Several decades of research into innovation management have failed to provide clear and
consistent findings or coherent advice to managers. In this paper, I argue that this is because
innovation management `best practice' is contingent on a range of factors, and that we need
better characterizations of the technological and market contingencies which affect the
opportunity for,and constraintson,innovation.I reviewresearchoninnovationtogether with
relevant studies from organizational behaviour and strategic management, and develop a
model which may help to guide future innovation research on the relationships between
environmental contingencies, organization configurations and performance. I identify
uncertainty and complexity as the key environmental contingencies that influence
organizational structure and management processes for innovation.
Conceptually, it is not difficult to identify
the contribution innovation can make tocompetitiveness (Table 1). However, it is
There is a gap between managers’ perceptions
more difficult to establish a strong empirical
of, and the reality of, criteria for successful
relationship between innovation and perform-
innovation (Cooper and Kleinschmidt 1993).
ance. For example, at firm level, the relation-
For example, one study found that only 7%
ships between innovation inputs and outputs is
were aware of the main findings of research,
and only half of these had attempted to apply
weakness in the relationship may be caused
the results of the research (Barclay 1992).
Moreover, the innovation processes used by
random unpredictability of innovation.
firms have changed very little although the
business environment has changed signifi-
innovation at the level of the firm. One utilizes
indicators available in the public domain, such
International Journal of Management Reviews Volume 3 Issue 3 pp. 169–183
Table 1. Innovation and competitive advantage
Re-writing the rules of the competitive game, creating a new `value proposition'
Offering a highly novel or unique product or service, premium pricing
Difficulty of learning about the technology keeps entry barriers high
Continuous movement of the cost/performance frontier
Source: Adapted from J. Tidd, J. Bessant and K. Pavitt (2001) Managing Innovation: Integrating Technological,
Market and Organizational Change, 2nd edition. Chichester: Wiley.
as R&D expenditure, number of patents and
added ratio, and points out that identical R&D
new product announcements. The other uses
expenditures in different industries do not
survey instruments to capture a broader range
necessarily indicate identical innovation
of indicators such as the proportion of tech-
activity. Budworth (1993) proposes a similar
‘innovation ratio’ based on the ratio of cash
proportion of sales or profits accounted for
outlay to cash return, so that when, or if, a
by products launched in the past three or five
company with a portfolio of different products
years. Table 2 lists the main measures used,
reaches steady state, the innovation ratio will
their main strengths and weaknesses, and an
be equivalent to the ratio of innovation spend
indication of possible levels of comparison.
to value added. On this basis, it is possible to
The main conclusion from this is that there is
calculate an innovation ratio for specific sec-
no single best measure of innovation. Some
tors and companies. For example, Budworth
indicators work well for certain sectors, for
calculates the ratio for the UK mechanical
example, R&D for large chemical and elec-
engineering sectors to be around 14%. As the
trical firms, and others work well for certain
value added for that sector is some 50% of
fields of technology, for example, patents for
turnover, this suggests that at least 7% of
mechanical technologies or product announce-
revenue should be devoted to innovation in
order to sustain intangible assets. Concep-
Measuring innovation inputs and outputs is
tually, this ratio is similar to the depreciation
difficult, but establishing the relationship
Geroski (1994) shows that the profit margin
firm performance is more problematic. Two
of innovators – using matched data from the
SPRU database and company accounts – is
used. The first is concerned with accounting
higher than non-innovators, controlling for
other influences. However, the effect is rather
profitability, return on investment (ROI) and
small, suggesting that benefits may have been
captured by users. Innovating firms are also
more protected from cyclical downturns.
Many traditional accounting and financial
indicators concentrate on short-term measures
the relationship between profitability and
of performance, and therefore may undervalue
lagged indicators of capital input, marketing
innovation. Kay (1993) argues that there can
expenses and R&D. The main conclusion was
be no long-term rationale for a firm that does
a rate of return to R&D of about 33%, with an
not add value, as value added is essentially the
average lag of about five years. Process R&D
had four times the rate of return of product
outputs and the cost of inputs (including
R&D but was more risky with a more variable
capital). Walker (1979) uses a R&D/value
Table 2. Strengths and weaknesses of measures of innovation
• close to commercialization • misses in-house process
• measures tacit knowledge • lack of homogeneity of
Source: Patel (2000) in Tidd (2000).
The use of stock market value as a perform-
reduces earnings per share (EPS) in the year of
ance indicator has a major advantage over other
expenditure, one of the major performance
financial measures such as profits or ROI, as it
criteria used by analysts (Arnold and Moizer
is likely to reflect the affect of innovation
1984). Some industrialists believe that this
approach systematically undervalues long-term
assumes that the market value of the firm is
R&D and capital expenditure. The fact that
proportional to its physical or tangible capital,
there is a weak correlation between company
valuations, in terms of the price to earnings (P/
observed a significant (though noisy) effect,
E), and expenditure on R&D suggests that the
and Hall (1993) raises an important worry
problem of under-valuation is industry specific,
if it exists at all. The problem appears to have
innovation are consistent. The valuation of
R&D capital collapsed from a value of unity to
between industry and its investors. Countering
a quarter over the 1980s, a result that is robust
the view that analysts are short sighted is the
to measurement and specification tests. The
importance of R&D information with 2.32 on
Exchange consistently undervalues shares of
a scale of seven (with 1 as the ‘best’) making it
expensed (as opposed to capitalized) R&D
development third with 2.36 (Pike et al. 1993).
Beyond R&D expenditure, research sug-
expenditure on R&D as a proportion of sales
gests a significant independent effect of
(R&D intensity) has a significant positive
patents on the market value of firms. Griliches
affect on value added and the number of new
et al. (1991) examined the relationship
product announcements made, which suggests
between patents and the market value of the
that R&D activities contribute to increasing
firm and found that, with the exception of the
both the number of new products introduced
pharmaceutical industry, changes in market
and their value. Our research also confirms
value due to changes in the patent rate were
that R&D intensity has a significant positive
not significant, accounting for only around 1%
effect on the market to book value, which
of the total fluctuations in market value.
(Sciteb/CBI 1991). Using the ratio of new
generic indicator of product innovation. A
product announcements to absolute R&D as a
benefit of using product announcements as a
proxy for research efficiency indicates that the
measure of market innovation is that it lends
efficiency of research also has a significant
itself to an event-study methodology to link
positive affect on the market to book value.
product announcements with the market value
This suggests that the market also values the
of a firm. For example, one study of more than
efficiency of R&D, that is the organization and
a thousand product announcements in the WallStreet Journal found that these had a positive
affect on the share price of the originating firm
market share and growth is less well under-
(Chaney et al. 1991). The study found that
firms introducing new products accrue around
0.75% excess market return over three days,
includes data on some 3000 business units
business unit, PIMS collects data on market
conditions, competitive position and financial
$26m (in 1972 dollars). Of course, the precise
return and value of each product announce-
profitability declines as the market evolves
ment depends on the industry sectors: the
over time as product and service differentia-
highest returns were found to be in food,
tion fall, and competition tends to shift to
price. Conversely, high rates of market growth
durable goods. The study also found that the
average P/E ratio of the firms making new
product announcements was almost twice that
announcements. This implies that the stock
market is valuing the long-term stream of
(6) low or negative case flow. (Buzell and
future earnings generated by the innovative
firms at a much higher rate than the non-innovators.
The importance of market share varies with
industry. Intuition would suggest that share
financial performance identified relationships
would be most important in capital-intensive
between innovation measures such as expendi-
ture on R&D and new product announce-
where economies of scale are required.
value added and market to book value (Tidd
has a much stronger impact on profitability in
2000; Tidd et al. 1996). For example,
innovative sectors, that is those industries
characterized by high R&D and/or marketing
expenditure. For the R&D and marketing-
intensive businesses, the ROI of the market
many of the ‘rules’ for product development
leader is on average 26 percentage points
higher than the average small-share business.
Japanese manufacturers of consumer durables,
In the manufacturing-intensive businesses, the
such as electronics or automobiles (Clark and
corresponding difference is only 12 points.
Fujimoto 1991). However, there is unlikely to
This suggests that scale effects are more
be ‘one best way’ to manage and organize
important in R&D and marketing than in
innovation, as industries differ in terms of
manufacturing. In the short term, high rates of
sources of innovation and the technological
product introduction and high expenditure on
and market opportunity, and organization-
R&D are associated with lower profitability
specific characteristics are likely to undermine
the notion of a universal formula for success-
related to long-term value enhancement of a
ful innovation (Tidd 1997). For example, a
business (Clayton and Turner 1998, 2000).
review of research on organizational innova-tion identified four factors which affect the
management of innovation: type of innova-
tion, stage of innovation, scope of innovationand type of organization (Damanpour 1991).
Several decades of research on the manage-
Similarly, a review of research on innovation
management calls for a re-examination of the
created many insights into the innovation
relative importance of organization context
process, but to date have failed to provide a
a n d i n d u st r y d y n a m i c s ( D r a z i n a n d
comprehensive framework to guide innovation
Schoonhoven 1996), an approach adopted by
research or management practice. Studies of
us at length elsewhere (Tidd et al. 2001).
innovation have been based on a broad range
Contingency theory offers the potential to
of disciplines, including management science,
understand better how context affects innova-
economics, geography, sociology and psych-
tion management. The central concept is that
no single organizational structure is effective
different methods, definitions and samples.
in all circumstances, and that instead there is
This diversity of research has limited the
an optimal organizational structure that best
fits a given contingency, such as size, strategy,
task uncertainty or technology (Donaldson
studies have failed to include some measure
1996). Therefore the better the fit between
of performance or success, which makes it
organization and contingency, the higher the
difficult to translate much of the research into
organizational performance (Donaldson 1999;
management prescription (Tidd 2000; Tidd et
Drazin and Van de Ven 1985). This relation-
al. 1996). In this paper, I attempt to identify
some of the emerging themes of research on
innovation management, focusing on the rela-
stantial body of research conducted in the
tionships between environment, organization
comparative case studies (Burns and Stalker
Much of the research on the management of
innovation has attempted to identify some
generic ‘best-practice’, but most studies have
Lawrence and Lorsch 1967). Clearly, one of
the primary tasks of contingency research is to
sectors. For example, the dominant models of
technology management are derived from the
influence organizational structure. According
to a large number of seminal studies, three
(1983, 1994), Galbraith (1994) and Galbraith
and Lawler (1993) have developed these ideas
consistently with organizational structure:
size, technology and task uncertainty.
works, which attempt to match organizational
There is a well-established body of research
that has examined the relationship between
formalization, specialization and firm size, the
Contingency theory is strongly positivist,
and has been much criticized, as it leaves little
et al. 1969) being the most influential work on
scope for other influences, such as managerial
choice or institutional pressures (Powell and
technology as a contingency, and discovered
a relationship between production technology,
offers some accommodation of the competing
organizational structure and performance.
theories by allowing some ‘‘strategic choice’’
However, Woodward’s operationalization of
within boundaries determined by contingen-
technology was relatively crude, based simply
on the flexibility and scale of production
(1990). I will adopt a similar position here,
processes, whereas Perrow (1970) developed a
and will argue that contingencies do influence
finer grain typology of technology, based on
task analysability and variability. Lawrence
innovation, but that they constrain rather than
and Lorsch (1967) proposed that the rate of
fully determine ‘best practice’, what I have
referred to as ‘‘strategic degrees of freedom’’
differentiation and integration within an
(Tidd 1993). Therefore, what remains is to
organization, and found support for this in
identify the most significant contingencies,
their comparative study of organizational
and the best configuration of organizational
structures in three different sectors. Galbraith
structures and management processes in each
r e l a t i o n sh i p s b e t we e n e n v i r o n m e n t a l
processed, which in turn influences the control
contingencies, type and degree of innovation,
and communication structures. More recently,
Figure 1. Innovation, environment and performance.
example, as in the automobile industry. Inmarket contests, a continuous flow of
Economists have long observed that industries
differ in the amount of resources devoted to
because product lives are short and imitation
innovation, and in the rate of technological
relatively easy. In this case, firms compete on
the basis of creativity, cross-functional
explanations for such differences focused on
integration and time-to-market, for example,
differences in firm size or market structure,
as in the consumer electronics sector. Finally,
but more recent work has emphasized the role
learning in technological systems consists of
of technological opportunity (Geroski 1994).
firms accumulating experience in solving the
operational problems that appear in complex,
networked technologies. Similarly, Langerak
opportunity have been identified (Klevorick
et al. (2000) identify a link between different
et al. 1995): advances in scientific under-
R&D knowledge domains and the Miles and
standing; technological advances in other
related industries; and positive feedback from
prospector, analyser, defender and reactors.
prior technological advances. The relative
recent research suggests that two contin-
varies by sector. For example, the pharma-
gencies exert a significant influence on the
ceutical and semiconductor sectors both have
organizational and management of innovation:
strong links to basic science, the former to a
narrow range of scientific fields, the latter to a
1997). A review of 21 innovation research
much wider range of fields. In the food and
projects concludes ‘‘environmental uncer-
electronics industries, material suppliers and
tainty influences both the magnitude and the
nature of innovation . . . (which) suggests that
sources of innovation. Customers are impor-
future research should adopt environmentally
tant sources of innovation in the machinery,
sensitive theories of organizational innovation
electrical equipment and medical instrument
by explicitly controlling for the degree and the
sectors. Pavitt (1990) develops a similar
nature of environmental uncertainty’’
(Damanpour 1996). In particular, perceptions
innovation: science based; scale intensive;
of environmental uncertainty appear to affect
i n f o r m a t i o n i n t e n s i v e ; a n d s u p p l i e r
innovation (Hauptman and Hirji 1999; Souder
et al. 1998). The second contingency, com-
tunity are associated with different market
plexity, is a function of the number of tech-
structures, firm strategies and organizational
nologies and their interactions, and recent
research suggests that innovation in complex
scenarios: technology races; technical parity
competition; market contest; and learning in
different from that in other fields (Dvir et al.
1998; Hobday et al. 2000). Uncertainty and
complexity need to be differentiated, as they
property, for example, focusing on scientific
appear to have different management require-
research excellence in target fields in the
ments. Uncertainty is a function of the rate of
pharmaceutical sector. In technical parity
change of technologies and product-markets,
competitions, the scientific and technical
whereas complexity is a function of techno-
knowledge is available to most firms, and
logical and organizational interdependencies.
firms must compete instead by developing and
For example, a firm exposed to an environ-
Figure 2. Effect of uncertainty and complexity on the management of innovation.
• Networked: low uncertainty, high com-
require high levels of internal R&D and
plexity. In this domain, project manage-
linkages with the science base, whereas a firm
attempting to manage complexity is likely to
professional structures typical, e.g.
be imbedded in a network of collaborating
organizations (Tidd 1995; Tidd and Trewhella
• Complex: high uncertainty, high
1997). Complexity does not necessarily imply
complexity. The presence of both high
uncertainty, or vice versa (Tidd 1997). How-
complexity to be associated with uncertainty
increases. Figure 2 presents a simple two-by-
two matrix, with uncertainty as one dimension
and complexity as the other dimension. Each
quadrant raises different issues and is likely to
management and innovation (Hobday et
require specific organizational structures and
• Differentiated: low uncertainty, lowcomplexity. In this domain, product and
the environment of technology and innovation
service differentiation are the key issues,
marketing competencies are critical, and a
product or market multi-divisional struc-ture typical, e.g. fast-moving consumer
Innovative: high uncertainty, low com-plexity. In this domain, scientific or tech-
The problem of not specifying the type and
nological competencies are critical, and a
functional structure typical, e.g. pharma-
substantial obstacle to the generalizability of
innovation research (Wolfe 1994). Innovation
can take two basic forms: product innovation,
will differ from the methods used occasionally
that is changes in the products or services that
to handle a radical innovation in product or
an organization offers; and process innova-
process. We can plot these two dimensions of
tion, that is changes in the ways products and
innovation of a simple matrix that defines the
services are created and delivered. Sometimes
space which has to be managed (Figure 3). On
the dividing line is blurred, for example, in the
duction, or a new service offering, but in most
and processes, through to radical ‘new to the
cases the distinction is useful. A second
world’ innovations. Booz Allen & Hamilton
(1982) categorize projects into six types:
environmental contingencies are likely to be
• cost reductions – process development
associated with different types and degree of
• repositioning – product augmentation
innovation. For example, traditional models of
product and process innovation life cyclessuggest a shift from product innovation to
incremental innovation as an industry matures
platform or generational; and derivative or
important to note, because the ways in which
(1997) distinguishes between two fundamental
Figure 3. Innovation `space': the type and degree of innovation.
Source: Adapted from J. Tidd, J. Bessant and K. Pavitt (2001) Managing Innovation: Integrating
Technological, Market and Organizational Change, 2nd edition. Chichester: Wiley.
types of innovation, sustaining innovation,
collaborating organizations (Tidd 1997). Kay
which continues to improve existing product
(1993) refers to the sum of these structural
characteristics forming the ‘‘architecture’’ of
markets, and disruptive innovation, which
provides a different set of functions which
are likely to appeal to a very different segment
of the market. Existing firms and theircustomers are likely to undervalue or ignore
There is a significant body of research on the
disruptive innovations, as these are likely to
environment–strategy and strategy–structure
appear inferior to existing technologies in
terms of measures of benefit and performance.
specific issue of innovation (Dess et al.
Therefore, established firms tend to be blind
to the potential of disruptive innovation,
‘‘configuration’’ emerged from such research,
which is more likely to be exploited by new
which is more than a typology derived from
evidence. A configuration is an internally
existing customers will tend to reinforce
consistent combination of strategy, organi-
sustaining innovation, but will fail to identify
zation and technology that provide superior
or wrongly reject potential disruptive innova-
tions. Our recent study of 50 development
example, the success of the multidivisional
projects in 25 firms examined the relationship
structure, or M-form, is associated with a
between the perceived novelty of a project and
strategy of diversification into related product
the structures, processes and methods used to
manage the projects (Tidd and Bodley 2001).
complexity of information placed strains on
We identified significant differences in terms
the traditional functional structure. The
various structures, processes and tools. For
electrical industries has not been based on a
example, heavyweight project managers and
single product, process or market, and they are
cross functional teams were more effective for
the high-novelty projects, and customers and
‘‘extensible technologies’’ (Chandler 1966,
suppliers were twice as likely to be involved
1990). The chemical industry extended into
in the development and commercialization of
textiles and pharmaceuticals, and the electrical
the novel projects. This supports the notion
that novelty is a significant factor affecting the
machine tools. In contrast, the steel industry
organizational and management of innovation.
is an example of non-extensible technology,which has focused on cost reduction and
product improvement, rather than diversifica-
tion. This suggests that the scope of thetechnology has a significant influence on
Under conditions of complexity and uncer-
strategy and organization (Channon 1973).
tainty, two organizational factors affect the
However, the multidivisional form quickly
ability of a firm to develop and commercialize
became the de facto standard for large
organizations, irrespective of the environment
organization of the firm, specifically func-
of technology. Multi-divisional firms can be
tional links and the definition of business
efficient innovators, measured in terms of
divisions based on product–market linkages;
patents and new products per unit of R&D
and links with other organizations, such as
expenditure (Cardinal and Opler 1993), as the
structure facilitates efficient innovation within
specific product-markets. Indeed, one of the
benefits claimed for the M-form organization
Amesse 1991). Studies have focused on the
is that it offers the potential to centralize
role of inter-personal relationships in the
nesses, but to decentralize product develop-
ment to the relevant divisions. However, in
business divisions, and some on the rela-
practice, the structure may limit the scope for
tionships between different organizations
learning new competencies: firms with fewer
(Jones et al. 1998). The research community
divisional boundaries are associated with a
has tended to focus on the polar extremes – the
strategy based on capabilities-broadening,
role of the individual and strategic alliances,
and has only recently recognized the need to
daries are associated with a strategy based on
bridge this gulf in studies of innovation
capabilities-deepening (Argyres 1996). In
suggests that performance at the level of
bilateral relationships or dyads, and therefore
business units is of much greater significance
the configuration, nature and content of a
than that at the corporate level: ‘‘corporate
network impose additional constraints and
returns will differ because their portfolios of
present additional opportunities. A network
business units differ . . . there is no evidence of
‘synergy’’’ (Rumelt 1991, 182). Therefore, the
economic actors are influenced by the social
structure makes it very difficult to identify and
context in which they are embedded and how
actions can be influenced by the position of
cross existing business divisions (Tidd 1994,
actors. A network can influence the actions of
1995). Decentralizing R&D reduces the scope
its members in two ways (Gulati 1998): first,
through the flow and sharing of information
differences in the position of actors in the
divisions will depend on the strategy and
network, which both reflects and is a source of
power and control imbalances. Therefore, the
position occupied in a network is a matter of
alternative structures to deal with complexity
great strategic importance, and sources of
and uncertainty, such as project-based firms
power include technology, expertise, trust,
and networked organizations (Gann and Salter
long-standing business relationships such as
suppliers, distributors, customers and com-petitors. Over time, mutual knowledge and
In his seminal review of models of innovation,
Rot hwe l l ( 1992) propo sed a ‘‘fi f th -
generation’’ model of innovation manage-
transaction costs. Therefore, a firm becomes
more likely to buy or sell technology from
facilitated by IT systems. More recently, the
members of its network (Bidault and Fischer
term ‘network’ has become widely used in
1994). The process is path dependent in the
innovation research and practice, but is not
sense that past relationships between actors
usually clearly specified. There is little
increase the likelihood of future relationships,
and the term and alternatives such as ‘web’
innovation. Indeed, much of the early research
and ‘cluster’ have been criticized for being too
on networks concentrated on the constraints
seeks to control standards by economies of
preventing the introduction of ‘superior’
scale and proprietary standards in order to
technologies or products by controlling supply
lock-in customers and other organizations in
and distribution networks (Hakansson 1995).
the network (Garud and Kumaraswamy 1993).
A network can never be optimal in any generic
t e c h n ol o g y c o m p l e x o r p e r f or m a n c e
uncertain, new mediating institutions are
evolution. For example, Belussi and Arcangeli
likely to be created (Attewell 1996). These
(1998) discuss the evolution of innovation
networks in a range of traditional industries in
Italy. The potential to design explicitly or
benefit from economies of scale in ‘rare event
participate selectively in networks for the
purpose of innovation, that is a path-creating
consultants, systems integrators and service
rather than path-dependent process, has only
recently received attention (Galaskiewicz
complex technologies. However, by reducing
1996). A study of 53 research networks found
the initial burden on users, these mediating
institutions may also reduce the potential for
develops as a result of environmentalinterdependence, and – through common
interests – an emergent network. However,another type of network requires some
triggering entity to form and develop – a so-
called ‘‘engineered’’ network (Doz et al.
literature on innovation management and the
2000). In an engineered network, a nodal firm
actively recruits other members to form a
network, without the rationale of environ-
develop a framework relating environmental
contingencies, organizational configurations,
innovation management and performance. My
Networks are appropriate where the benefits
uncertainty of the environment affects the
infrastructure and standards and other network
degree, type, organization and management of
externalities outweigh the costs of network
innovation, and that the greater the fit between
governance and maintenance. Where there are
high transaction costs involved in purchasing
configuration, the greater the performance.
technology, a network approach may be more
However, it is clear that this hypothesis must
appropriate than a market model and, where
be tested empirically, specifically using better
uncertainty exists, a network may be superior
measures of complexity and uncertainty.
to full integration or acquisition. Different
Together, a better understanding of these and
types of network are likely to be associated
with different environmental contingencies
innovation management research and clearer
complex products have to interface with the
and more consistent advice for management
products and services of other vendors, and it
practice. The goal should be to identify the
is in the interest of all organizations to share
organizational configurations most suited to
knowledge in order to ensure compatibility. In
specific technological and market environ-
ments, rather than to seek a single ideal or
appropriate. In contrast, a ‘closed’ network
best-practice model for any context. In this
respect, research on the management of inno-
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“Block” and “run” innovative strategies and their implications for project and knowledge management routines: The case of a pharmaceutical and chemical company Centre de Recherche en Gestion, Ecole polytechnique, Paris Abstract The role of innovation in business has long been recognized, but increased competition among companies has forced them to seek new strategies. In t