Chapter 10
Organizing for Innovation
SYNOPSIS OF CHAPTER
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, size is also likely to create an organization resistant to
change and lacking entrepreneurial incentives. Big firms often manage this issue by organizing
into small divisions to capture the advantages of a small, entrepreneurial firm in each unit.
The degree to which firms use formalization, standardization and centralization can influence
their ability 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 a
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.
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.
Finally, the issues surrounding the choice of organizational structure are magnified when applied
to multinational firms. The best structure enables these firms to leverage the knowledge
developed in each market while ensuring the entire organization benefits from relevant
innovations.
TEACHING OBJECTIVES
1. Develop an understanding of the impact of size and structure on a firm’s ability to
innovate and implement new technologies.
2. Investigate how different dimensions of organizational structure affect a firm’s ability to
innovate.
3. Understand the unique factors that affect the choice of organizational structure in
multinational organizations.
LECTURE OUTLINE
Overview
Organizational structure and its use of rules, standardized procedures and controls can have
a bearing on an organization’s ability to generate innovation. 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.
Size and Structural Dimensions of the Firm
In the 1940’s Joseph Schumpeter promoted the idea that large firms would be better
innovators because they 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 though because large firms:
may experience decreased R&D efficiency if managerial control diminishes
may not be able to maintain R&D staff incentives because R&D staff do not directly
receive much of the return on their innovations
often have multiple levels of authority that can make firms less nimble and
responsive to change
may experience disincentives to change because of the risk it poses to existing cash
flows. Strategic commitments to customers and suppliers can lead to the “Icarus
Paradox”; where success in existing lines of business or products can lead to
overconfidence, carelessness and reluctance to question the status quo.
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. Firms also can take on a more modular form by outsourcing non-critical
functions.
The 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 to review with your students here
(see Theory in Action section of this chapter for more detail).
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 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 by
discouraging experimentation.
Centralization describes the degree to which decision-making 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 thus 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,
increases 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, while the advantages of centralization accrue more
readily to electronics companies for example.
Show Figure 10.1
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 while an organic structures (low formalization and
standardization) will do a better job if the goal is to foster innovation.
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. There is also a body of research on “skunk
works” that suggests that R&D teams may need to be isolated from the rest of the
organization in order to explore new alternatives, unfettered by the demands of the rest of the
organization.
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
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 to discuss in this section with
your students are IKEA and Sony. Modularity becomes more valuable when there is a
combination of heterogeneous inputs (e.g., diverse components that could be combined, or
technologies that could be used) and heterogeneous demands (e.g., when there is great
variety in what consumers want). With this combination, the ability to “mix and match”
components to achieve a wide range of configurations enables the firm or industry to more
closely meet idiosyncratic customer needs.
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 and/or intensive coordination is required. When products (or
production systems) are more modular, it frees up the firm to pursue a more modular (or
“loosely coupled”) organizational design. This does not mean that all firms that produce
modular products will have more modular structures, but it does increase their ability to
adopt such structures if there are advantages to doing so. Thus the modularization of the
computer lead to an industry-wide transformation whereby integrated producers like Prime,
Wang, and Data General were displaced by a networked of producers (including Sun
Microsystems, Silicon Graphics, and Motorola), whose components could be combined in
numerous end product configurations
The theory-in-action on Boeing’s 787 Dreamliner provides a very illustrative example of both
the pros and cons of the adoption of a more modular organization (and product) design.
Managing Innovation Across Borders
The primary trade-off faced by multinational firms is between efficiency and meeting the varied
needs of local markets. Bartlett & Ghoshal identified four primary strategies firms can
use to address the additional complexity of managing innovation efforts in multiple
countries: Center-for-global, local-for-local, locally leveraged, and globally linked.
A center-for-global strategy (i.e. central hub and global deployment) is
appropriate when managers have a strong desire to control the evolution of a
technology, development activities require close coordination (this may be the
case when dispersed efforts might create inefficiencies in response to
technological change), when managers are concerned about protecting
proprietary technologies, and when the needs of each local market are similar
enough to be met through a centralized effort.
A local-for-strategy is completely decentralized, and is appropriate when innovations
must be significantly customized to the local market. The costs of this strategy
include redundancy among R&D efforts, the lack of scale economies, and the
isolation of an innovation in the organization that other divisions could benefit
from.
A locally leveraged strategy identifies the most creative resources and innovative
developments and deploys them across the company. For example, a “brand
custodian” oversees the marketing of a single product in multiple markets when
the markets have similar needs.
The globally linked approach creates a system of decentralized R&D divisions
(each working on a particular function or leveraging a local resource) to take
advantage of resources available in different locations while global coordination
keeps the focus on company objectives.
Bartlett and Ghoshal recommend a transnational approach that makes resources and
capabilities from all regions and divisions available to exploit an opportunity in any
market by:
encouraging reciprocal interdependence among the divisions of the firm,
utilizing integration mechanisms across the divisions,
balancing the organization’s identity between national brands and global image.
In their efforts to use the transnational approach Ericsson adjusts the organization’s structure to
accommodate a particular need. They also rotate 50-100 engineers to different subsidiaries
for a year or two in order to facilitate the diffusion of knowledge throughout the firm and
encourage employees to identify with the global firm and various divisions at one time.