Chapter 4 Managing innovation within firms

Organisations and innovation

Chapter 1 outlined some of the difficulties in studying the field of innovation. In par-
ticular, it emphasised the need to view innovation as a management process within
the context of the organisation. This was shown to be the case, especially in a modern
industrialised society where innovation is increasingly viewed as an organisational
activity. Chapters 2 and 3 offered an overview of the wider issues of innovation, in
particular the economic and market factors, which ultimately will be the judge of
any product or service that is launched. This chapter tackles the difficult issue of
managing innovation within organisations. To do this, it is necessary to understand
the patterns of interaction and behaviour that represent the organisation.

The dilemma of innovation management

Within virtually all organisations there is a fundamental tension between the need for
stability and the need for creativity. On the one hand, companies require stability and
static routines to accomplish daily tasks efficiently and quickly. This enables the organ-
isation to compete today. For example, the processing of millions of cheques by banks
every day or the delivery of food by multiples to their retail outlets all over the country,
demands high levels of efficiency and control. On the other hand, companies also need
to develop new ideas and new products to be competitive in the future. Hence they
need to nurture a creative environment where ideas can be tested and developed. This
poses one of the most fundamental problems for management today (see Figure 4.1).
Take any medium to large company and examine its operations and activities.
From Mars to Ford and from P&G to Sony, these companies have to ensure that
their products are carefully manufactured to precise specifications and that they are
delivered for customers on time day after day. In this hectic, repetitive and highly
organised environment, the need to squeeze out any slack or inefficiencies is crucial
to ensure a firm’s costs are lower than their competitors’. Without this emphasis on
cost reductions, a firm’s costs would simply spiral upwards and the firm’s products
and services would become uncompetitive. But we have already seen in Chapters 1
and 2 that long-term economic growth is dependent on the ability of firms to make
improvements to products and manufacturing processes. This means that firms need to
somehow make room for creativity and innovation, that is, allow slack in the system.

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Figure 4.1 Managing the tension between the need for creativity and efficiency

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 Innovation dilemma in low technology sectors

Here, then, is the dilemma: ‘The farther that any company seeks to innovate, as
measured by the degrees of change from its base markets and technologies, the greater
the likelihood that its innovation efforts will fail. And yet, the less that a firm seeks to
innovate, across the board, the greater the likelihood that the corporation itself will fail.’
So, how do firms try to reduce costs and slack to improve competitiveness on the
one hand and then try to provide slack for innovation on the other? As usual, with
dilemmas, the answer is difficult and has to do with balancing activities. The firm
needs to ensure there is a constant pressure to drive down costs and improve effi-
ciency in its operations. At the same time, it needs to provide room for new product
development and making improvements. The most obvious way forward is to sepa-
rate production from research and development (R&D) but, whilst this usually is
done, there are many improvements and innovations that arise out of the operations
of the firm, as will be seen in the next chapter. Indeed, the operations of the firm
provide enormous scope for innovation.
This is the fundamental tension at the heart of an enterprise’s long-run survival.
The basic problem confronting an organisation is to engage in sufficient exploitation
to ensure its future viability. Exploitation is about efficiency, increasing productivity,
control, certainty and variance reduction. Exploration is about search, discovery,
autonomy, innovation and embracing variation. Ambidexterity is about doing both.
O’Reilly and Tushman (2008) argue that efficiency and innovation need not be stra-
tegic trade-offs and highlight the substantive role of senior teams in building dynamic
capabilities. In organisational terms, dynamic capabilities are at the heart of the abil-
ity of a business to be ambidextrous – to compete simultaneously in both mature and
emerging markets – to explore and exploit. Ambidexterity entails not only separate
structure sub-units for exploration and exploitation, but also different competencies,
systems, incentives, processes and cultures – each internally aligned (O’Reilly and
Tushman, 2008; Smith and Tushman, 2005). Current research is exploring how
firms should dynamically reconfigure resource portfolios to leverage organisational
ambidexterity for new product development (Wei et al., 2014).

Pause for thought

To resolve the innovation dilemma, why do firms not simply separate the creative
side of their business from the operational side?

Innovation dilemma in low technology sectors

Research in the area of low technology intensive industries shows a dominance of
incremental, mostly process-driven innovations where disruptive innovation activi-
ties are scarce. Generally, the dominant pattern of technological development in
low technology intensive industries is characterised by a high path-dependency,
which is continuously stabilised by incremental innovation activities. High returns
on investment are generated from continuous optimisation of processes and of the
existing technologies, thereby reinforcing the development paths. Smart et al. (2010)
reviewed the process innovation literature and developed a model of costs associated
with adoption. This included: capital costs, development costs and switching costs.

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 Chapter 4 Managing innovation within firms

This cost-minimising orientation is particularly apparent in many mature industries,

such as the food and FMCG industries, where price-based competition is high. Benner
and Tushman’s (2002) study within the paint and photographic industries suggests
that this focus can result in a shift in the balance of innovation, towards efficiency at
the expense of long-term adaptation. This, in turn, creates an emphasis on exploita-
tive activities, crowding out more significant innovations. Whilst these activities may
help firms learn and adapt quickly in the short term, they were seen to inhibit a
longer-term focus and lead to inertia. This creates a pressure on R&D to improve the
product and production process to lower costs over time, which can, in turn, stifle
more significant innovation. Thus, arguably the innovation dilemma in low-tech
sectors is even worse than high tech sectors.

Dynamic capabilities
How, then, do firms escape from the innovation dilemma? The literature on organisa-
tional capabilities offers insight into the different resources and environment necessary
for developing incremental and radical innovations. Incremental innovation reinforces
the capabilities of established organisations, whilst radical innovation forces them to
ask a new set of questions, to draw on new technical and commercial skills, and to
employ new problem-solving approaches. The impact of this on the nature of innova-
tion activities is that, as the organisation learns and increases its efficiency, subsequent
innovation is increasingly incremental. Another constraint on innovation that can
arise from this is a shift to simply meeting existing customer needs.
The literature on dynamic capabilities seems to offer the most likely solution for
firms. It has found that every firm has a zero-level or baseline set of routines, i.e.,
those that serve the purpose of producing and marketing the given products and
services currently in the portfolio (how we earn a living now). Some firms have
dynamic capabilities, i.e., those routines that relate to the innovation of products and
services, to the innovation of the production process, or to the search and attraction
of new customers, etc. – dynamic capabilities implement the change of old routines
with new ones. Chapter 7 explores this issue further.

Managing uncertainty
Whilst management in general involves coping with uncertainty, sometimes trying to
reduce uncertainty, the raison d’être of managers involved in innovation is to develop
something different, maybe something new. The management of the innovation process
involves trying to develop the creative potential of the organisation. It involves trying
to foster new ideas and generate creativity. Managing uncertainty is a central feature
of managing the innovation process. This has been recognised for over 40 years within
the innovation and R&D management literature (Pearson, 1983). Nonetheless, it con-
tinues to be a cause for concern for firms. At the very least, there is the uncertainty of
output (including market uncertainty) – i.e., what is required – and also uncertainty
of process – i.e., how to produce it. Pearson offered a helpful uncertainty matrix for
managers to help them deal with different levels of uncertainty. This recognised that
different environments required different management styles (see Figure 4.2).

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