CHAPTER 13: MANAGING INNOVATION AND CHANGE

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CHAPTER 13 MANAGING INNOVATION AND CHANGE
TEACHING OBJECTIVES
1. To define innovation as the process of developing new products, production or operating systems. (13.1) 2. To discuss the product life cycle, and how it affects the rate of innovation. (13.1) 3. To discuss the role of intrapreneurs in organizations. (13.1) 4. To explain various techniques used to manage the innovation process, including project management and the stage gate funnel. (13.2) 5. To review the ways to foster an innovative culture: organizational structure, people, and property rights. (13.2) 6. To discuss the role that information technology has on innovation and creativity. (13.3)

CHAPTER SUMMARY
This chapter examines innovation and creativity. This is the process of developing new products, services, or procedures to better serve the needs of customers. Innovation brings about technological change. Quantum technological change, which results in quantum innovations, is distinguished from incremental technological change, which results in incremental innovations. Incremental innovations build on quantum innovations. The product life cycle is discussed with emphasis on how the rate of technological change in an industry and the role of fad and fashion play on the level of innovation and creativity that is needed in an industry. Intrapreneurs are entrepreneurs that are innovative employees of the organization. They recognize and implement either quantum or incremental product improvements. The chapter then discusses ways to manage the innovation process. Attention is given to the tools and processes associated with project management. The stage-gate development funnel is discussed as a model used to promote innovation. In managing innovation in high-tech organizations, cross-functional cooperation is key. Although product team and matrix structures promote innovation, organizations need more complex integrating mechanisms: Team managers and product champions, “skunk works,” new venture divisions, and joint ventures. A focus on structure, people, and property rights fosters an innovative culture. The chapter concludes with a discussion of how information technologies creates synergies and efficiencies in the organization, thus enhancing creativity and innovation.

CHAPTER OUTLINE 13.1 Innovation and Technological Change

Innovation is the development of new products or production systems. There is a link between innovation and technological change. Technology is the skills, tools, and experience used to design and produce goods and services. Changes in technology are prevalent and significantly affect an organization.

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Two types of technological change are quantum and incremental change. Quantum technological change is a basic transformation that reforms the way products are made. Personal computers (PCs) and genetic engineering are examples. Products that use a quantum technological advance, such as Intel’s first microprocessor, are called quantum innovations. Such innovations force companies to change. Incremental technological change is an improvement of base technology; products that use these refinements, such as Intel’s newer microprocessors are called incremental innovations. Anderson and Tushman call quantum innovations “technological discontinuities.” In the model of innovation, a technological discontinuity creates fierce competition to become the leader. After the dominant design appears, companies improve base technology through incremental change. (Fig. 13.1) Companies like Microsoft and Intel have gained from technological change, but others like IBM have experienced market decline. Technological change is both an opportunity and a threat. Creating new products makes others obsolete. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ • Refer to discussion question 1 here to review quantum and incremental change. _________________________________________________________________________________ _________________________________________________________________________________

The Product Life Cycle The life cycle represents the changes in demand for a product that occur over time. The rate of technological change determines how important it is for managers to innovate. The life cycle is represented by four stages: Embryonic- Customers are unsure what the product has to offer, and it has yet to gain widespread acceptance. Growth- Many consumers are entering the market and purchasing the product for the first time (for example: PDAs) Maturity- Consumers are buying replacement products (cars, telephones, PCs) as opposed to first time buyers.

The length of the life-cycle depends upon the rate of technological change and the role of fads and fashions to the particular industry or market.

Organizational Insight 13.1: Innovation at the Gap
In an effort to increase innovation, The Gap clothing chain decentralized many product development duties to the store level. This caused problems because the store managers did not have the ability to predict trends, fads, or fashions. He fixed the problem by centralizing control at the top. Q. Why does decentralization of innovation work in some industries but not others?

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Decline- Occurs when demand falls. This is often because of obsolescence (VCRs)

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A. In some industries such as clothing, fads and fashion change so quickly that a lower-level manager can’t keep up with the trends. Other industries operate in a much more stable environment, and managers can keep up. This is a good illustration of why decentralized authority does not always work. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

Innovation, Intrapreneurship, and Creativity
Intrapreneurs are entrepreneurs inside an organization who are responsible for the success or failure of a project. These would include managers, scientists, or researchers employed by a specific company. Many times, they get frustrated with the internal workings of the organization, and start their own companies. Creativity can simply be defined as going beyond the current boundaries. Examples include generating new ideas, combining or synthesizing two or more previously unrelated ideas, or modifying a product or process in order to make it better. A knowledge creating organization is one where such innovation is going on at all levels and in all areas of the organization.

13.2

Managing the Innovation Process

High-tech companies use several tools to increase innovation: Project management, stage-gate development funnel, team leadership, “skunk works,” and new ventures. Project Management A project is a subunit whose goal centers on developing a product or service on time, within budget, and in compliance with certain specifications. Project management is the process of managing the project. The involves a variety of management skills and tools, especially for large projects. Some tools that project managers use include PERT/CAM networks or GANTT charts. The Critical Path Method shows what these models are trying to achieve, which is to determine which tasks are critical to the completion of the task, and what the sequence of the tasks should be. (Fig. 13.3) Stage-Gate Development Funnel If resources are spread too thin by funding too many projects, no project receives the required resources to make it successful. Managers need a plan for approving projects, such as a stage-gate funnel. (Fig. 13.4) Stage 1, the wide mouth of the funnel, fosters innovation by requesting new product ideas. Rewards may be offered for ideas. Companies like 3M, allow research scientists time to develop their projects. New ideas are given to an evaluating team to determine the idea’s feasibility and its match to company strategy. Once these criteria are met, the proposal goes to stage 2, a new product development plan with all the pertinent information including resource requirements. A cross-functional team prepares the plan, using customer needs assessment surveys.

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A senior management committee at gate 2 determines if the plan is beneficial based on resource requirements. Projects are rejected, revised, or moved to development, stage 3. The time for stage 3 varies according to industry and product type. Using Cross Functional Teams and a Product Team Structure Successful innovation depends on the coordination between R&D and other departments. Subunit orientations make coordination difficult. Q. What functions must coordinate with R&D? A. R&D must cooperate with product engineering, process engineering, materials management, manufacturing, and marketing. R&D and engineering groups must ensure that research results are efficiently transformed into product design. Coordinating with manufacturing assures reliable products at a reasonable cost. Coordinating with marketing assures that the products are customer driven. Product development teams need representatives from marketing, engineering, and manufacturing; they are usually made up of three to six people. Members are responsible for one project at a time. Q. What structures best manage high-tech innovation? A. The product team structure and matrix structure are appropriate for high-tech organizations, because cross-functional teams develop products from the idea through the sales stage. These structures promote understanding and reduce communication problems. Because authority is decentralized to teams, members must cooperate on the project. A team structure may be incapable of solving coordination issues, so organizations can adopt other integration mechanisms: team leaders and project champions, “skunk works,” new venture divisions, and joint ventures. Team Leadership A leader needs a cross-functional perspective and a certain level of authority and power. A lightweight team leader has a lower rank than a functional department head, no control over resources, and can only handle minor modifications. This lack of authority impedes cross-functional coordination. A heavyweight team leader controls resources and may overrule functional heads. Heavyweight leaders are more effective for new product development or project management. Heavyweight leaders act as product champions by assuming “ownership,” solving problems, resolving conflicts, and giving the team informal leadership. Although some leaders are assigned to projects, a product champion may emerge informally.

Organizational Insight 13.2: Championing the Mustang
Engineer Don Frey championed the Ford Mustang, and Lee Iacocca, a vice president and general manager, supported the idea. Q. How did the product champion bring the Mustang to market? A. Don Frey, an R&D engineer, realized the importance of incremental R&D and used customer complaints as a guide. Once on the top planning committee, he championed the Mustang. Ford did not support his idea, so he used other funds for a prototype. Top management refused to support the Mustang because of money lost on the Edsel. The idea would have died had Lee Iacocca not become Ford’s

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general manager. Iacocca risked his reputation for the project, and the Mustang was a huge success. A product champion and a manager willing to take a risk achieved this innovation. “Skunk Works” and New Venture Divisions A “skunk works” is a task force established to facilitate new product design by coordinating various functions. Members from various functions are placed at a separate facility, offering a small-organization setting to encourage innovation and motivation for rapid product development. Task force members are intrapreneurs, internal entrepreneurs, responsible for the project’s success or failure. A skunk works disbands when the product is brought to the market. A new venture division is responsible for commercializing the product. It is an independent division and contains the functions to manage a project from start to finish. Project members head the division’s functions and manage the functional structure. One challenge is to balance control between corporate headquarters and the division. Corporate headquarters has concerns about profit potential, as resources are allocated to the division. If corporate headquarters intervenes, the division loses autonomy, leading to a decline in the division’s entrepreneurial culture.

Organizational Insight 13.3: Too Much Innovation at Lucent
Lucent created venture divisions in an attempt to increase innovation. The problems that resulted were enormous communication and coordination problems in that the managers in each division had no idea what managers in the other divisions were doing. Q. Is it possible to have too much innovation? A. Make sure students understand that innovation is industry specific. Not all industries need to be on the cutting edge in order to be successful. Lucent’s problem centered around an ineffective structure. This is a good illustration of so many concepts in the entire text. In this case, the structure was ineffective, and thwarted the goals of the organization. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

Joint ventures allow for pooling of resources and sharing R&D risks. A new organization is created. Creating a Culture for Innovation Culture plays an important role in shaping and promoting innovation. See Figure 7.2 from Chapter 7. Organizational structure: Organizational size and age impede innovation. A large organization with a large hierarchy slows decision-making; as bureaucracy increases, employees are unwilling to take risks. Organizations become inflexible as they age. It is hard for people to remain entrepreneurial throughout their careers. Age and size lead to stability. Additional hierarchical levels keep intrapreneurs, internal entrepreneurs, from having authority over projects. When skills are spread across subunits, coordination is difficult. Q. What structures overcome these problems?

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A. An organic structure emphasizes cross-functional communication. Product team and matrix structures provide the autonomy necessary for innovation. The informal organization is key. 3M lets scientists use resources for chosen projects, which are separate from formal projects. People: Organizations hire those with similar values, and individuals are attracted to companies with similar values. To promote innovation, a high-tech organization needs diversity in scientists. An organization needs people committed to innovation, as well as those who pursue it in diverse ways. Property rights: The performance of R&D scientists is difficult to evaluate, as innovation is a complex process that often takes years to yield results. Scientists often take their ideas and start companies. Q. How can a company retain talented scientists? A. It can create career paths for R&D employees and let successful scientists lead projects. Scientists should have the option of managing areas such as manufacturing. Cross-functional experience will qualify scientists to serve as project managers. An organization must establish strong property rights such as bonuses and stock options proportionate to the profits generated by their efforts. Individual and group performance can be tied to bonuses. An innovative culture centers on property rights, people, and organizational structure. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ • Refer to discussion question 4 here to review methods to make a culture innovative. _________________________________________________________________________________ _________________________________________________________________________________

Managerial Implications: Innovation
Research and development activities must be integrated into other functions for innovation. Employees need autonomy and resources to encourage new product development. Top management should create a culture to support innovation and reward employee contributions to success.

13.3

Innovation and Information Technology

Innovation and Information Synergies Synergies occur when two or more individuals or subunits are able to pool their resources and collaborate across subunit boundaries. IT also allows for more boundary spanning activities, which consist of units interacting with individuals outside of the organization to obtain knowledge about the environment.

Focus on New Information Technology: Amazon.com, Part 6
Amazon used innovation to sell books over the Internet.

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The cost and time savings that occur when technology allows individuals to perform their jobs better is called information efficiency. By improving the initial base of knowledge and having the technology to circulate knowledge rapidly through the organization, IT can dramatically facilitate creativity.

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Q. Characterize innovation at Amazon. A. Selling books over the Internet is a quantum innovation because it is a first. However, incremental innovations continue to take place at Amazon. In addition to books, Amazon now offers CDs, gifts, a free greeting card service, and online auctions in conjunctions. Incremental changes have changed Amazon from an “online book seller” to a “leading Internet product provider.”

IT and Organizational Structure and Culture
IT has allowed organizations to decentralize decision-making authority. This is because IT gives lowerlevel employees more information than they previously could have. It also creates information synergies because it facilitates increased communication and coordination between decentralized decision makers. This typically means that fewer managers are needed to solve problems and make decisions.

DISCUSSION QUESTIONS AND ANSWERS
1. What is the relationship between quantum and incremental technological change? Quantum change is a dramatic shift that results in quantum innovations. Innovations result in environmental changes and require operational changes. Incremental change builds on quantum changes; incremental innovations refine quantum innovations. The first Intel microprocessor was a quantum innovation; the successors are incremental innovations. Another quantum innovation occurs and restarts cycle. 2. What is the relationship between creativity, intrapreneurship and innovation?

They are very similar concepts. Creativity and innovation can simply be defined as going beyond the current boundaries, including generating new ideas, combining or synthesizing two or more previously unrelated ideas, or modifying a product or process in order to make it better. Intrapreneurs are entrepreneurs inside an organization who actually engage in the process. They are generally attracted to organizations that have an innovative culture that allows them to develop new products and services. 3. What is project management? How should managers decide which projects to pursue?

4. What steps would you take to create (a) a structure and (b) a culture congenial to innovation in a high-tech organization? (a) A high-tech organization needs organic structures to promote decentralization, mutual adjustment, and cross-functional cooperation; product team and matrix structures create cross-functional teams to develop products from the idea to the sales stage. These structures promote cross-functional understanding and reduce communication problems. Because authority is decentralized to teams, members must cooperate on the project. The informal organization can deal with obstacles associated

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Project management is the application of specific management techniques designed to help members in organizations complete a project. Managers often try to take on too many projects at once. They need to develop a process to evaluate proposals and deciding which ones to reject. The stage-gate funnel is a good tool for determining whether or not a project or product has a market, is profitable, and fits in with the organization’s goals and objectives.

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with the formal structure. Other integration mechanisms can promote innovation: team leaders and product champions, “skunk works,” new venture divisions, and joint ventures. (b) A high-tech organization should focus on structure, people, and property rights for an innovative culture. See (a) for structure. People committed to innovation when maintaining diversity must be hired. Strong property rights are imperative with bonuses tied to individual and group performance. Innovative employees should receive bonuses and stock options proportionate to their contributions to profits. Career paths for scientists within R&D and between R&D and other functions lead to innovation.

ORGANIZATIONAL THEORY IN ACTION Making the Connection
Each small group of students represents top managers of a chain of stores selling high-priced, highquality clothing. Students discuss ways to revitalize the product development process. 1. Using the chapter material, outline the way you will create a program to increase creativity and intrapreneurship at the store and corporate level. For example, how will you encourage input from employees and customers, and who will be responsible for managing the program? 2. How will you make use of IT and organizational structure to facilitate the innovation process?

The Ethical Dimension
Students examine the ethical issues surrounding who should benefit when intrapreneurs make discoveries that result in millions of dollars in profit. Who should share in the profits?

Making the Connection
Students will find an organization that is trying to promote its level of innovation, and examine how it is doing this.

CASE FOR ANALYSIS
Big Changes at Boeing Boeing faced competitive forces that made increased quality and reduced costs necessary. Boeing responded to change by altering its structure and culture. 1. Chart the major steps that Boeing took to encourage innovation and new-product development. Boeing shifted to a product team structure and established cross-functional teams. Employees from engineering and production were given responsibilities. Boeing had traditionally been secretive about its designs; with the 777, Boeing invited representatives from 18 suppliers and 8 airlines to meet with the product development team. Making customers an integral part of the innovation process was a dramatic change for Boeing. The 777 was the first airliner to be designed completely by a computer. Boeing engineers developed a 3D computer aided design technology to design and test parts, and shortened development time from six to four years. 2. How easy would it be for other organizations to follow Boeing’s lead? It would not be easy for others to make changes in structure and culture to compete in the fierce battle of commercial jet aircraft. Others would have to realize that technological changes and innovation are

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related. Boeing changed its technology and operating systems to raise the speed of new product innovation to develop a product that customers wanted.

Analyzing the Organization
Students examine the extent to which their organization has been involved in efforts to promote innovation.

TEACHING SUGGESTONS
1. Assign the models in the chapter to individuals or groups to explain to the entire class using examples. 2. Have students identify organizations that they consider innovative or creative. Go to the organization’s web site and determine from a structure, culture, or people standpoint what makes them so creative. Try and see if any patterns emerge. 3. In small groups, have students brainstorm about an idea that they have or a business they would like to start. This can be as simple as a new restaurant idea, or as complex as an entirely new product. After the small groups settle on the most innovative idea, have them draw the structure of the organization, and also have them identify what types of technology they will use. 4. Compare and contrast how far IT has come in the last decade or so. Do this using a process that everyone is familiar with, such as the registration process in college. For example, in the 1980s, I had an assembly line system at my college in which we went from station to station to build a schedule. Today, registration is all web-based. 5. Building upon the previous, ask them how this technology allows front-line workers to be more creative.

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