The Sources of Management Innovation

Michael J. Mol & Julian Birkinshaw London Business School

At Analog Devices, and many other U.S. companies, product and process innovation are not the main bottleneck to progress. The bottleneck is management innovation. We have to ask ourselves, as a company and a nation, are we investing enough in management innovation? Do we even know how much or how little were investing?
Ray Stata, Chairman of Analog Devices, on the reasons why his companys growth became subdued over time (in a 1989 Sloan Management Review article) http://www.london.edu/programmes/executiveeducation/finance.html

2005 London Business School.

Long-run changes in competitive position in the automobile industry

Driven by Innovation in Management methods
Toyota Lean production / Just in Time etc. General Motors Divisionalisation Ford Assembly line / Mass production

1900

1920

1940

1960

1980

2000

What is a management innovation?

The implementation of a new management practice, process or structure that significantly alters the way in which the work of management is performed and is intended to further organisational goals.
PRINCIPLES PROCESSES STRUCTURES

PRACTICES
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A Contemporary Example of a Management Innovation

1996 Shell Exploration & Production
Basic research unit closed; Tim Warren seeks other ways of achieving breakthrough innovation

Gamechanger model developed:

$15m fund, 7-8 mid-level staff; seed funding innovative ideas through fast peer-review Over six years, 1300 ideas submitted, 138 projects, several real businesses, estimated $2.5 billion value

Principles challenged by Gamechanger

Capital allocation is controlled by senior executives Capital allocation requires careful and detailed analysis http://www.london.edu/programmes/executiveeducation/finance.html

The prevalence of different types of innovation in the academic literature

12,000

10,000

8,000

6,000

4,000

2,000

0 Technological Product Business / business Strategy / strategic model Organizational / organisational Administrative Management

The prevalence of different types of innovation in the managerial literature

45,000 40,000

35,000

30,000

Number of hits

25,000

20,000

15,000

10,000

5,000

0 Technological Product Business / business Strategy / strategic model Organizational / organisational Administrative Management

Stock of knowledge
Three lines of inquiry in current literature: How do individual management innovations diffuse? Historically, how were individual management innovations shaped? How is management innovation related to other forms of innovation, especially technological innovation?
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Diffusion processes
Diffusion speed and pattern of M-form (Teece, 1980; Palmer, Jennings, and Zhou, 1993), TQM (Zbaracki, 1998), ISO 9000 (Guler, Guillen and MacPherson, 2002) etc. Various attempts at theorising, including fashion and fad (Abrahamson, 1996), bandwagoning (Abrahamson and Rosenkopf, 1993), neo-institutional approach (Staw and Epstein, 2000).
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Histories of creation
Creation of M-form (Chandler, 1962), Activity-based costing (Cooper and Kaplan, 1988), Discounted Cash Flow (Pezet, 1997), Lean Production (Womack, Roos and Jones, 1990) etc. Without exception these have focused on individual innovations, not on comparisons or a generalized understanding
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Types of innovation
A few comparisons between various types of innovation (Damanpour and Evan, 1984; Alnge, Jacobsson, and Jarnehammar, 1998; Boer and During, 2001). This literature has focused on symptomatic differences and not produced a classification of management innovations.
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Our research project

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

The Community Innovation Survey (CIS 3) contains a number of questions that arguably capture management innovation. These questions focus on new management techniques, organisational structures, marketing methods and corporate strategies. We attempt to predict the occurrence of management innovation.
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Our model
We follow the well-known garbage can model of Cohen, March and Olsen (1972) in which organisations are viewed as a collection of problems looking for answers, solutions looking for issues, and decision-makers (looking for work). We see management innovation as one outcome of the garbage can.
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Problems (1)
Hypothesis 1. Management innovation is most likely to occur in the presence of demonstrable obstacles to growth and innovation. We use the innovation inhibitors questions (8.1) to measure demonstrable objects.

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

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

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

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

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Solutions (4)
Hypothesis 5. Management innovation is most likely to occur when a firm uses three different types of knowledge sources simultaneously: market sources, internal sources, and professional sources. We use the sources of information question (12.1 three groups) to measure these three types of knowledge sources.
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Findings
We use both OLS regression (on a count variable with range 0-4) and logit (on a management innovation dummy). The results confirm all of our hypotheses with the exception of the effect of market sources. We also find that size matters and that management innovation is more likely to occur in the joint presence of other types of innovation and where many employees hold degree level training.
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Extension 1
We are interested in the performance effect of management innovation. We believe there should be a positive effect (perhaps moderated) of management innovation on performance:

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How does Management Innovation generate competitive advantage?

System of interlinked activities
Which part(s) of the organization are affected?

GEs Work Out

Toyotas Lean Manufacturing

Less easy to understand, less easy to copy

One discrete activity

BPs Peer Assist system

Leads to changes to management practice

Intels production futures market

Leads to changes to management principles

Performance test
Unfortunately we can not use the CIS data to test for performance because of a) common method bias and b) measurement problems. Therefore we are now trying to use the ARD at ONS (in a similar vein to Criscuolo and Haskel though with different measures).
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Extension 2
Strategies Belgium undertaking innovation 38 undertaking no innovation 21 Denmark undertaking innovation 31 undertaking no innovation 13 Germany undertaking innovation 59 undertaking no innovation 29 Greece undertaking innovation 34 undertaking no innovation 14 Spain undertaking innovation 34 undertaking no innovation 11 France undertaking innovation 35 undertaking no innovation 13 Ireland undertaking innovation n/a undertaking no innovation n/a Italy undertaking innovation 42 29 52 undertaking no innovation 16 10 22 Luxembourg undertaking innovation 63 72 69 undertaking no innovation 32 46 46 The Netherlands undertaking innovation 49 25 36 undertaking no innovation 21 11 18 Austria undertaking innovation 52 42 61 undertaking no innovation 22 24 30 Portugal undertaking innovation 42 48 54 undertaking no innovation 18 14 19 Finland undertaking innovation 40 40 44 undertaking no innovation 15 15 22 Sweden undertaking innovation 48 13 52 undertaking no innovation 21 4 26 United Kingdom undertaking innovation 62 52 53 undertaking no innovation 25 20 21 Iceland undertaking innovation 44 31 45 undertaking no innovation 23 17 27 Norway undertaking innovation 42 29 51 http://www.london.edu/programmes/executiveeducation/finance.html undertaking no innovation 18 10 22 Management Organisation Marketing 32 51 15 29 11 31 5 12 54 71 28 42 29 47 10 20 42 52 16 22 34 15 n/a 8 3 n/a 33 15 28 10 55 28 40 21 37 14

35 14 41 23 28 8 48 24 35 15 30 14 39 20 66 31 41 20 33 14

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

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

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Management Innovation vs. Technological Innovation

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

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Management Innovation vs. Business History

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

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Management Innovation vs. Process Innovation

Object relation Similarities Overlap in process focus Creation events Differences Work of management versus work

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Management Innovation vs. Organizational Change

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

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