The Sources of Management Innovation Michael J. Mol & Julian Birkinshaw - London Business School “ At Analog Devices, and many other U.S. companies, product and process innovation are not the main bottleneck to progress. The bottleneck is management innovation.” We have to ask ourselves, as a company and a nation, are we investing enough in management innovation? Do we even know how much or how little we’re investing? Ray Stata, Chairman of Analog Devices, on the reasons why his company’s growth became subdued over time (in a 1989 Sloan Management Review article )

Long-run changes in competitive position in the automobile industry 1900 1920 1940 1960 1980 2000 … Driven by Innovation in Management methods Ford Assembly line / Mass production General Motors Divisionalisation Toyota “ Lean” production / Just in Time etc.

What is a management innovation? “ T he implementation of a new management practice, process or structure that significantly alters the way in which the work of management is performed and is intended to further organisational goals .” PRINCIPLES PROCESSES PRACTICES STRUCTURES

“ T he implementation of a new management practice, process or structure that significantly alters the way in which the work of management is performed and is intended to further organisational goals .”

A Contemporary Example of a Management Innovation 1996 Shell Exploration & Production Basic research unit closed; Tim Warren seeks other ways of achieving breakthrough innovation Gamechanger model developed: $15m fund, 7-8 mid-level staff; seed funding innovative ideas through fast peer-review Over six years, 1300 ideas submitted, 138 projects, several real businesses, estimated $2.5 billion value Principles challenged by Gamechanger “ Capital allocation is controlled by senior executives” “ Capital allocation requires careful and detailed analysis”

1996 Shell Exploration & Production

Basic research unit closed; Tim Warren seeks other ways of achieving breakthrough innovation

Gamechanger model developed:

$15m fund, 7-8 mid-level staff; seed funding innovative ideas through fast peer-review

Over six years, 1300 ideas submitted, 138 projects, several real businesses, estimated $2.5 billion value

Principles challenged by Gamechanger

“ Capital allocation is controlled by senior executives”

“ Capital allocation requires careful and detailed analysis”

The prevalence of different types of innovation in the academic literature

The prevalence of different types of innovation in the managerial literature

Stock of knowledge Three lines of inquiry in current literature: How do individual management innovations diffuse? Historically, how were individual management innovations shaped? How is management innovation related to other forms of innovation, especially technological innovation?

Three lines of inquiry in current literature:

How do individual management innovations diffuse?

Historically, how were individual management innovations shaped?

How is management innovation related to other forms of innovation, especially technological innovation?

Diffusion processes Diffusion speed and pattern of M-form (Teece, 1980; Palmer, Jennings, and Zhou, 1993), TQM (Zbaracki, 1998), ISO 9000 (Guler, Guillen and MacPherson, 2002) etc. Various attempts at theorising, including fashion and fad (Abrahamson, 1996), bandwagoning (Abrahamson and Rosenkopf, 1993), neo-institutional approach (Staw and Epstein, 2000).

Diffusion speed and pattern of M-form (Teece, 1980; Palmer, Jennings, and Zhou, 1993), TQM (Zbaracki, 1998), ISO 9000 (Guler, Guillen and MacPherson, 2002) etc.

Various attempts at theorising, including fashion and fad (Abrahamson, 1996), bandwagoning (Abrahamson and Rosenkopf, 1993), neo-institutional approach (Staw and Epstein, 2000).

Histories of creation Creation of M-form (Chandler, 1962), Activity-based costing (Cooper and Kaplan, 1988), Discounted Cash Flow (Pezet, 1997), Lean Production (Womack, Roos and Jones, 1990) etc. Without exception these have focused on individual innovations, not on comparisons or a generalized understanding

Creation of M-form (Chandler, 1962), Activity-based costing (Cooper and Kaplan, 1988), Discounted Cash Flow (Pezet, 1997), Lean Production (Womack, Roos and Jones, 1990) etc.

Without exception these have focused on individual innovations, not on comparisons or a generalized understanding

Types of innovation A few comparisons between various types of innovation (Damanpour and Evan, 1984; Al ä nge, Jacobsson, and Jarnehammar, 1998; Boer and During, 2001). This literature has focused on symptomatic differences and not produced a classification of management innovations.

A few comparisons between various types of innovation (Damanpour and Evan, 1984; Al ä nge, Jacobsson, and Jarnehammar, 1998; Boer and During, 2001).

This literature has focused on symptomatic differences and not produced a classification of management innovations.

Our research project Julian, Gary Hamel and I started a 2-year research project on Management Innovation in 10/04. It is partly funded by the Advanced Institute for Management Research (AIM / ESRC). Our goal is to uncover what drives management innovation, how management innovation affects firm performance and eventually how firms can increase their capacity for management innovation.

Julian, Gary Hamel and I started a 2-year research project on Management Innovation in 10/04. It is partly funded by the Advanced Institute for Management Research (AIM / ESRC).

Our goal is to uncover what drives management innovation, how management innovation affects firm performance and eventually how firms can increase their capacity for management innovation.

Management Innovation & CIS The Community Innovation Survey (CIS 3) contains a number of questions that arguably capture management innovation. These questions focus on new management techniques, organisational structures, marketing methods and corporate strategies. We attempt to predict the occurrence of management innovation.

The Community Innovation Survey (CIS 3) contains a number of questions that arguably capture management innovation.

These questions focus on new management techniques, organisational structures, marketing methods and corporate strategies.

We attempt to predict the occurrence of management innovation.

Our model We follow the well-known ‘garbage can’ model of Cohen, March and Olsen (1972) in which organisations are viewed as a collection of problems looking for answers, solutions looking for issues, and decision-makers (looking for work). We see management innovation as one outcome of the garbage can.

We follow the well-known ‘garbage can’ model of Cohen, March and Olsen (1972) in which organisations are viewed as a collection of problems looking for answers, solutions looking for issues, and decision-makers (looking for work).

We see management innovation as one outcome of the garbage can.

Problems (1) Hypothesis 1. Management innovation is most likely to occur in the presence of demonstrable obstacles to growth and innovation. We use the ‘innovation inhibitors’ questions (8.1) to measure demonstrable objects.

Hypothesis 1. Management innovation is most likely to occur in the presence of demonstrable obstacles to growth and innovation.

We use the ‘innovation inhibitors’ questions (8.1) to measure demonstrable objects.

Problems (2) Hypothesis 2. Management innovation is most likely to occur in the presence of discontinuous change in the company’s business environment. We use the ‘significant changes’ question (2) to measure discontinuous change.

Hypothesis 2. Management innovation is most likely to occur in the presence of discontinuous change in the company’s business environment.

We use the ‘significant changes’ question (2) to measure discontinuous change.

Solutions (1) Hypothesis 3. Management innovation is most likely to occur when the scope of the market the firm operates in is wide. We use the ‘largest market’ question (3.5) to measure market scope.

Hypothesis 3. Management innovation is most likely to occur when the scope of the market the firm operates in is wide.

We use the ‘largest market’ question (3.5) to measure market scope.

Solutions (2) Hypothesis 4a. Management innovation is most likely to occur when a firm uses a wide selection of knowledge sources. We use the ‘sources of information’ question (12.1 – dummy coded) to measure knowledge sources.

Hypothesis 4a. Management innovation is most likely to occur when a firm uses a wide selection of knowledge sources.

We use the ‘sources of information’ question (12.1 – dummy coded) to measure knowledge sources.

Solutions (3) Hypothesis 4b. Management innovation is most likely to occur when a firm uses its knowledge sources intensely. We use the ‘sources of information’ question (12.1 – degree of importance) to measure intensity of use.

Hypothesis 4b. Management innovation is most likely to occur when a firm uses its knowledge sources intensely.

We use the ‘sources of information’ question (12.1 – degree of importance) to measure intensity of use.

Solutions (4) Hypothesis 5. Management innovation is most likely to occur when a firm uses three different types of knowledge sources simultaneously: market sources, internal sources, and professional sources. We use the ‘sources of information’ question (12.1 – three groups) to measure these three types of knowledge sources.

Hypothesis 5. Management innovation is most likely to occur when a firm uses three different types of knowledge sources simultaneously: market sources, internal sources, and professional sources.

We use the ‘sources of information’ question (12.1 – three groups) to measure these three types of knowledge sources.

Findings We use both OLS regression (on a count variable with range 0-4) and logit (on a management innovation dummy). The results confirm all of our hypotheses with the exception of the effect of market sources. We also find that size matters and that management innovation is more likely to occur in the joint presence of other types of innovation and where many employees hold degree level training.

We use both OLS regression (on a count variable with range 0-4) and logit (on a management innovation dummy).

The results confirm all of our hypotheses with the exception of the effect of market sources.

We also find that size matters and that management innovation is more likely to occur in the joint presence of other types of innovation and where many employees hold degree level training.

Extension 1 We are interested in the performance effect of management innovation. We believe there should be a positive effect (perhaps moderated) of management innovation on performance:

We are interested in the performance effect of management innovation. We believe there should be a positive effect (perhaps moderated) of management innovation on performance:

How does Management Innovation generate competitive advantage? One discrete activity System of interlinked activities Which part(s) of the organization are affected? Leads to changes to management practice Leads to changes to management principles Toyota’s Lean Manufacturing Intel’s production futures market BP’s Peer Assist system GE’s Work Out Less easy to understand, less easy to copy

Performance test Unfortunately we can not use the CIS data to test for performance because of a) common method bias and b) measurement problems. Therefore we are now trying to use the ARD at ONS (in a similar vein to Criscuolo and Haskel – though with different measures).

Unfortunately we can not use the CIS data to test for performance because of a) common method bias and b) measurement problems.

Therefore we are now trying to use the ARD at ONS (in a similar vein to Criscuolo and Haskel – though with different measures).

Extension 2

Conclusion The CIS is a useful source for a part of our research agenda, we need to complement it with other studies for completeness. The garbage can model teaches us something about how management innovation is implemented. Gaining a better understanding of management innovation is important for a) the competitiveness of U.K. firms, b) policy making processes and c) the legitimacy of business schools.

The CIS is a useful source for a part of our research agenda, we need to complement it with other studies for completeness.

The garbage can model teaches us something about how management innovation is implemented.

Gaining a better understanding of management innovation is important for a) the competitiveness of U.K. firms, b) policy making processes and c) the legitimacy of business schools.

Management Innovation vs. Management Fashion Similarities Historical and contemporary focus Market for ideas Differences Institutionalized vs. transient Performance vs. legitimacy focus Creation vs. diffusion focus Object relation

Similarities

Historical and contemporary focus

Market for ideas

Differences

Institutionalized vs. transient

Performance vs. legitimacy focus

Creation vs. diffusion focus

Management Innovation vs. Technological Innovation Similarities Creation events Institutionalized Performance focus Differences Management versus technology (no object overlap) Object relation

Similarities

Creation events

Institutionalized

Performance focus

Differences

Management versus technology (no object overlap)

Management Innovation vs. Business History Similarities Focus on management innovation, including creation events Differences Plural vs. singular – theoretically driven vs. empirically driven Contemporary + historical vs. strictly historical Object relation

Similarities

Focus on management innovation, including creation events

Differences

Plural vs. singular – theoretically driven vs. empirically driven

Contemporary + historical vs. strictly historical

Management Innovation vs. Process Innovation Similarities Overlap in process focus Creation events Differences Work of management versus work Object relation

Similarities

Overlap in process focus

Creation events

Differences

Work of management versus work

Management Innovation vs. Organizational Change Similarities Focus on change trajectories Differences Specific change vehicle vs. any type of change New vs. different Work of management vs. any work Object relation

Similarities

Focus on change trajectories

Differences

Specific change vehicle vs. any type of change

New vs. different

Work of management vs. any work