Foundations of managenemt

Innovating frequently poses considerable challenges for large firms. Identify the types of innovations that typically pose the greatest challenges for large firms, and discuss why these types are usually so challenging. Discuss how managers may attempt to address these challenges.

When you are through changing, you are through. ~Bruce Barton. As said and proved change is inevitable, technology is changing everything; including the way the change is changing itself. In such ever evolving state of rapid technological advancements, we are witnessing phenomenal change in the products, equipments and also their production techniques. From the days of tape recorders to days of digital music, from the days of mainframes to laptops, every field has seen a significant change in the products, processes, distribution and marketing. If one were to define innovation as creation, development and implementation of a product, process or service with an aim of improving the effectiveness of a particular function and improve efficiency, then it should be quite obvious that many firms should devote a significant part of their resources to R&D. Ironically, firms are not very open to innovation of every kind. This poses an important question that we are going to address below; why wouldn't every major firm invest considerably in R&D or simply why are not all the firms pro innovation? (As many researchers have explained this phenomenon as "Inertia to change"). To begin with, I would attempt defining the various types of innovation and the prevalent features of each of these. Secondly I will put forward the impact of each of these on firms and identify certain specific kinds of innovations that pose severe challenges to the large bureaucratic organisations. Following this we would examine a few social, organisational, economic and cultural factors that could hinder creativity at individual level and innovation at organisational level. Lastly, I would discuss how far will "open innovation" nullify the challenges and aid Innovation at Organisational level.

The invention of many devices, that have now become an indispensable part of our lives have been brought to life by the pool of R&D units across America .Ethernet, GUI(Graphic user interface) and many other hardware technologies are brain child of Palo Alto Research centre and other early research centres. Research and development centres emerged in late 19th century and became widespread in 20th century. These centres were often considered as a valuable strategic asset as they enhanced the current product and process technology and thereby strengthening the firms position attempting to establish niche in the market (Chesbrough 2003).The statistics on the OCED state that an average US firm spends about 3.5% of revenue on R&D further stresses the importance given by firms to R&D (OECD 2008). Though it is quite explicit and understood that innovations of every sort are important to firms and markets to improve efficiency, it has never been clear as to why firms are reluctant to face innovation. Hence, it would be a better move to understand how these technological advancements impact the firms. Classification as always would help us get a better focus on how these different innovations impact firms. Initial classification of innovations was largely based on the subject of innovation i.e. process innovations, service innovations, product innovation and business model innovations. However, each of these can be further segmented to incremental and radical. Where, incremental introduces minor changes to the existing product and exploits the potential of the established design (Nelson and Winter, 1982; Ettlie, Bridges, and O'Keefe, 1984; Dewarand Dutton, 1986; Tushman and Anderson, 1986) and radical, in contrast is design of new product/Process by new scientific engineering and with new potential applications. Following the traditional categorization, Gatignon and his colleagues have put forth an unambiguous and methodical classification of innovations. This structural approach distinguishes innovation based on product complexity (number of subsystems), locus of innovation (core or peripheral), types of innovation (incremental or radical) and its characteristics (competency enhancing or competency destroying).

Another significant contribution to the classification is introduction of architectural innovation. Classification here is by means of product, its components and the ways they are integrated into a system and is an addition to earlier classification of incremental and radical. Architectural innovation is often defined as the reconfiguration of established system to link together existing components in a new way (Rebecca M. Henderson 1990).Hence, with many approaches to analysis of innovation, I put forth my understanding of innovation; Product, process, service and Business model can be categorised as both Incremental, Radical and architectural. The radical and incremental in turn can be categorised as competence enhancing or competence destroying. Competence enhancing and competence destroying are rather characteristics of innovation and are used to describe a firm's commercial success in the market.

Though the categorisation does make it simple to understand the influence of each of these innovations on adaptability, but all this subcategories do not have the same influence on the firms. The variations of these effects are rather an interesting paradigm to study. The incremental is often associated with competency enhancing as they reinforce the existing competencies, effect peripheral systems rather than the core systems (Gutton at all 2002) and still evade the existing customers and markets. But on a different note radical and architectural innovations can be both competency enhancing and destroying. Radical innovations always disrupt an existing technological trajectory; face a degree of newness and certain degree of uncertainty to achieve the required customer demand (Clayton M. Christensen and Joseph L. Bower). Another major distinction between the three different kinds essentially is the degree of difficulty in adapting to the innovation by the firms (Henderson at all), which identifies those innovations that pose the greatest challenge for large firms - i.e. Architectural innovation and Rapid innovation. To discuss why these two types of innovations are so challenging we need to examine the characteristics and various economic, cultural, organisational and strategic factors that inhibit firms to innovate.

Economic factors:

  1. Significant fixed costs: Established firms have a fixed knowledge of channels, filters, processes and strategies. Though the organisations often want to adapt to the new technologies by altering or removing the existing channels or by adopting new strategies may incur high fixed costs (Henderson et all) as many firms would have already had established and sustained methods of production, designing and distribution.
  2. Costs of Commercialisation: The ultimate goal of any firm, if not explicitly stated would be "profits" or "commercial success". Also established firms would have worked their way for decades to capture the markets in which they can target their products and services (Christenson at all). The costs of commercialisation of a product in the existing markets are yet another reason why the incumbent firms generally intensify their commitments to conventional technology and not pursuing a new technology and thereby giving the new firm attacker's advantage.
  3. Bounded rationality: For most of the managers who have to take crucial decisions on the acceptance of an innovative technology and hence allocate resources need to be completely aware of the risks, rewards and returns. However due to uncertainty for the new technology in the markets and information asymmetry, often biases managerial decisions against the pursuit of a new technology. However, many of the entrant firms willing to risk often create a new market for disruptive technologies and innovations.
  4. Lower profit margins: Most of the disruptive technologies have low profit margins in the initial stages of introduction into the market. These low profit margins are seen as unhealthy and non lucrative to the most of the large firms and hence they do not venture out into the new unconventional markets.

Organisational factors:

  1. Organisational structure: Post Taylorism and scientific management, many organisations have been well defined and structured (as hierarchy) with top heavy management for systemisation and simplification of tasks, the routes of communication were well defined and communication across the wrong channels prohibited (Taylor, F.W). However, organisation structure should be redesigned for free flow of information across the teams and individuals for incorporating innovation across the organisations process (Doughherthy and hardy) but for continuous innovating might always require continuous organisational rearrangements which may not suit the organisational schema or strategy. Incremental innovation often requires very less or no organisational structural changes unlike rapid/disruptive innovations. Fluid organisational structures can ingrain the successive evolution of disruptive technology though they are trajectory disrupting changes. If it is true that innovations are essential, and fluid structures are essential to sustain innovations, Is adhocracy this generation's organisational mantra?
  2. Inconsistency with strategy: Strategy is often defined as an organisation's plan for its future and evaluation evolved patterns out of its past (Mintzberg), Firms often devise strategies or course of actions to reach a goal. However, their course of action need not be constant for a significant period of time. Most of the times firms strategic attention span is shorter than the development time of innovation. In such cases the firm does not value innovation and the innovation plan is often said to be inconsistent with the strategy of a firm. The inconsistencies are most prevalent in disruptive and architectural innovation as incremental are often designed or subjected to be in alignment with the current processes expertise and strategy to build on the existing competency of the firm.
  3. Culture of an organisation: Organisations are the places where every situation is highly structured and where employees and senior managers feel threatened by uncertainty in the organisation. Most often the problem solving techniques are also regulated and charted out for the sake of avoiding uncertainty, risk and conflict (Christina E.Shalley 2004).Infact many organisations do not foster an environment where creativity is encouraged and rewarded. Moreover, this rigidity of an organisation shapes the cultural dimensions (values, beliefs and attitudes) of the people. Interestingly, in attempting to keep away from conflict and uncertainty, managers play a critical role in hindering creativity and in turn innovation. Autonomy, not rigid rules is the solution to the problem of curtained creativity at every level of an organisation. However, Managers often face a dilemma to choose between Autonomy and rigidity?. Ideo (design and innovation firm and an example drawn to show how autonomy fosters innovation) unlike many firms allows a great degree of flexibility. Ideo concentrates on the gaps (structural holes) in the information between industries and brings in solutions for potential use in projects (Burt 1983, 1992). They welcome any kind of innovation; be it disruptive, incremental or architectural. Most of these innovations are not shredded away( though they disrupt the existing track) and are stored in the organisational memory until some project that comes up that might benefit from the design (Nelson and winter 982).This flexible culture of an organisation aids flourishing technology and innovation by formal and informal organisational routines.
  4. Manager's commitment to Innovation: As principal agent theory suggests, managers are often risk averse and don't attempt to maximize risk to get great profits. Also, agents are career committed and lend impetus only if a project enhances their career profile. A unsuccessful project or commitment can induce negativity to their career. Hence managers prefer picking up projects and also support only certain kind of innovation as career costs can often demoralising and put them in an disadvantageous position. Hence, Managers pick up the incremental technologies that help them stay competitive within the existing technology trajectory (Christensen et all) and not the disruptive technologies that enable them to capture new markets.

External factors:

Customers: "Customers place stringent limits on the strategies firms can and cannot pursue"- Christensen. Large firms are mostly customer sensitive, market driven and concerned about the customer needs and hence these three factors significantly impact the resource allocation, which precedes innovation (resource allocation is most important factor for innovation to occur). Firms fail to allocate resources when they fail to reach or address the needs of existing customers. When the initial performance of a new emergent innovation/technology opens up new emergent market segments and not with current customers, managers often deny resources to such technologies. Hence large bureaucratic firms embark and develop new disrupt technology only when there is a certain significant customer demand for the product and reasonable market to have a sustainable success. In more simple terms, "Programs addressing the needs of the firms most powerful customers almost always pre-empted resources from the disruptive technologies whose markets tended to be small and where customers' needs are poorly defined"- Christensen. Further, Christensen stated a six factor model that describes the factors affecting the resource allocation across proposals to develop sustaining technologies Vs disruptive technologies which strengthens importance of customer market.

Juxtaposition of both the factors that challenge and foster innovation will give a better picture of how innovation is perceived in large firms. There are enough factors/Forces that aid innovation and determine the necessity of innovation in firms. The Porter's forces that shape competition and strategy are indeed forces that also foster innovation. The five forces namely, threat of entrants, bargaining power of buyers and suppliers, rivalry among competitors and threat of substitutes (products or services) foster innovation. All these forces support innovation either by forcing a firm to make process leaner or by supporting product differentiation. For example, threat of entrants to an industry dilutes the market share for a firm and puts pressure on the prices, costs and exhausts the potential of an industry( for example, with so many technology firms sprouting across the world makes the industry i.e. technology sector non profitable but competitive. At the same time sectors such as steel industry or mining are profitable).Hence innovation (process/product) can be one of the ways to stay competitive. Similarly with bargaining power of suppliers and buyers, firms can forward and vertically integrate by allowing changes in their production process. To avoid substitution incumbent firms raise the benchmark of product technology and therefore support innovation. Advanced technology and innovations along with appropriate price structures show positive influence on profitability. If innovation shapes profitability to a certain extent should the challenging factors restrict a firm from pursuing innovation and what could the possible solution be to limit these challenges on innovation?- The most convenient solution and a fundamental shift in generating ideas is shift from Closed innovation to open innovation (chesbrough 2003), shift from the idea of self reliance to idea of integration and assimilation.

Open Innovation model

Open innovation is certainly the best solution for those firms that find that innovation is not in alignment with their company's strategy or to take up a disruptive technology, In other words in open innovation the boundary between firm and its outside environment becomes porous, enabling innovation to move freely between organisations- Chesbrough.

A few aspects of open innovation that make it more employable than closed innovation are listed below.

  • Almost all ideas can be considered and supports a firm to venture into a new business (Joint agreements, mergers etc).
  • Open innovation incorporates the ability to rescue false negatives.
  • The incumbent firms' costs of commercialisation, forming a customer base and uncertainty of innovation can be avoided as the emergent firms would already have sorted out the above issues and incumbent firms would leverage opportunity created by the new firms.
  • Best use of both internal and external ideas.
  • Funding the innovation would also not be a great issue of concern if the firms follow open innovation.

Though open innovation seems to a feasible option to attain profitability, to evolve in new direction (which can be categorised as product innovation, i.e. to elude the uncertainties to pursue disrupt technologies) and create value by internal research, i.e. to keep alive the incremental developments, it might fail to parent creativity at lower levels. Creativity of the workforce, will at all times add a new dimension to design process in most cost effective and appreciable way. Creativity at the lower levels can often be harnessed by effective leadership, autonomy and creating value for the lowest segment. Appropriate HR policies are yet another significant contribution to organisational creativity, screening the candidates with high creative thinking skills at the early point will usually enhance creative situation. Woodman's multi factor model gives us the perfect understanding of various individual ( Cognitive abilities, Personality, Knowledge), Group characteristics ( Norms, Cohesiveness, size, diversity, roles) and organisational characteristics ( Culture, resources, rewards, technology, structure and strategy) responsible for cumulative growth of creativity in organisations (Woodmen et all).

Hence the challenges caused disruptive and architectural innovation can be nullified by choosing open innovation model; and Incremental can be sustained by pursuing R&D with decent budget and organisational enthusiasm to enhance the current products and process. Both Open and R&D innovations assist product, process, service and business model innovations. Process and service innovations can be further accelerated by gearing creativity at every level of organisation by motivation, appropriate HR policies , positive task conflicts providing essential resources and setting up creativity enhancing goals. To conclude innovation should never be cornered but nurtured through different means.

References:

  • Burgelman, R.A. 1991. Intra-organizational ecology of strategy making and organizational adaptation: Theory and field research. Organization Science, 2(3): 239-262.
  • Chesbrough, H (2003). The era of open innovation, Sloan management review, 44(3):35-41.
  • Christensen, C.M., and Bower, J.L.(1996).Customer power, strategic Investment , and the failure of leading firms. Strategic management journal, 17: 197-218.
  • Dougherty, D., & Hardy, C. 1996. Sustained product innovation in large, mature organizations: overcoming innovation-to-organization problems. Academy of Management Journal, 39(5): 1120-1153.
  • Gatignon, H., Tushman, M.L., Smith, W., & Anderson, P. 2002. A structural approach to assessing innovation: Construct development of innovation locus, type, and characteristics. Management Science, 48(9): 1103-1122.
  • Hargadon, Andrew; Sutton, Robert I. Technology brokering and innovation in a product development firm. Administrative Science Quarterly, 1997
  • Henderson, R. M., & Clark, K. B. 1990. Architectural innovation: The reconfiguration of existing product technologies and the failure of established firms. Administrative Science Quarterly, 35(1): 9-30.
  • Mintzberg, H., Ahlstarnd, B and Lampel, J. (2008). Second edition. Prentice-hall. Chapter 1
  • Organisation for economic co-operation and development, 2008.
  • Porter, M.E. (2008). The five competitive forces that shape strategy. Harvard business review, January: 78-93.
  • Richard W. Woodman, John E. Sawyer and Ricky W. Griffin, 1993. Towards a theory of organisational creativity. Academy of management.
  • Shally, C.E., and Gilson, L.L.(2004). What leaders need to know: A review of social and contextual factors that can foster or hinder creativity. Leadership quarterly, 15: 33-53.
  • Taylor, F.W. (1923). The principles of scientific management. New York: Harper. Chapter 1.

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