Management of Technology- MGT 325- Part 2- Project

‫المملكة العربية السعودية‬
‫وزارة التعليم‬
‫الجامعة السعودية اإللكترونية‬

Kingdom of Saudi Arabia
Ministry of Education
Saudi Electronic
University

College of Administrative and Financial Sciences
Assignment 3
Management of Technology (MGT 325)
Deadline: 30/11/2024 @ 23:59
Course Name: Management of
Technology
Course Code: MGT325

Student’s Name:

Semester: 1st

CRN:

Student’s ID Number:

Academic Year:2024-25
For Instructor’s Use only
Instructor’s Name:
Students’ Grade:
Marks Obtained/Out of 10

Level of Marks: High/Middle/Low

Instructions – PLEASE READ THEM CAREFULLY
•

The Assignment must be submitted on Blackboard (WORD format only) via allocated
folder.

•

Assignments submitted through email will not be accepted.

•

Students are advised to make their work clear and well presented, marks may be reduced
for poor presentation. This includes filling your information on the cover page.

•

Students must mention question number clearly in their answer.

•

Late submission will NOT be accepted.

•

Avoid plagiarism, the work should be in your own words, copying from students or other
resources without proper referencing will result in ZERO marks. No exceptions.

•

All answered must be typed using Times New Roman (size 12, double-spaced) font. No
pictures containing text will be accepted and will be considered plagiarism).

Restricted – ‫مقيد‬

•

Submissions without this cover page will NOT be accepted.

Course Learning Outcomes-Covered
✓ Explain of the concepts, models for formulating strategies, defining the organizational
strategic directions and crafting a deployment strategy.(LO-3)
✓ Evaluate and chose Team size, composition, structure, leadership and administration, all
factors that impacts the success of a new product development team.(LO-4)

Assignment

Marks: 10

Instructions for Students:
1. Read the case “Organizing for Innovation at Google” in Chapter 10 of Strategic
Management of Technological Innovation, Page 225.
2. Apply the knowledge from the chapter and conduct your own research to gain a deeper
understanding.
3. Provide critical analysis and discussions for each question below. (150–200 words)
4. Answers should be comprehensive, clear, and reflect both conceptual understanding and
research insights.
Questions:
1. Google’s Mission and Growth (2 marks)
✓ Describe Google’s mission under Eric Schmidt’s leadership and how it influenced
the company’s approach to growth and diversification. Include examples of how
Google expanded beyond search and advertising.
2. Structure and Hierarchy (2 marks)
✓ Explain Google’s approach to hierarchy and structure as it grew into a large
company. How did Google attempt to retain a “small-company feel” despite its
rapid expansion?
3. Team Organization for Innovation (2 mark)
✓ Google’s engineers work in small, autonomous teams. Discuss how this team
structure supports innovation within the company.

Restricted – ‫مقيد‬

4. Role of Incentives in Driving Innovation (2 marks)
✓ Google encourages employees to spend 20% of their time on personal innovation
projects. What impact might this have on an employee’s creativity and job
satisfaction? Provide examples of how this might lead to new product
development.
5. Comparison with Traditional Corporate Structures (2 marks)
✓ Google’s “technocracy” contrasts with typical divisional structures in other
companies. Describe these differences and discuss how Google’s model supports
cross-unit collaboration.
NOTE: It is mandatory for the students to mention their references, sources and support each
answer with at least 2 peer reviewed journal.

Restricted – ‫مقيد‬

Chapter Ten
Organizing for
Innovation
Organizing for Innovation at Google
Google was founded in 1998 by two Stanford Ph.D. students, Sergey Brin and
Larry Page, who had developed a formula for rank ordering random search
results by relevancy. Their formula gave rise to an incredibly powerful Internet
search engine that rapidly attracted a loyal following. The search engine enabled
users to quickly find information through a simple and intuitive user interface.
It also enabled Google to sell highly targeted advertising space.
The company grew rapidly. In 2001, Brin and Page hired Eric Schmidt, former
CTO of Sun Microsystems and former CEO of Novell, to be Google’s CEO. In
2004, the company went public, raising $1.6 billion in one of the most highly
anticipated IPOs ever. Under Schmidt, the company adhered to a broad yet disciplined mission: “To organize the world’s information and make it universally
accessible and useful.” This led the company to leverage its core search and
advertising capabilities into blogging, online payments, social networks, and
other information-driven businesses.
By 2014, Google had sales of over $66 billion, and employed more than
57,000 people. Despite this size, however, the company eschewed hierarchy
and bureaucracy and sought to maintain a small-company feel. As noted by
Schmidt during an interview, “Innovation always has been driven by a person or
a small team that has the luxury of thinking of a new idea and pursuing it. There
are no counter examples. It was true 100 years ago and it’ll be true for the next
100 years. Innovation is something that comes when you’re not under the gun.
So it’s important that, even if you don’t have balance in your life, you have some
time for reflection. So that you could say, ‘Well, maybe I’m not working on the
right thing.’ Or, ‘maybe I should have this new idea.’ The creative parts of one’s
mind are not on schedule.”a
In accordance with this belief, Google’s engineers were organized into small
technology teams with considerable decision-making authority. Every aspect of
the headquarters, from the shared offices with couches, to the recreation facilities
and the large communal cafe known as “Charlie’s Place,” was designed to foster
225

226 Part Three Implementing Technological Innovation Strategy

informal communication and collaboration.b Managers referred to Google as a flexible and flat “technocracy,” where resources and control were allocated based on
the quality of people’s ideas rather than seniority or hierarchical status. Schmidt
remarked, “One of the things that we’ve tried very hard to avoid at Google is the
sort of divisional structure that prevents collaboration across units. It’s difficult. So I
understand why people want to build business units, and have their presidents. But
by doing that you cut down the informal ties that, in an open culture, drive so much
collaboration. If people in the organization understand the values of the company,
they should be able to self-organize to work on the most interesting problems.”c
A key ingredient in Google’s organization is an incentive system that requires
all technical personnel to spend 20 percent of their time on innovative projects of their own choosing. This budget for innovation is not merely a device
for creating slack in the organization for creative employees—it is an aggressive mandate that employees develop new product ideas. As noted by one
Google engineer, “This isn’t a matter of doing something in your spare time, but
more of actively making time for it. Heck, I don’t have a good 20% project yet
and I need one. If I don’t come up with something I’m sure it could negatively
impact my review.”d Managers face similar incentives. Each manager is required
to spend 70 ­percent of his or her time on the core business, 20 percent on
related-but-­different projects, and 10 percent on entirely new products. According to Marissa Mayer, Google’s head of search products and user experience, a
significant portion of Google’s new products and features (including Gmail and
AdSense) resulted from the 20 percent time investments of Google engineers.
In 2015, the company was reorganized into Alphabet Inc., a holding company, wherein Google and other divisions such as Access, Calico, CapitalG,
Nest, and others were wholly owned subsidiaries. The divisions retained their
flat and flexible reporting structures.e
In a podcast interview at Stanford ­University, Andy Grove (former CEO of Intel)
remarked that the company’s organization appeared chaotic, even noting “From
the outside it looks like Google’s organizational structure is best described by . . .
Brownian motion in an expanding model” and questioned whether Schmidt
believed this model would continue to work forever. In his response, Schmidt
responded, “There’s an important secret to tell, which is there are parts of the
company that are not run chaotically. Our legal department, our finances. Our
sales force has normal sales quotas. Our normal strategic planning activities, our
normal investment activities, our M&A activities are run in a very traditional way.
So the part of Google that gets all the attention is the creative side, the part where
new products are being built and designed, and that is different. And it looks to
us like that model will scale for quite some time . . . it looks like small teams can
run ahead and that we can replicate that model for that part of the company.”f

Discussion Questions
1. What are the advantages and disadvantages of the creative side of Google
being run as a flexible and flat “technocracy”?
2. How does Google’s culture influence the kind of employees it can attract
and retain?

Chapter 10 Organizing for Innovation

227

3. What do you believe the challenges are in having very different structure and
controls for Google’s creative side versus the other parts of the company?
4. Some analysts have argued that Google’s free-form structure and the
20 percent time to work on personal projects is possible only because
Google’s prior success has created financial slack in the company. Do you
agree with this? Would Google be able to continue this management style if
it had closer competitors?
a

J. Manyika, “Google’s View on the Future of Business: An Interview with CEO Eric Schmidt,” McKinsey
Quarterly, November 2008.
b
From “The Google Culture,” www.google.com.
c
Manyika, “Google’s View on the Future of Business.”
d
B. Iyer and T. H. Davenport, “Reverse Engineering Google’s Innovation Machine,” Harvard Business
Review, April 2008.
e
R. Price and M. Nudelman, “Google’s Parent Company, Alphabet, Explained in One Chart,” Business
Insider, 2016. Available at:
f
Podcast retrieved on April 13, 2009, at

OVERVIEW
The structure of an organization and the degree to which it uses formalized and standardized procedures and controls can significantly influence its likelihood of innovating, the effectiveness of its innovation projects, and the speed of its new product
development processes.1 For example, it is often argued that small, flexible organizations with a minimum of rules and procedures will encourage creativity and experimentation, leading to more innovative ideas. At the same time, it is also frequently
pointed out that well-developed procedures and standards can ensure that the organization makes better development investment decisions and is able to implement projects quickly and efficiently. How then do managers decide what structure and controls
would make the most sense for their firm?
A vast majority of firms use some type of product team structure to organize their
new product development process, and we will look closely at how teams are composed and structured in Chapter Twelve, Managing New Product Development Teams.
This chapter focuses on the organization-wide structural dimensions that shape the
firm’s propensity and ability to innovate effectively and efficiently. We will review
the research on how firm size and structural dimensions such as formalization, standardization, and centralization affect a firm’s innovativeness. By focusing on these
underlying structural dimensions, we will elucidate why some structures may be better
for encouraging the creativity that leads to idea generation, while other structures may
be better suited for efficient production of new products. We will also explore structural forms that attempt to achieve the best of both worlds—the free-flowing organic
and entrepreneurial structures and controls that foster innovation, plus the formalized
and standardized forms that maximize efficiency while ensuring coherence across all
of the corporation’s development activities. The chapter then turns to the challenge
of managing innovation across borders. Multinational firms face particularly difficult

228 Part Three Implementing Technological Innovation Strategy

questions about where to locate—and how to manage—their development activities.
We will review some of the work emerging on how multinational firms can balance
the trade-offs inherent in these choices.

SIZE AND STRUCTURAL DIMENSIONS OF THE FIRM
Size: Is Bigger Better?
In the 1940s, Joseph Schumpeter challenged supporters of antitrust law by proposing that large firms would be more effective innovators.2 Schumpeter pointed out that
(1) capital markets are imperfect, and large firms are better able to obtain financing for
R&D projects, and (2) firms with larger sales volume over which to spread the fixed
costs of R&D would experience higher returns than firms with lower sales volume.
Large firms are also likely to have better-developed complementary activities such as
marketing or financial planning that enable them to be more effective innovators, and
they are also likely to have greater global reach to obtain information or other resources.
Another advantage of size may arise in scale and learning effects. If large firms spend
more on R&D in an absolute sense, they might also reap economies of scale and learning curve advantages in R&D—that is, they may get better and more efficient at it over
time.3 Through investing in R&D, the firm develops competencies in the new product
development process and thus may improve its development process. It may accumulate
better research equipment and personnel. Furthermore, as a large firm gains experience
in choosing and developing innovation projects, it may learn to make better selections of
projects that fit the firm’s capabilities and have a higher likelihood of success.
Large firms are also in a better position to take on large or risky innovation projects
than smaller firms.4 For example, only a large company such as Boeing could develop
and manufacture a 747, and only large pharmaceutical companies can plow millions
of dollars into drug development in hopes that one or two drugs are successful.5 This
suggests that in industries that have large development scale (i.e., the average development project is very big and costly), large firms will tend to outperform small firms
at innovation. In theory a coalition of small firms ought to achieve the same scale
advantages, but in practice, coordinating a coalition of firms tends to be very difficult.
While a single large firm can exert hierarchical authority over all of the development
activities to ensure cooperation and coordination, coalitions often do not have such a
well-defined system of authority and control.
On the other hand, as a firm grows, its R&D efficiency might decrease because of
a loss of managerial control.6 That is, the bigger a firm gets the more difficult it can
become to effectively monitor and motivate employees. Furthermore, as a firm grows,
it becomes increasingly difficult for individual scientists or entrepreneurs to appropriate the returns of their efforts; therefore their incentives diminish.7 Thus, as the firm
grows, the effectiveness of its governance systems may decrease.
Large firms may also be less innovative because their size can make them less nimble and responsive to change. Large firms typically have more bureaucratic inertia due
to many layers of authority and well-developed policies and procedures.8 For example,
in the early 1980s, Xerox discovered that the administrative layers it had added to
prevent errors in new product development had the unintended effect of blocking a

Chapter 10 Organizing for Innovation

disaggregated
When something
is separated into
its constituent
parts.

229

project’s progress, making product development cycles unacceptably long and putting
Xerox at a disadvantage to more nimble Japanese competitors.9
High numbers of employees, large fixed-asset bases, and a large base of existing
customers or supplier contracts can also be sources of inertia, making it difficult for
the firm to change course quickly. As the number of employees grows, communication and coordination may become more difficult and prone to decision-making
delays. When large firms have large fixed-asset bases and/or significant fixed costs,
they often prefer to stick with existing sources of cash flow rather than gambling on
big changes. Strategic commitments to customers and suppliers can also tie the firm
to its existing businesses and technologies, making it more difficult to respond to
technological change. Strategic commitments can thus lead to an Icarus Paradox—a
firm’s prior success in the market can hinder its ability to respond to new technological generations.
Small firms are often considered more flexible and entrepreneurial than large firms.
They are unencumbered by multiple layers of administration, large fixed-asset bases,
or strategic commitments to large numbers of employees, customers, and suppliers.
Small firms may also find it much simpler to monitor employees and reward them
for their effort or success at innovation.10 Because resources are less abundant, small
firms may also be more motivated to choose projects more carefully, leading to higher
rates of new product success.
A number of empirical studies have attempted to test whether large size improves or
hampers innovation productivity. Several studies of patent counts, new drug introductions, and technological innovations that improve product performance have indicated
that small firms often outperform large firms in innovation.11 For example, a few studies of patenting output have concluded that small firms appear to spend their R&D
dollars more carefully and are more efficient, receiving a larger number of patents
per R&D dollar.12 One study of 116 firms developing new business-to-business products also found that small firms (those with annual sales less than $100 million) had
significantly shorter development cycles than large firms (those with $100 ­million
and more in sales), even when considering the relative magnitude of the innovation.13
However, a few studies have indicated that large firms may still outperform small
firms in innovation in some industries.14
While the firm’s overall size is not an easy-to-manipulate attribute of the firm, many
firms have found ways of making even large firms feel small. One primary method is to
break the overall firm into several smaller subunits, and then encourage an entrepreneurial culture within these subunits. Multiple studies have observed that in industries characterized by high-speed technological change, many large and hierarchical firms have
been disaggregated (or “unbundled”) into networks of smaller, often more specialized,
autonomous divisions or independent firms.15 In such industries, many firms have undergone large-scale downsizing, with many functions and layers of management eliminated.
The giant multidivisional firms of the twentieth century were replaced by leaner firms
that were more focused and flexible, loosely coupled in a network of alliances, supplier
relationships, and distribution agreements.16 This phenomenon led to the rise of terms
such as virtual organization,17 network organization,18 and modular organization.19
Since firms also use big company–small company hybrids to vary other structural
dimensions of the firm (including formalization, standardization, and centralization),

230 Part Three Implementing Technological Innovation Strategy

these ambidextrous approaches to organizing will be covered in more depth after the
structural dimensions of the firm are reviewed.

STRUCTURAL DIMENSIONS OF THE FIRM
Firms vary on a number of structural dimensions that can influence the amount, type,
and effectiveness of their innovation. Key structural dimensions include centralization, formalization, and standardization.

Centralization
centralization/
decentralization

Centralization is the
degree to which
decision-making
authority is kept
at top levels of
management.
Decentralization
is the degree to
which decisionmaking authority
is pushed down
to lower levels of
the firm.

Centralization is the degree to which decision-making authority is kept at top levels of
the firm, while decentralization is the degree to which decision-making authority is
pushed down to lower levels of the firm. Centralization can refer both to the geographical location of activities (that is, the degree to which activities are performed in a central location for the firm) and to where power and authority over activities are located.
That is, activities might occur in locations far from the corporate headquarters, but the
authority and decision making over those activities may be retained at h­ eadquarters—
leading to greater centralization than their physical location would suggest.
For firms that have multiple R&D projects ongoing, whether to centralize or decentralize R&D activities is a complex issue. Decentralizing R&D activities to the divisions of the firm enables those divisions to develop new products or processes that
closely meet their particular division’s needs (see Figure 10.1). The solutions they
develop are more likely to fit well within the operating structure of the division, and
be closely matched to the requirements of the customers served by that division. The
decentralization of development projects also enables the firm to take advantage of the

FIGURE 10.1

Centralized and Decentralized R&D Activities
Decentralized R&D

Centralized R&D
Division

Division

R&D

Corporate
Headquarters

Division

R&D

R&D
Corporate
Headquarters

R&D

Division

Division
(a)

R&D

R&D
(b)

Chapter 10 Organizing for Innovation

formalization

The degree to
which the firm
utilizes rules,
procedures,
and written
documentation
to structure the
behavior of
individuals or
groups within the
organization.

231

diversity of knowledge and market contacts that may exist in different divisions. Consistent with this, studies by Felipe Csaszar show that when decision-making about new
projects is pushed down to the lowest levels of the firm, the firm ends up taking on both
a greater quantity and variety of projects. Though there will be more failed projects, the
firm makes fewer “errors of omission.”20 However, there is much risk of reinventing
the wheel when R&D activities are decentralized. Many redundant R&D activities may
be performed in multiple divisions, and the full potential of the technology to create
value in other parts of the firm may not be realized. Furthermore, having multiple R&D
departments may cause each to forgo economies of scale and learning-curve effects.
By contrast, if the firm centralizes R&D in a single department, it may maximize
economies of scale in R&D, enabling greater division of labor among the R&D specialists and maximizing the potential for learning-curve effects through the development of
multiple projects. It also enables the central R&D department to manage the deployment of new technologies throughout the firm, improving the coherence of the firm’s
new product development efforts and avoiding the possibility that valuable new technologies are underutilized throughout the organization. For example, in the late 1980s,
Intel realized that, as a result of 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.
The use of a centralized versus decentralized development process varies by type
of firm and industry. For example, a study by Laura Cardinal and Tim Opler found
that research-intensive firms that were highly diversified were more likely to establish
separate research and development centers to facilitate communication and transfer of
innovation across divisions.21 A study by Peter Golder, on the other hand, found that
consumer products companies tend to utilize more decentralized R&D, tailoring projects to local markets, while firms in electronics industries tend to centralize R&D in
centers of excellence that are devoted to leveraging particular competencies.22
There is some disagreement about whether centralization enhances or impedes a
firm’s flexibility and responsiveness to technological change (or other environmental shifts). A highly centralized firm may be better able to make a bold change in its
overall direction because its tight command-and-control structure enables it to impose
such change on lower levels of the firm in a decisive manner. Decentralized firms may
struggle to get the cooperation from all the divisions necessary to undergo a significant change. But decentralized firms may be better able to respond to some types of
technological or environmental change because not all decisions need to be passed up
the hierarchy to top management; employees at lower levels are empowered to make
decisions and changes independently and thus may be able to act more quickly.

Formalization and Standardization
Formalization and standardization are closely related structural dimensions of organizations. The formalization of the firm is the degree to which the firm utilizes

232 Part Three Implementing Technological Innovation Strategy

standardization

The degree to
which activities
are performed
in a uniform
manner.

mechanistic

An organization structure
characterized by
a high degree
of formalization
and standardization, causing
operations to be
almost automatic
or mechanical.

organic

An organization structure
characterized by
a low degree of
formalization
and standardization. Employees
may not have
well-defined job
responsibilities
and operations
may be characterized by a
high degree of
variation.

rules, procedures, and written documentation to structure the behavior of individuals or groups within the organization. Standardization is the degree to which
activities in a firm are performed in a uniform manner. The rules and procedures
employed in formalization can facilitate the standardization of firm activities and
help to regulate employee behavior by providing clear expectations of behavior and
decision-­making criteria. Formalization can substitute for some degree of managerial
oversight, and thereby help large companies run smoothly with fewer managers. This
is demonstrated in the accompanying Theory in Action about 3M, where both Lehr
and Jacobson responded to the difficulty of managing the growing firm by imposing
more discipline and rules. By creating formal processes for choosing and managing
development projects, Lehr and Jacobsen hoped to improve the overall efficiency and
coherence of the firm’s many decentralized development activities. However, high
degrees of formalization can also make a firm rigid.23 If a firm codifies all of its
activities with detailed procedures, it may stifle employee creativity. Employees may
not feel empowered or motivated to implement new solutions. This is also noted in the
3M example, when employee resentment of the new planning methods led to morale
and motivation problems.
Similarly, while standardization can ensure that activities within the firm run smoothly
and yield predictable outcomes, standardization can also stifle innovation. Standardization may be used to ensure quality levels are met and that customers and suppliers are
responded to consistently and equitably. However, by minimizing variation, standardization can limit the creativity and experimentation that leads to innovative ideas.

Mechanistic versus Organic Structures
The combination of formalization and standardization results in what is often termed
a mechanistic structure. Mechanistic structures are often associated with greater
operational efficiency, particularly in large-volume production settings. The careful
adherence to policies and procedures combined with standardization of most activities
results in a well-oiled machine that operates with great consistency and reliability.24
For example, Dell Computer achieves its operational excellence, delivering products
cost-effectively and with minimal inconvenience, by being highly standardized, disciplined, and streamlined.25 While mechanistic structures are often associated with high
centralization, it is also possible to have a highly decentralized mechanistic structure
by using formalization as a substitute for direct oversight. By establishing detailed
rules, procedures, and standards, top management can push decision-making authority
to lower levels of the firm while still ensuring that decisions are consistent with top
management’s objectives.
Mechanistic structures, however, are often deemed unsuitable for fostering innovation. Mechanistic structures achieve efficiency by ensuring rigid adherence to
standards and minimizing variation, potentially stifling creativity within the firm.
Organic structures that are more free-flowing, and characterized by low levels of formalization and standardization, are often considered better for innovation and dynamic
environments.26 In the organic structure, employees are given far more latitude in their
job responsibilities and operating procedures. Because much innovation arises from
experimentation and improvisation, organic structures are often thought to be better
for innovation despite their possible detriment to efficiency.27

Theory in Action   Shifting Structures at 3M
In 1916, William McKnight, the then general manager
of sales and production for 3M, authorized the creation
of the company’s first research laboratory to improve
3M’s sandpaper. McKnight had a strong belief in the
power of individual entrepreneurship and innovation.
He encouraged innovation through a combination of
setting ambitious goals for new product development
and giving individuals considerable freedom in how
they pursued those goals. For example, McKnight
established a companywide objective that 25 percent
of sales should come from products created in the last
five years. He also endorsed a “bootlegging” program
whereby researchers could spend up to 15 percent of
their time on whatever projects they were interested
in pursuing.
As the firm grew, McKnight continued to support a
centralized R&D lab while also encouraging divisions to
pursue their own development initiatives in response
to market needs they encountered. However, as 3M’s
product portfolio grew, it became increasingly difficult
for 3M to manage functions such as production and
sales. In 1944, McKnight began to experiment with an
even more decentralized organizational form wherein
divisions would have not only their own R&D labs, but
also their own production operations and sales force.
McKnight believed that small independent businesses
would grow faster than a large company, leading to his
“grow and divide” philosophy: Each division would be
independent, and as its development projects grew into
successful departments, they too would be spun off into
new divisions.
By 1980, when Lou Lehr took the helm, 3M had
grown to have 85 basic technologies and competed in
about 40 major product markets. Lehr feared that 3M’s
greatest strength had become its weakness—the proliferation of independent businesses had led to a fragmentation of effort. Lehr worried that divisions might be
wasting too much time on redundant activities and not
taking advantage of the opportunity to leverage technologies across multiple divisions where they might
be valuable. He wanted to ensure that divisions with
related technologies would cooperate on development
projects, and that new technologies would be diffused
across the company. So he consolidated the company’s
42 divisions and 10 groups into four business sectors

based on their relatedness of technology. He also created a three-tiered R&D system: central research laboratories that concentrated on basic research with
long-term potential, sector labs that would serve groups
of related divisions and develop core technologies to
drive medium-term (5 to 10 years) growth, and division labs that would continue to work on projects with
immediate applications. Lehr also imposed much more
formal planning on the development process—some of
3M’s managers began to refer to it as “planning by the
pound.” He also eliminated many projects that had been
struggling for years.
The arrival of “Jake” Jacobson in 1986 as the new
CEO led 3M into an era of even greater discipline.
Jacobson increased the target of sales from products
developed within the past five years to 35 percent. He
increased the R&D funding rate to about twice that of
other U.S. companies, but also directed the company
to become more focused in its project selection and
to shorten development cycle times. He also implemented a companywide move toward using teams for
development rather than encouraging individual entrepreneurs. Though Jacobson’s initiatives improved efficiency, many researchers began to resent some of the
changes. They believed that the move to manage all
development projects with teams was destroying the
individualistic culture of entrepreneurship at 3M and
that the focus on discipline came at the expense of creativity and excitement. Motivation and morale problems
began to emerge.
Thus, when “Desi” Desimone became the CEO in
1991, he eased the company back toward a slightly
looser, more entrepreneurial focus. He believed his
predecessors had established a good architecture for
ensuring that innovation did not run away in an uncontrolled fashion, but he also believed the company
needed more balance between freedom and control, as
reflected in the following quote:
Senior management’s role is to create an internal environment in which people understand and value 3M’s
way of operating. It’s a culture in which innovation and
respect for the individual are still central. If you have
senior management who have internalized the principles, you create a trust relationship in the company.

continued
233

concluded
The top knows it should trust the process of bottom-up
innovation by leaving a crack open when someone is
insistent that a blocked project has potential. And the
lower levels have to trust the top when we intervene or
control their activities.

Source: Adapted from C. Bartlett and A. Mohammed, “3M:
­Profile of an Innovating Company,” Harvard Business School
case no. 9-395-016, 1995.

Size versus Structure
Many of the advantages and disadvantages of firm size that were discussed at the
beginning of the chapter are related to the structural dimensions of formalization, standardization, and centralization. Large firms often make greater use of formalization
and standardization because as the firm grows it becomes more difficult to exercise
direct managerial oversight. Formalization and standardization ease coordination
costs, at the expense of making the firm more mechanistic. Many large firms attempt
to overcome some of this rigidity and inertia by decentralizing authority, enabling
divisions of the firm to behave more like small companies. For example, firms such
as General Electric, Hewlett-Packard, Johnson and Johnson, and General Motors have
attempted to take advantage of both bigness and smallness by organizing their companies into groups of small companies that can access the large corporation’s resources
and reach while retaining a small company’s simplicity and flexibility.28 The next section examines several methods by which firms can achieve some of the advantages of
large size, and the efficiency and speed of implementation afforded by mechanistic
structures, while simultaneously harnessing the creativity and entrepreneurial spirit of
small firms and organic structures.

The Ambidextrous Organization: The Best of Both Worlds?

ambidextrous
organization

The ability of an
organization to
behave almost
as two different
kinds of companies at once. Different divisions
of the firm may
have different
structures and
control systems,
enabling them
to have different cultures
and patterns of
operations.
234

Most firms must simultaneously manage their existing product lines with efficiency,
consistency, and incremental innovation, while still encouraging the development of
new product lines and responding to technological change through more radical innovation. Tushman and O’Reilly argue that the solution is to create an ambidextrous organization.29 An ambidextrous organization is a firm with a complex organizational form
that is composed of multiple internally inconsistent architectures that can collectively
achieve both short-term efficiency and long-term innovation.30 Such firms might utilize
mechanistic structures in some portions of the firm and organic structures in others.
This is one of the rationales for setting up an R&D division that is highly distinct (either
geographically or structurally) from the rest of the organization; a firm can use high levels of formalization and standardization in its manufacturing and distribution divisions,
while using almost no formalization or standardization in its R&D division. Incentives
in each of the divisions can be designed around different objectives, encouraging very
different sets of behavior from employees. A firm can also centralize and tightly coordinate activities in divisions that reap great economies of scale such as manufacturing,
while decentralizing activities such as R&D into many small units so that they behave
like small, independent ventures. Whereas traditionally research emphasized the importance of diffusing information across the firm and ensuring cross-fertilization of ideas
across new product development efforts, recent research suggests that some amount of
isolation of teams, at least in early development stages, can be valuable. When multiple

Chapter 10 Organizing for Innovation

Skunk Works®

Skunk Works®
is a term that
originated with a
division of Lockheed Martin that
was formed in
June of 1943 to
quickly develop
a jet fighter
for the United
States Army. It
has evolved as
skunk works
to refer more
generally to new
product development teams that
operate nearly
autonomously
from the parent
organization,
with considerable
decentralization
of authority and
little bureaucracy.

235

teams interact closely, there is a risk that a solution that appears to have an advantage
(at least at the outset) will be too rapidly adopted by other teams. This can cause all of
the teams to converge on the same ideas, thwarting the development of other creative
approaches that might have advantages in the long run.31 Consistent with this, a significant body of research on “skunk works” has indicated that there can be significant
gains from isolating new product development teams from the mainstream organization.32 Separating the teams from the rest of the organization permits them to explore
new alternatives, unfettered by the demands of the rest of the organization.
Similarly, firms that have multiple product divisions might find that one or more
divisions need a more organic structure to encourage creativity and fluid responses
to environmental change, while other divisions benefit from a more structured and
standardized approach. For example, when USA Today decided to establish an online
version of the popular newspaper, management discovered it would need more flexible
procedures to respond to both rapid technological change and the real-time information updating requirements of the online paper. The paper would also require different
incentive schemes to attract and retain technologically savvy employees. The company
established the online paper as a separate division with a different reporting structure,
less formalization, a different pay structure, and even different cultural norms about
appropriate work attire and working hours.
Apple provides another example. In 1980, Apple was churning out Apple II personal computers at a fast clip. However, Steve Jobs was not content with the product
design; he wanted a product that would revolutionize the world by dramatically changing the way people interact with computers. He wanted to develop a computer so userfriendly and self-contained that it would appeal even to people who had no interest
in the technological features of computers—it would become an extension of their
everyday lives. Jobs began working with a team of engineers on a new project called
Macintosh (originally developed by another Apple engineer, Jef Raskin). Jobs did not
believe that the growing corporate environment at Apple was conducive to nurturing
a revolution, so he created a separate division for the Macintosh that would have its
own unique culture. He tried to instill a free-spirited entrepreneurial atmosphere reminiscent of the company’s early beginnings in a garage, where individualistic and often
eccentric software developers would flourish. The small group of team members was
handpicked and sheltered from normal corporate commitments and distractions. He
encouraged the Macintosh team members to consider themselves renegades, and even
hung a pirate’s skull-and-crossbones flag over their building. Jobs would also take
the team on regular retreats to isolated resorts and reaffirm the renegade culture with
quotes like “It’s more fun to be a pirate than to join the Navy.”33
If big firms can have internal structures with the incentives and behavior of small
firms, then much of the logic of the impact of firm size on technological innovation rates becomes moot. A single organization may have multiple cultures, structures,
and processes within it; large firms may have entrepreneurial divisions that can tap
the greater resources of the larger corporation, yet have the incentive structures of
small firms that foster the more careful choice of projects or enhance the motivation of
R&D scientists. Such entrepreneurial units may be capable of developing discontinuous innovations within the large, efficiency-driven organizations that tend to foster
incremental innovations.

236 Part Three Implementing Technological Innovation Strategy

Firms can also achieve some of the advantages of mechanistic and organic structures by
alternating through different structures over time.34 Schoonhoven and Jelinek studied Intel,
Hewlett-Packard, Motorola, Texas Instruments, and National Semiconductor and found that
these firms maintained a “dynamic tension” between formal reporting structures, quasiformal structures, and informal structures.35 While the organizations had very explicit reporting
structures and formalized development processes, the organizations were also reorganized
frequently to modify reporting relationships and responsibilities in response to a changing
environment. Thus, while the organizations used seemingly mechanistic structures to ensure
systematic and efficient production, frequent reorganizing enabled the firms to be flexible.
These firms also used what Schoonhoven and Jelinek term quasiformal structures in
the form of teams, task forces, and dotted-line relationships (that is, reporting relationships
that were not formally indicated on the organizational chart). These quasiformal structures were more problem-focused and could change faster than the rest of the company.
They also provided a forum for interaction across divisions and thus played an important
­boundary-spanning role. One advantage of quasiformal structures is that they fostered
interactions based on interests rather than on hierarchy. This can foster more employee
motivation and cross-fertilization of ideas. As noted by one employee: “Sometimes
[­innovation] happens in the men’s room. One guy’s talking to another guy, and another
guy’s standing, eavesdropping on the conversation, scribbling on a n­ apkin.”36 Some of the
downsides to such quasiformal structures were that they required time to manage, and they
could be hard to kill. Since the quasi structures were not part of the formal reporting structure, it could sometimes be difficult to establish who had the authority to disband them.

MODULARITY AND “LOOSELY COUPLED” ORGANIZATIONS
Another method firms use to strike a balance between efficiency and flexibility is to
adopt standardized manufacturing platforms or components that can then be mixed
and matched in a modular production system. This enables them to achieve standardization advantages (such as efficiency and reliability) at the component level, while
achieving variety and flexibility at the end product level.

Modular Products
Modularity refers to the degree to which a system’s components may be separated
and recombined.37 Making products modular can exponentially increase the number
of possible configurations achievable from a given set of inputs.38 For example, many
of IKEA’s shelving systems are designed so that users can mix and match a number of
components to meet their needs. The shelves and supports come in a range of standardized sizes, and they can all be easily attached with standardized connectors. Similarly, some stoves now offer customers the ability to expand the range of the stove’s
functionality by removing the burners and plugging in other cooking devices such as
barbecue grills and pancake griddles. P
­ ublishers have even embraced modularity by
offering digital content that enables instructors to assemble their own textbooks from
book chapters, articles, cases, or their own materials.
Many other products are produced in a modular way, even though the customer does
not perceive the modularity. By standardizing a number of common components and
using flexible manufacturing technologies that can quickly shift from one assembly

Chapter 10 Organizing for Innovation

237

configuration to another, companies can produce a wide variety of product models just
by changing which components are combined, while still achieving economies of scale
and efficiency in the individual components. For example, Chrysler achieves one of the
fastest new product development cycles in the automobile industry while also keeping
new product development costs low through its practice of using a few standard platforms upon which all of its new car models are built. Tata Motors, the Indian company
that introduced a $2500 car in 2008, used modularity even more dramatically. The
Nano is built in components that can be sold and shipped in kits to be assembled and
serviced by local entrepreneurs. This both enables the distribution of the Nano to be
fast and streamlined and enables better penetration of remote rural markets.39
Modularity is achieved in product design through the specification of standard interfaces. For example, by designing all of its shelving components to work with its standardized connectors, IKEA ensures that components can be freely mixed and matched.
Individual components can be changed without requiring any design changes in the
other components. Because modularity enables a wider range of end configurations to
be achieved from a given set of inputs, it provides a relatively cost-effective way for
firms to meet heterogeneous customer demands. Furthermore, since modularity can
enable one component to be upgraded without changing other components, modularity can enable firms and customers to upgrade their products without replacing their
entire system. The personal computer is an excellent example of a modular system
that enables upgrading. For example, if users want their personal computer to have
more memory or a better monitor, they do not need to replace their entire computer
system—they can simply purchase and install additional memory or a new monitor.
Modular products become more valuable when customers have heterogeneous
demands and there are diverse options for meeting them. For example, suppose a car
may be assembled from a range of components. The wider the range of components
that may be recombined into a car, the wider is the range of possible car configurations achievable through modularity, and the greater is the potential opportunity cost
of being “locked in” to a single configuration. Furthermore, the more heterogeneous
customers are in their demand for car features, the less likely they are to agree on a
single configuration. By employing modularity, heterogeneous customers can choose
a car configuration that more closely meets their preferences.40 By contrast, if customers all want the same thing, then there is little to be gained through offering a modular
system—it will be a simple matter to determine the best combination of components
to meet customer demands and integrate them into a nonmodular system.
When products are made more modular, it enables the entire production system to
be made more modular. The standard interfaces reduce the amount of coordination
that must take place between the developers of different components, freeing them to
pursue more flexible arrangements than the typical organizational hierarchy.41 Thus
more modular products are often associated with more modular organizations with
less centralization.42 Such flexible arrangements are referred to as “loosely coupled
organizational structures,” as described in the next section.

Loosely Coupled Organizational Structures
Organizations can also be made modular through the adoption of structures that
enable “loose coupling.”43 In a loosely coupled structure, development and production

238 Part Three Implementing Technological Innovation Strategy

activities are not tightly integrated but rather achieve coordination through their adherence to shared objectives and common standards. If, for example, each development
group agrees to a development plan and standardized interfaces that enable the components they develop to connect and interact effectively, there may be little need for
close coordination between the groups. The standard interface provides “embedded
coordination” among all the development and production participants.44 This can
enable components of a product to be produced by highly autonomous divisions of the
firm, or even by multiple independent firms.
Advances in information technology have also enabled loosely coupled organizational structures to become more common.45 Information technology can enable a firm
to access and process more information at a lower cost, vastly increasing the firm’s
options for development configurations.46 For example, information technology lowers a firm’s search costs for locating suitable development partners, as well as the costs
of monitoring the partner’s performance. This was clearly demonstrated in a study by
Nick Argyres of the development of the B-2 “Stealth” bomber, a highly advanced military aircraft, developed jointly by Northrop, Boeing, Vaught, and General Electric.47
Argyres found that enhanced information technology limited the need for coordination
of activities through hierarchical control. By using information technology and developing a standard interface—a shared “technical grammar” that facilitated communication across firms—the firms involved in the development of the bomber could work
autonomously, yet cooperatively.
Less need for integration frees firms to pursue more flexible research and development and production configurations. For instance, firms can become more specialized by focusing on a few key aspects of technological innovation that relate closely
to the firm’s core competencies, while obtaining other activities through outsourcing or alliances. By focusing on those activities in which the firm has a competitive
advantage, the firm can improve its chance of developing a product that has a priceto-value ratio that attracts customers while reducing the overhead and administrative
complexity of maintaining a wide scope of activities. This can cause whole industries
to be transformed as large vertically integrated firms are displaced by nimbler, more
specialized producers.48 For example, when computer workstations displaced their
more integrated predecessors, minicomputers (which were traditionally built using
a proprietary central processor, combined with a proprietary system bus, and run
with a proprietary operating system), the entire computer industry began to become
more modular as integrated producers like Prime, Wang, and Data General were displaced by a network of producers (including Sun Microsystems, Silicon Graphics, and
Motorola), whose components could be combined in numerous end product configurations. The platform ecosystems described in Chapter Four are another example of
loosely coupled organizations, as are distributed innovation systems that use crowdsourcing like Linux and Wikipedia.49
There are, however, disadvantages of loose coupling. Many activities reap significant synergies by being integrated.50 In particular, activities that require the frequent
exchange of complex or tacit knowledge are likely to need closer integration than a
loosely coupled development configuration can offer. For example, suppose the design
of a delivery mechanism for a drug will require intensive coordination with the design
of the drug itself. It may be that the strength and dosage of the drug must be carefully

Theory in Action   The Loosely Coupled Production of Boeing’s
787 Dreamlinera

When Boeing launched its sales program for the yetto-be-built 787 Dreamliner in late 2003, it rapidly
became the fastest-selling commercial jet liner in history. By 2011, Boeing had received more than 800
advance orders for the aircraft—more than any other
plane in history.b The Dreamliner marked an important
turning point for the company. Boeing had not built an
all-new airliner since 1994, when the 777 took to the
sky. Since that time, Airbus had led the way in aerospace innovation, while Boeing had been content to
stretch and refine its existing families of airplanes such
as the 737 and 747. Many had begun to believe that
Boeing no longer had what it took to build an entirely
new aircraft.c The Dreamliner’s success or failure would
thus send strong signals to the market about the company’s prospects for the future.
The Dreamliner was a super-efficient long-range
mid-sized airliner. It would be the first commercial jet
manufactured primarily from carbon fiber composites,
enabling it to be significantly lighter and thus more
fuel efficient than traditional commercial jets. Because
the composite material could be more easily sculpted
than aluminum, the wings of the jet would have graceful curves like a bird’s wings. Furthermore, since the
composite material was exceptionally strong and
resistant to corrosion, the cabin could be both more
pressurized and more humidified, making air travel
more comfortable.d Composites also allowed Boeing
to easily assemble the forward, center, and rear sections of the fuselage, the wings, the horizontal stabilizers, and the vertical fins as large individual modules
that could be quickly snapped together to form the
airplane, instead of constructing the aircraft piece
by piece using aluminum sheets as prior aircraft had
been constructed.e
The innovations of the Boeing 787 program
extended well past the actual composition of the aircraft. For the 787 project, Boeing also revolutionized
the structure of the production processes involved in
building a commercial aircraft. The production of the
787 would be significantly more loosely coupled than
any commercial aircraft to date. Dozens of partners

from around the world built and preassembled large
pieces of the plane which were then delivered to the
Boeing plant for final assembly.f For example, Mitsubishi,
Kawasaki, and Fuji, all of Japan, were contracted to produce the wings, forward fuselage, and center wing box,
respectively. Saab makes the cargo doors, and Alenia
Aeronautica of Italy produces a horizontal stabilizer and
central fuselage. Dozens of companies from other countries contribute other parts.g Roughly 70 percent of the
Dreamliner would be built outside of the United States.
The dramatic increase in outsourcing was expected
to provide a range of benefits that included spreading
the risk of developing the aircraft, containing costs, and
improving the prospects for foreign sales since purchasers and their governments often like to see work done
on the aircraft in their countries.h
Though Boeing had outsourced a portion of the work
on its planes for decades, the 787 ushered in a new
era of outsourcing, Boeing’s role would shift from being
the traditional designer and manufacturer to becoming
“an essential elements company, reserving for itself
optimum design and integration tasks and relying on a
select group of outsiders for everything else.”i The revolutionary new production process was not without its
challenges, however. The sheer complexity of the project and the large number of suppliers involved made
coordination much more complicated. Breakdowns in
this coordination had led to several delays. Though
the first Dreamliner had been slated to take flight in
August of 2007, customers did not actually take delivery of the first Dreamliners until late 2011. The challenges of coordinating suppliers around the globe had
led to numerous production delays and design adjustments. Boeing’s managers indicated that the company would make little profit on the first several dozen
planes because even after they rolled off the assembly line, they would require corrective work, including the repair of parts and design changes.j ­Boeing’s
management acknowledged that some mistakes had
been made in the supply chain, and E
­ ngineering Vice
President Mike Denton indicated that the company was
considering bringing more of the work back in-house.
continued
239

concluded
He noted, “We will probably do more of the design and
even some of the major production for the next new
airplanes ourselves as opposed to having it all out with
the partners.”k
a

Adapted from “The Loosely Coupled Production of Boeing’s
787 Dreamliner” by Jaspal Singh and Melissa A. Schilling,
New York University teaching case.
b
 C. Drew, “Boeing Posts 20% Profit Gain But Cuts Forecast
For 2012 As Jet Completion Slows,” New York Times,
­January 25, 2012.
c
 M. V. Copeland, “Boeing’s Big Dream,” Fortune 157, no. 9
(2008), pp. 180–91.
d
 S. Holmes, “Better Living at 30,000 Feet,” BusinessWeek,
August 2, 2007.

e

 R. Renstrom, “Boeing’s Big Gamble: Half-Plastic Dreamliner,”
Plastics News, July 2, 2007.
f
 P. Hise, “How Many Small Businesses Does It Take to
Build a Jet?” Fortune Small Business 17, no. 6 (2007),
pp. 42–45.
g
 J. Weber, “Boeing to Rein in Dreamliner Outsourcing,”
­BusinessWeek Online, January 19, 2009, p. 10.
h
 Ibid., and M. Mecham, “The Flat-Earth Airplane,” Aviation
Week & Space Technology, July 3, 2006, p. 43.
i
 Mecham, “The Flat-Earth Airplane.”
j
 C. Drew, “Boeing Posts 20% Profit Gain But Cuts Forecast
For 2012 As Jet Completion Slows.” New York Times,
­January 25, 2012.
k
 Weber, “Boeing to Rein in Dreamliner Outsourcing.”

calibrated and adjusted in accordance to the speed at which the delivery mechanism
releases the drug. Alternative materials considered for the delivery mechanism may
also have to be evaluated for their risk of potential interaction with chemicals used
in the drug solution. If ongoing intensive coordination is required, the development
activities might be better carried out through close integration of all parties.
An integrated firm also has mechanisms for resolving conflict that may be more
effective or less expensive than those available in the market.51 For example, if a dispute should arise over the development of a new product among development groups
that are within the same firm, top managers can decide what action to take and exercise their authority over the development groups. But if the development groups are in
separate companies, developing a new product in a collaboration agreement, neither
firm may possess the authority to resolve the dispute and enforce a particular outcome.
If the firms are unable to resolve the dispute themselves, they may face going to court
or arbitration to resolve the dispute, an expensive and time-consuming option.

MANAGING INNOVATION ACROSS BORDERS
The organization of innovation activities becomes particularly interesting for multinational firms. Many of the same issues that shape the centralization-versus-­decentralization
decision discussed earlier become highly amplified in the multinational firm. Foreign
markets offer highly diverse sources of information and other resources. They may
also have highly diverse product needs and different operating norms. This prompts
many firms to consider decentralizing R&D to take advantage of local information and
tailor innovation activities to the local market. However, innovations developed in this
decentralized manner might never be diffused to the other divisions. The customization of products and processes to the local markets makes them particularly difficult
to transfer to divisions serving different markets. Divisions that are accustomed to
developing their own innovations may be reluctant to share them with others for fear
of giving away their proprietary knowledge. They may also be reluctant to adopt other
240

Chapter 10 Organizing for Innovation

centerfor-global
strategy

When all innovation activities
are conducted
at a central hub
and innovations
are then diffused
throughout the
company.

local-for-local
strategy

When each division or subsidiary of the firm
conducts its own
R&D activities,
tailored for the
needs of the local
market.

locally
­leveraged
strategy

When each
division or
subsidiary of the
firm conducts
its own R&D
activities, but the
firm attempts to
leverage resulting innovations
throughout the
company.

241

divisions’ innovations because of the belief that innovations that are not developed
locally will not suit their local market needs (a phenomenon known as not-inventedhere syndrome). However, much of the value creation potential of a multinational is the
opportunity to leverage technological innovation (and other core competencies) into
multiple markets. Allowing innovation activities to become completely autonomous
and disconnected risks forfeiting this opportunity. How does the multinational resolve
this dilemma? A series of studies by Christopher Bartlett and Sumantra Ghoshal highlight some advantages and disadvantages of various approaches to the management of
multinational innovation. They identify four primary strategies used by firms: centerfor-global, local-for-local, locally leveraged, and globally linked.52
The center-for-global strategy entails conducting all innovation activities at a
centralized hub. These innovations are then deployed globally throughout the company. The centralization of innovation activities enables management to:
∙ Tightly coordinate all R&D activities (across both functions and projects).
∙ Achieve greater specialization and economies of scale in R&D activities while
avoiding duplication of activities in multiple divisions.
∙ Develop and protect core competencies.
∙ Ensure that innovations are standardized and implemented throughout the company.
Managers are likely to choose a center-for-global approach to innovation when they
have a strong desire to control the evolution of a technology, when they have strong
concerns about the protection of proprietary technologies, when development activities require close coordination, or when there is a need to respond quickly to technological change and dispersed efforts are likely to create inefficiencies.53 However,
a center-for-global approach tends to not be very responsive to the diverse demands
of different markets. Furthermore, the divisions that serve these markets might resist
adopting or promoting centrally developed innovations. As a result, innovations developed centrally may not closely fit the needs of foreign markets and may also not be
deployed quickly or effectively.
A local-for-local strategy is the opposite of the center-for-global strategy. Each
national subsidiary uses its own resources to create innovations that respond to the
needs of its local market. A local-for-local strategy takes advantage of access to diverse
information and resources, and it customizes innovation for the needs and tastes of the
local market. Managers are likely to choose a local-for-local strategy when divisions
are very autonomous and when markets are highly differentiated.
There are several downsides to the local-for-local strategy, however. It can result in
significant redundancy in activities as each division reinvents the wheel. Furthermore,
each division may suffer from a lack of scale in R&D activities, and there is a risk that
valuable innovations will not be diffused across the firm.
Over time, firms have developed variants of these strategies that attempt to reap
advantages of both the center-for-global and local-for-local strategies. Bartlett and
Ghoshal identify one such strategy as the locally leveraged strategy. A firm implementing a locally leveraged strategy attempts to take the most creative resources and
innovative developments from the divisions and deploy them across the company. This
strategy enables the firm to take advantage of the diverse ideas and resources created
in local markets, while leveraging these innovations across the company. One way this

242 Part Three Implementing Technological Innovation Strategy

globally linked
strategy
Innovation
activities are
decentralized,
but also centrally
coordinated
for the global
needs of the
corporation.

strategy is employed in consumer markets is to assign an individual the role of international brand custodian. This person is responsible for ensuring that a successful brand
is deployed into the firm’s multiple markets while also maintaining consistency in the
product’s image and positioning.54 Such a strategy can be very effective if different
markets the company serves have similar needs.
Another approach, the globally linked strategy, entails creating a system of
decentralized R&D divisions that are connected to each other. Each geographically
decentralized division might be charged with a different innovation task that serves the
global company’s needs. For example, a multinational auto manufacturer may empower
one of its European divisions with the responsibility for developing new subcompact
models that most closely fit the European markets but that may ultimately also be sold
in the United States, Canada, and South America. In the meantime, its American division might bear the bulk of the responsibility for collaborating with other manufacturers to develop more efficient manufacturing processes that will ultimately be deployed
corporatewide. Thus, while innovation is decentralized to take advantage of resources
and talent pools offered in different geographic markets, it is also globally coordinated
to meet companywide objectives. This approach also attempts to enable the learning
accrued through innovation activities to be diffused throughout the firm. This strategy
can be quite powerful in its ability to tap and integrate global resources, but it is also
expensive in both time and money as it requires intensive coordination.
In both the locally leveraged and globally linked strategies, R&D divisions are
decentralized and linked to each other. The difference lies in the missions of the
R&D divisions. In the locally leveraged strategy, the decentralized R&D divisions
are largely independent of each other and work on the full scope of development
activities relevant to the regional business unit in which they operate. This means,
for example, that if their regional business unit produces and sells health care items,
beauty care products, and paper products, the R&D division is likely to work on
development projects related to all of these products. However, to ensure that the
best innovations are leveraged across the company, the company sets up integrating mechanisms (such as holding regular cross-regional meetings, or establishing a
liaison such as an international brand custodian) to encourage the divisions to share
their best developments with each other. By contrast, in the globally linked strategy, the R&D divisions are decentralized, but they each play a different role in the
global R&D strategy. Instead of working on all development activities relevant to
the region in which they operate, they specialize in a particular development activity. For example, an R&D division may be in a regional business unit that produces
and sells health care, beauty care, and paper products, but its role may be to focus on
developing paper innovations, while other R&D divisions in the firm work on health
care items or beauty care products. Or it might focus on basic chemistry applications
relevant to all of the products, while another division explores packaging innovations, and so on. The role of the division should exploit some local market resource
advantage (such as abundant timber or a cluster of chemical technology firms). This
strategy attempts to take advantage of the diversity of resources and knowledge in
foreign markets, while still linking each division through well-defined roles in the
company’s overall R&D strategy.

Chapter 10 Organizing for Innovation

243

Bartlett and Ghoshal argue that, overall, the multinational firm’s objective is to
make centralized innovation activities more effective (that is, better able to serve the
various local markets) while making decentralized innovation activities more efficient (that is, eliminating redundancies and exploiting synergies across divisions).
Bartlett and Ghoshal propose that firms should take a transnational approach wherein
resources and capabilities that exist anywhere within the firm can be leveraged and
deployed to exploit any opportunity that arises in any geographic market. They argue
that this can be achieved by:
∙ Encouraging reciprocal interdependence among the divisions of the firm (that is,
each division must recognize its dependency on the other divisions of the firm).
∙ Utilizing integration mechanisms across the divisions, such as division-spanning
teams, rotating personnel across divisions, and so on.
∙ Balancing the organization’s identity between its national brands and its global
image.
Ericsson provides an excellent example of this approach. Instead of using a strictly
centralized or decentralized structure for its innovation activities, Ericsson’s structure ebbs and flows between centralization and decentralization. Sometimes Ericsson
increases levels of centralization and global integration for particular projects, while
other times it decentralizes much more authority over innovation activities to its geographically dispersed divisions. Similar to the dynamic tension approach described by
Jelinek and Schoonhoven, Ericsson regularly modifies its structure to adjust the balance between integration and autonomy. To encourage interunit integration, Ericsson
also sends teams of 50 to 100 engineers to a different subsidiary for a year or two.
Such member rotation programs facilitate the diffusion of knowledge throughout the
firm.55 Furthermore, encouraging engineers to become integrated into multiple areas
of the company helped the engineers identify with both the global company and particular divisions.

Summary
of
Chapter

1. The impact of firm size on innovation has been debated for more than 50 years.
Size is thought to confer advantages such as economies of scale in R&D, greater
access to complementary resources (like capital and market access), and learning
benefits. However, size may also be associated with disadvantages such as inertia
and governance problems.
2. Many firms attempt to make big companies feel small by breaking them into networks of more specialized divisions. These divisions can behave like smaller,
more entrepreneurial firms.
3. Structural dimensions of the firm, including formalization, standardization, and
centralization, also affect the firm’s propensity to innovate and its effectiveness at
innovation. Formalization and standardization tend to improve efficiency, but can
stifle experimentation and creativity. Centralization has a more ambiguous effect

244 Part Three Implementing Technological Innovation Strategy

on innovation; in some cases, centralization can enable significant innovation to
occur more rapidly, and in other situations, decentralization fosters more innovation by enabling managers to respond quickly to local needs.
4. Traditionally, scholars have divided organization structures into two major types:
mechanistic structures, which are highly formalized and standardized, and are
good for efficient production, and organic structures, which are loose and free
flowing and are good for creativity and experimentation.
5. Ambidextrous organizations attempt to achieve both the efficiency advantages
of large mechanistic firms and the creativity and entrepreneurial spirit of small
organic firms. These firms may have divisions with different structures and control schemes, or they may alternate between different structures.
6. Recently, many firms have begun forming loosely coupled networks both within
and between firms to conduct development activities. Part of this transition is
attributed to the rise in information technology and the resultant decrease in coordination costs.
7. Multinational firms face significant challenges in determining where and how to
conduct their R&D activities. One primary challenge is to balance the need to
tap the knowledge and resources of local markets while also achieving coherence
across the corporation and ensure that technological innovations are diffused and
leveraged throughout the organization.

Discussion
Questions

1. Are there particular types of innovation activities for which large firms are likely
to outperform small firms? Are there types for which small firms are likely to
outperform large firms?
2. What are some advantages and disadvantages of having formalized procedures for
improving the effectiveness or efficiency of innovation?
3. What factors should a firm consider when deciding how centralized its R&D
activities should be? Should firms employ both centralized and decentralized
R&D activities?
4. Why is the tension between centralization and decentralization of R&D activities
likely to be even greater for multinational firms than for firms that compete in one
national market?
5. What are some of the advantages and disadvantages of the transnational approach
advocated by Bartlett and Ghoshal?

Suggested
Further
Reading

Classics
Burns, T., and G. M. Stalker, The Management of Innovation (London: Tavistock
­Publications, 1961).
Chandler, A., Strategy and Structure: Chapter in the History of the American Industrial Enterprise (Cambridge, MA: Harvard University Press, 1962).

Chapter 10 Organizing for Innovation

245

Ettlie, J. E., W. P. Bridges., and R. D. O’Keefe, “Organization Strategy and Structural Differences for Radical versus Incremental Innovation,” Management Science 30
(1984), pp. 682–95.
Schilling, M. A., “Towards a General Modular Systems Theory and Its Application to
Inter-firm Product Modularity,” Academy of Management Review 25 (2000), 312–34.
Schumpeter, J. A., Capitalism, Socialism and Democracy (New York: Harper &
Brothers Publishers, 1942).
Thompson, J. D., Organizations in Action (New York: McGraw-Hill, 1967).

Recent Work
Arora, A., S. Belenzon, and L. A. Rios, “The Organization of R&D in American Corporations: The Determinants and Consequences of Decentralization,” NBER Working
Paper No. 17013 (2011), May.
Kafouros, M., C. Wang, E. Mavroudi, J. Hong, and C. S. Katsikeas, “Geographic Dispersion and Co-Location in Global R&D Portfolios: Consequences for Firm Performance,” Research Policy 47 (2018):1243–55.
Kornberger, M., “The Visible Hand and the Crowd: Analyzing Organization Design in
Distributed Innovation Systems,” Strategic Organization 15 (2017):174–93.
Tushman, M., W. K. Smith., R. C. Wood., G. Westerman., and C. O’Reilly, “Organizational Designs and Innovation Streams,” Industrial and Corporate Change 19 (2010),
pp. 1331–66.

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