Welcome to Week 5!
This week, we will explore ways to increase the innovation of an organization.
For many technology-driven organizations, the ability to innovate is an important core competency. While in the short-term, the price and performance of a company’s products are the fundamental drivers of its competitiveness, in the long run, competitiveness is based on the ability to innovate.
This week, we will look at ways a company can stay ahead of its competition by increasing its ability to innovate. To do this, we will need to develop an understanding of the impact of size and structure on a firm’s ability to innovate and implement new technologies, and we will investigate how different dimensions of organizational structure affect a firm’s ability to innovate.
This week, we will also look at the factors that determine whether or not collaboration is the optimal strategy for an organization. Some of the types of collaboration considered include strategic alliances, joint ventures, licensing, outsourcing, and collective research.
Given an organizational context, develop a plan to increase the innovative capabilities of the organization both through collaboration strategies and internal innovation.
Given an organizational context, develop a plan to increase the innovative capabilities of the organization through both collaboration strategies and internal innovation.
Identify and explain the various forms of collaboration and the tradeoffs associated with each of them.
Determine the factors that are crucial to a successful collaboration.
Analyze the unique factors that affect the choice of organizational structure in multinational organizations.
Evaluate the impact of size and structure on a firm’s ability to innovate and implement new technologies.
Identify how different dimensions of organizational structure affect a firm’s ability to innovate.
Design and Management Systems for Corporate Innovation
Introduction | Size of the Organization | Structure of the Organization | Ambidextrous Organizations | Collaboration Strategies | Advantage of Collaboration
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One of the most important decisions a company has to make is deciding the right size and structure of the company. Is big better than small? Is formal better than informal? How big is too big, and when is too much formality too much? Obviously, each organization will be different, and it is likely that the same organization might need to change depending on the situation it finds itself in.
Size and structure impact the organization’s ability to innovate and effectively implement technology in ways that do not always make the selection of the best organizational structure obvious. While a larger firm may have the advantage of economies of scale in R&D and better access to complementary resources, its size could easily create an organization resistant to change and lacking in entrepreneurial incentives. One way for large companies to overcome the problems associated with being large is by organizing into small divisions to capture the advantages of a small entrepreneurial firm in each unit. However, as you can imagine, this would create its own problems.
Companies also have to decide how much formalization, standardization, and centralization they need in order to innovate effectively. Formal structures that use standard rules to guide employees can make the firm operate more smoothly with fewer managers but can also result in an organization that is slow to accept change and stifles creativity. Centralization offers the advantages of economies of scale and coordination of efforts between divisions but can also result in solutions that do not work well in diverse departments and missed opportunities for learning from the diverse knowledge available throughout the firm.
The answer seems to be a balance between the big and small, formal and informal. Organizations that find this balance are said to be ambidextrous. Ambidextrous organizations attempt to take advantage of the efficiencies resulting from a mechanistic structure (emphasizing formalization and standardization), and the creative energy generated in an organic structure (with little formalization and standardization). Improvements in information technology have enabled firms to create loosely-coupled networks, using structures appropriate to each division’s function, to obtain the best results from each.
Size of the Organization
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Even if it is not obvious, a great deal of research supports the notion that organizational structure and its use of rules, standardized procedures, and controls can have a bearing on an organization’s ability to generate innovation.
While small, flexible structures are thought to be best suited to idea generation, and structures with well-developed procedures and standards may engender better investment decisions and more efficient implementation. Some have disagreed. In the 1940s, Joseph Schumpeter promoted the idea that large firms would be better innovators.
Schumpter believed this because larger firms have:
Greater access to financing
Larger sales volume over which they can spread fixed R&D costs
A higher likelihood of having complementary activities like marketing and financial planning
Greater access to global sources of information and other resources
Greater efficiencies gained through economies of scale and experience
Access to better research equipment and personnel
An ability to select projects more appropriate to their capabilities and those with higher rates of success due to greater development experience
A greater ability to absorb the risks associated with innovation efforts
The story is not all positive, however, because large firms experience decreased R&D efficiency if managerial control diminishes, and they may not be able to maintain R&D staff incentives because R&D staff does not directly receive much of the return on their innovations. They also often have multiple levels of authority that can make firms less nimble and responsive to change, and they may experience disincentives to change because of the risk it poses to existing cash flows.
Small firms are often more flexible and entrepreneurial because they do not have the burden of a large bureaucracy or large investments in fixed assets. These firms often have shorter development cycles and a sharper focus because they have much more limited resources than larger firms. Firms often obtain the advantages of a small firm by creating virtual or modular organizations by disaggregating, or breaking into smaller, specialized divisions or separate businesses.
Structure of the Organization
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Just as size is important, so is structure. Research has proven that a firm’s ability to be an effective innovator is influenced by the degree to which its structure is formalized, standardized, and centralized.
3M’s experience with structural change in support of its R&D efforts is a good example of this. The textbook has a good description of what 3M did in the Theory in Action section of chapter 10.
Formalization is the extent to which firms use rules, procedures, and written documentation to regulate the behavior of employees or activities. While a formal structure may reduce the need for managerial oversight, it is likely that a rigid structure will stifle creativity and leave employees feeling that they have neither the authority nor the incentive to generate new ideas.
Standardization is the degree to which activities are performed in a uniform manner. Standardized activities can keep the firm running smoothly and ensure product quality but also may stifle innovation by limiting creativity and discouraging experimentation.
Centralization describes the degree to which decision-making power is held by a few individuals at the top of the organization. Centralization enables the firm to impose change from above, which can be particularly important if change is large-scale or needs to be deployed with great consistency across the organization. For example, in the late 1980s, Intel realized that due to the rising complexity and information processing demands in the semiconductor industry, its decentralized process development (which was scattered across diverse business groups) was resulting in serious delays and cost overruns. In the 1990s, Intel centralized all process development, giving a single fabrication facility full responsibility for all new process generation. This development group would have maximum development resources (the highest in the industry). Once a new development process was completed and tested, it was replicated (in a process known in Intel as “copy exactly”) in all of the company’s other fabrication facilities.
Decentralization enables innovation to be more closely aligned with each division’s needs and to increase the likelihood the innovation will fit within the operating structure of the firm and meet the needs of the division’s customer base. On the other hand, using a decentralized structure runs the risk that divisions will perform redundant R&D activities and that the benefits of a new technology may not be fully disseminated throughout the firm. The advantages of decentralization tend to accrue more readily to consumer products companies, whereas the advantages of centralization accrue more readily to electronics companies, for example.
Mechanistic and Organic Structures benefit firms in different ways. Mechanistic structures (high formalization and standardization) are best used when an organization’s aim is operational efficiency, whereas an organic structure (low formalization and standardization) will do a better job if the goal is to foster innovation.
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Ambidextrous organizations use a mechanistic structure to manage existing product lines and an organic structure in the parts of the organization that are focused on innovation (e.g. R&D), and thereby attempt to have the best of both worlds. For example, USA Today found that the print newspaper division required a more mechanistic structure while the online version of the paper needed the flexibility of a less formalized structure. Apple also experienced the need for less formality in the development of the Macintosh in order to pursue its goal of “out-innovating” Microsoft.
If large firms adopt multiple structures, or if they make use of quasi-formal structures that are appropriate to each task, they can offset the negative effects of size on innovation.
Modularity and “loosely-coupled” organizations are another way to describe the structure of organizations. Modularity defines the degree to which a system’s components may be separated and recombined and is facilitated by the specification of standard interfaces. By incorporating modularity into product design, firms can simultaneously achieve the benefits of flexibility and standardization. Good examples are IKEA and Sony.
Modularity can also be applied to organizational structures. For example, development and production groups can work independently by first agreeing ahead of time to a development plan and a set of standardized interfaces. A modular structure is not recommended when the sharing of complex knowledge or intensive coordination is required.
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An important way to increase the innovative capability of an organization may be to collaborate. However, in order to determine whether or not collaboration is the optimal strategy for an organization, many different issues need to be considered. Some of those issues are addressed in the following questions:
Are the necessary resources available?
Can you take the risk that collaboration will expose proprietary resources to expropriation?
Can you exercise the level of control required over both the development process and the future development of the resulting technology?
Is there an opportunity for the firm to develop capabilities or access another firm’s capabilities in the collaboration?
When looked at in total, it is clear that for a collaboration to be successful, a firm must consider both the resource and strategic fit of its potential partner.
If the partner is desirable on these dimensions, the firms must develop an agreement that includes clear and flexible monitoring and governance mechanisms (including evaluation and enforcement) to ensure both partners understand their rights and obligations.
Whether to perform activities in-house or with partners is a difficult decision for firms, but the reality is that a significant portion of innovation comes from the collaborative efforts of multiple individuals or organizations.
Collaboration requires the firm to relinquish some degree of control over a technology’s development, share the financial returns, and expose a firm to the possibility of malfeasance by its partner. On the upside, collaboration also lowers the costs and risks associated with the development of a new technology.
An important question that must be considered when looking at collaboration strategies is the following: Why would a firm develop a technology on its own instead of collaboration with a partner? The answer is fairly straightforward. A firm may go solo if it possesses all the capabilities and resources in-house that it needs, if the development of the new technology is an opportunity to develop new competencies, if the risk of transferring knowledge to a partner is too great, if the firm wants to control the subsequent trajectory of the technology’s development, or if an appropriate partner is not available.
Monsanto, developed on its own, is a genetically-modified soybean seed that could be used in conjunction with Roundup, an herbicide. They had to go solo because the biotechnology industry was in its infancy; there were no appropriate partners to supply the technology. Monsanto turned the need to develop this capability in-house into an opportunity to make biotechnology its strategic focus.
Honda Motors not joining the Alliance of Automobile Manufacturers is an example of a company that went solo because they wanted to retain control over the development process (and the profits), and because the company’s culture emphasizes independence and self-reliance.
Boeing considered going solo because they knew they needed to create a new airplane every 12 to 15 years to transfer the skills and experience necessary to do so onto the next generation of employees.
Advantage of Collaboration
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Collaborating can provide a firm with the needed skills or resources faster than developing them on one’s own. Using the skills or resources of a partner can help a firm reduce its asset commitment (and avoid a large investment in a technology that may become obsolete quickly), and enable it to be more flexible, an especially important feature in markets characterized by rapid technological change. Collaboration can also be an important opportunity for the firm to acquire new knowledge, either through the transfer of knowledge between development partners or through the more efficient creation of new knowledge as a result of the collaborative efforts. Collaboration may also be advantageous if it results in the creation of a shared standard. Where compatibility and complementary goods are important to the commercialization efforts of a new technology, collaboration at the development stage can bring about cooperation at the commercial stage.
In 1997, Nokia, Motorola, and Ericsson formed a nonprofit corporation, the WAP Forum, whose purpose was to establish a common wireless telecommunication format and to prevent multiple competing standards. The forum merged with the Open Mobile Architecture initiative to form the Open Mobile Alliance (OMA) in 2002. By early 2003, more than 200 mobile operators, equipment producers, and software developers had signed on to the standard.
IBM, Apple, and Hewlett Packard were not as fortunate with their joint venture, Taligent. Taligent was formed with the intention of developing and promoting an operating system that would replace Microsoft Windows. Despite an investment of $50 million and a three-year commitment, the venture failed to meet the expectations of the partners and was dissolved.
The factors determining a company’s optimal strategy include whether there are barriers to imitation, capable competitors, complementary goods available, and whether or not the firm is able to produce the technology and complementary goods (if necessary) in-house. Charles Hill derived four strategies based on these factors: aggressive sole provider, selective partnering, passive multiple licensing, aggressive multiple licensing, and outsourcing.
III. Discussion Grading and Follow-up Topics
Remind students about the Discussion Grading Policy for this class as an announcement or in an early discussion posting.
A. Benefits of Collaboration
If a firm decides it is in its best interest to collaborate on a development project, how would you recommend the firm to choose a partner, a collaboration mode, and governance structure for the relationship?
How does the mode of collaborating (e.g., strategic alliance, joint venture, licensing, outsourcing, collective research organization) influence the success of a collaboration?
Identify an example of collaboration between two or more organizations. What were the advantages and disadvantages of collaboration versus solo development? What collaboration mode did the partners choose? What were the advantages and disadvantages of the collaboration mode?
B. Innovation Activities
Are there particular types of innovation activities for which large firms are likely to outperform small firms? Are there types for which small firms are likely to outperform large firms?
What are some of the advantages and disadvantages of the transnational approach advocated by Bartlett and Ghoshal?
What factors should a firm take into account when deciding how centralized its R&D activities should be? Should firms employ both centralized and decentralized R&D activities?