresh ideas and provided input for suggestions or improvements. For example, new employees at Firm I who underwent on-the-job-training (OJT) shared their skills from previous jobs. It gave them a chance to demonstrate their qualities. This method of diffusing knowledge adds to the observation of Gieskes and Langenberg (1999), who stated that management should foster learning by giving employees at all levels the opportunities and tools to learn from their own and others’ experience. Only then can they use this learning to innovate according to organizational objectives. Another method of diffusing knowledge was when the employees shared with their departments the new knowledge gained from external training. Firm A used this as a means of generating new ideas and constructive criticisms, and ultimately decided as a group if they should take any action. This is in line with the views from Sloan and Hyland (2000) that the knowledge captured has to be shared and disseminated throughout the organization and applied, creating a culture embracing constant change. Hedberg (1981) in addition, reported that knowledge diffusion is the synergistic efforts of the organization as a whole, rather than considering the cumulative learning of individuals. Upgrading Skills and Knowledge All employees in the case studies underwent some form of formal training to increase and upgrade their skills and knowledge. In Firms A and E, there were work induction programmes, OJT and external training in computer skills. In Firm H, 2 percent of total payroll and in Firm I, 4 percent of annual revenue was committed to training employees. Firm J adopted an annual Individual Development Plan as part of the ISO 9002 system for training and enhancing skills. Managers reviewed this plan for relevant training programmes suitable for employees in that particular year. Firm I conducted in-house skills enhancement programmes to update on trends in the logistics industry. The findings show that the Singaporean firms were more
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active in upgrading the skills and knowledge of their employees. Generally, the managers affirmed that training improved the skills and knowledge of employees. But there was a need to continually assess whether employees were putting them to full use, and derive maximum benefit from the firm’s investment. Problem Solving and Work Improvement The case findings showed that most of the firms relied on small groups for problem solving and work improvement. Results were far superior when employees worked in teams because they could better identify and solve problems. This is similar to Nemeth’s (1997) proposition that groups exhibit the potential to both outperform and be more creative than individuals. Improvements occurred continuously for seven out of the ten firms. The administration manager in Firm A explained that there was constant attention on improving systems and processes, and fixing customer problems. Similarly, Firm B assessed continuous improvement issues weekly, where employee suggestions could spin off projects. When improvements were needed, the managers sought ideas and advice from employees. In Firms C, G and J, improvements occurred on an ad-hoc basis and were implemented when the ideas proved feasible. Other methods involved suggestion schemes, daily operations or regular departmental meetings. In Firm I, improvements occurred in a bottomup fashion, where supervisors acted as representatives of shop-floor level workers. They gave information, suggestions and feedback to management on the issues faced by employees. Authors such as McFadzean and Money (1994) and Vancouver (1996) reported the importance of the ‘structure’ and ‘procedures’ to be conducive for ideas and feedback from employees with management support. Similarly, O’Loughlin and McFadzean (1999) favoured the socio-technical systems that enable the development of efficient and effective problem-solving techniques, where management should embrace and encourage interpersonal behaviour within the organization. The outcome of problem solving in the organizations studied can be summarised in Table 2. When employees find out during problem solving what is wrong in the process and how to correct it, this reflects single-loop learning. Seven firms engaged in a different learning process when solving problems. Wang and Ahmed (2002) report that this learning process is where employees not only ask what it wrong and how to make corrections, but also move on to question why the errors occur and
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Table 2. Learning Process in the Distribution Centres Learning process
Making corrections to problems/errors (single-loop learning) Understanding root cause and preventing reoccurrence (double-loop learning) Creating new knowledge and quantum leaps (triple-loop learning)
Australian firms
Singaporean firms
0% 80%
0% 60%
20%
40%
Table 3. Teams Adopted for Problem Solving and Work Improvement Types of teams used Operational work teams Quality Control Circles (QCC) Work Improvement Teams (WIT) Quality Improvement Teams (QIT)
how to make modifications in terms of both quality techniques and the organization’s underlying norms, policies and objectives so that errors can be prevented. This problemsolving approach involves the process of defining the problem, searching for alternatives, and selecting the best solution (Couger, 1996). However, only three firms had a learning process beyond this. Wang and Ahmed (2002) propose that it involves knowledge creation and is about re-evaluating all existing techniques and systems, reconsidering where the organization should stand in the marketplace, and how to redefine existing techniques and systems, develop new concepts and even change fundamentals of judgement. The managers in these three firms (Firms, B, H and J) stated that from identifying problems and solving them, they implemented new breakthrough systems or processes and even benchmarked them to a standard. As a result, new knowledge was generated, paving the way for innovation. An example was when an employee devised a sensor for an automated pallet racking system. The sensor could detect that there were no pallets left and activated the machine to automatically replenish the rack with a new pallet. Another example concerned the space utilization at the Distribution Centre in Firm J. A QCC team identified a new method of packaging for cartons, which saved space and money, and subsequently became a standard operating procedure.
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Australian firms
Singaporean firms
80% 0% 20% 0%
0% 80% 60% 20%
Teamwork and Empowerment Teamwork The findings showed that teams were evident in all the firms. Teamwork was used in work operations, problem solving and improvement. Employees had a wider perspective and knowledge of the functions and job scope of other departments. This was cited for the Quality Improvement Teams in Firm J. The types of teams used in other firms are shown in Table 3. The majority of the Australian firms (80 percent) adopted operational work teams. The employees worked permanently in the same team, including problem solving and work improvement. The firms in Singapore however adopted QCC, WIT and QIT. The members of these teams comprised people from various departments. However, Firms F, G and I adopted more than one type of team within the organization. Nevertheless, all the firms stated that problem solving and work improvements were conducted in a group effort. A prominent point was that Singaporean firms embarked on more crossfunctional teams, and placed more focus on problem solving or improvement projects. The findings on teamwork and problem solving are in line with Conti and Kleiner (1997). They believe that teamwork improves productivity and builds more flexibility into a business. Sashkin and Sashkin (1994) also state that
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teams have become essential elements in problem solving and in helping businesses move forward into the future. Empowerment The findings showed that there was some form of empowerment given to employees in nine out of ten firms. In Firm A, that this was not very evident because of the small size and flat structure, and the employees were assigned set responsibilities. Employees in Firms E and B were only empowered if they demonstrated capable qualities or were adequately trained. These firms dealt with high-value goods such as automobiles, where mistakes could be costly and impact on profits. Pietenpol and Gitlow (1996) indicated the need for management to provide first of all, training and skills required by employees to make decisions. Second, there must be security to make decisions without fear of reprisal from their supervisors (Pietenpol & Gitlow, 1996). The views of the Australian managers were similar to those of the Singaporean managers. Firm G employees were closely supervised in the beginning until they showed potential to make decisions independently. However, employees had to share the decisions and feedback to management. The logistics and warehouse manager described his bureaucratic company concerning hierarchy and reporting. Supervisors had to report to their managers before seeking advice from higher management. They were discouraged from bypassing immediate superiors when seeking senior management. In Firm J, employees required adequate training to be empowered and make reliable decisions. The logistics manager commented that employees were empowered to a certain extent only. Senior managers still made certain decisions to prevent costly mistakes. In Firm I, only middle management were empowered. This was not clearly perceptible at the supervisory or lower levels. Operational staff mainly received instructions and had to execute accordingly based on plans. It was apparent that the firms interviewed in both countries were cautious about bestowing power and decision-making responsibilities to their employees. The Singaporean firms however, seemed more conservative as compared to the Australian firms, based on the comments made by managers. Singaporean managers highlighted bureaucracy and employees at lower levels not being empowered. This implied that they may still believe in traditional structures and hierarchy system, where employers retain decision-making
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authority. Empowerment was still bestowed in all the firms nevertheless, and there was teamwork effectiveness as illustrated. It can be concluded that the employees possessed this competency to support the innovative efforts of firms.
Skills Flexibility The findings showed that employees were cross-trained, widening their job areas to ensure skills flexibility. Only Firm A faced difficulties because some employees were resistant to change. There were examples cited of employees at the distribution centre trained in administration such as computer skills for stock control and monitoring invoices. The Singaporean firms reported more instances of training and multi-skilling. Employees continuously learnt new skills such as operating different equipment, drivers worked in the distribution centre or conducted storekeeping, and employees from the shop floor learnt to operate computerized systems such as the warehouse management system. In addition, employees in Firms G and H underwent job rotation and changed departments after every few years. Firm J experienced a recent downsizing causing employees to be cross-trained and possess multiple skills. Even management was cross-trained through secondment or at subsidiary branches overseas to get more exposure on how the company operated. In line with the literature, Cordery (1989) stressed the importance of multi-skilling and flexibility where organizations can cope with environmental changes that entail fluctuations in work demands. With a multi-skilled workforce, organizations become more effective and efficient, since there is increased labour flexibility, reduced labour costs and increased productivity (Cordery, 1989). All the firms studied except Firm A possessed this competence through the comments made by managers and examples illustrated.
Adaptiveness to Change Various authors, such Pietenpol and Gitlow (1996) and Cordery (1989), have written that successful change management requires employee versatility and the right attitude. Innovative organizations consist of employees who react positively to change. Most managers interviewed verified employees’ positive perception to change and willing participation. Three managers however stated that the difficulty in measuring or gauging the resistance from employees because they were
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intangible. Management in the firms tried to gain support and increase the morale of employees when implementing change. The managing director in Firm J described the downsizing where feedback was sought from employees on the decision. Committee meetings were conducted with focus groups on the firm’s intranet, inviting comments and suggestions. They obtained a positive response with comments kept anonymous and confidential. As a result of the survey, the firm could implement this structural change effectively with minimal grievances to employees. The managers in Firm C reported the need for employees to share the same organizational objectives when implementing change. Management created awareness, gained support and feedback, and allowed for joint decisionmaking. Change implementation was successful with a facilitative climate. Ford, Ford and McNamara (2002) also reported this instance in Firm C. They propose that successful change implementation stems from employees sharing the same objective and initiative. The findings showed that employees gave valuable input and feedback when implementing change. The managers’ comments suggested that employees were flexible, and conformed to new ways of working or doing things. They prescribed that training, development, teamwork and cross-functional communication allowed individuals to gain a broader perspective of the organizational goals and objectives. With a sense of pride and belonging in the firm, employees became dedicated and adaptive to change. This competency evident in the firms can be compared with the literature. Cordery (1989) writes that with proper training, education and support, employees can undertake a wider range of tasks and respond to changes in the workplace. Similarly, by allowing employees to give feedback, suggestions and participate in decision-making, they experience an exciting challenge to their abilities to improve and innovate in their work processes (Pietenpol & Gitlow, 1996). Therefore, it can be concluded that the competency of adaptiveness to change was present for employees in the firms.
Role of Management Translating Strategy into Innovative Activities Apart from employees, management also possessed certain qualities and competencies. One of their roles is to deploy corporate strategies and translate them into innovative and improvement activities. Most of the managers interviewed were involved in setting goals
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into action plans for constant review. What the firms intended to achieve were translated top down, or filtered down the structure. It was conspicuous that policies and decisions were spearheaded at senior management level. These were documented and cascaded down throughout to the managers, supervisors and team leaders, who assisted in setting action plans or departmental goals for innovative activities. For example, an Annual Quality Improvement Plan (AQIP) was evident in Firm J. The overall objective was divided according to different departments. The departments, in turn, classified their own objectives, targets and measures to achieve annually. They were assessed and monitored at monthly departmental meetings and biannual company-wide meetings. Management tried not to get involved in the supervision of this, and left it to self-driven employees and supervisors. In this way, the motivational levels were maintained. When goals were achieved, incentives and reward schemes were given to employees in the respective departments. Innovation plans were also set, considering the views and feedback of employees. In Firm A, new ideas and suggestions were always considered, discussed at meetings, and put to trial before implementation. In Firm D, management was not confined to the office only, but assisted in the distribution centre providing labour support such as assisting in the loading, unloading and unpacking of cartons. They had a more hands-on experience and discovered the issues pertinent to employees. As such, management was multi-skilled, gained the rapport, confidence and trust from employees.
Developing and Diffusing Knowledge for Innovation The managers adopted different strategies to encourage innovative activities. In Firms A and C, management encouraged innovation through empowerment. Leadership opportunities increased employees’ motivation, skills and knowledge to perform better. Team leaders were more focused on improving and innovating in work aspects. Management believed that empowerment and knowledge helped in developing and improving processes. Other strategies for increasing innovation were training, upgrading and providing recognition. Management in Firm F believed that communication was crucial to improving innovation through constant two-way flow. Other managers discussed informal and social activities, and regular get-togethers to create a
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Table 4. Diffusing Knowledge in Employees for Innovation Strategies to diffuse knowledge Training Empowerment Recognition and rewards Social activities Formal meetings
harmonious environment for innovative activities. A summary of strategies deployed to diffuse knowledge and innovation is depicted in Table 4. The findings showed that the Australian firms generally placed more emphasis on empowerment for developing employees; whereas the Singaporean firms, however, were more conservative and focused on training, development, having formal meetings and conducting social activities as a way for knowledge diffusion. There was equal belief among all the firms that providing recognition and rewards was necessary to motivate employees for innovation.
Conclusion The study has shown several competencies evident in individuals at the distribution centres. These competencies constructed the foundation to operationalise behaviours and capabilities needed for continuous innovation to occur. This was in accordance to the research framework set out for the study. Although there were other variables investigated which formed an overall conclusion for continuous innovation in firms, this paper only focuses on one aspect of it – the competencies of individuals in the organization. It was found that the skills and motivation of employees shaped the essential mechanisms by which firms could operate more efficiently, since employees are the key resources to the firm. The findings and views from managers interviewed confirmed that these competencies existed and had a positive contribution to innovative efforts in the firms. This study provides important lessons for managers in logistics organizations in Australia and Singapore and demonstrates how differing extents of competencies and behaviours of employees can impact on the operation of firms and their capacities to innovate. With the ability to discern such characteristics of individuals, management can then strategically
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Australian firms
Singaporean firms
20% 60% 40% 0% 0%
0% 0% 40% 20% 40%
plan and set objectives, processes and systems for continuous innovation. The findings show that there were some differences in the competencies and strategies adopted by firms in Singapore and Australia as highlighted in the paper. It was established that Singaporean firms tended to be more conservative in empowering employees and placed greater emphasis on teamwork, formalities and meetings. Training was more widespread in the Singaporean firms and that managers placed greater emphasis on the development of employee skills when compared to the Australian firms. These differences could be for a variety of reasons, such as the organizational strategy, mission and goals. The research was essentially exploratory and as such, only investigated if these competencies were evident in the firms. Examples were given to illustrate how they occurred. Further research needs to be undertaken to investigate the views of employees at the operational level on the competencies that they possess since the managers tended to give a somewhat optimistic and possibly biased view most of the time, portraying their firms to be successful and innovative. The biggest challenge facing distribution centres was the efficient orientation of employees and demonstration of competencies, especially in this rapid and dynamic logistics industry. Management was conscious of the need to determine and prioritize core skills of employees and ensured that they were competent to perform job responsibilities. They placed some validity on the competencies of their employees and their strategic commitment to innovation.
References Amabile, T. (1996) Creativity in context. Westview Press, Boulder, CO. Bergenhenegouwen, G.J. (1996) ‘Competence development – a challenge for HRM professionals: core competences of organizations as guidelines for
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the development of employees’, Journal of European Industrial Training, 20(9), 29–35. Boer, H., Caffyn, S., Corso, M., Coughlan, P., Gieskes, J., Magnusson, M., Pavesi, S. and Ronchi, S. (2001) ‘Knowledge and Continuous Innovation: The CIMA methodology’, International Journal of Operations and Production Management, 21(4), 490–504. Boer, H. (2002) ‘Continuous Innovation’. Paper presented at the Incite Seminar, Sydney, 25 April. Brannick, T. and Roche, W.K. (1997). Business Research methods: strategies, techniques and sources (eds.), Dublin: Oaktree Press. Brooking, A. (1996) Intellectual capital: core asset for the third millennium enterprise. International Thomson Business Press, London. Conti, B. and Kleiner, B. (1997) ‘How to increase teamwork in organizations’, Training for Quality, 5(1), 26–9. Cooper, J.R. (1998) ‘A multidimensional approach to the adoption of innovation’, MCB Management Decision, 36(8), 493–502. Cordery, J.L. (1989) ‘Multi-skilling: a discussion of proposed benefits of new approaches to labour flexibility within enterprises’, Personnel Review, 18(3), 13–22. Couger, J.D. (1996) Creativity and innovation in information systems organization. Boyd & Fraser, Boston, MA. Coughlan, P., Harbison, A., Corso, M., Pavesi, S., Ronchi, S., Caffyn S., Magnussin, M., Sundgren, N., Boer, H., Gieskes, J., Chapman, R. and Hyland, P. (2000) Developing Continuous Innovation as Organisation-wide Process. Internet website. Available from http://bus.macarthur.uws. edu.au/cima/CIMA% 20Clearing%20House/Full %20Papers.htm, accessed 30 November 2000. Cumming, B.S. (1998) ‘Innovation overview and future challenges’, European Journal of Innovation Management, 1(1), 21–9. Doyle, P. (1995) ‘Marketing in the new millennium’, European Journal of Marketing, 29(13), 23–41. Drucker, P.F. (1992) Managing for the Future. Butterworth-Heinemann, Oxford. Ford, J.D., Ford, L.W. and McNamara, R.T. (2002) ‘Resistance and the background conversation of change’, Journal of Organisational Change Management, 15(2), 105–21. Gieskes, J.F.B. and Langenberg, I.W.H.A. (1999) Learning and improvement in product innovation processes: enabling behaviours. Available at http://bus.macarthur.uws.edu.au/cima/CIMA %20Clearing%20House/Full%20Papers.htm, accessed 30 November 2000. Gundry, L., Prather, C. and Kickul, J. (1994) ‘Building the creative organisation’, Organisational Dynamics, 22(4), 22–37. Hedberg, B. (1981) ‘How organisations learn and unlearn’. In Nystrom, P.C. and Starbuck W.H. (eds) Handbook of organisational design. Cambridge University Press, London. Kervin, J.B. (1992) Methods for business research, New York: Harper Collins.
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Majaro, S. (1988) The creative gap: managing ideas for profit. Longman, London. McAdam, R. and McClelland, J. (2002) ‘Individual and team-based idea generation within innovation management: organisational and research agendas’, European Journal of Innovation Management, 5(2), 86–97. McFadzean, E.S. and Money, A. (1994). The theory of strategic problem solving. HWP 9402, Henley Management College, Oxford. Nemeth, C.J. (1997) ‘Managing innovation: when less is more’, California Management Review, 40(1), 59–74. O’Loughlin, A. and McFadzean, E. (1999). Toward a holistic theory of strategic problem solving. Team Performance Management 5(3), 130–20. Pascale, R., Carland, J. and Carland, J. (1997). ‘A comparative analysis of two concept evaluation methods for new product development projects’, Project Management Journal 28(4), 47– 52. Perry, T. (1995) ‘How small firms innovate: designing a culture for creativity’, Research Technology Management, 38(2), 14–17. Pietenpol, D. and Gitlow, H.S. (1996). ‘Quality notes: empowerment and the system of profound knowledge’, International Journal of Quality Science, 1(3), 50–7. Quinn, J.B. (1985) ‘Managing innovation: controlled chaos’, Harvard Business Review, May, 73–84. Ramsey, R. (1997) ‘Where do good ideas come from?’, Supervision, 58(12), 12–14. Roffe, I. (1999) ‘Innovation and creativity in organisations: a review of the implications for training and development’, Journal of European Industrial Training 23(4/5), 224–41. Sashkin, M. and Sashkin, M. (1994) The new teamwork. American Management Association, New York. Slack, N., Chambers, S., Harland, C., Harrison, A. and Johnston, R. (1999). Operations management, 2nd edn. Financial Times, London. Sloan, T. and Hyland, P. (2000) ‘The product innovation process: Learning and Unionisation’. Paper presented at the 8th IERA 2000 Conference, Singapore, 5–8 July. Schein, E.H. (1985) Organisational culture and leadership: A dynamic view. Jossey-Bass, San Francisco CA. Soosay, C.A. (2003) ‘Continuous Innovation in Logistics Services: An empirical study of Distribution Centres’. PhD Thesis, University of Western Sydney. Vancouver, J.B. (1996) ‘Living systems theory as a paradigm for organizational behaviour: understanding humans, organizations and social processes’, Behavioural Science, 41(3), 165–87. Wang, C.L. and Ahmed, P.K. (2002) ‘Learning through quality and Innovation’, Managerial Auditing Journal, 17(7), 417–24. Yin, R. (2003) Case Study Research: Design and Methods, 3rd edn. Sage Publications, Thousand Oaks CA.
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Dr. Claudine A. Soosay is a Senior Research Fellow at Central Queensland University, Australia. She received her PhD in Innovation and Management at the University of Western Sydney, Australia. She teaches Operations Management to postgraduate students at CQU. Her research areas include Continuous Innovation, Systemic innovation, Knowledge Management, Organisational Learning, Industry studies, Regional and labour market studies in Queensland. From her research, Dr Soosay has published in international refereed journals and conference proceedings.
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Predicting Entrepreneurship From Ideation and Divergent Thinking Michael Ames and Mark A. Runco In order to find out why certain entrepreneurs are successful we administered two measures of ideational skill to 47 successful entrepreneurs. The first asked about the Strengths, Weaknesses, Opportunities, and Threats (SWOT) to their own businesses; it assessed the participants’ ideational productivity (i.e. fluency) and originality. The second measure was a selfreport of ideational tendencies in the natural environment. Statistical analyses indicated that the more successful entrepreneurs did indeed have particular ideational tendencies. This was especially apparent in the self-report measure of ideation. The two groups did not differ in terms of secondary criterion questions (e.g. profitable years within the last five, number of employees), nor in their SWOT scores. This last finding with the SWOT was unexpected but easy to understand, given the paper-and-pencil format of the test. The significant difference that were uncovered suggest that ideation is an important talent for entrepreneurs. Predictions about entrepreneurial success may, for example, be improved if an individual’s ideational skills are assessed. Furthermore, it would be reasonable to encourage and support entrepreneurial potentials via programmes that target ideation.
E
ntrepreneurship takes many forms. It always leads to innovation, and thus to something new. The innovation may be a new business, or a new product or service, with a new business developed to support that product or service. The entrepreneurship may begin with the recognition of a new niche, or need, or a solution and useful product. Whatever form it takes, and whatever its beginnings, entrepreneurship depends on creativity (Kao, 1989; Sexton & Bowman-Upton, 1991). It also relies heavily on motivation, confidence, and intelligence, but at the heart is creativity. It would be extremely useful to identify the best predictors of entrepreneurship. One way to identify them is to study the characteristics of highly successful entrepreneurs. This insures that it is indeed successful entrepreneurship that is eventually predicted. This parallels a technique used in the creativity literature (e.g. Davis, Keegan, & Gruber, in press; Wallace & Gruber, 1988) where only eminent or at least reputable creators are studied in order to be certain that the subjects of study are in fact truly creative. Very likely, some of the critical talents in entrepreneurship are cognitive. In fact, Barron (1998) argued that cognitive and social factors are more important than personality factors © Blackwell Publishing Ltd, 2005. 9600 Garsington Road, Oxford OX4 2DQ and 350 Main St, Malden, MA 02148, USA.
in determining entrepreneurial success. Our investigation was directed at the question, ‘which cognitive skills?’. We were particularly interested in the role of ideation (the generation of ideas). Ideation is very important for the entrepreneur because of the need for original insights and ideas. Presumably the entrepreneur first has an idea about new products or businesses, and then evaluates the feasibility or the entrepreneurial endeavour. The process probably thus starts with an idea. In fact, ideas may be important for entrepreneurship even after the original conception. As Kuratko and Welsch (2001) put it, Although the origin of an idea is important, creative thinking plays a critical role in its development. In other words there is a major difference between speculating about an idea and initiating one that is the product of extended thinking, research, experience and work. More importantly, a prospective entrepreneur must have the desire to take a good idea through the various development states . Thus innovation represents a marriage of the vision to create a good idea and the perseverance and dedication to stick with the concept through its implementation. Successful entrepreneurs
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are able to blend imaginative, creative thinking with systematic, logical processing abilities; this combination is the key to their success. (Kuratko & Welsch, 2001, 152–153) Can successful entrepreneurs thus be predicted from measures of ideation? If so, which index best captures entrepreneurial potential? Ideational fluency (i.e. productivity with ideas, being able to produce a large number of ideas) and ideational originality (i.e. finding unusual, novel or unique ideas) are each important for certain kinds of creative work (Runco, 1991); are they also important for the entrepreneur? Ideas play a huge role in business, and especially in innovation and entrepreneurship (Basadur & Runco, 1993; Kuratko & Welsch, 2001; West et al., 2004). Perhaps the most important thing is to produce a large number of ideas, in which case fluency may be sufficient to discriminate highly successful from less-successful entrepreneurs. This is quite possible because entrepreneurs often start more than one company and may develop more than one new product. Then again, originality is more important than fluency for creativity per se, and originality is by definition more indicative of the quality of ideas. Perhaps entrepreneurs need not only a large number of ideas, but especially ideas of high quality and originality. This research thus addressed the following questions: Are ideational skills important for successful entrepreneurs? Do they excel on measures of ideation, and if so, which ideational indicators best discriminate more successful entrepreneurs from their lesssuccessful counterparts?
Method Participants and Criteria of Entrepreneurship Forty-seven entrepreneurs were interviewed. Sixty entrepreneurs had been nominated by a Chamber of Commerce in Orange County, California. Some were unavailable. The success or the participants as entrepreneurs was confirmed with objective questions asked during the interviews. Most important for our purposes was the section of the interview concerning the number of business each individual had started, which was used to confirm their entrepreneurship, and was our primary criterion variable (see the results section below). Twenty-five of participants had started more than three businesses. Twentytwo of the participants had started one or two businesses. The entrepreneurs were also asked about profit in the last five years, number of employees and number of products sold.
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There was quite a range within the sample. Some had, for example, been self-employed for only four years, but some for more than 30 years. Some had only one employee, but some had over 400. Some had never developed a new product, but some had developed dozens of new products. Again, the point is that this sample contained only successful entrepreneurs, but within the sample there was impressive variability. This was important for the parametric statistics, reported below, and for generalizations.
Measures of Divergent Thinking and Ideation Two measures were adapted from the field of creative studies and administered to a group of successful entrepreneurs. The first measure assessed the participants’ ideational fluency and originality. The first of these is based on productivity. It is operationally defined in terms of the number of ideas given (Guilford, 1968; Runco, 1991). The second index, originality, represents an individual’s capacity to generate ideas that are unique. A participant receives an originality point, then, whenever he or she gives an idea that no one else gives. Originality is especially important for creativity because it is a prerequisite. It is necessary, but not sufficient: creative things are always original. This first measure was similar to the divergent thinking tests that are often used in studies of management (Basadur, 1994) and general creative potential (Guilford, 1968; Runco, 1991) but this new measure asked the participants about their organizations. The four questions were based on the SWOT model of organizations (Kuratko & Welsch, 2001, 112–113; Mintzberg, 1994). The questions asked the entrepreneurs to generate a list of (a) strengths, (b) weaknesses, (c) opportunities, and (d) threats to their business (SWOT). These questions were open-ended and allowed respondents to give as many or as few ideas as they wanted. Such tests are reliable and useful in various groups (Basadur, 1994; Guilford, 1968; Runco, 1991, 1999; Torrance, 1995). The SWOT was administered as part of the interview, in their own offices, at their convenience. This task was designed specifically for this research but is similar to the open-ended divergent thinking tasks that are very frequently used in studies of creativity (e.g. Guilford, 1968; Runco, 1991, 1999). Their responses were later scored for fluency (the number of ideas given) and originality (the number of unique ideas given, where ‘unique’ means given by only one of the participants). This exact scoring procedure has been used
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many times. Inter-judge and inter-item reliabilities typically exceed 0.70 (e.g. Runco, 1991). The second measure also focused on ideational tendencies, but it is a self-report rather than a problem-solving test. It was developed to sample actual behaviour – ‘ideational behaviour’ – and seems to provide very useful and reliable information about creative potentials (Runco, Plucker & Lim, 2000–2001). This second predictor was the Ideational Behavior Scale, known as the RIBS and developed by Runco, Plucker and Liml. (2000–2001). It was developed to assess how often an individual generates his or her own ideas in the natural environment (i.e. not on a test or in the laboratory). It asks about ideational behaviours that may occur in day-to-day situations or on common tasks. Here are three examples from the RIBS (each answered with a five-point Likert scale): ‘I usually come up with a lot of ideas or solutions to problems’; ‘I enjoy puzzles and games that require me to think of solve problems’; ‘I often have insights about new and better ways of doing things’. There were 37 of questions in this version of the RIBS (see Runco, Plucker & Lim, 2000–2001).
Results and Discussion Regression Predicting Ideation A regression indicated that composite scores from the SWOT, one for fluency and one for originality, were significantly correlated with RIBS performances (R = 0.37, p = 0.05). The product moment correlations were also significant (rs = 0.30 and -0.29, respectively, ps < 0.025). Perhaps most important was a second regression analysis that indicated that the SWOT originality scores were predictive of the RIBS scores even after SWOT fluency was statistically controlled (R = 0.50, p = 0.036, R2change = 0.10, p = 0.030). This is important because sometimes fluency confounds originality in tasks like the SWOT (Hocevar, 1981; Runco, 1986). It also indicates that what is important for the RIBS (and as we shall see below, for entrepreneurship) is productivity and the quantity of ideas. That follows from the direction of the product moment correlations, given just above (0.30 and -0.29): high fluency was related to ideation on the RIBS, as was low originality. Examination of the individual SWOT scores indicated that only one, weaknesses, was positively and significantly correlated with the RIBS (r = 0.26, p = 0.044). Given that Weaknesses was the only SWOT item to show a statistically significant relationship, it is probably best not to over-interpret it. It could be that the question of weaknesses is
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especially challenging or engaging, but any interpretation along these lines would be based on one question in the SWOT. Just as single-item tests are avoided, so too should we avoid putting much emphasis on the weaknesses question and finding.
Group Differences The key criterion variable in this investigation represented the number of businesses started by the entrepreneur. The distribution was such that the most meaningful comparison contrasted individuals who had started 1–2 businesses (n = 22) and individuals who had started three or more businesses (n = 25). These two groups differed significantly in their ideational tendencies, as assessed by the RIBS (F(1, 41) = 4.61, p = 038). The first group (1–2 businesses) had less frequent ideation (M = 118.4) than the second group (3 or more businesses, M = 126.8). These groups did not differ in terms of secondary criterion questions (e.g. profitable years within the last five, number of employees). They also did not differ in their SWOT scores. Still, the significant difference suggests that ideation may indeed be an important talent for entrepreneurs. Predictions about entrepreneurial success may, then, be improved if an individual’s ideational skills are assessed. The difference between the RIBS and the SWOT suggests that care must be taken with the method used to assess ideational skills. Recall here although the sample contained only successful entrepreneurs, quite a range of talents was represented. Each participant had been nominated by a chamber of commerce, but many of them had only started one business, and some had not developed any new products. Some had been in business for decade, some for just a few years. A few had hundreds of employees, but others had only one employee. The point is that there was variation within the sample, and the participants were not all in the highest level of entrepreneurial talent. They were all successful, but there was enough variation in the sample to uncover certain differences, especially when the RIBS was used to index ideational behaviour.
Conclusions The key finding in this investigation was that the ideational tendencies of the two groups of entrepreneurs differed. The more successful entrepreneurs (i.e. those who had started three or more businesses) had higher RIBS scores, indicating that, in the natural environment,
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they tended to produce many ideas. They seemed to frequently use their ideational skills in the natural environment and relied more on their own thinking than on routine and rote solutions to problems. Although this finding must be interpreted in the light of self-report assessments (e.g. they depend on the participant’s memory and honesty), it is important to also keep in mind here that the RIBS has demonstrated it usefulness and accuracy in previous research (Runco, Plucker & Lim, 2000– 2001). The SWOT scores of the groups did not differ, perhaps because it was not indicative of ideation that occurs naturally. It is an administered test with presented problems. More than the RIBS, the SWOT would suffer from the constraints of experimental control. Perhaps the entrepreneurs did not treat the SWOT problems seriously, and thus did not apply themselves. Indeed, the different results implied by the SWOT and the RIBS may be explained in terms of the format of the measures and the focus of each. Again, the RIBS was designed to measure ideation in the natural environment while the SWOT presents problems to participants. The RIBS is a selfreport, and suffers accordingly (e.g. memory and honesty were mentioned above), but it does focus on ideational tendencies outside of a controlled setting. Given how busy the entrepreneurs were during the research, this may explain why group differences were uncovered with the RIBS and not the SWOT. The RIBS just asked them to look back at their lives; the SWOT required that they put aside the business day’s tasks (even though they were sitting in their offices) and actually solve the SWOT problems (that may have seemed artificial, or at least irrelevant to the demands of that particular day). It is significant that the SWOT scores were predictive of RIBS scores. It is also significant that neither of these measures is biased by levels of intelligence (Guilford, 1968; Runco & Albert, 1986; Runco, Plucker & Lim, 2000–2001). They measure ideation and the potential for creative thought, not general intelligence. This kind of research, with the focus on ideational potential, is useful because it has such clear-cut implications. Although future research should replicate and extend the current investigation, if the finding of ideational differences between more- and lesstalented entrepreneurs holds up, it would be reasonable to encourage and support entrepreneurial potentials via programmes that target ideation. There is no shortage of this kind of programme. Basadur (1994; Basadur, Runco & Vega, 2000), for example, has developed an extensive programme to encourage
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ideational fluency and originality. There is a great deal that can be done to support ideation, for it seems to be sensitive to environmental settings, interpersonal reactions, and attitudes (Runco, 1991). Very importantly, there are social and environmental constraints on ideation, which of course need to be removed or avoided to encourage original thinking, and thereby entrepreneurial thinking. Attitudes seem to be especially sensitive to educational and enhancement efforts (Davis, 1995). As is probably obvious, there is a large literature on ideation and its encouragement, and it appears that it should be examined and applied to entrepreneurial education (Hamel & Prahalad, 1989, 1994; Senge, 2002). There is also a great deal of room for future research. It is critical, for example, to follow up this research with an investigation of a wider range of entrepreneurs. In fact, it would be ideal to compare successful entrepreneurs with individuals who are successful in business but not particularly innovative. Other measures could be considered as well. We are currently examining personality profiles to identify a tendency towards entrepreneurship. It would also be useful to modify the RIBS such that it focuses on business activities and innovation (e.g. ‘how often to you think of some new product you would like to develop?’). At present it asks respondents about all kinds of ideation; it is not focused on business or entrepreneurship. Still, it is interesting that it discriminated between the two groups in our sample. Apparently, entrepreneurship benefits from one’s fluency with ideas.
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Davis, G. (1995) Creativity is forever. Iowa: Publishing Co. Davis, S.N., Keegan, R.T. and Gruber, H.E. (in press) ‘Creativity as purposeful work: The evolving systems approach’. In Runco, M.A. (ed.), Creativity research handbook (vol. 3). Hampton Press, Cresskill NJ. Guilford, J.P. (1968) Creativity, intelligence, and their educational implications. EDITS/Knapp, San Diego, CA. Hamel, G. and Prahalad, C. (1989) ‘Strategic intent’, Harvard Business Review, May–June, 63–79. Hamel, G. and Prahalad, C. (1994) ‘Competing for the future’, Harvard Business Review, July–August, 122–28. Kao, J.J. (1989) Entrepreneurship, creativity, and organizations. Prentice Hall. Kuratko, D.F. and Welsch, H.P. (2001) Strategic entrepreneurial growth. Harcourt College Publishers, Fort Worth, TX. Mintzberg, H. (1994) ‘The rise and fall of strategic planning’, Harvard Business Review, Jan/Feb, 107– 114. Runco, M.A. (ed.) (1991) Divergent thinking. Ablex Publishing Corporation, Norwood, NJ. Runco, M.A. (1999) ‘Divergent thinking’. In Runco, M.A. and Pritzker, S. (eds.) Encyclopedia of creativity. Academic Press, San Diego, CA, pp. 577–82. Runco, M.A. and Albert, R.S. (1986) ‘The threshold hypothesis regarding creativity and intelligence: An empirical test with gifted and nongifted children’, Creative Child and Adult Quarterly, 11, 212– 18. Runco, M.A. and Basadur, M. (1993) ‘Assessing ideational and evaluative skills and creative styles and attitudes’, Creativity and Innovation Management, 2, 166–73. Runco, M.A., Plucker, J.A. and Lim, W. (2000–2001) ‘Development and psychometric integrity of
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a measure of ideational behavior’, Creativity Research Journal, 13, 391–8. Senge, P. (1992) ‘Mental models’, The Planning Review, 20, 4–11. Sexton, D.L. and Bowman-Upton, N.B. (1991) Entrepreneurship, creativity, and growth. Macmillan, New York. Torrance, E.P. (1995). Why fly? Albex, Norwood, NJ. Wallace, D. and Gruber, H.E. (1988) Creative people at work. Oxford University Press, New York. West, M.A., Hirst, G., Richter, A. and Shipton, H. (2004) ‘Twelve steps to heaven: Successfully managing change through developing innovative teams’, European Journal of Work and Organizational Psychology, 13, 269–99.
Dr Ames holds a PhD in Business and Economics from Claremont Graduate University. He is a Full Professor of Management at California State University, Fullerton. Dr. Ames has been the Small Business Institute Director at the University since 1978 and the Center for Entrepreneurship Director since 2001. Mark Runco received his PhD in Cognitive Psychology from the Claremont Graduate School. He is currently Professor at California State University and ‘Professor 2’ at the Norwegian School of Economics and Business Administration (Bergen, Norway). Dr. Runco is Past President of the American Psychological Association’s Division 10 (Creativity, Aesthetics, and Psychology) and Editor of the Creativity Research Journal.
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The Virtues of ‘Blue Sky’ Projects: How Lunar Design Taps into the Power of Imagination Constantine Andriopoulos and Manto Gotsi In an era of globalization, intense competition and unpredictability, organizational creativity is increasingly important and, hence, tapping into the power of imagination in the work setting is propelled to unprecedented heights. This article explores how imagination is encouraged among employees within a successful NPD consultancy (Lunar Design Inc.) through the processes of ‘initiating’, ‘defining’, ‘imagining’ and ‘implementing’ ‘blue sky’ projects. Such activities enhance creative thinking, generate new knowledge, break down stereotypes, enhance employees’ morale and satisfaction and build a reputation of a visionary organization. We urge managers to address the hidden danger of pigeonholing conventional work as mundane, especially in times of a recession where more structure needs to be incorporated in ‘blue sky’ activities.
Imagination is more important than knowledge, for knowledge is limited while imagination embraces the entire world. Albert Einstein
Introduction
T
he uncertainty (Daft & Lengel, 1986) and ambiguity (Daft & Weick, 1984) that characterize contemporary rapidly changing markets (Jacobson, 1992) have propelled the importance of organizational creativity to unprecedented heights. In the past, competitive advantage has been achieved mainly by lowering production and distribution costs or by gaining differentiation in existing industries and businesses (Hart & Sharma, 2004). Today, competitive advantage is increasingly no longer won by adding value to existing products/services or by introducing new ones in existing markets, but by generating and dominating fundamentally new markets (Hamel & Prahalad, 1991). During the last fifteen years we have, for instance, witnessed the commercialization of the Internet, robots and handheld devices; products that have changed the way people interact, shop and communicate with each other. It is clear that traditional markets are shrinking and companies are
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forced to move beyond their current market boundaries and to redefine their industries. Organizations are therefore increasingly relying on their employees’ imagination and intuition to explore future possibilities and exploit new competitive opportunities (Christensen, 1997; Hamel, 2000; Hamel & Prahalad, 1994; March, 1991). A proactive approach is hence imperative in dealing with the unprecedented rate of uncertainty evident in the external environment. We propose that this proactive approach requires the initiation of processes that probe the future; practices that mobilize and utilize employees’ imagination. In this article, we first provide a theoretical background on the concept of imagination and its value for enhancing creativity in work settings. We then present our inductive, exploratory methodology and highlight the processes involved in mobilizing imagination in the context of Lunar Design. Lastly, we identify the virtues of ‘blue sky’ projects and discuss the challenges that they raise for managers of creative organizations.
Theoretical Background The ability to create is a unique quality endowed to human beings (Goldenberg & © Blackwell Publishing Ltd, 2005. 9600 Garsington Road, Oxford OX4 2DQ and 350 Main St, Malden, MA 02148, USA.
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Mazursky, 2002). This is the kind of creativity that enabled Leonardo Da Vinci to imagine a helicopter over 500 years ago, Edison to develop the light bulb and more recently, Steve Jobs to develop the personal computer (Andriopoulos & Dawson, forthcoming). In this realm, imagination is an essential driver to evolution and can be used to create solutions to real-life problems (Szulanski & Amin, 2001). As noted by Hamel and Prahalad (1994, p. 89), ‘industry foresight grows out of a child like innocence about what could be and should be, out of a deep and boundless curiosity’ and imagination is a critical component. However, throughout history, the term ‘imagination’ has remained somewhat unclear.1 The concept of ‘imagination’ originates in the work of classic Greek philosophers Plato and Aristotle. The first mention of the word can be traced back to Plato’s idea of ‘phantasia’ (e.g. mental images) and his effort to bring together sensory awareness and logical thinking leading to the creation of knowledge (Shaw, 2000). In this respect, imagination has been viewed as ‘power necessary to the knowledge of the material world’ (Bundy, 1927, p. 48). In other words, Plato suggests that nothing can be known that cannot first be imagined. From another perspective, Aristotle perceived imagination as a ‘function present to the intellect that interprets sensation without which there is no thought’ (Brann, 1991, p. 40). Later on, in the eighteenth and nineteenth centuries, the Romantic Movement considered imagination as the greatest source of artistic creativity (Abrams, 1953), while in the twentieth century, imagination was often defined as the competence of fantasy or non-actual ideation (Thomas, 1999). Recently, several scholars have attempted to shed some light on the concept of imagination by exploring the relationships between imagination, imagery, image and mental processes (Clancey, 1997; Kosslyn, 1994; Pylyshyn, 1991). In this realm, imagination has been increasingly viewed as the ability to envision and express human potential and limitations by manipulating products, symbols, signs and so on (Appadurai, 1996). Despite the growing interest in the area, creativity researchers at large still leave the concept of ‘imagination’ undefined, making use of other synonyms, such as fantasy or daydreaming or even using the terms creativity and imagination interchangeably (Ainsworth-
1
A full review of the historical evolution of the concept of imagination is beyond the scope of this paper. We refer interested readers to Shaw (2000) as a useful starting point.
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Land, 1982; Valkenburg and van der Voort, 1994). In addition, little is yet known about the processes and underlying mechanisms that mobilize imagination in organizational settings. For instance, although Appadurai (1996, p. 5) acknowledges the fact that staff in many contemporary organizations are starting to bring their imaginations into play in their everyday working lives, he does not explain how imagination is or may be implemented within the working environment. This is not surprising if one considers that imagination and playfulness are often discouraged in the workplace, and even considered by many as a waste of time or an indication of laziness (Adams, 2001). What is clear, however, is that similarly to the development of creativity in individuals (Amabile et al., 1996; Cummings & Oldham, 1997), the organizational environment and the resources available to employees can mobilize or inhibit imagination in the work setting. Fitzpatrick (2002), therefore, argues that firms need to take appropriate initiatives (for instance, she talks about the importance of improvization in encouraging the deliberate action of novel activity) to facilitate this engagement and encourage employees to use their imagination in their work. The scarcity of research in this interesting area has triggered this exploratory study. This paper seeks to identify useful lessons for practitioners by exploring how a clearly successful new product design consultancy enhances its employees’ engagement to imaginative action. For the purposes of this study, we define imagination as the process through which individuals envision and/or create objects and events that do not yet exist from the combination and recombination or transformation of established concepts (Adams, 2001; Assagioli, 1965; Kristensen, 2004; Roos & Victor, 1999, p. 350; Valkenburg & van der Voort, 1994). To explore the processes involved in mobilizing imagination in the workplace, we focus on a new product design consultancy, because such firms are under constant pressure to perpetually present clients with novel and unique solutions that stand out from the crowd and create competitive advantage (Angelmar, 1990; Cooper & Kleinschmidt, 1987). Furthermore, the constant pool of clients and projects from multiple (mainly high-tech) sectors implies that these firms have to relentlessly ‘stay ahead of the game’ of product innovation. One of their key challenges is, therefore, not only to anticipate the future, but often to define it (Brown & Eisenhardt, 1997). The next section discusses the research methods employed for the purposes of this study.
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practitioners that seek to mobilize imagination in their own work settings.
The Context Lunar Design Inc. is a leading new product design and engineering consultancy, employing around 30 staff. Lunar has offices in Palo Alto and San Francisco, with clients ranging from Fortune 500 to small, start-up companies. The firm has been operating for twenty years, remains profitable and is continuously praised in the business and design press for its innovative output. In addition, Lunar has been consistently ranked in the top-ten design firms of Business Week magazine’s Industrial Design Excellence Awards (IDEA). The continuous publicity the company receives in the media, portraying this organization as a leader in creativity and innovation in its industry, was the main reason for selecting Lunar as the case organization for this research.
Methods Adopted In an attempt to explore the processes through which Lunar encourages imagination in its work setting and to identify the benefits that these offer to the company, a qualitative research design was adopted. A qualitative approach was deemed appropriate since this study seeks ‘to describe, decode, translate, and otherwise come to terms with the meaning, not the frequency, of certain more or less naturally occurring phenomena in the social world’ (Easterby-Smith, Thorpe & Lowe, 1991). Specifically, the case-study approach was adopted integrating a diverse range of sources, including archival records (websites, magazines, company brochures and employee handbooks), interviews and observation, all of which have provided a rich dataset on a phenomenon in which exhibited behaviours could not be manipulated through the use of experiments (Yin, 1984). We chose this approach because extant theoretical perspectives on processes that mobilise employees’ imagination in work settings are relatively rare and underdeveloped. Although a limitation of this paper is the fact that its findings are based on the analysis of a single case study (Eisenhardt, 1989), scholars support that one detailed case employing a viable methodology can play a significant role in developing theory, especially in under-researched areas such as the focus of this paper (Bryman, 1988; Dyer & Wilkins, 1991; Gummesson, 1993; Sutton & Hargadon, 1996; Yin, 1984). The worldwide reputation of Lunar as one of the leaders in foreseeing the future of product development in multiple industries suggests that findings from this case can offer valuable insights to
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Interviews with Key Employees The research took place during the summer of 2001, involving seventeen in-depth interviews with Lunar employees, ranging from founders and directors to engineers and industrial, product and graphic designers. A topic guide with open-ended questions was used to gain insights on the processes that encourage imagination in the workplace. The use of a list of questions that served as an aide memoire covering the topics to be discussed ensured that not only the predetermined topics were covered but also gave the authors the opportunity to explore topics or subject areas that required further discussion.
Observation Findings from the in-depth interviews were also complemented by two weeks of non-participant observation in the company’s two offices, respectively in Palo Alto and San Francisco. Observation of formal meetings, brainstorming sessions and informal interactions among employees within their disciplinary groups or across disciplinary groups provided the authors with more information to supplement and cross-validate interview data.
Analysis The interviews that we have conducted were tape-recorded and then transcribed. Confidentiality and anonymity were ensured throughout the process. We analysed the interview and observation data in order to identify the emergent themes inductively in the first instance and then synthesized them using the constant comparison method in order to explain the activities (and their benefits and consequences) under investigation (Glaser & Strauss, 1967).
Research Findings Our research highlighted that the company under investigation initiates its own ‘blue sky’ project work to mobilize imagination and leverage the development of new materials, processes and technologies or address product categories that could greatly benefit from the attention of thoughtful design and engineering. These programmes are called ‘Moonshine’ and are intended to unleash employees’ imagination in areas outside the traditional ‘fee for service realm’. As the projects undertaken
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Initiating The ‘big idea’ (imagination-driven) ‘Selling’ the vision (formally and informally) Defining Defining the project Deciding on key criteria Devising the action plan
Implementing Testing against project criteria Exploring commercialization
Imagining Generating and combining ideas, concepts, designs, ... (individually and collectively) Figure 1. Mobilizing Imagination in Lunar: The ‘Blue Sky’ Process within Moonshine are ‘blue sky’ in nature, team members have complete freedom to develop solutions that are quite different from client projects, which are typically constrained by criteria such as manufacturing costs and regulatory or brand requirements. These conceptual projects encourage employees to utilize their imagination to explore, expand and document different possibilities and evaluate the materialization of these ideas into commercial applications. Lunar’s employees embark on such creative endeavours on a regular basis; all the staff that we have interviewed, from senior to junior, stressed that these conceptual projects are of high importance to the company. Design without boundaries allows staff an additional level of creative freedom; a blank canvas where there are no client specifications, no predefined budgets, no criteria set by the client’s industry and no competitive products to consider. In Lunar’s case these ‘blue sky’ programmes initiate and sustain imagination on a systematic basis. The process works as follows (Figure 1).
Initiating Interviewees stressed that unless an organization creates the conditions for encouraging
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imaginative actions, relatively few wild and impractical ideas are likely to occur. Consequently, Lunar placed great emphasis on formalizing ‘blue sky’ activities that mobilize employees’ imagination. An industrial designer explains how the Moonshine concept was first initiated in the firm: Initially, four people were a little bit frustrated with clients’ projects and once in a while they wanted to explore using all their imagination; now Moonshine is like a regular activity The company was from the very beginning supportive towards this activity. Interestingly, our observation in the company’s offices also highlighted that Moonshine participants tended to regularly discuss their ‘blue sky’ projects both informally during impromptu meetings with other employees but also formally through presentations in staff meetings. Staff used these meetings as opportunities to ‘sell’ the vision of the project to fellow employees and proselytize them to the work. Most of the time, Moonshine projects start small, at the individual level, taking the form of self-expression or internal investigation. As Moonshine initiators start talking about their ideas, they generate an interest and hence other colleagues, who may feel that they have similar interests or that they can contribute to
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the project, start ‘buying into’ the work and the team begins to grow. The company operates an all-inclusive strategy where anybody who has an interest in exploring any ‘blue sky’ projects further may initiate his/her own internal Moonshine programme. As the Director of Technology pointed out: . . . then we have the Moonshine project. Anybody who has an idea, they kind of run with it. They use all our resources; I think that for the designers is the ultimate. It helps them and it helps Lunar at the same time
Defining After the initiation stage, where an idea is generated and members are recruited, participants then go through the process of clearly defining the area to be further explored and specifying the product category. Team members also discuss and have to agree around the criteria and internal evaluation process. In conjunction with the company as a whole, an action plan is devised, which sets up clearly the goals of the project and the potential outcomes as well as the resources needed and the proposed timeframe. Moonshine project criteria usually revolve around developing something new and noteworthy within an established budget and pre-determined timeframe.
Imagining Employees stressed that Moonshine is a way of independent thinking and behaving that leads to ideas, sketches, concepts and designs that are original and inspiring. This approach allows Lunar to define leadership and future opportunities for their clients, the media and themselves. The main aim of the ‘imagining’ stage is for participants to generate as many ideas or design concepts as possible related to their passions, fantasies and opinions regarding the future of the selected product category. The unanticipated combination of participants’ ideas, knowledge and skills, in conjunction with an attitude, which is less resource-driven and more imaginationdriven, enhances the identification of new opportunities. The ‘imagining’ stage is usually characterized by several brainstorming sessions exploring possible and desirable future developments for the area under investigation. At the brainstorming sessions that we attended employees were asked not to criticize or praise others’ ideas. The whole point of this type of activity is to generate an abundance of ideas and not to judge or filter them; it is about
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throwing them out on the table, building upon others’ ideas and inspiring colleagues’ creative thinking, as explained by the President of the company: In these Moonshine things we can take risks and do things that our clients might never accept. You do experimental things and you are open to failure. Like, oh well, we thought it would be a cool thing but it’s just a failure. We can’t do that to a client, they come to us because they need to have a successful product This stage is not only limited to collective work. It may also involve a more silent and individual aspect, as explained by a graphic designer: Right now I am working on labelling connectors and stuff and I am quite doing that but I am thinking in the back of my mind the Blu Jacket that I am working on too and when I have an idea I write it down . . . Moonshine projects are ideal for risk-taking, which in return results in an atmosphere that could be described as a ‘designer’s playground’. Since the projects are internal to Lunar Design, failing to achieve project goals has no impact on a client’s business.
Implementing The pool of ideas and images generated at the previous stage then comprise the basis upon which different concepts are tested against the project’s requirements. This stage involves a feasibility analysis of the generated ideas that takes into consideration the potential challenges and restrictions in implementing the proposed concepts. This is the time where the participants start talking to suppliers, vendors or other companies and exploring whether they can transform their dream into reality. For instance, a Moonshine project focusing on a bike saddle resulted in a provisional patent application. Three of the world’s leading bikesaddle manufacturers subsequently expressed interest in the concept. The company is still in the process of seeking a licensee for this design.
Lessons for Practitioners: The Virtues of ‘Blue Sky’ Projects Having explained Lunar’s ‘blue sky’ process for unleashing imagination, two key questions arise. First, what do employees gain by being involved in ‘blue sky’ projects? Second, how does the company benefit from initiating these internally driven programmes? Following is
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an explanation of five of the virtues in initiating ‘blue sky’ internal projects.
Enhancing Creative Thinking No matter what the result is, ‘blue sky’ projects provide team members with opportunities to explore potentially uncharted territory thereby expanding their creativity. For instance, in the course of a discussion with an industrial designer, he explained the importance of ‘blue sky’ work to their creativity: . . . looking at moonshine is the ultimate place for creativity, total freedom, a lot of brainstorming However, although ‘blue sky’ projects are an effective way for designers to use their imagination, experiment and work on their wildest ideas, sustaining this ‘anything is possible’ climate is not always easy. An industrial designer illustrated this by noting that: The moonshine projects are another way to foster creativity. It can be harder because there are no restrictions and you must still be creative. They allow us to think about things that we do not normally think [about]
Generating New Knowledge Employees’ knowledge and experience are enhanced as the internally driven projects comprise another arena for employees to be exposed to external stimuli. The main goal of ‘blue sky’ projects is to increase external stimuli so that employees’ perspectives are refreshed and stimulated. Creativity can take many forms in society and that is why it is important for employees to be open-minded and seek for its expressions outside their particular field.
Breaking Down Stereotypes The diversity within the ‘blue sky’ projects helps to maximize employees’ tolerance threshold towards their colleagues. In Lunar’s case, Moonshine teams are cross-functional, making use of a diverse range of talents within the organization from different disciplinary groups. This means that employees participating in these programmes may work together with people from other disciplines for the first time. By being involved in a mutually exciting and challenging project, employees from the different disciplinary groups are given the opportunity to appreciate fellow colleagues’ skills and capabilities. In other words, the more employees are exposed to co-workers with different backgrounds, skills, education
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and abilities, the more likely they are to break down stereotypes and become used to the diversity in the workplace (Sutton & Kelley, 1997).
Enhancing Employees’ Morale and Satisfaction The initiation of ‘blue sky’ projects also enhances employees’ morale and satisfaction. Employees who are involved in interesting work tend to be more satisfied (Amabile et al., 1994; Mainemelis, 2001). In addition, ‘blue sky’ projects keep Lunar’s designers fresh, sharp and energized, which is highly beneficial to their clients. The Vice President of the company reflects her observations with regard to the importance of imaginative actions when she feels ‘down’ creatively: I think also Moonshine initiatives have proven to be a really good way because we have a lot of projects that come out of that, that’s proven to be a really good way to let people explore things that they interested in doing . . . Apart from enhancing employees’ morale, these internally driven projects are another way of encouraging employees’ satisfaction. Moonshine participants are thrilled to have the opportunity to frolic in the ‘designers’ playground’. A senior designer demonstrates the impact of new projects on his satisfaction. They’ve always been supporting on the stuff that I’m interested in doing and I’ve tried to respond to that generosity or mutual respect, with doing work that hopefully places Lunar in a good light, it puts us in places where maybe our day to day work won’t go. Because I’ve done a lot of outside projects, like the ‘blu’ jacket, that require mutual faith on both parts and being mutually constructive and they’ve done a great job at creating an environment where that could happen.
Building a Reputation of a Visionary Organization ‘Blue sky’ projects can help creative organizations to build and maintain a favourable reputation with their stakeholders. For instance, the Blu e-fibre jacket (one of the most successful Moonshine projects to date) was featured not only in design magazines but also mainstream consumer-oriented and businessoriented magazines, such as Wired, Conde Nast Traveller and Worth magazines. The generated publicity confirms that Lunar thrives in envisioning and creating novel objects that do not yet exist in the competitive landscape. These projects offer excellent opportunities to show
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to potential clients, or even prospective employees that the company is visionary; that it is a forward thinker, which will use staff’s imagination to forecast the trends for a particular product line or even teach them how to think creatively.
Challenges ‘Blue sky’ projects are a useful activity for mobilizing imagination towards directed innovation and identifying opportunities that companies can possibly commercially exploit in the future. There is, however, a hidden danger that employees may at some point compare ‘blue sky’ projects with client work and, hence, ‘pigeonhole’ conventional project work as mundane. If this occurs, management may therefore need to stress that the purpose of ‘blue sky’ projects is not purely an opportunity to unleash creative energy, but also an activity organized to trigger employees’ imagination about the future of multiple industries. Staff also need to be continuously reminded that the company’s central mission is client success, and that every client project demands the staff’s wholehearted focus and commitment (even if some of the projects do not provide the same creative outlets as the ‘blue sky’ projects do). In the case of a recession (like the one that many companies have experienced after 2002) or in situations where companies do not have the financial ability to fund such programmes in a free-form state (giving staff the opportunity to apply their imagination without the expectation of receiving any direct financial reward) there is probably a need for incorporating more structure to these types of activities. For instance, there may be a need to focus only on funding ‘blue sky’ projects that will enable the company to gain exposure in new markets and win awards in conceptual categories. Firms facing the aforementioned challenges would have to focus on ‘blue sky’ projects, which deliver a tangible result, for instance, by exploring relevant royalty and licensing opportunities.
Conclusions Although extant literature highlights that tapping into the power of imagination is critical for mobilizing creativity and innovation in the workplace, there is a clear dearth of empirical studies exploring processes that actually encourage imagination in the context of creative organizations. Researchers increasingly stress the importance of imagination as key to
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mobilizing individual creativity and, hence, as a building block towards sustaining organizational innovation (Appadurai, 1996). Scholars also propose that the organizational environment, the resources available and different management initiatives can mobilize or inhibit imagination in the work setting (Fitzpatrick, 2002). In our search for initiatives that aid organizations to tap into the power of imagination, this study has discovered the virtues of ‘blue sky’ projects and identified several organizational benefits in initiating and supporting such activities. Although the findings are drawn from a single case study, Lunar has been a star performer for more than one decade, achieving worldwide recognition for its foresight in multipleproduct innovation and, hence, this case study provides valuable insights on processes that can mobilize imagination in other work settings. We, however, encourage fellow academics to extend this research and examine the degree to which such processes exist in a wider context of creative companies through further exploratory studies (Miles & Huberman, 1984). This study also provides managers of creative organizations and creative individuals with useful insights on the merits of internally driven, ‘blue sky’ projects as a means of tapping into the power of imagination in their workplace. We have highlighted the key stages of Lunar’s formalized Moonshine process and encourage managers to consider the benefits, challenges and potential application of Lunar’s ‘blue sky’ projects with reference to their own organization. Although the outcome of these projects is, most of the times, conceptual in nature and (in most cases) seldom leads to commercial applications, managers should not undermine the importance of both the intellectual capital generated by ‘blue sky’ teams as well as the feeling of empowerment that employees experience when, as in Lunar’s case, they are given the space to channel their creativity in such innovative endeavours. The development of different possibilities about the future as well as the search for partners to team up with in order to translate dreams into tangible products are likely to lead to longer lasting and more rewarding jobs for staff in such work settings.
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Ainsworth-Land, W. (1982) ‘Imaging and Creativity: An Integrating Perspective’, Journal of Creative Behaviour, 16, 5–28. Amabile, T.M., Hill, K.G., Hennessey, B.A. and Tighe, E.M. (1994) ‘The Work Preference Inventory: Assessing Intrinsic and Extrinsic Motivational Orientations’, Journal of Personality and Social Psychology, 66, 950–67. Amabile, T.M., Conti, R., Coon, H., Lazenby, J. and Herron, M. (1996) ‘Assessing the work environment for creativity’, Academy of Management Journal, 39, 1154–84. Andriopoulos, C. and Dawson, P. (forthcoming) Managing Creativity, Innovation and Change. Pearson Education, Essex. Angelmar, R. (1990) ‘Product Innovation: A tool of competitive advantage’, European Journal of Operational Research, 47(2), 182–9. Appadurai, A. (1996) Modernity at Large: Cultural Dimensions of Globalisation, University of Minnesota Press, Minnesota. Assagioli, R. (1965) Psychosynthesis. Penguin Books, New York. Brann, E.T. (1991) The World of Imagination. Rowman & Littlefield Publishers, Maryland. Brown, S.L. and Eisenhardt, K.M. (1997) ‘The art of continuous change: Linking complexity theory and time-paced evolution in relentlessly shifting organizations’, Administrative Science Quarterly, 42, 1–34. Bryman, A. (1988) Doing Research in Organisations. Routledge, London. Bundy, M.W. (1927) The Theory of Imagination in Classical and Medieval Thought. University of Illinois Press, Illinois. Christensen, M.C. (1997) The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. Harvard Business School Press, Boston, Massachusetts. Clancey, W.J. (1997) Situated Cognition: On Human Knowledge and Computer Representations. Cambridge University Press, Cambridge. Cooper, R.G. and Kleinschmidt, E.J. (1987) ‘New products: What separates winners from losers’, Journal of Product Innovation Management, 64(3), 169–84. Cummings, A. and Oldham, G.R. (1997) ‘Enhancing Creativity: Managing work contexts for the high potential employee’, California Management Review, 40(1), 22–38. Daft, R.L. and Lengel, R.H. (1986) ‘Organizational Information Requirements, Media Richness, and Structural Design’, Management Science, 32(5), 554–71. Daft, R.L. and Weick, K.E. (1984) ‘Toward a Model of Organizations as Interpretation Systems’, Academy of Management Review, 9(2), 284–95. Dyer, W.G. Jr. and Wilkins, A.L. (1991) ‘Better stories, not better constructs, to generate better theory: A rejoinder to Eisenhardt’, Academy of Management Review, 16(3), 613–19. Easterby-Smith, M., Thorpe, R. and Lowe, A. (1991) Management Research: An Introduction. Sage Publications, London. Eisenhardt, K.M. (1989) ‘Building theories from case study research’, Academy of Management Review, 14(4), 532–50.
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Fitzpatrick, S. (2002) ‘The imaginary and improvisation in public administration’, Administrative Theory and Praxis, 24(4), 635–54. Glaser, B. and Strauss, A.L. (1967) Discovery of Grounded Theory: Strategies for Qualitative Research. Aldine, Illinois. Goldenberg, J. and Mazursky, D. (2002) Creativity in Product Innovation. Cambridge University Press, Cambridge. Gummesson, E. (1993) Qualitative Methods in Management Research. Sage, London. Hamel, G. (2000) Leading the Revolution. Harvard Business School Press, Boston, Massachusetts. Hamel, G. and Prahalad, C.K. (1991) ‘Corporate Imagination and Expeditionary Marketing’, Harvard Business Review, July–August, 81–92. Hamel, G. and Prahalad, C.K. (1994), Competing for the Future, Harvard Business School Press, Harvard. Hart, S.L. and Sharma, S. (2004) ‘Engaging fringe stakeholders for competitive imagination’, Academy of Management Executive, 18(1), 7–18. Jacobson, R. (1992) ‘The “Austrian” school of strategy’, Academy of Management Review, 17(4), 782– 807. Kosslyn, S.M. (1994) Image and Brain: The Resolution of the Imagery Debate, MIT Press, Cambridge, Massachusetts, USA. Kristensen, T. (2004) ‘The physical context of creativity’, Creativity and Innovation Management, 13(2), 89–96. Mainemelis, C. (2001) ‘When the muse takes it all: A model for the experience of timelessness in organizations’, Academy of Management Review, 26(4), 548–65. March, J.G. (1991) ‘Exploration and exploitation in organizational learning’, Organization Science, 2(1), 71–87. Miles, M.B. and Huberman, A.M. (1984) Qualitative Data Analysis: A Sourcebook of New Methods. Sage, Thousand Oaks CA. Pylyshyn, Z.W. (1991) ‘The Role of Cognitive Architecture in Theories of Cognition’. In VanLehn, K. (ed.), Architectures for Intelligence. Erlbaum, New Jersey, pp. 189–223. Roos, J. and Victor, B. (1999) ‘Toward a New Model of Strategy-Making as Serious Play’, European Management Journal, 17(4), 348–55. Shaw, H.J. (2000) ‘Consumer imagination, identity and Self-expression’, Advances in Consumer Research, 27, 50–6. Sutton, R.I. and Hargadon, A.B. (1996) ‘Brainstorming Groups in Context: Effectiveness in a Product Design Firm’, Administrative Science Quarterly, 41, 685–718. Sutton, R.I. and Kelley, T. (1997) ‘Creativity Doesn’t Require Isolation: Why Product Designers Bring Visitors “Backstage” ‘, California Management Review, 40(1), 75–91. Szulanski, G. and Amin, K. (2001) ‘Learning to Make Strategy: Balancing Discipline and Imagination’, Long Range Planning, 34(5), 537– 56. Thomas, N. (1999) ‘Are Theories of Imagery Theories of Imagination? An Active Perception Approach to Conscious Mental Content’, Cognitive Science, 23, 207–45.
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Valkenburg, P.M. and van der Voort, T.H.A. (1994) ‘Influence of TV on daydreaming and creative imagination: a review of research’, Psychological Bulletin, 116(2), 316–39. Yin, R.K. (1984) Case Study Research: Design and Methods. Sage, Thousand Oaks CA.
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Constantine Andriopoulos is a Lecturer at the Business School of the University of Aberdeen. He received his PhD from the Marketing Department of the University of Strathclyde in Glasgow, Scotland. His research interests include tensions and paradoxes in the creative process and the study of corporate culture in innovative work settings. Manto Gotsi is a Lecturer at the Business School of the University of Aberdeen. She received her PhD from the Marketing Department of the University of Strathclyde in Glasgow, Scotland. Her research focuses on organizational culture, identity change and reputation management within creative and services industries.
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Book Reviews Albers, Sönke (ed.), Cross-functional Innovation Management: Perspectives from Different Disciplines, Wiesbaden 2004, 518pp., ISBN 3-409-12627-9.
The book is meant as a ‘Festschrift’ to commemorate Professor Klaus Brockhoff’s 65th birthday in October 2004. The volume comprises of more than twenty articles from friends, colleagues and former academic students, and covers a wide range of aspects regarding innovation (and technology and R&D) management. The editor of this ‘Festschrift’ – one of his promoted academic students – has divided the book into seven parts. Part 1 deals with ‘Innovation and Strategy’ while Part 2 links ‘Innovation and Research & Development’. The largest section of the book – Part 3 – covers ‘Innovation and Marketing’. The linkage between ‘Innovation and Controlling and Finance’ is discussed in Part 4 of the book, followed by a chapter (Part 5) on ‘Innovation, Foundations, and Universities’. In Part 6, ‘Innovation and National Economic Performance’ are analysed. The concluding Part 7 lists all of Klaus Brockhoff’s publications and also provides information about dissertations and habilitation theses that he supervised. Almost all articles in the book are supplemented by various tables and figures and state a number of references. Each article on its own provides an excellent introduction into the respective topic. Since it is impossible to provide a detailed description of all the papers in the book – 27 in all – I will only give an overview of all the different articles published in this piece of work hoping to stimulate the reader’s interest. In Part 1 of the book six articles analyse innovation management from a strategic point of view. In the opening article of this chapter, Jürgen Hauschildt and Sören Salomo discuss the relationship between the degree of innovativeness and the success of innovations, while Hans Georg Gemünden provides a comprehensive overview on the research on innovation networks. The question on how to protect innovations successfully is highlighted by Gerhard Schewe in his article ‘On Barriers to Entry in Innovative Markets’ (p. 55). Innovation processes in a specific field, pharmaceutical companies, are analysed by Hartmut © Blackwell Publishing Ltd, 2005. 9600 Garsington Road, Oxford OX4 2DQ and 350 Main St, Malden, MA 02148, USA.
Kreikebaum. He argues that the set up of ‘a flexible organization is a prerequisite for successful innovations strategies’ (p. 73). Santiago García Echevarría focuses on the impact of IT technologies on innovative companies. In the concluding article of Part 1, Arnoud de Meyer and Sam Garg reveal some preliminary findings concerning the influence of a specific context (geographically speaking) on the management of innovation, focusing on East and South Asia in their paper. In Part 2 of the book, two articles link innovation with R&D. Hans-Horst Schröder points out that ‘many companies today are confronted with a widening gap between the actual information available and the data containing potential information’ (p. 136) and therefore he introduces a new system that – based on knowledge discovery in databases – provides early information on upcoming technologies. Ramayia Balachandra’s article deals with recent advances in R&D and new product development projects. Under the heading ‘Innovation and Marketing’ (Part 3) nine articles discuss this junction from different angles. Henrik Sattler reports on the usage of conjoint analysis in new product development and confirms his findings with empirical data by a recent survey he has carried out. Vithala R. Rao discusses bundles of multi-attributed items, bundles being ‘a subset of items offered in a single package, each of which is described on a number of attributes’ (p. 178). His paper focuses on modelling bundle perceptions, bundle preferences and bundle choice. ‘Virtual Customer Integration’ (VCI) is the title of the article submitted by Holger Ernst to the ‘Festschrift’. He identifies several key advantages of VCI. In order to make full use of these advantages management should follow five fundamental principles. The background and components of customer relationship management (CMR) and its contribution to successful innovations are explained by Manfred Krafft and Katrin Krieger. They identify CMR as a useful concept ‘to systematically identify interesting innovations, increase success of innovations
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projects and improve innovation management’ (p. 222). Bernd Skiera and Martin Spann link virtual stock markets to new product development. Based on data they have gathered they conclude that virtual stock markets have the potential to support the new product development process. Sönke Albers, the editor of the ‘Festschrift’, introduces a new method – based on analogue innovations – for forecasting the diffusion of a product prior to launch. Under the heading ‘Marketing-Mix and New Product Diffusion’ (p. 259) Heiko Kay Xander has written a review article on the diffusion research carried out at the University of Passau under Helmut Schmalen, Klaus Brockhoff’s first academic student. Unfortunately Helmut Schmalen died in 2002, and this article is meant to acknowledge his contributions posthumously. Ursula Weisenfeld uses genetically modified food as an example when she elaborates on ‘Risk, Innovation and the Diffusion of Innovations’ (p. 277) and differentiates between attraction and avoidance characteristics of products. She concludes that ‘in an avoidance world, signaling to change the perception of a single characteristic involves addressing the risk associated with that characteristic’ (p. 291). Cornelia Zanger, Martin Kuder and Hansjörg Gaus present the results of an empirical study on the attitudes of different customer segments along the life-cycle of a product, using a car as a model. Part 4 links ‘Innovation and Controlling and Finance’. Reinhart Schmidt presents in his piece of work some results from a study focusing on ‘Corporate Governance and Product Innovation’ (p. 311), while Peter Witt analyses the relationship between corporate venture capital and external innovations. The role, function and potential contribution of ‘the controller’ in a company to an innovation process is discussed by Jürgen Weber and Eric Zayer. They describe the controller as a ‘highly specialized employee who works as a supporting and challenging counterpart to the manager to ensure economically sound decisions . . .’ (p. 350). One of the contributions (amongst others) identified by the authors is that on the process level the controller can serve as a co-ordinator and promoter of the respective innovation. Therefore it is suggested that ‘controllers be integrated in innovation processes to a larger degree’ (p. 364). Thorsten Teichert presents a bibliometric analysis in his article on ‘Mapping Research in Innovation Management’ (p. 369) which opens up Part 5 of the book – ‘Innovation, Foundations, and Universities’. He focuses on articles from the journal Research Policy and extracts a number of factors representing ‘seven research streams [which] can be set apart for Research
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Policy as a result of this co-citation analysis’ (p. 377). Günter Fandel and Steffen Blaga look at the production process at universities with students being input and output factors while Wilhelm Krull discusses the role of private foundations in innovation processes. He points out that foundations can play a major role in these processes in a number of ways: ‘By encouraging risk-taking, by stimulating new developments, redressing imbalances, creating role models for an effective change of research strategies or institutional structures, and by contributing to the creation of a more research-friendly society’ (p. 419). Heribert Meffert looks at ‘Innovation in Non-ProfitOrganizations’ (p. 423) using the example of an operating foundation. He stresses the importance of foundations as initiators in societal innovation processes. Part 6, ‘Innovation and National Economic Performance’, consists of three articles. Heiner Müller-Merbach elaborates on appropriate indicators for national economic performance, while Alok K. Chakrabarti and Mark P. Rice look at the ‘Changing Roles of Universities in Developing Entrepreneurial Regions’ (p. 453), using Finland and the USA as examples. In the concluding article of this section, Ashok K. Gupta, G.L. Tembe and Manjulika Koshal take India as an example when they discuss industry interaction with publicly funded R&D laboratories from an industry point of view. The final part of the book (Part 7) contains two very impressive lists; a register of all of Klaus Brockhoff’s publications (covering 23 pages), and a compilation of dissertations and habilitation theses that have been completed under his supervision. In my opinion this ‘Festschrift’ provides not only a valuable insight into a number of different perspectives that are all related to innovation management in its broadest sense, but the book also pays tribute to an outstanding researcher (and inspiring teacher) whose merit it is to have made innovation management (as well as technology management and R&D management) popular in Germany. I recommend this book to all researchers and managers engaged in the field of innovation (and technology and R&D management), as this edition also provides a comprehensive overview on the many different research streams in the area that have been stimulated by the work of Klaus Brockhoff. Dr. Astrid Hunck-Meiswinkel Chair of Marketing & Technology Management Universität Lüneburg
[email protected]
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Kelley, Tom, (with Jonathan Littman), The Art of Innovation Lessons in Creativity from IDEO America’s leading design firm, Doubleday New York, 2001, 307 pp with index, ISBN: 0-385-499-84-1 Remember the all-time classic, The Management of Innovation, by Burns and Stalker (1961)? Remember their famous description on the organic firm and find in Kelley’s book a vibrant and modern example of the organic firm and the principles of such firms in American society. Kelly (1955) is general manager of IDEO a famous American design firm founded by his brother Tom in the early 1970s. The book is all about this firm where innovation is the life and blood of the organization. The book uses the term innovation basically for the N(ew) P(roduct/or service) D(evelopment) process and in 13 chapters and 297 pages this process and the IDEO way of handling it is described. The text is written in a colorful way full of anecdotes, examples and beautifully designed and illustrated as the reader will expect from a leading design firm. Noblesse oblige. In the massive load of examples and best practices the authors cover basically a fivestep approach (or methodology as they call it) to the NPD process. 1. Understand the market, the client, the technology . . . 2. Observe real people in real life situations . . . 3. Visualize new-to-the-world concepts . . . 4. Evaluate and refine the prototypes in a series of quick interactions. 5. Implement the new concept for commercialization. These basic steps are lined out in the first chapter, and then the following 11 chapters illustrate the process and the IDEO way of handling it. The last chapter wrappes everything neatly up and provides the reader with an excellent summary on page 296: • Watch customers – and no customers – especially enthusiasts. • Play with your physical workplace in a way that sends positive ‘body language’ to employees and visitors. • Think ‘verbs’ not ‘nouns,’ in your product and service offerings so that you create wonderful experiences for everyone who comes into contact with your company or brand. • Break rules and ‘fail forward’ so that change is part of the culture, and little setbacks are expected. • Stay human, scaling your organizational environment so that there’s room for hot groups to emerge and thrive.
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• Build bridges from one department to another, from your company to your prospective customers, and ultimately from the present to the future.
Advantages of the Book The book is a great story on a great design firm. It is filled with charming examples of how an innovative climate can be established. It is a very good introduction into the reality of an organic firm. The (close) reader will at least pick up ten inspiring ideas that will directly work in their own organization. It is indeed a book for inspiration on how to make the NPD process work.
Limitations of the Book Tom Kelley and IDEO live a true American way of life: work hard and play even harder. Have fun and give energy, much energy, so much energy that a European may get exhausted by the sheer number of examples and case stories, of which I counted over 190. By the way almost all are success stories. My rough counting came to nine failure cases, most of them not by IDEO but by others. One of the few IDEO examples of failure ‘ended up in the permanent collection of New York’s Museum of Modern Art’. Somehow this seems not very realistic regarding the elsewhere as ‘normal’ reported mortality rate in NPD. Another example of the American based content of the book is where Kelley easily shifts from IDEO’s basic business model (providing good designs) to another (producing and selling our own product) while cannibalizing the former product of a (former?) client. Such a shift usually will lead to the ending of a design firm when it is based in Europe.
Recommendation Over 190 cases and anecdotes seems to be a lot for an author who advocates ‘one click is better than two’ as one of the ten great rules for creating great products and services. But why care? The book gives us a description of IDEO and thus cannot be else than: beautiful, rich and messy. Read it and get inspired. Han van der Meer University of Twente and EACI
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Hemlin, Sven, Allwood, Carl Martin and Martin, Ben R. (eds.) (2004) Creative Knowledge Environments: The Influences On Creativity In Research And Innovation, Edward Elgar Publishing, ISBN: 1843765187
As in my current research activities I am interested in the way in which the physical environment (e.g. the design studio) can support creative design processes, it was quite exciting to review a scholarly book that directly addresses the issue of the ways in which the environment can influence creative processes in research settings. The need for creativity in contemporary research evidently requires research environments that are substantially different from the traditional research environments. Creative Knowledge Environments is set up as a traditional research-oriented book: an introduction setting up a framework for the study of creative knowledge environments, then a series of chapters dealing with empirical work (both qualitative and quantitative studies) on issues that concern creative knowledge environments. These empirical contributions are organized in two parts: Part 1 deals with the micro level, concerning the direct working environment of the researcher, and Part 2 deals with the meso- and macro levels, concerning the characteristics of the institution, the region and even the country. Then, the editors summarize the findings by making an attempt to move from the largely descriptive accounts in the empirical chapters, towards some more normative conclusions, regarding how creative knowledge environments can be stimulated. In the introductory section, Hemlin et al. develop a substantial theoretical framework, providing different ‘lenses’ through which the creative knowledge environment can be observed. One of these is that there are three aspects to creative knowledge environments: the physical environment, the cognitive environment and the social environment. Another guiding theme appears to be the ‘triple helix’ perspective, meaning that creative knowledge environments can be situated in academia, industry and government. This triple-helix perspective is used throughout the book. The main assumption is that especially hybrid forms in which, for instance, industry and academia team up, appear to be conducive to the creative knowledge environment. The authors also attempt to organize the creative knowledge environment in three dimensions: In addition to the type of creative knowledge environment, which follows the lines of the triple helix model, the authors identify the scale and the stage in the task process. Evidently,
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the scale of the environment is relevant, as there are large differences between the direct environment of the individual researcher and the overarching environment for creative research on the country level. The third stage in the task process dimension refers to typical stages in an innovation process, such as problem analysis, idea generation, development, and evaluation and selling. The emphasis on different stages influences the needs in the creative knowledge environment. Personally, I think this dimension oversimplifies the processes that take place in such environments. I prefer to refer to activities rather than stages, to reduce any traces to the oversimplified linear process models. As most creative knowledge environments embody all these activities, albeit in different mixes, these environments need to encompass the potentially conflicting different requirements of these various activities. According to Hemlin et al.: ‘Creative knowledge environments are those environments, contexts and surroundings the characteristics of which are such that they exert a positive influence on human beings engaged in creative work aiming to produce new knowledge or innovations, whether they work individually or in teams, within a single organization or in collaboration with others’ (p. 1). This is a pretty broad definition, which provides some problems for the coherence of the book. Even though the editors make a brave attempt to define ‘creative knowledge environment’ as a whole, they hesitate to make a clear specification of what constitutes ‘creative knowledge’. In the contributions, and even the editors’ own discussion on how to stimulate a creative knowledge environment, it remains unclear what knowledge can be regarded to be ‘creative knowledge’ and what knowledge is just ‘knowledge’. This confuses the discourse to such extent that even the editors themselves use ‘knowledge creation’ and ‘creative knowledge’ interchangeably (p. 207). In their suggestions for further research Hemlin et al. do acknowledge this problem, but especially in the chapters on meso- and macro level creative environments, the hesitation to demarcate the ‘creative’ environment from the ‘regular’ environment, makes for a lack of focus in the empirical contributions. One example is a chapter dealing with a bibliometric review of research collaboration in Latin America. To me, the productivity (in publications) and the
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BOOK REVIEWS
amount of authors involved in these publications, do tell us something about productivity through collaboration in research, but the extent to which this contributes to our understanding of creative knowledge could have been made more clear. Another example is a contribution on the ‘industrial doctoral student’, which is based on interviews with doctoral students operating in different kinds of organizations: research environments, engineering environments, and consultant environments. This paper does contribute to the understanding of the experiences and learning of PhD students that are immersed in professional organizations, but it is less clear how this is something that specifically relates to the creative knowledge environment. All in all I have learned quite a bit from reading the book. The introduction in particular is well-written and gives an extensive overview on the theory on creative knowledge environments. Even though the editors state that ‘There are few if any relevant studies on the physical environment and its influence on creativity and innovation’ (p. 16). The book, especially on the micro-level descriptions, provides a good framework from which the design of the physical creative environment can be accessed. Nieminens’ chapter on ‘changing academic research environments and innovative research’ should be mentioned, where he addresses how the current organizational set-up of most universities do not meet the demands of the dramatic changes that have taken place in the academic research environment. While the traditional research institutions are set up to nurture fortresses that protect mono-disciplinary bodies of knowledge, the modern research environment
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requires strong collaboration between disciplines. Nieminen argues that an alternative set-up of the research institution is long overdue. The studies described in the part on the creative meso- and macro environments, although somewhat scattered, do provide sufficient interesting material to ponder. The chapter on differences in creative research activities between the UK and France (and Germany) by Kaiser was especially interesting. According to Kaiser, English researchers tend to switch jobs regularly, which leads to dynamic network building and strong external orientation for soliciting knowledge. At the same time, this may lead to a lack of commitment. In contrast, in France, there is a stronger commitment to stay within one institution. This leads to stability and more long-lasting external relationships. The other side of this may be a lack of openness to new sources of knowledge. This chapter did provide me with a better understanding of the parties that I collaborate with in my research. All in all, Creative Knowledge Environments provides a courageous attempt to get a grasp on a slippery and broad subject. It does not quite succeed in delivering a comprehensive overview of the creative knowledge environment, and it would have been very helpful if the authors of the empirical chapters had abided to Hemlin et al.’s framework and organized their findings accordingly. However, notwithstanding this limitation, I still find myself turning to this book for reference, and using it in discussions on a regular basis, which to me, is a clear sign of its value. Remko van der Lugt Delft University of Technology
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