Hello everybody, good news, a new lecture in innovation management.
Today we are going to talk about organizational structure and ambidexterity.
And don't worry, I know you've been hearing a lot about ambidexterity.
So we'll cut that part as short as we need it.
But this is really important when it comes to innovating.
So be patient, we'll get there.
Okay, so last week, brief reminder, we've talked about new product development.
We've talked about what could actually change different ways to change products.
And we've looked at different ways of performing R&D for the new product development process,
land processes, and unplanned processes.
Today we are going to talk about how organizational structure could actually impact the innovation
process and the innovation result.
So we will have a brief refresher on what is organization structure really.
And then we'll see where that leads.
So basically today's session leads us with a basic question, what impact does organizational
structure and design have on innovations?
Is there any best organizational structure for innovating?
And we'll cover some research a bit later, which talks about that.
For example, the mirroring hypothesis is one such assumption that there is actually a very
strong relationship between the organizational structure and the product architecture itself
or the resulting product.
So let's get started with a brief refresher on organizational structure.
If you look up the definition, it's basically the firms form the reporting relationships,
procedures, controls, authority, and decision-making process.
So we can actually distinguish between what in German we would call the Aufbau Organisertzuhn
and the Aplau Organisertzuhn.
So we could look at processes rather than relationship between organizations.
But let's stick with the organizational structure as we can depict it in an organic run.
So what is important though is that an organizational structure can help or assist an organization
strategy.
Not each organization structure is suitable to every strategy and vice versa, but it's
a very critical element of strategy implementation.
And it's really not completely captured if we draw a nice organogram.
So then we have the reporting and formal power relationships between organization units,
but there can be lots of processes or informal things that are also part of organization
structure.
What is important to know is that strategy and structure have a reciprocal relationship.
So one depends upon the other and kind of they interact and not anywhere the structure
fits any strategy.
So what should come first?
Good structure or good strategy?
We'll let that answer one of the old gurus, the inventors of strategy if we want to say
so.
Alfred Chandler said a couple years back then structure follows strategy.
That's a very famous saying and it does mean that the organization structure should follow
your strategic plan.
So strategy comes first and you should implement a structure that fits and matches your strategy.
So first strategy and structure, but of course changing structure could be a difficult thing.
And we are not going to go into organizational culture and all that in this session, of course
that would be way too much.
So how can we measure organizational structure?
Can we actually measure organizational structure?
We can.
In the 1970s, the so-called Aston studies have kind of led to a couple of dimensions
that allows us to formally describe organizational structure.
And I'm not showing it so you learn it for an examination, of course there's no need
for that.
And actually it's a bit limiting.
But what they've captured is how our activity is structured.
So division of labor and all that and power authorities, where is power located as a decentralized
decentralized, where is it located and how dynamic is the whole thing.
So is it kind of a very static structure as a change?
As I said, don't learn it for the examination, but if you ever need to formally define or
describe organizational structure, this is where it comes from.
What I would rather want to do is describe some of the archetypes of organizational structure,
ways to organize and look at the advantages and disadvantages of each of these archetypes
with the goal of answering the question.
So what does it mean for innovation?
Is it really kind of helping or hurting innovation?
And why in what sense?
Let's get started with the simplest form in which we can organize.
Actually it's the second simplest.
The simplest is no formal organization at all.
Kind of the functional organization is the simplest that we can do.
It's the so-called unitary form or the functional form.
And surprise, surprise, it is structured according to corporate functions.
So you have a board of directors, a CEO, whatever, and then you have different departments that
consist of the corporate functions, sales, manufacturing, R&D, legal, whatsoever.
So there could be plenty of these.
What are the advantages and disadvantages of this form of organizing?
Well, first of all, it's rather a simple way and pretty clear way to organize that.
It's clear who's your boss.
It also allows the vision of labor and specializing.
So you can be a sales expert and everybody knows where to find you.
But at the same time, it also leads to so-called silos of knowledge.
So sales knowledge resides in the sales division and nowhere else really.
So these silos of knowledge are kind of leading to very isolated islands of knowledge, which
is not easily spreading throughout the whole organization.
Also if you look at who's coordinating the whole departments in this case, well, actually
the CEO, the board of directors need to coordinate the functions to get the product done and
sold basically.
So the CEO, the board of directors are very much involved in day-to-day operations because
they need to coordinate the different departments.
And if you think about innovation, so which departments are involved in new product development,
and selling, remember last time, actually basically all the departments are involved
in developing and selling manufacturing and selling a new product.
So the whole organization is basically involved whenever a new product needs to be created.
Can't think that this works well for smallish companies, but if you start to become a big
company involving the whole organization in developing and selling new products, it does
not really scale that well.
So, and of course it's pretty tricky to measure the performance of my departments.
I can't really compare departments and see who contributes, how much turned to my profit
in the end, who's much more innovative, because it's pretty tricky to measure the success
of your legal department or your sales department and see how much has that department really
contributed to my success.
So it's pretty, it helps to kind of, to create specialists and experts in my respective functions.
But in terms of innovation, it really kind of leads to silos of knowledge and problems
of coordinating new products throughout the whole organization.
Also conflicts of interest between let's say R&D and marketing could occur at every step
within my new product development.
The next form of organizing, the next archetype is one that has been developed in the 1920s
with the DuPont and GM and is the multi-divisional form or the M form of organizing.
In this we have not only say functions, corporate functions as kind of boundaries for my departments,
but we have quasi-autonomous strategic business units.
So what does quasi-autonomous mean?
Basically they operate as a profit center.
They within the grant strategy that is given by the CEO, by the organization, they can
operate basically create their own strategies underneath.
So that also leads to them being, we can compare them quite nicely in terms of success.
We can compare the margin for Europe versus the margin for the SD port and the margin
for Asia and Africa.
One is much worse than the others, but we can ask questions why.
So that's meant by quasi-autonomous.
And how are these structured?
Well, here I present you a region geographically structured division, US, Europe, Asia, Africa,
but it could be actually anything that allows to operate quasi-autonomously.
We could also have brands as kind of my divisions or product groups as my divisions.
So that would be possible.
When it comes to innovation, well, we can see if we want to introduce a new product
in Europe, every all that's involved there is in the European division.
The US and Asian divisions aren't really touched at all.
So this scales a bit better in the sense that your products don't involve the whole organization.
So what can happen and what does happen is that these business units, these divisions
are competing for the same resources against each other.
So each of these divisions has incentive to be very innovative and profitable so they
can kind of get the most resources.
The disadvantage when it comes to innovation, well, actually each of these divisions contains
a U-form, a functional division in its purest form.
In reality, we rarely see that, but theoretically the archetype, all these geographic divisions
contain a U-form organization within each of these divisions.
So we have an R&D department in the US division, we have an R&D department in the European
division and we have an R&D department in the Asia-Africa division.
In all these departments, develop products independently of each other for their respective
divisions and only for their respective divisions.
So this redundancy is also an inefficiency because we don't really have centralized
R&D.
Actually there's hybrid forms that involve centralized functions.
You'll get to one example later.
So one attempt that was very popular in the 1990s to kind of alleviate the disadvantages
of the U and M forms by creating a matrix organization, a matrix organization that
has different organizational logics intersecting.
And basically each staff has two bosses and two persons telling them what to do.
This form of organizing fell a bit out of fashion and perhaps if you are a staff and
on Monday, product manager A tells you, hey, this is priority one and your sales boss tells
you, hey, this is priority one, you can see where the problems might come from.
But nonetheless, it does exist.
Some organizations use matrix structure, but it has turned out to be quite complex and
quite difficult to maintain.
I would love to have an interactive discussion now to discuss what are the implications of
each organization on innovation to explore a little bit more how these different types
can kind of what the impact on innovation might.
So think about centralization and decentralization in the U and M form a bit, what that might
do to R&D and to innovation.
I told you that there's a hybrid form that is neither kind of the pure redundant multi-division
nor the functional organization form.
Procter & Gamble is one such example.
They actually have global business units, which are product groups.
So essentially this is multi-divisional form, but they also have shared functions, corporate
functions and global business services.
These are functionally organized sections.
So a corporate R&D center, for example, or legal and auditing department that supports
all these global business units.
And then there's local market development organizations that know very much local customer
requirements and preferences.
So actually this is a hybrid between a global and local approach.
We call that transnational and it's a hybrid between U form, a functional organized form
and then M form, it's a multi-divisional organized form.
So what else can we say about organizational structure?
Think about hierarchy and when communication goes from the top to the bottom of the hierarchy
in your organization, from the CEO to the middle management until it trickles down to
whoever actually does work.
And then results trickle up again through middle management and all that.
And if you know Chinese whispers or Stillepost in German, you know that everybody kind of
tries to make sense of what they hear, what information they get and they try to convey
things the way they have understood that.
So how middle management is very much able to interpret intermediate different visions,
ideas initiatives and can facilitate or suppress lots of innovative initiatives and ideas.
So middle management actually plays a big part in shaping what is going on.
So whenever we had organizational innovation, very often that went hand in hand with breakthrough
technological innovation.
So the M form, the multi-divisional form.
In the 1990s, we had hearing aid producer Oticon, a Danish company, which introduced
a spaghetti organization, which was essentially a project based organization.
3M, we've heard about 3M, they basically invented the incubator model of incubating new ideas.
So that is kind of, these are examples of new organizational structures that were able
to implement strategy in a good way, in a better way.
If you look at research on the relationship between organizational structure and R&D,
we can see that whether you are decentralized or centralized, for example, has a big impact
on where R&D is also on the output.
So actually, we'll skip that.
Okay, so we have discussed about several forms of organizational structure, different ways
to form your organizational boundaries and organize your work.
And when we want to identify clusters, when we want to identify flows of knowledge, often
what we do is, we do a social network analysis to see who communicates with whom.
You can do this with very cool things like doing social network analysis between two
soccer teams and seeing who passes the ball to whom.
But you can also do that by looking, for example, at email communication with your employees
and see who communicates with whom, and very often when you do that, you can identify clusters
and these clusters actually match your organizational boundaries.
So we can see with this social network analysis that organizational boundaries have an impact
on how communication happens and who communicates with whom.
What we do see is that there are some people, in this case we have one person SD on the
right hand side, who is basically the only person interacting with the outside of his
or her department.
So this is what we call a gatekeeper.
This is the person that decides on which knowledge enters or leaves the department.
Beyond gatekeepers, we also have knowledge brokers.
These are positions within the network that connect to departments or multiple departments.
So knowledge brokers, gatekeepers.
We can actually identify them in a real world analysis of companies.
Also it has been said that organizational structure can actually be found in your product
architecture.
The way you organize your company will, and actually this has received partial support
that your product architecture is mirrored by the organizational structure that you want
up the product.
You can recognize in your product architecture how you organize your work.
So when unit boundaries are often boundaries of communication, that means it's difficult
to communicate between organizational units.
And we have learned in the very beginning that tacit knowledge, especially sticky to
persons, can be transferred mostly through experience and social interaction.
Tacit knowledge can be shared more difficult across the distances.
There's trust issues between units.
It's we versus them, the engineers versus the marketing people, for example.
So that means that unit boundaries, organizational boundaries, are big hurdles for communication.
I mentioned that knowledge gatekeepers act as stalwarts, they are the points of entrance.
You have to pass them basically.
On the one hand, gatekeepers are a good thing because they connect.
On the other hand, they are kind of the sole point of failure.
And if they don't follow the correct knowledge, for example, then we might have a problem.
So what can we do to counter these knowledge silos?
How can we circumvent the gatekeepers?
We need to make their organizational boundaries more permeable.
So knowledge should flow in different directions in and out through different ways.
We should facilitate within organization knowledge exchange, but across organizational units.
How can we do that?
Actually, one way to do that is to organize communities, communities within my organization
or communities that span different organizations.
There's many types of communities, project teams across spanning business units, for example.
Communities of practice are a way to share knowledge and bring newcomers up to speed.
Professional communities, so architects communities, doctors communities that span organizations
within the industry.
We have user communities where users interact with each other.
So plenty of communities, and these help, these are one way, one tool to facilitate
knowledge flows beyond organizational boundaries.
Well, communities of practice are a popular management tool to do that.
Obviously, we could go deeper in there, but we are staying with that at that level.
I promised you ambidexterity.
So let's talk about ambidexterity.
First of all, I know that you have been learning about ambidexterity a lot.
So let me ask you a simple question.
Do you know what ambidexterity actually means?
Where it comes from?
It means to be, means both, and texture means right.
So it essentially means both right handed.
So this is, if you have two right hands, if you're nimble and capable with both your hands,
that means ambidex, to be ambidexterious.
So it's the capability to be both efficient and flexible.
And this is very important for innovation and innovation management because in innovation,
we distinguish between exploration and exploitation.
Exploitation is usually associated with incremental innovation.
It's following the technology trajectory, making or exploiting business opportunities
by incrementally improving things.
Exploration, on the other hand, is related with disruptive, with radical innovation.
For example, changing technology trajectories or coming up with new, really radically new
ideas.
Well, exploration and exploitation, these are, if you're a company, if an organization
is able to do both at the same time, then you're an ambidexterious organization.
But how can we achieve ambidexterity?
And why is it difficult?
Think about it.
The logics are very, very different.
If you want to explore things, you need to be very creative, free of stress, without
strict timelines, for example, and be allowed to play with lots of things.
And perhaps, because it's risky, have a high chance of failure.
And this failure should be permitted.
So this is one logic.
If you're exploiting, well, you want to create business opportunities and get more revenue.
So basically, you have to adhere to deadlines, you have to have planable improvements, and
everything that you do should lead to more money.
So this is a very different logic, and you pursue a very different path.
You need different mindsets, you set different budgets and timelines, and you actually often
need different people to do both.
But how can you overcome, how can you still achieve ambidexterity?
Well, actually, one thing is that you get insights from peripheral sources, outside
the organization, get ideas and external knowledge.
So communities of practice would be one side, but you could also look at different markets.
Fino Machinima, it's using video games to make movies, which are used for advertisement
and prototyping movies and all that.
But you actually use computer games like Halo.
So you use insights and tools from different markets to create something new.
3M basically discovered that the sandpaper they have, it's basically paper with glue
on it and then the sand on top.
And they noted, oh, hey, if we tone down the glue a little bit, this is a great masking
tape, which painters can use to kind of cover things that they don't want painted.
So looking at different markets.
How else can you achieve exploration?
Well, you can actually isolate your subgroups so they don't exchange so much knowledge,
so that there's not dominant logic, that there's not the dominant way of thinking.
So preserving diversity by keeping your research groups independent, for example.
You can try to, if you want to achieve exploration and exploitation, you can try to achieve
it by balancing both things at the same time.
Or you could try to have phases of incremental improvement, exploiting phases, which are
then penetrated by short bursts of radical innovations that are explorative in nature.
And then we have, for quite some time, an exploiting phase, again, for quite some time.
These are two different ways to achieve, well, as I said, sometimes you need different people,
different cultures, different values.
One way in which organizations try to achieve ambidexterity nowadays, at least when it comes
to innovation, is by spinning out organizations or by keeping organizations separate.
That essentially incubators and accelerators are one way to achieve ambidexterity by creating
two separate organizations.
One that is explorative in nature, the startups, the incubators, and one which is exploitative
in nature, the corporate mothership.
And if there's a success in terms of exploration, well, then the startups are bought and integrated.
All industries operate in this model, the pharmaceutical industry, for example.
So let's talk more about external knowledge.
So why is external knowledge important?
Well, some old research has found that actually external knowledge is important sources of
information when it comes to developing new knowledge.
Firms organize their external knowledge search in different ways.
One is the external search breadth.
Actually it's the number of outside sources that you look for.
These outside sources could be universities, competitors, customers, various journals,
patent databases, whatever.
So different search channels.
You could search broadly or you could search very narrowly.
Actually a very broad search is often associated with incremental innovations because you get
a good overview of things and what's state of the art.
You can introduce new to the firm innovations, which is the outside.
Search depth, on the other hand, means how intensively you work with the outside sources
in order to innovate.
So a multi-year cooperation with a university, for example, is rather deep and it's a commitment
in terms of times and money.
Just going to fair and seeing what's going on there is a rather shallow, not so deep
external knowledge search.
Very deep searches have been associated with radical innovations.
So the multi-year joint venture with another company to really create something radical.
So what is better, searching broad, searching deep, can there be too much?
Actually yes.
Actually you could search too deep and too broad.
When you don't search outside, well, you don't get any outside knowledge at all.
And remember, there's always working more smart people outside your organization than
inside your organization.
And if you search too deep, well, you become too reliant on your collaborator, on your
partner and you need to spend way too much resources for that collaboration.
So you don't get anything done at all, basically.
If you search too broad, well, you distribute your attention too much and you also never
get anything done.
You visit fairs, you read papers, you talk to customers, competitors, and basically you
over-search and you won't get anything done.
So research has found, basically, there's an optimal level of search depth and search
breadth.
Lastly, I want to talk about geography when we talk about organizational structure and
external knowledge because also innovation in geography has a relationship.
So there tend to be clusters of industry clusters of knowledge and firms actually tend to search
first if they have a problem for closed knowledge.
If knowledge for a problem that they face is not within their organization, they actually
start on a national level and then move on if they don't find to an international level.
At the same time, they start with knowledge that's very close to their technology.
So you look at what your competitors do, for example.
If you don't find any solution, you start looking more and more for different technologies
and increasing in the technological distance that you search for.
Knowledge also spills over and if you are an organization or company in one area, knowledge
spills over to other organizations.
So research has said it spills over through informal and labor market transmission mechanisms.
What that means?
It means people talk with each other even if they work in different firms and people
change jobs and move from one firm to another.
So that means it leads to regions of being very strong within the same industry leading
to clusters.
One last thing that I would like to convey though is that sometimes we might think that
knowledge spillovers are a bad thing, that a company wants to avoid that at all times.
But actually firms sometimes voluntarily spillover information, they sometimes freely
give away information to the outside and sometimes even to competitors.
There's a very cool paper by Robert Elne which is called Collective Invention which is an
old example about steam iron furnaces and this was the time when competitors shared
their innovations and that led to a very high innovation rate for the whole industry
and the whole industry benefited from that.
A few years ago Tesla for example said, hey other electric car companies feel free to
use our patents, we won't sue you.
Why?
Why would they spillover the innovation, the knowledge, why would they allow competitors
to use their own patents?
Of course they said it's much more important that the market of electric vehicles basically
succeeds than that we succeed.
We need to develop a market so that also charging infrastructure is being built.
If only we are successful, there will be no charging infrastructure, there will be
no government subsidies, so it's much more important that electric vehicles as a whole
grows and then we'll get a big part of that pie.
So sometimes you want to grow a market and that is for example when collective invention
happens and firms voluntarily spillover innovations.
That's it basically.
We looked at organization structure, we looked at the unitary, the multidivisional form
and we actually looked at the matrix, well not really the matrix, and discussed how that
might impact on innovation, what's the advantages and disadvantages of organization structures
on innovation.
One thing that we found is that communication, knowledge flows don't travel easily within
organizational boundaries.
When we do a social network analysis, we can often see just from the communication or organizational
boundaries.
So overcoming these, enabling knowledge flows beyond or across organizational units is very
important.
So that's where external knowledge search comes from, allowing to use different sources
of information, searching broadly and deeply.
And then we talked about geography and what role location plays when it comes to knowledge
crossing organizational boundaries, why clusters exist and why knowledge builds over and why
sometimes organizations might want that knowledge built over.
I'm a bit sorry that we can't really discuss interactively and I have to present all this
stuff without any interaction, so I'll see whether we can do any interactive tutorials
or at least some online quizzes to get some interaction with us.
Thanks for listening in and see you next week.
Thank you very much.
What's the return on investment for, or the return of, what's the return on investment
for, or the return, sorry, oh, screwed, I don't really.