Assignment12

Innovating organizations — those that are designed to do something for the first time —call for unique structures, information and decision processes, and reward and people-selection systems.

Designing the Innovating Organization

Jay R. Galbraith

nnovatlon is in. New workable, marketable ideas are being sought and promoted these days as never before in the effort to restore U.S. leadership in technology, in productiv- ity growth, and in the ability to compete in the world marketplace. Innovative methods for conserving energy and adapting to new energy sources are also in demand.

The popular press uses words like revitalization to capture the essence of the is- sue. The primary culprit of our undoing, up until now, has been management's short-run earnings focus. However, even some patient

managers with long-term views are finding that they cannot buy innovation. They can- not exhort their operating organizations to be more innovative and creative. Patience, money, and a supportive leadership are not enough. It takes more than these things to achieve innovation.

It is my contention that innovation requires an organization specifically designed for that purpose —that is, such an organiza- tion's structure, processes, rewards, and peo- ple must be combined in a special way to cre- ate an innovating organization, one that is

Organizational Dynamics. Winter 1982. © 1982, AMACOM, a division of American Manaf^ement Associations. All rights reserved. 0090-2616/82/0016-0005/$02.00/0

designed to do something for the first time. The point to be emphasized here is that the innovating organization's components are completely different from and often contrary to those of existing organizations, which are generally operating organizations. The latter are designed to efficiently process the mil- lionth loan, produce the millionth automo- bile, or serve the millionth client. An organi- zation that is designed to do something well for the millionth time is not good at doing something for the first time. Therefore, orga- nizations that want to innovate or revitalize themselves need two organizations, an op- erating organization and an innovating orga- nization. In addition, if the ideas produced by the innovating organization are to be im- plemented by the operating organization, they need a transition process to transfer ideas from the innovating organization to the operating organization.

This article will describe the com- ponents of an organization geared to pro- ducing innovative ideas. SpeciHcally, in the next section of this article, I describe a case history that illustrates the components required for successful innovation. Then I will explore the lessons to be learned from this case history by describing the role struc- ture, the key processes, the reward systems, and the people practices that characterize an innovating organization.

THE INNOVATING PROCESS

Before I describe the typical process by which innovations occur in organizations, we must understand what we are discussing. What is innovation? How do we distinguish between invention and innovation? Inven- tion is the creation of a new idea. Innovation is the process of applying a new idea to create a new process or product. Invention occurs more frequently than innovation. In

6 addition, the kind of innovation in which we

are interested here is the kind that becomes necessary to implement a new idea that is not consistent with the current concept of the or- ganization's business. Many new ideas that are consistent with an organization's current business concept are routinely generated in some companies. Those are not our current concern; here we are concerned with imple- menting inventions that are good ideas but do not quite fit into the organization's cur- rent mold. Industry has a poor track record with this type of innovation. Most major technological changes come from outside an industry. The mechanical typewriter manu- facturers did not introduce the electric type- writer; the electric typewriter people did not invent the electronic typewriter; vacuum tube companies did not introduce the tran- sistor, and so on. Our objective is to describe an organization that will increase the odds that such nonroutine innovations can be made. The following case history of a non- routine innovation presents a number of les- sons that illustrate how we can design an in- novating organization.

THE CASE HISTORY

The organization in question is a venture that was started in the early seventies. While working for one of our fairly innovative electronics firms, a group of engineers devel- oped a new electronics product. However, they were in a division that did not have the charter for their product. The ensuing polit- ical battle caused the engineers to leave and form their own company. They successfully found venture capital and introduced their new product. Initial acceptance was good, and within several years their company was growing rapidly and had become the indus- try leader.

However, in the early 1970s Intel invented the microprocessor, and by the mid-to-Iate seventies, this innovation had

lay R. Calbraith, fortnerly professor of manage- t)ieiit at the Wharton School of the University of Pennsylvania, is currently directing his own management consulting firm out of Denver and is associated with several other consulting finns in Boston and Toronto. His principal area of st)edatization is organization of design change and dcvelopmetit. More recently he has con- centrated on fnajor strategy and slriicture changes both in his writing and consulting.

Before joining the Wharton School. Dr. Gal- braith was a professor at the Sloati School of Management at the Massachusetts Institute of Technology. From 1972 to 1974. on leave from MIT. he mus affiliated with the European In- stitute for Advanced Studies hi Management in Brussels.

Dr. Calhraith has written numerous articles for professional journals, handbooks, and re- search collections. In addition, he has writte)! three books: Designing Complex Organizations {Addison-Weslcy, 1973), Organization Design <Addiso)i-Wesley, 1977): and Strategy Imple- mentalion (West Publishing Company, 1978), Organization Design was selected by the Orga- nization Development Council as co-recipient of the outstanding book on organizations for the years 1976-77.

He has had considerable consulting experience in the United States, Europe, and South Amer- ica — particularly on matrix management issues and major reorganizations.

spread through the electronics industries. Manufacturers of previously 'dumb" prod- ucts now had the capability of incorporating intelligence into their product lines. A com-

petitor who understood computers and soft- ware introduced just such a product into our new venture firm's market, and it met with high acceptance. The firm's president re- sponded by hiring someone who knew some- thing about microcomputers and some soft- ware people and instructing the engineering department to respond to the need for a competing product.

The president spent most of his time raising capital to finance the venture's growth. But when he suddenly realized that the engineers had not made much progress, he instructed them to get a product out quickly. They did, but it was a half-hearted effort. The new product incorporated a mi- croprocessor but was less than the second- generation product that was called for.

Even though the president devel- oped markets in Europe and Singapore, he noticed that the competitor continued to grow faster than his company and had started to steal a share of his company's market. When the competitor became the in- dustry leader, the president decided to take charge of the product-development effort. However, he found that the hardware pro- ponents and software proponents in the en- gineering department were locked in a polit- ical battle. Each group felt that its "magic" was the more powerful. Unfortunately, the lead engineer (who was a co-founder of the firm) was a hardware proponent, and the hardware establishment prevailed. How- ever, they then clashed head-on with the marketing department, which agreed with the software proponents. The conflict re- sulted in studies and presentations, but no new product. So here was a young, small (1,200 people) entrepreneurial firm that could not innovate even though the presi- dent wanted innovation and provided re- sources to produce it. The lesson is that more was needed.

As the president became more deeply involved in the problem, he received

_J

a call from his New England sales manager, who wanted him to meet a field engineer who had modified the company's product and programmed it in a way that met cus- tomer demands. The sales manager sug- gested, "We may have something here.'

Indeed, the president was im- pressed with what he saw. When the engi- neer had wanted to use the company's product to track his own inventory, he wrote to com- pany headquarters for programming instruc- tions. The response had been: It's against company policy to send instructional materi- als to field engineers. Undaunted, the engi- neer bought a home computer and taught himself to program. He then modified the product in the field and programmed it to solve his problem. When the sales manager happened to see what was done, he recog- nized its significance and immediately called the president.

The field engineer accompanied the president back to headquarters and pre- sented his work to the engineers who had been working on the second-generation product for so long. They brushed off his ef- forts as idiosyncratic, and the field engineer was thanked and returned to the field.

A couple of weeks later the sales manager called the president again. He said that the company would lose this talented guy if something wasn't done. Besides, he thought that the field engineer, not engineer- ing, was right. While he was considering what to do with this ingenious engineer, who, on his own had produced more than the entire engineering department, the presi- dent received a request from the European sales manager to have the engineer assigned to him.

The European sales manager had heard about the field engineer when he vis- ited headquarters, and had sought him out and listened to his story. The sales manager knew that a French bank wanted the type of

8 application that the field engineer had cre-

ated for himself; a successful application would be worth an order for several hundred machines. The president gave the go-ahead and sent the field engineer to Europe. The engineering department persisted in their view that the program wouldn't work. Three months later, the field engineer successfully developed the application, and the bank signed the order.

When the field engineer returned, the president assigned him to a trusted mar- keting manager who was told to protect him and get a product out. The engineers were told to support the manager and reluctantly did so. Soon they created some applications software and a printed circuit board that could easily be installed in all existing ma- chines in the field. The addition of this board and the software temporarily saved the com- pany and made its current product slightly superior to that of the competitor.

Elated, the president congratulated the young field engineer and gave him a good staff position working on special as- signments to develop software. Then prob- lems arose. When the president tried to get the personnel department to give the engi- neer a special cash award, they were reluc- tant. "After all," they said, "other people worked on the effort, too. It will set a prece- dent." And so it went. The finance depart- ment wanted to withhold $500 from the en- gineer's pay because he had received a $1,000 advance for his European trip, but had turned in vouchers for only $500.

The engineer didn't help himself very much either; he was hard to get along with and refused to accept supervision from anyone except the European sales manager. When the president arranged to have him permanently transferred to Europe on three occasions, the engineer changed his mind about going at the last minute. The president is still wondering what to do with him.

There are a number of lessons about the needs of an innovative organiza-

tion in this not uncommon story. The next section elaborates on these lessons.

Figure 1

ORGANIZATION DESIGN COMPONENTS

THE INNOVATING ORGANIZATION

Before we can draw upon the case history's lessons, it is important to note that the basic components of the innovating organization are no different from those of an operating organization. That is, both include a task, a structure, processes, reward systems, and people, as shown in Eigure 1. Figure 2 com- pares the design parameters of the operating organization's components with those of the innovating organization's components.

This figure shows that each compo- nent must fit with each of the other compo- nents and with the task, A basic premise of this article is that the task of the innovating organization is fundamentally different from that of the operating organization. The inno- vating task is more uncertain and risky, takes place over longer time periods, as- sumes that failure in the early stages may be desirable, and so on. Therefore, the organi- zation that performs the innovative task should also be different. Obviously, a firm that wishes to innovate needs both an op- erating organization and an innovating orga- nization. Let's look at the latter.

STRUCTURE OF THE INNOVATING

ORGANIZATION

The structure of the innovating organization encompasses these elements: (1) people to fill three vital roles —idea generators, sponsors, and orchestrators; (2) differentiation, a pro- cess that differentiates or separates the inno- vating organization's activities from those of the operating organization; and (3) "reserva- tions," the means by which the separation occurs - and this may be accomplished phys- ically, financially, or organizationally.

Stage of Development Strategy

The part that each of these ele- ments plays in the commercialization of a new idea can be illustrated by referring to the case history.

Roles

Like any organized phenomenon, innova- tion is brought about through the efforts of people who interact in a combination of roles. Innovation is not an individual phe- nomenon. People who must interact to pro- duce a commercial product — that is, to inno- vate in the sense we are discussing — play their roles as follows:

• Every innovation starts with an idea generator or idea champion. In the above example, the field engineer was the person who generated the new idea —that is. the inventor, the entrepreneur, or risk taker on whom much of our attention has been fo- cused . The case history showed that an idea champion is needed at each stage of an idea's or an invention's development into an innovation. That is. at each stage there must be a dedicated, full-time individual whose

Figure 2 COMPARISON OF COMPONENTS OF OPERATING AND INNOVATING ORGANIZATIONS

Operating Organization Innovating Organization

Structure

Processes

Reward systems

People

Division of labor Departmentalization Span ol control Distribution of power

Providing information and communication

Planning and budgeting Measuring performance Linking departments

Compensation Promotion Leader style Job design

Selection/recruitment Promotion/transfer Training/development

Roles: Orchestrator Sponsor Idea generator (champion)

Differentiation Reservations

Planning/funding Getting ideas Blending ideas Transitioning Managing programs

Opportunity/autonomy Promotion/recognition Special compensation

Selection/self-selection Training/development

10

success or failure depends on developing the idea. The idea generator is usually a low- level person who experiences a problem and develops a new response to it. The lesson here is that many ideas originate down where "the rubber meets the road." The low status and authority level of the idea genera- tor creates a need for someone to play the next role.

• Every idea needs at least one sponsor to promote it. To carry an idea through to implementation, someone has to discover it and fund the increasingly disrup- tive and expensive development and testing efforts that shape it. Thus idea generators need to find sponsors for their ideas so they can perfect them. In our example, the New England sales manager, the European sales manager, and finally the marketing manager all sponsored the field engineer's idea. Thus one of the sponsor's functions is to lend his or her authority and resources to an idea to

carry the idea closer to commercialization. The sponsor must also recognize

the business significance of an idea. In any organization, there are hundreds of ideas be- ing promoted at any one time. The sponsor must select from among these ideas those that might become marketable. Thus it is best that sponsors be generalists. (However, that is not always the case, as our case his- tory illustrates.)

Sponsors are usually middle man- agers who may be anywhere in the organiza- tion and who usually work for both the operating and the innovating organization. Some sponsors run divisions or depart- ments. They must be able to balance the operating and innovating needs of their busi- ness or function. On the other hand, when the firm can afford the creation of venture groups, new product development depart- ments, and the like, sponsors may work full time for the innovating organization. In the

case history, the two sales managers sponta- neously became sponsors and the marketing manager was formally designated as a spon- sor by the president. The point here is that by formally designating the role or recogniz- ing it, funding it with monies earmarked for innovation, creating innovating incentives, and developing and selecting sponsorship skills, the organization can improve its odds of coming up with successful innovations. Not much attention has been given to spon- sors, but they need equal attention because innovation will not occur unless there are people in the company who will fill all three roles.

• The third role illustrated in the case history is that of the orchestrator. The president played this role. An orchestrator is necessary because new ideas are never neu- tral. Innovative ideas are destructive; they destroy investments in capital equipment and people's careers. The management of ideas is a political process. The problem is that the political struggle is biased toward those in the establishment who have authori- ty and control of resources. The orchestrator must balance the power to give the new idea a chance to be tested in the face of a negative establishment. The orchestrator must pro- tect idea people, promote the opportunity to try out new ideas, and back those whose ideas prove effective. This person must le- gitimize the whole process. That is what the president did with the field engineer; before he became involved, the hardware establish- ment had prevailed. Without an orchestra- tor, there can be no innovation.

To play their roles successfully, orchestrators use the processes and rewards to be described in the following sections. That is, a person orchestrates by funding in- novating activities and creating incentives for middle managers to sponsor innovating ideas. Orchestrators are the organization's top managers, and they must design the in- novating organization.

The typical operating role structure of a divisionalized firm is shown in Figure 3. The hierarchy is one of the operating func- tions reporting to division general managers who are, in turn, grouped under group executives. The group executives report to the chief executive officer (CEO). Some of these people play roles in both the operating and the innovating organization.

The innovating organization's role structure is shown in Figure 4. The chief executive and a group executive function as orchestrators. Division managers are the sponsors who work in both the operating and the innovating organizations. In addi- tion, several reservations are created in which managers of research and develop- ment (R&D), corporate development, prod- uct development, market development, and new process technology function as full-time sponsors. These reservations allow the sep- aration of innovating activity from the operating activity. This separation is an or- ganizing choice called differentiation. It is described next.

Differentiation

In the case history we saw that the innova- tive idea perfected at a remote site was rela- tively advanced before it was discovered by management. The lesson to be learned from this is that if one wants to stimulate new ideas, the odds are better if early efforts to perfect and test new 'crazy" ideas are differ- entiated—that is, separated —from the func- tions of the operating organization. Such differentiation occurs when an effort is sep- arated physically, financially, and/or orga- nizationally from the day-to-day activities that are likely to disrupt it. If the field engi- neer had worked within the engineering de- partment or at company headquarters, his idea probably would have been snuffed out prematurely.

Another kind of differentiation can 11

Figure 3 TYPICAL OPERATING STRUCTURE OF DIVISIONALIZED FIRM

CEO

Staffs

Group executive

Group executive

Group execuf ive

Division Division Division

Marketing Operations

Market development

Corporate development

Group executive

Corporate research

and development

Division Group research and development

Engineering Product development

Process technology

I I I I rm

12

be accomplished by freeing initial idea tests from staff controls designed for the operat- ing organization. The effect of too much control is illustrated by one company in which a decision on whether to buy an oscil- loscope took about 15 to 30 minutes (with a shout across the room) before the company was acquired by a larger organization. After the acquisition, that same type of decision took 12 to 18 months because the purchase required a capital appropriation request. Controls based on operating logic reduce the innovating organizations ability to rapidly, cheaply, and frequently test and modify new ideas. Thus, the more differentiated an ini- tial effort is, the greater the likelihood of innovation.

The problem with differentiation.

however, is that it decreases the likelihood that a new proven idea will be transferred back to the operating organization. Herein lies the differentiation/transfer dilemma; The more differentiated the effort, the greater the likelihood of producing a new business idea, but the less likelihood of transferring the new idea into the operating organization for implementation. The dilemma occurs only when the organization needs both invention and transfer. That is, some organizations may not need to transfer new ideas to the operating organization. For example, when Exxon started its information systems busi- ness, there was no intention to have the pe- troleum company run this area of business. Exxon innovators had to grow their own op- erating organizations; therefore, they could

Figure 4

AN INNOVATING ROLE STRUCTURE

(differentiation)

Orchesfratof (group executive)

( Reservaf ionj

n X X X X X

I I ITT1 X X X X X X

Key

G Orchestrator CD Sponsor/Reservation X Idea generator/champion

maximize differentiation in the early phases. Alternatively, when Intel started work on the 64K RAM (the next generation of semicon- ductor memories, this random access mem- ory holds roughly 64.000 bits of informa- tion), the effort was consistent with their current business and the transfer into fabri- cation and sales was critical. Therefore, the development effort was only minimally sep-

arated from the operating division that was producing the 16K RAM. The problem be- comes particularly difficult when a new product or process differs from current ones, but must be implemented through the cur- rent manufacturing and sales organizations. The greater the need for invention and the greater the difference between the new idea and the existing business concept, the greater 13

the degree of differentiation required to per- fect the idea. The only way to accomplish both invention and transfer is to proceed stagewise. That is, differentiate in the early phases and then start the transition process before development is completed so that only a little differentiation is left when the product is ready for implementation. The transition process is described in the section on key processes (page 15).

In summary, invention occurs best when initial efforts are separated from the operating organization and its controls —be- cause innovating and operating are funda- mentally opposing logics. This kind of sep- aration allows both to be performed simul- taneously and prevents the establishment from prematurely snuffing out a new idea. The less the dominant culture of the organi- zation supports innovation, the greater is the need for separation. Often this separation occurs naturally as in the case history, or clandestinely, as in "bootlegging." If a firm wants to foster innovation, it can create res- ervations where innovating activity can oc- cur as a matter of course. Let us now turn to this last structural parameter.

Reservations

Reservations are organizational units, such as R&D groups, that are totally devoted to creating new ideas for future business. The intention is to reproduce a garage-like at- mosphere where people can rapidly and fre- quently test their ideas. Reservations are havens for "safe learning." When innovating, one wants to maximize early failure to pro- mote learning. On reservations that are sep- arated from operations, this cheap, rapid screening can take place.

Reservations permit differentiation to occur by housing people who work solely for the innovating organization and by hav- ing a reservation manager who works full

14 time as a sponsor. They may be located

within divisions and/or at corporate head- quarters to permit various degrees of differ- entiation.

Reservations can be internal or ex- ternal. Internal reservations may include some staff and research groups, product and process development labs, and groups that are devoted to market development, new ventures, and/or corporate development. They are organizational homes where idea generators can contribute without becoming managers. Originally, this was the purpose of staff groups, but staff groups now fre- quently assume control responsibilities or are narrow specialists who contribute to the current business idea. Because such internal groups can be expensive, outside reserva- tions like universities, consulting firms, and advertising agencies are often used to tap nonmanagerial idea generators.

Reservations can be permanent or temporary. The internal reservations de- scribed above, such as R&D units, are rea- sonably permanent entities. Others can be temporary. Members of the operating orga- nization may be relieved of operating duties to develop a new program, a new process, or a new product. When developed, they take the idea into the operating organization and resume their operating responsibilities. But for a period of time they are differentiated from operating functions to varying degrees in order to innovate, fail, learn, and ulti- mately perfect a new idea.

Collectively the roles of orchestra- tors, sponsors, and idea generators working with and on reservations constitute the structure of the innovating organization. Some of the people, such as sponsors and or- chestrators, play roles in both organizations; reservation managers and idea generators work only for the innovating organization. Virtually everyone in the organization can be an idea generator, and all middle man- agers are potential sponsors. However not all choose to play these roles. People vary

considerably in their innovating skills. By recognizing the need for these roles, devel- oping people to fill them, giving them oppor- tunity to use their skills in key processes, and rewarding innovating accomplishments, the organization can do considerably better than just allowing a spontaneous process to work. Several key processes are part and parcel of this innovating organizational structure. These are described in the next section.

KEY PROCESSES

In our case history, the idea generator and the first two sponsors found each other through happenstance. The odds of such propitious match-ups can be significantly improved through the explicit design of pro- cesses that help sponsors and idea generators find each other. The chances of successful match-ups can be improved by such funding, getting ideas, and blending ideas. In addi- tion, the processes of transitioning and pro- gram management move ideas from reserva- tions into operations. Each of these is de- scribed below.

Funding

A key process that increases our ability to in- novate is a funding process that is explicitly earmarked for the innovating organization. A leader in this field is Texas Instruments

(TI), a company that budgets and allocates funds for both operating and innovating. In essence the orchestrators make the short-run/ long-run tradeoff at this point. They then or- chestrate by choosing where to place the in- novating funds —with division sponsors or corporate reservations. The funding process is a key tool for orchestration.

Another lesson to be learned from the case history is that it frequently takes more than one sponsor to launch a new idea. The field engineer's idea would never have been brought to management's attention without the New England sales manager. It would never have been tested in the market without the European sales manager. Multi- ple sponsors keep fragile ideas alive. If en- gineering had been the only available spon- sor for technical ideas, there would have been no innovation.

Some organizations purposely create a multiple sponsoring system and make it le- gitimate for an idea generator to go to any sponsor who has funding for new ideas. Multiple sponsors duplicate the market sys- tem of multiple bankers for entrepreneurs. At Minnesota Mining and Manufacturing (3M), for example, an idea generator can go to his or her division sponsor for funding. If refused, the idea generator can then go to any other division sponsor or even to corpo- rate R&D. If the idea is outside current busi- ness lines, the idea generator can go to the new ventures group for support. If the fdea is

'[Ijnvention occurs best when initial efforts are separated from the operating organization and its controls—because innovating and operating are fundamentally opposing logics/' 15

rejected by all possible sponsors, it probably isn't a very good idea. However, the idea is kept alive and given several opportunities to be tested. Multiple sponsors keep fragile young ideas alive.

Getting Ideas

The process of getting ideas occurs by hap- penstance as it did in the case history. The premise of this section is that the odds of match-ups between idea generators and sponsors can be improved by organization design. First, the natural process can be im- proved by network-building actions such as multidivision or multireservation careers or company-wide seminars and conferences. Ail of these practices plus a common phys- ical location facilitate matching at 3M.

The matching process is formalized at Tl, where there is an elaborate planning process called the objectives, strategies and factics or OST system, which is an annual harvest ol" new ideas. Innovating funds are distributed to managers of objectives (spon- sors) who fund projects based on ideas for- mulated by idea generators, and these then become tactical action programs. Ideas that are not funded go into a creative backlog to be tapped throughout the year. Whether for- mal, as at TI, or informal, as at 3M, it is noteworthy that these are known systems for matching ideas with sponsors.

Ideas can also be acquired by ag- gressive sponsors. Sponsors sit at the cross- roads of many ideas and often arrive at a better idea by putting two or more together. They can then pursue an idea generator to champion it. Good sponsors know where the proven idea people are located and how to attract such people to come to perfect an idea on their reservation. Sponsors can go inside or outside the organization to pursue these idea people.

And finally, formal events for 16 matching purposes can be scheduled. At 3M,

for example, there's an annual fair at which idea generators can set up booths to be viewed by shopping sponsors. Exxon Enterprises held a 'shake the tree event" at which idea people could throw out ideas to be pursued by attending sponsors. The variations of such events are endless. The point is that by devoting time to ideas and making innova- tion legitimate, the odds that sponsors will find new ideas are increased.

Blending Ideas

An important lesson to be derived from our scenario is that it is no accident that a field engineer produced the new product idea. Why? Because the field engineer spent all day working on customer problems and also knew the technology. Therefore, one person knew the need and the means by which to satisfy that need. (An added plus: The field engineer had a personal need to design the appropriate technology.) The premise here is that innovation is more likely to occur when knowledge of technologies and user require- ments are combined in the minds of as few people as possible — preferably in that of one person.

The question of whether innova- tions are need-stimulated or means-stimu- lated is debatable. Do you start with the dis- ease and look for a cure, or start with a cure and find a disease for it? Research indicates that two-thirds of innovations are need-stim- ulated. But this argument misses the point. As shown in Figure 5(a), the debate is over whether use or means drives the downstream efforts. This thinking is linear and sequen- tial. Instead, the model suggested here is shown in Figure 5(b). That is, for innovation to occur, knowledge of all key components is simultaneously coupled. And the best way to maximize communication among the components is to have the communication occur intrapersonally — that is, within one persons mind. If this is impossible, then as

Figure 5 LINEAR SEQUENTIAL COUPLING COMPARED WITH SIMULTANEOUS COUPLING OF KNOWLEDGE

(a) Linear

Means- stimulated

Needs- stimulated

Sequential Coupling

Research and

development

Marketing

Manufacturing

Research and

development

Marketing

Manufacturing

User

User

(b) Simultaneous Coupling

Research and

development

few people as possible should have to com- municate or interact. The point is that inno- vative ideas occur when knowledge of the es- sential specialties is coupled in as few heads as possible. To encourage such coupling, the organization can grow or select individuals with the essential skills or it can encourage interaction between those with meshing skills. These practices will be discussed in a people section.

A variety of processes are em- ployed by organizations to match knowl- edge of need and of means. At IBM they place marketing people directly in the R&D labs where they can readily interpret the market requirement documents for research- ers. People are rotated through this unit, and a network is created. Wang holds an annual users' conference at which customers and product designers interact and discuss the use of Wang products. Lanier insists that all

top managers, including R&D management, spend one day a month selling in the field. It is reported that British scientists made re- markable progress on developing radar after actually flying missions with the Royal Air Force. In all these cases there is an explicit matching of the use and the user with knowl- edge of a technology to meet the use. Again these processes are explicitly designed to get a user orientation among the idea generators and sponsors. They increase the likelihood that inventions will be innovations. The more complete a new idea or invention is at its inception, the greater the likelihood of its being transferred into the operating organization.

Transitioning

Perhaps the most crucial process in getting an innovative product to market is the tran- 17

Choices

Figure 6

TRANSITIONING IDEAS BY STAGES

Stages

II Nth Implementation

Sponsor Champion Staffing Location Funding Autonomy

Corporate Corporate Corporate Corporate Corporate Complete

Corporate Corporate Corporate-division Corporate Corporate Complete

Division Division Division Division Division Minimal

18

sitioning of an idea from a reservation to an operating organization for implementation. This process occurs in stages, as illustrated in the case history. First, the idea was formu- lated in the field before management knew about it. Then it was tested with a customer, the French bank. And finally, at the third stage, development and full-scale implemen- tation took place. In other cases, several ad- ditional stages of testing and scale-up may be necessary. In any case, transitioning should be planned in such stages. At each stage the orchestrator has several choices that balance the need for further invention with the need for transfer. The choices and typical stages of idea development are shown in Figure 6.

At each stage these choices face the orchestrator: Who will be the sponsor? Who will be the champion? Where can staff be se- cured for the effort? At what physical loca- tion will work be performed? Who will fund the effort? How much autonomy should the effort have, or how differentiated should it be? For example, at the initial new idea for- mulation stage the sponsor could be the cor- porate ventures group with the champion working on the corporate reservation. The effort could be staffed with other corporate reservation types and funded at the corpo- rate level. The activity would be fully sep- arate and autonomous. If the results were positive, the process could proceed to the

next stage. If the idea needed further devel- opment, some division people could be brought in to round out the needed special- ties. If the data were still positive after the second stage, then the effort could be trans- ferred physically to the division, but the champion, sponsor, and funding might re- main at the corporate level. In this manner, by orchestrating through choices of sponsor, champion, staff, location, funding, and autonomy, the orchestrator balances the need for innovation and protection with the need for testing against reality and transfer.

The above is an all-too-brief out- line of the transition process; entire books have been written on the subject of technol- ogy transfer. The goal here is to highlight the stagewise nature of the process and the deci- sions to be made by the orchestrator at each stage. The process is crucial because it is the link between the two organizations. Thus to consistently innovate, the firm needs an in- novating organization, an operating organi- zation, and a process for transitioning ideas from the former to the latter.

Managing Programs

Program management is necessary to imple- ment new products and processes within di- visions. At this stage of the process, the idea generator usually hands the idea off to a

product/project/program manager. The product or process is then implemented across the functional organization within the division. The systems and organizational processes for managing projects have been discussed elsewhere and will not be discussed here. The point is that a program manage- ment process and skill is needed.

In summary, several key processes — that is, funding, getting ideas, blending ideas, transitioning, and managing programs — are basic components of the innovating structure. Even though many of these occur naturally in all organizations, our implicit hypothesis is that the odds for successful in- novation can be increased by explicitly de- signing these processes and by earmarking corporate resources for them. Hundreds of people in organizations choose to innovate voluntarily, as did the field engineer in the case history. However, if there were a re- ward system for people like these, more would choose to innovate, and more would choose to stay in the organization to do their innovating. The reward system is the next component to be described.

REWARD SYSTEM

The innovating organization, like the operating organization, needs an incentive system to motivate innovating behavior. Be- cause the task of innovating is different from that of operating, the innovating organiza- tion needs a different reward system. The in- novating task is riskier, more difficult, and takes place over longer time frames. These factors call for some adjustment of the operating organization's reward system, the amount of adjustment depending on how In- novative the operating organization is and how attractive outside alternatives are.

The functions of the reward system are threefold: First, the rewards must attract idea people to the company and the reserva-

tions and retain them. Because various firms have different attraction and retention prob- lems, their reward systems must vary. Sec- ond, the rewards provide motivation for the extra effort needed to innovate. After 19 fail- ures, for example, something has to moti- vate the idea generator to make the 20th at- tempt. And, finally, successful performance deserves a reward. These rewards are pri- marily for idea generators. However, a re- ward-measurement system for sponsors is equally important. Various reward systems will be discussed in the next sections.

Rewards for Idea Generators

Reward systems mix several types of internal motivators, such as the opportunity to pur- sue one's ideas, promotions, recognition, systems, and special compensation. First, people can be attracted and motivated in- trinsically by simply giving them the oppor- tunity and autonomy to pursue their own ideas. A reservation can provide such oppor- tunity and autonomy. Idea people —who are internally driven —such as the field engineer in our story can come to a reservation, pursue their own ideas, and be guided and evaluated by a reservation manager. This is a reward in itself, albeit a minimal reward. If that minimal level attracts and motivates idea people, the innovating organization need go no further in creating a separate re- ward system.

However, if necessary, motivational leverage can be obtained by promotion and recognition for innovating performance. The dual ladder—that is, a system whereby an individual contributor can be promoted and given increased salary without taking on managerial responsibilities —is the best example of such a system. At 3M a contrib- utor can rise in both status and salary to the equivalent of a group executive without be- coming a manager. The dual ladder has al- ways existed in R&D, but it is now being ex- 19

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tended to some other functions as well. Some firms grant special recogni-

tion for high career performance. IBM has its IBM fellows program in which the person se- lected as a fellow can work on projects of his or her own choosing for five years. At 3M, there is the Carlton Award, which is de- scribed as an internal Nobel Prize. Such pro- motion and recognition systems reward in- novation and help create an innovating culture.

When greater motivation is needed, and/or the organization wants to signal the importance of innovation, special compen- sation is added to the aforementioned sys- tems. Different special compensation systems will be discussed in the order of increasing motivational impact and of increasing dys- functional ripple effects. The implication is that the firm should use speciai compensa- tion only to the degree that the need for at- traction and for motivation dictate.

Some companies reward successful idea generators with one-time cash awards. For example. International Harvester's share of the combine market jumped from 12 per- cent to 17 percent because of the introduc- tion of the axial flow combine. The scientist whose six patents contributed to the product development was given $10,000. If the prod- uct continues to succeed, he may be given another award. IBM uses the 'Chairman's Outstanding Contribution Award." The cur- rent program manager on the 4300 series was given a $5,000 award for her breakthrough in coding. These awards are made after the idea is successful and primarily serve to re- ward achievement rather than to attract in- novators and provide incentive for future efforts.

Programs that give a "percentage of the take" to the idea generator and early team members provide even stronger moti- vation. Toy and game companies give a roy- alty to inventors —both internal and external — of toys and games they produce. Apple

Computer claims to give royalties to em- ployees who write software programs that will run on Apple equipment. A chemical company created a pool by putting aside 4 percent of the first five years' earnings from a new business venture, which was to be dis- tributed to the initial venture team. Other companies create pools from percentages that range from 2 to 20 percent of cost sav- ings created by process innovations. In any case, a predetermined contract is created to motivate the idea generator and those who join a risky effort at an early stage.

The most controversial efforts to date are attempts to duplicate free-market rewards within the firm. For example, a cou- ple of years ago, ITT bought a small com- pany named Qume that made high-speed printers. The founder became a millionaire from the sale; he had to quit his previous em- ployer to found the venture capital effort to start Qume. If ITT can make an outsider a millionaire, why not give the same chance to entrepreneurial insiders? Many people advo- cate such a system but have not found an ap- propriate formula to implement the idea. For example, one firm created five-year mile- stones for a venture, the accomplishment of which would result in a cash award of $6 million to the idea generator. However, the business climate changed after two years, and the idea generator, not surprisingly, tried to make the plan work rather than adapt to the new, unforeseen reality.

Another scheme is to give the idea generator and the initial team some phantom stock, which gets evaluated at sale time in the same way that any acquisition would be evaluated. This process duplicates the free- market process and gives internal people the same venture capital opportunities and risks as they would have on the outside.

The special compensation pro- grams produce motivation arid dysfunc- tions. People who contriblite at later stages frequently feel like second-class citizens.

Also, any program that discriminates will create perceptions of unfair treatment and possible fallout in the operating organiza- tion. If the benefits are judged to be worth the effort, however, care should be taken to manage the fallout.

Rewards for Sponsors

The case history also demonstrates that sponsors need incentives, too. In the ex- ample, because they were being beaten in the market, the sales people had an incentive to adopt a new product. The point is that spon- sors will sponsor ideas, but these may not be innovating ideas unless there's something in it for them. The orchestrator's task is to create and communicate those incentives.

Sponsor incentives take many forms. At 3M, division managers have a bonus goal that is reached if 25 percent of their revenue comes from products intro- duced within the previous five years. When the percentage falls below the goal, and the bonus is threatened, these sponsors become amazingly receptive to new product ideas. The transfer process becomes much easier as a result. Sales growth, revenue increase, numbers of new products, and so on, may be the bases for incentives that motivate sponsors.

Another controversy can arise if the idea generators receive phantom stock. Should the sponsors who supervise these idea people receive phantom stock, too? Some banks have created separate subsid- iaries so that sponsors can receive stock in the new venture. To the degree that sponsors contribute to idea development, they will need to be given such stock options, too.

Thus, the innovating organization needs reward systems for both idea genera- tors and sponsors. It should start with a sim- ple reward system and move to more moti- vating, more complex, and possibly more upsetting types of rewards only if and when

attraction and motivation problems call for them.

PEOPLE

The final policy area to be considered in- volves people practices. The assumption is that some people who are better at innovating are not necessarily good at operating. There- fore, the ability of the Innovating organiza- tion to generate new business ideas can be increased by systematically developing and selecting those people who are better at inno- vating than others. But first the desirable attributes must be identified. These charac- teristics that identify likely idea generators and sponsors are spelled out in the following sections.

Attributes of Idea Generators

The field engineer in our case history is the stereotype of the inventor. He is not main- stream. He's hard to get along with, and he wasn't afraid to break company policy to perfect his idea. Such people have strong egos that allow them to persist and swim up- stream. They generally are not the type of people who get along well in an organiza- tion. However, if an organization has reser- vations, innovating funds, and dual ladders, these people can be attracted and retained.

The psychological attributes of suc- cessful entrepreneurs include great need to achieve and to take risks. But, to translate that need into innovation, several other at- tributes are needed. First, prospective inno- vators have an irreverence for the status quo. They often come from outcast groups or are newcomers to the company; they are less satisfied with the way things are and have less to lose if there's a change. Success- ful innovators also need "previous program- ming in the industry" —that is, an in-depth knowledge of the industry gained through 21

either experience or formal education. Hence, the innovator needs industry knowl- edge, but not the religion.

Previous startup experience is also associated with successful business ventures. As are people who come from incubator firms (for example high-technology com- panies) and areas (such as Boston and the Silicon Valley) that are noted for creativity.

The amount of organizational effort needed to select these people varies with the ability to attract them to the organization in the first place. If idea people are attracted through reputation, then by funding reserva- tions and employing idea-getting processes, idea people will, in effect, select themselves — they will want to work with the organiza- tion—and over time their presence will re- inforce the organization's reputation for idea generation. If the firm has no reputation for innovation, then idea people must be sought out or external reservations established to encourage initial idea generation. One firm made extensive use of outside recruiting to accomplish such a goal. A sponsor would develop an idea and then attend annual con- ferences of key specialists to determine who was most skilled in the area of interest; he or she would then interview appropriate candi- dates and offer the opportunity to develop the venture to those with entrepreneurial interests.

Another key attribute of successful business innovators is varied experience, which creates the coupling of a knowledge of means and of use in a single individual's mind. It is the generalist, not the specialist, who creates an idea that differs from the firm's current business line. Specialists are inventors; generalists are innovators. These people can be selected or developed. One ceramics engineering firm selects the best and the brightest graduates from the ceram- ics engineering schools and places them in central engineering to learn the firm's overall system. They are then assigned to field en- gineering where they spend three to five years with customers and their problems and then they return to central engineering prod- uct design. Only then do they design prod- ucts for those customers. This type of inter- nal coupling can be created by role rotation. Some aerospace firms rotate engineers through manufacturing liaison.

People who have the characteristics that make them successful innovators can be retained, however, only if there are reserva- tions for them and sponsors to guide them.

Attributes of Sponsors and Reservation Managers

The innovating organization must also at- tract, develop, train, and retain people to

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"[T]he idea generator [does] not take very well to being supervised. Idea generators and champions have a great deal of ownership in their ideas. They gain their satisfaction from having 'done it their way.

manage the idea development process. Be- cause certain types of people and manage- ment skills are better suited to managing ideas than others, likely prospects for such positions should have a management style that enables them to handle idea people, as well as early experience in innovating, the capability to generate ideas of their own, the skills to put deals together, and generalist business skills.

One of the key skills necessary for operating an innovating organization is the skill to manage and supervise the kind of person who is likely to be an idea generator and champion - that is, people who, among other characteristics, do not take very well to being supervised. Idea generators and champions have a great deal of ownership in their ideas. They gain their satisfaction by having "done it their way." The intrinsic satisfaction comes from the ownership and autonomy. However, idea people also need help, advice, and sounding boards. The suc- cessful sponsor learns how to manage these people in the same way that a producer or publisher learns to handle the egos of their stars and writers. This style was best de- scribed by a successful sponsor:

It's a lol like leaching your kids lo ride a bike. You're there. You walk along behind. If the kid takes off, he or she never knows that they could have been helped. If they stagger a little, you lend a helping hand, undetected preferably. If they fall, you catch them. If they do something stupid, you take the bike away until they're ready.

This style is quite different from the hands-on, directive style of managers in an operating organization. Of course, the best way to learn this style is to have been man- aged by it and seen it practiced in an inno- vating organization. Therefore, experience in an Innovating organization is essential.

More than the idea generators, the sponsors need to understand the logic of in- novation and to have experienced the man-

agement of innovation. Its managers need to have an intuitive feel for the task and its nuances. Managers whose only experience is in operations will not have developed the managerial style, understanding, and intui- tive feel that is necessary to manage innova- tions because the logic of operations is coun- terintuitive in comparison with the logic of innovations. This means that some idea gen- erators and champions who have experienced innovation should become managers as well as individual contributors. For example, the president in our case history was the inven- tor of the first-generation product and there- fore understood the long, agonizing process of developing a business idea. It is also rare to find an R&D manager who hasn't come through the R&D ranks.

The best idea sponsors and idea reservation managers, therefore, are people who have experienced innovation early in their careers and are comfortable with it. They will have been exposed to risk, uncer- tainty, parallel experiments, repeated fail- ures that led to learning, coupling rather than assembly-line thinking, long time frames, and personal control systems based on people and ideas, not numbers and budget variances. Sponsors and reservation man- agers can be developed or recruited from the outside.

Sponsors and reservation managers need to be idea generators themselves. Ideas tend to come from two sources. The first is at low levels of the organization where the problem gap is experienced. The idea genera- tor who offers a solution is the one who ex- perienced the problem and goes to a sponsor for testing and development. One problem with these ideas is that they may offer only partial solutions because they come from specialists whose views can be parochial and local. But sponsors are at the crossroads of many ideas. They may get a broader vision of the emerging situation as a result. These 23

Figure 7 AN INNOVATING ORGANIZATION'S DESIGN COMPONENTS

Roles Idea generators Sponsors Orchestrators Degree of

differentiation Reservations

Stage of Development Strategy

Selection and development of:

Idea generators Sponsors

Reward systems Funding

Getting ideas Blending ideas Transitioning Managing

programs

Rewards for idea generators

Opportunity/autonomy Promotion/recognition Special compensation

One-time awards Percentage of profits Phantom stock

Rewards for sponsors

24

idea sponsors can themselves generate an idea that is suitable for the organization's business, or they can blend several partial ideas into a business-adaptable idea. Spon- sors and reservation managers who are at the crossroads of idea flow are an important sec- ondary source of new ideas. Therefore, they should be selected and trained for their abil- ity to generate new ideas.

Another skill that sponsors and es- pecially reservation managers need is the ability to make deals and broker ideas. Once an idea has emerged, a reservation manager may have to argue for the release of key peo- ple, space, resources, charters, for produc-

tion time, or a customer contact. These deals all require someone who is adept at persua- sion. In that sense, handling them is no dif- ferent than project or product management roles. People do vary in their ability to make deals and to bargain and those who are par- ticularly adept should be selected for these roles. However, those who have other idea management skills may well be able to be trained in negotiating and bargaining.

And, finally, sponsors and reserva- tion managers should be generalists with general business skills. Again, the ability to recognize a business idea and to shape par- tial ideas into business ideas are needed.

Sponsors and reservation managers must coach idea generators in specialties in which the idea generator is not schooled. Most suc- cessful research managers are those with business skills who can see the business sig- nificance in the good ideas that come from scientists.

In summary, the sponsors and res- ervation managers who manage the idea- development process must be recruited, se- lected, and developed. The skills that these people need relate to their style, experience, idea-generating ability, deal-making ability, and generalist business acumen. People with these skills can either be selected or developed.

Thus some of the attributes of suc- cessful idea generators and idea sponsors can be identified. In creating the innovating or- ganization, people with these attributes can be recruited, selected, and/or developed. In so doing, the organization improves its odds at generating and developing new business ideas.

by hiring some entrepreneurs, by creating "breakthrough funds," or by offering special incentives. These are good policies but by themselves will not accomplish the goal. Fig- ure 1 conveyed the message that a consistent set of policies concerning structure, process, rewards, and people are needed. The inno- vating organization is illustrated in Figure 7. It is the combination of idea people, reserva- tions in which they can operate, sponsors to supervise them, funding for their ideas, and rewards for their success that increase the odds in favor of innovation. Simply imple- menting one or two of these practices will re- sult in failure and will only give people the impression that such practices do not work. A consistent combination of such practices will create an innovating organization that will work.

SUMMARY

The innovating organization described is one that recognizes and formalizes the roles, pro- cesses, rewards, and people practices that naturally lead to innovations. The point we have emphasized throughout this article is that the organization that purposely designs these roles and processes is more likely to generate innovations than is an organization that doesn't plan for this function. Such a purposely designed organization is needed to overcome the obstacles to innovation. Be- cause innovation is destructive to many es- tablished groups, it will be resisted. Innova- tion is contrary to operations and will be ig- nored. These and other obstacles are more likely to be overcome if the organization is designed specifically to innovate.

Managers have tried to overcome these obstacles by creating venture groups.

SELECTED BIBLIOGRAPHY

The basic ideas of organization design and of blending structure, processes, rewards, and peo- ple practices are described in my earlier book. Or- ganization Design (Addison-Wesley. 1978). The idea of differentiation comes from Paul Lawrence and Jay Lorsch's Organization and Environment (Harvard Business School, 1967). One can also find there the basic ideas of contingency theory.

The structure of the innovative organi- zation and the three roles involved are similar to those identified in the investment idea and capital budgeting process. These have been identified by Joseph Bower in The Resource Allocation Process (Division of Research at Harvard University, 1968).

Innovation itself has been treated in var- ious ways by many people. Some good ideas about technological innovation can be found in Lowell Steele's Innovation in Big Business (El- sevier, 1975). 2 5