11

Management innovation Management innovation (Innovation in organisational (Innovation in organisational structures and management structures and management

theme)theme)

Management innovation Management innovation (Innovation in organisational (Innovation in organisational structures and management structures and management

theme)theme)Michael Mol – U. of Reading & visiting

researcher, LBS Management Innovation LabJulian Birkinshaw – London Business School

““We find evidence in a wide range of industry We find evidence in a wide range of industry sectors that the systematization of management sectors that the systematization of management

innovations will be a critical success factor for innovations will be a critical success factor for 21st century companies”. 21st century companies”.

(Feigenbaum & Feigenbaum in Sloan (Feigenbaum & Feigenbaum in Sloan Management Review, 2005)Management Review, 2005)

22

What is a management What is a management innovation?innovation?

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

PRINCIPLES

PROCESSES

PRACTICES

STRUCTURES

33

RelevanceRelevanceFor practice. The half-life of other types of For practice. The half-life of other types of

innovation is shrinking. Firms may need to innovation is shrinking. Firms may need to be innovative on multiple dimensions be innovative on multiple dimensions simultaneously. simultaneously.

For policies. Management innovation is a For policies. Management innovation is a driver of economic growth. UK firms driver of economic growth. UK firms compete on their innovativeness. compete on their innovativeness. Management is an increasing part of what Management is an increasing part of what makes them stand out. Few countries have makes them stand out. Few countries have seriously tackled management innovation seriously tackled management innovation so far.so far.

44

Aims of our research projectAims of our research project

1.1. Analysis of the factors that explain the levels of Analysis of the factors that explain the levels of management innovation (for the CIS3 survey.)management innovation (for the CIS3 survey.)

2.2. Analysis of the factors that explain the levels of Analysis of the factors that explain the levels of management innovation (for the CIS4 survey.)management innovation (for the CIS4 survey.)

3.3. Analysis of the consistency of management Analysis of the consistency of management innovation across the CIS3 and CIS4 surveys.innovation across the CIS3 and CIS4 surveys.

4.4. Analysis of the performance impact of Analysis of the performance impact of management innovation, using CIS3 and ARD data.management innovation, using CIS3 and ARD data.

Recommendations.Recommendations.

55

Some backgroundSome background

Three lines of inquiry in current literature:Three lines of inquiry in current literature:How do individual management How do individual management

innovations diffuse?innovations diffuse?Historically, how were individual Historically, how were individual

management innovations shaped?management innovations shaped?How is management innovation related to How is management innovation related to

other forms of innovation, especially other forms of innovation, especially technological innovation?technological innovation?

66

Diffusion processesDiffusion processesDiffusion speed and pattern of M-form Diffusion speed and pattern of M-form

(Teece, 1980; Palmer, Jennings, and Zhou, (Teece, 1980; Palmer, Jennings, and Zhou, 1993), TQM (Zbaracki, 1998), ISO 9000 1993), TQM (Zbaracki, 1998), ISO 9000 (Guler, Guillen and MacPherson, 2002) etc.(Guler, Guillen and MacPherson, 2002) etc.

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

77

Histories of creationHistories of creationCreation of M-form (Chandler, 1962), Creation of M-form (Chandler, 1962),

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

Focus on individual innovations, not on Focus on individual innovations, not on comparisons or generalised comparisons or generalised understanding.understanding.

88

Types of innovationTypes of innovationA few comparisons between various types A few comparisons between various types

of innovation (Damanpour and Evan, of innovation (Damanpour and Evan, 1984; Alänge, Jacobsson, and 1984; Alänge, Jacobsson, and Jarnehammar, 1998; Boer and During, Jarnehammar, 1998; Boer and During, 2001).2001).

This literature focuses on symptomatic This literature focuses on symptomatic differences and not on a classification of differences and not on a classification of management innovations or management innovations or understanding of their antecedents.understanding of their antecedents.

99

Positioning our research projectPositioning our research project

Our research does not provide an exact fit Our research does not provide an exact fit with any of these three streams with any of these three streams because we are interested in:because we are interested in:

a)a) Management innovation as the Management innovation as the phenomenon (not a specific innovation)phenomenon (not a specific innovation)

b)b) The implementation of management The implementation of management innovation inside individual firmsinnovation inside individual firms

c)c) Its performance consequencesIts performance consequences

1010

ConceptualisationConceptualisation

What causes management innovation?What causes management innovation?

We broadly follow the behavioral We broadly follow the behavioral theory of the firm (Simon, March, theory of the firm (Simon, March, Cyert), specifically the notion of Cyert), specifically the notion of ‘problemistic search’. Management ‘problemistic search’. Management innovation is implemented at the innovation is implemented at the interface of problems and solutions.interface of problems and solutions.

1111

Conceptualisation (continued)Conceptualisation (continued)

What are the performance What are the performance consequences of management consequences of management innovation?innovation?

We see management innovation as We see management innovation as possibly leading to differentiation in possibly leading to differentiation in resources and capabilities, which in resources and capabilities, which in strategic management are seen as the strategic management are seen as the cornerstone of competitive advantage.cornerstone of competitive advantage.

1212

Method (1)Method (1)CIS3, CIS4 & ARD.CIS3, CIS4 & ARD.‘‘Wider innovation’: implementation of Wider innovation’: implementation of

advanced management techniques, advanced management techniques, implementation of new or significantly implementation of new or significantly changed organisational structures, and changed organisational structures, and significant changes to the firm’s marketing significant changes to the firm’s marketing concepts / strategies.concepts / strategies.

We do not use new or significantly changed We do not use new or significantly changed corporate strategy much because it provides corporate strategy much because it provides a poor conceptual fit – although we did check a poor conceptual fit – although we did check whether excluding it has an impact on results.whether excluding it has an impact on results.

1313

Method (2)Method (2)Between CIS3 and CIS4 there are some Between CIS3 and CIS4 there are some

inconsistencies both in terms of how the inconsistencies both in terms of how the wider innovation items are defined and wider innovation items are defined and how they are measured.how they are measured.

It appears as though UK firms are only It appears as though UK firms are only half as innovative now as they were four half as innovative now as they were four years ago!years ago!

See table….See table….

Strategy Management Organisation Marketing Sum of 3 Sum of 4

CIS 3 .42 (.49) .35 (.48) .39 (.49) .45 (.50) 1.20 (1.25) 1.62 (1.65)

CIS 4 .19 (.39) .17 (.38) .21 (.41) .22 (.42) .61 (.93) .80 (1.21)

Means for individual management innovation items, for three items combined and for four items combined, with standard deviations between brackets.

1515

CIS3 – predicting innovationCIS3 – predicting innovation

Dummies are used for whether or not a Dummies are used for whether or not a type of innovation had been implemented.type of innovation had been implemented.

Thus our dependent variable takes on the Thus our dependent variable takes on the values of 0, 1, 2, and 3.values of 0, 1, 2, and 3.

Ordered logit (with robust standard errors) Ordered logit (with robust standard errors) is applied.is applied.

Industry dummies not shown anywhere.Industry dummies not shown anywhere.3,635 firms across the range of industries.3,635 firms across the range of industries.

Coefficients Standard errors Coefficients Standard errors

Firm size .25 .02(***) .17 .02(***)

Capital intensity .02 .00(***) .06 .04

Export intensity .04 .15 -.37 .19(*)

Degrees .01 .00(***) .01 .00(***)

Product innovation .93 .07(***) .38 .08(***)

Process innovation .73 .07(***) .27 .08(***)

Alliances .24 .09(*) -.13 .10

Innovation inhibitors .07 .01(***)

Organisational change .31 .10(**)

Market scope .15 .04(***)

Internal sources .31 .06(***)

Market sources .18 .03(***)

Professional sources .21 .03(***)

Wald chi2 944.28(***) 1239.09(***)

Log pseudolikelihood -5455.93 -4005.66

Pseudo R2 0.09 0.16

1717

CIS4 – predicting innovationCIS4 – predicting innovation

Unfortunately several of our predictor Unfortunately several of our predictor variables are no longer available, so the variables are no longer available, so the model is somewhat more limited.model is somewhat more limited.

We add type of customer (new to CIS4) We add type of customer (new to CIS4) as a predictor variable.as a predictor variable.

Number of firms is 11,328 here.Number of firms is 11,328 here.

Coefficients Standard errors Coefficients Standard errors

Firm size .18 .01(***) .18 .01(***)

Degrees .00 .00(***) .00 .00(***)

Product innovation .63 .05(***) .63 .05(***)

Process innovation .69 .05(***) .69 .05(***)

Alliances .48 .06(***) .48 .06(***)

Innovation inhibitors .05 .01(***) .05 .01(***)

Market scope .08 .02(***) .08 .02(***)

Internal sources .41 .07(***) .42 .07(***)

Market sources .13 .03(***) .13 .03(***)

Professional sources .15 .02(***) .15 .02(***)

Business customers -.01 .07

Consumer customers -.05 .08

Wald chi2 2881.74(***) 2884.65(***)

Log pseudolikelihood -10266.72 -10264.97

Pseudo R2 0.15 0.15

1919

IntermezzoIntermezzoOur analysis has so far revealed small Our analysis has so far revealed small

differences between CIS3 and CIS4 in differences between CIS3 and CIS4 in terms of what predicts management terms of what predicts management innovation but big differences in innovation but big differences in absolute levels of innovation.absolute levels of innovation.

It turns out such differences are also It turns out such differences are also substantial across countries.substantial across countries.

This table shows some numbers for CIS3 This table shows some numbers for CIS3 (from Eurostat, other innovation active (from Eurostat, other innovation active firms only).firms only).

Country Strategy Management Organisation Marketing

Belgium 38 32 51 33

Denmark 31 11 31 28

Germany 59 54 71 55

Greece 34 29 47 40

Spain 34 42 52 37

France 35 34 15 n/a

Ireland n/a n/a n/a n/a

Italy 42 29 52 35

Luxembourg 63 72 69 41

The Netherlands 49 25 36 28

Austria 52 42 61 48

Portugal 42 48 54 35

Finland 40 40 44 30

Sweden 48 13 52 39

United Kingdom 62 52 53 66

Iceland 44 31 45 41

Norway 42 29 51 33

Average 44.7 35.3 49.0 39.3

2121

Combining CIS3 and CIS4Combining CIS3 and CIS4 If we merge CIS3 and CIS4 this allows us If we merge CIS3 and CIS4 this allows us

to investigate (in)consistencies across the to investigate (in)consistencies across the surveys and also to potentially tackle surveys and also to potentially tackle problems of reverse causality.problems of reverse causality.

This obviously reduces the sample (to 400-This obviously reduces the sample (to 400-800 depending on the analysis).800 depending on the analysis).

We first run a simple correlation between We first run a simple correlation between management innovation in both surveys.management innovation in both surveys.

Then we predict management innovation Then we predict management innovation in CIS4 using only CIS3 predictor variables.in CIS4 using only CIS3 predictor variables.

Mean Standard deviation

CIS3 CIS4

CIS3 1.566 1.239 1

CIS4 .8595 1.024 .2596 1

Coefficients Standard errors

Firm size .04 .09

Capital intensity .04 .26

Export intensity -.10 .50

Degrees .01 .00(†)

Product innovation -.05 .25

Process innovation -.32 .25

Alliances .78 .26(**)

Innovation inhibitors .04 .04

Organisational change .28 .35

Market scope .43 .14(**)

Internal sources .21 .19

Market sources -.02 .10

Professional sources .10 .10

Wald chi2 6885.74(***)

Log pseudolikelihood -.463.97

Pseudo R2 0.12

2424

CIS3 – predicting performanceCIS3 – predicting performanceWe now link CIS3 data to ARD data.We now link CIS3 data to ARD data.Our performance measure is change in Our performance measure is change in

productivity, measured as sales per productivity, measured as sales per employee, between 2000 and 2003.employee, between 2000 and 2003.

Management innovation can indirectly Management innovation can indirectly effect both the efficiency with which effect both the efficiency with which employees perform tasks and the ability employees perform tasks and the ability of the firm to sell products in the of the firm to sell products in the marketplace.marketplace.

This is an OLS regression on 1,048 firms.This is an OLS regression on 1,048 firms.

StandardizedBeta

t-value

Constant 4.01(***)

Management innovation .12 3.55(***)

Export intensity .03 .71

Capital intensity -.04 -1.34

Degrees -.08 -2.43(*)

Market scope -.02 -.56

Product innovation -.03 -.78

Process innovation .02 .48

Change .04 1.24

Firm size -.13 -3.89(***)

F-value 4.97(***)

R2 .08 Adjusted R2 .06

2626

Different types of innovationDifferent types of innovation

Finally we seek to determine which Finally we seek to determine which sequence produces better predictions: sequence produces better predictions: management innovation before product management innovation before product & process innovation or vice versa.& process innovation or vice versa.

To allow for comparable numbers, we To allow for comparable numbers, we run simple correlations.run simple correlations.

1 2 3 4 5 6

1 Product innovation CIS3 1

2 Process innovation CIS3 .350 1

3 Management innovation CIS3 .314 .179 1

4 Product innovation CIS4 .274 .146 .187 1

5 Process innovation CIS4 .201 .198 .159 .426 1

6 Management innovation CIS4 .160 .109 .260 .370 .344 1

2828

What have we learned (1)What have we learned (1)Problemistic search teaches us something Problemistic search teaches us something

about how management innovation is about how management innovation is implemented. It points to problems and implemented. It points to problems and solutions and the need to join these to be solutions and the need to join these to be a management innovator.a management innovator.

The consistent positive correlation with The consistent positive correlation with other types of innovation supports the other types of innovation supports the notion of ‘innovative companies’ that notion of ‘innovative companies’ that engage in multiple types of innovation.engage in multiple types of innovation.

Management innovation may well produce Management innovation may well produce a positive performance effect.a positive performance effect.

2929

What have we learned (2)What have we learned (2)Knowledge intensive firms (with many Knowledge intensive firms (with many

graduates) are better at producing graduates) are better at producing management innovation. Good news?management innovation. Good news?

Inconsistencies between CIS3 and CIS4, as Inconsistencies between CIS3 and CIS4, as well as between countries, somewhat limit well as between countries, somewhat limit the usefulness of making comparisons but the usefulness of making comparisons but it at least seems that broadly the same it at least seems that broadly the same factors continue to predict management factors continue to predict management innovation.innovation.

Alliances are now a positive predictor of Alliances are now a positive predictor of management innovation. Does that imply management innovation. Does that imply alliances have become more effective?alliances have become more effective?

3030

Preliminary recommendations Preliminary recommendations (1)(1)

We must get the message out that this We must get the message out that this type of innovation is important. This needs type of innovation is important. This needs to become engrained in the repertoire of to become engrained in the repertoire of policy makers, business schools etc.policy makers, business schools etc.

At the same time more evidence that At the same time more evidence that management innovation influences firm management innovation influences firm performance, and a deeper understanding performance, and a deeper understanding of how it does so, is needed.of how it does so, is needed.

3131

Preliminary recommendations Preliminary recommendations (2)(2)

Need to inform firms of the factors that Need to inform firms of the factors that stimulate management innovation. stimulate management innovation. Various channels are in place to do that Various channels are in place to do that (media, DTI, AIM etc.). (media, DTI, AIM etc.).

Of the factors discussed here, alliances, Of the factors discussed here, alliances, knowledge sources, and perhaps knowledge sources, and perhaps employment of trained graduates are employment of trained graduates are the most ‘manageable’ ones.the most ‘manageable’ ones.

3232

Preliminary recommendations Preliminary recommendations (3)(3)

Need to gain a deeper understanding of Need to gain a deeper understanding of the process of management innovation the process of management innovation in practice to complement these in practice to complement these structural models. The LBS Management structural models. The LBS Management Innovation Lab (Innovation Lab (www.managementinnovationlab.comwww.managementinnovationlab.com) is ) is one of the means for doing that.one of the means for doing that.

This can provide policy makers and This can provide policy makers and practitioners with a clearer view of practitioners with a clearer view of which ‘buttons to press’ at what time. which ‘buttons to press’ at what time.