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Open Innovation and Organization Design

Authors:
Michael L. Tushman at Harvard University
Michael L. Tushman
Karim R. Lakhani at Harvard University
Karim R. Lakhani
Hila Lifshitz-Assaf at University of Warwick
Hila Lifshitz-Assaf
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Abstract

Abernathy's (1978) empirical work on the automotive industry investigated relationships among an organization’s boundary (all manufacturing plants), its organizational design (fluid vs. specific), and its ability to execute product and/or process innovations. Abernathy's ideas of dominant designs and the locus of innovation have been central to scholars of innovation, R&D, and strategic management. Similarly, building on March and Simon's (1958) concept of organizations as decision making systems, Woodward (1965), Burns and Stalker (1966), and Lawrence and Lorsch (1967) examined relationships among organizational boundaries, organization structure, and innovation in a set of industries that varied by technology and environmental uncertainty. These and other early empirical works have led a diverse group of scholars to develop theories about firm boundaries, organization design, and the ability to innovate.
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24 Journal of Organization Design
JOD, 1(1): 24-27 (2012)
DOI: 10.7146/jod.2012.1.8
© 2012 by Organizational Design Community
OPEN INNOVATION AND
ORGANIZATION DESIGN
Michael TushMan • KariM laKhani • hila lifshiTz-assaf
Abernathy’s (1978) empirical work on the automotive industry investigated relationships
among an organization’s boundary (all manufacturing plants), its organizational design (uid
vs. specic), and its ability to execute product and/or process innovations. Abernathy’s ideas
of dominant designs and the locus of innovation have been central to scholars of innovation,
R&D, and strategic management. Similarly, building on March and Simon’s (1958) concept
of organizations as decision making systems, Woodward (1965), Burns and Stalker (1966),
and Lawrence and Lorsch (1967) examined relationships among organizational boundaries,
organization structure, and innovation in a set of industries that varied by technology and
environmental uncertainty. These and other early empirical works have led a diverse group
of scholars to develop theories about rm boundaries, organization design, and the ability to
innovate.
In organizational economics, the notion of organizational boundaries has been rooted in
transaction cost logic (Coase, 1937). Economists favor explanations based on minimizing
transaction costs. Many activities related to innovation and the design and production of
goods and services are difcult to contract on the open market. Transaction costs make it
efcient for the emergence of rms that reduce such costs by integrating market activities
inside the rm (Williamson, 1975, 1981). The transaction cost research tradition has helped
to clarify relationships among innovation, the rm, and its environment (or market). This
literature has focused on understanding which sets of activities should be inside or outside
the rm’s boundaries.
Organization theorists and strategic management scholars have noted that value creation
involves the production of complex goods and services requiring ongoing knowledge
development and transfer across diverse settings (Chandler, 1977; Nickerson & Zenger,
2004). The burden of continuous knowledge creation imposes high coordination costs that
are best minimized through a managerial hierarchy. For anything but the simplest problems,
the visible hand of a rm’s management is required to dene and select problems to solve for
value creation. Lastly, a signicant body of research in organization theory is rooted in how
rms set boundaries in a way that protects them from dependencies in their task environment
and reduces uncertainty around critical task, power, and competence contingencies (e.g.,
Santos & Eisenhardt, 2005; Thompson, 1967).
However, customers and other users outside the rm are also an important source of valuable
innovations (von Hippel, 1988, 2005). Users include self-organizing communities that freely
share knowledge. The open source software movement crystallized an alternative innovation
ecosystem where external-to-the-rm user communities design, develop, distribute, and
support complex products on their own or in alliance with (and in some cases opposition to)
incumbent rms. The rise – and sometimes prevalence – of community innovation, with its
contrasting loci of innovation and nonhierarchical bases of organizing, poses a challenge to
the received theory of innovation, the rm, and organizational boundaries.
The organization design community must reconcile these divergent scholarly perspectives
on the relationship between rm boundaries and the locus of innovation (Gulati, Puranam,
& Tushman, 2012). The innovation and organization design literatures must move beyond
debates between open vs. closed boundaries and instead embrace the notion of complex
organizational boundaries where rms simultaneously pursue a range of boundary options
that include “closed” vertical integration, strategic alliances with key partners, and “open”
boundaries characteristic of various open innovation approaches. The simultaneous pursuit
25
Michael Tushman • Karim Lakhani • Hila Lifshitz-Assaf Open Innovation and Organization Design
of multiple types of organizational boundaries results in organizations that can attend to
complex, often internally inconsistent, innovation logics and their structural and process
requirements.
With the democratization of both the tools of knowledge production and dissemination,
many more actors outside traditional rm boundaries have access to unique solution
knowledge that may be applicable to innovation tasks within rms (Jeppesen & Lakhani,
2010). Such task decomposition and the fact that widely distributed actors have access to
differentiated knowledge push the locus of innovation outside traditional rm boundaries.
We suggest that task decomposition and knowledge distribution provide a framework for
the choice of rm boundaries. These strategic contingencies lead to a different set of design
and boundary choices than the traditional topics of asset specicity, information processing,
or strategic core. Lastly, we suggest that rm-centered innovation logic is fundamentally
different from open innovation logic, and that open innovation logic is increasingly gaining
momentum as new multi-actor organizational forms emerge. If so, our theories of innovation,
organization design, and organizational change must capture and resolve the tensions between
these contrasting innovation modes.
Open innovation, enabled by low-cost communication and the decreased costs of memory
and computation, has transformed markets and social relations (Benkler, 2006). In contrast to
rm-centered innovation, open innovation is decentralized, peer based, and includes intrinsic
and pro-social motives. While the community nature of peer innovation is developing its own
literature, and we are rapidly gaining an understanding of the nature and social structure of
these communities, the impact of this innovation mode on the rm is not well understood. We
do not yet have a theory of the rm, either for incumbents or new entrants, which takes into
account community innovation. Thus far, the impact of open innovation on the organization
theory and strategic management literatures has been minimal (Argote, 2011).
As open and rm-based innovation are based on contrasting assumptions of agency,
control, motivation, and locus of innovation, emerging theories of organizing for innovation
must reect these paradoxical and internally inconsistent innovation modes. Innovation
and organization design research must move to macro levels of analysis as we explore how
communities inform and shape the rm, and how the rm shapes and leverages its communities
in service of its innovation processes and objectives (e.g., Jacobides & Winter, in press;
O’Mahony & Lakhani, 2011). Similarly, if open and market-based innovation processes are
complements, and the rm’s boundaries are contingent on the product’s degree of modularity
and knowledge distribution, multiple types of boundaries will be employed to manage
innovation. Those boundaries will range from traditional intra-rm interfaces to complex
inter-rm relations (e.g., ambidextrous designs), to webs of interdependence with partners,
to interdependence with potentially anonymous communities. Just how are the mechanisms
associated with complex intra-rm boundaries and relations with partners different from
shaping relations in open communities? The theory of innovation and complex organizational
boundaries can build on extant literature on paradox (e.g., Andriopoulos & Lewis, 2009) and
extend this work to contradictory innovation modes. As so much of this research on dynamic
boundaries involves senior leaders making choices involving contrasting innovation modes
in the context of the rm’s history, it is also important to understand how managers think
about innovation and organization designs in a way that admits these contradictions (e.g.,
Smith & Lewis, 2011; Smith & Tushman, 2005).
We have focused here on the challenges faced by incumbent rms having to respond to
increasingly open innovation requirements. Much work needs to be done on the characteristics
of new entrants that are born in a context already rooted in open innovation. It may be that
the founding of rms anchored in open innovation is fundamentally different from that
of traditional entrepreneurial start-ups. It may also be that rms such as LuLuLemon or
Threadless build their initial business models and supporting organizational forms based
on open innovation logic and only deal with more traditional innovation and organizational
dynamics when they increase their scale (Lakhani & Kanji, 2009).
As the theoretical and research implications of contrasting innovation modes and complex
boundaries are substantial, so too are the implications for managerial choice and agency. If
open and rm-based innovation processes are complements, then management must choose
26
Michael Tushman • Karim Lakhani • Hila Lifshitz-Assaf Open Innovation and Organization Design
which tasks will be executed in each innovation mode. We suggest that these choices are
contingent on the extent to which critical tasks can be decomposed and the extent to which
the tasks’ knowledge requirements are concentrated. Strategic choices need to be executed
with systems, structures, incentives, cultures, and boundaries tailored to open and rm-based
innovation modes. Further, if the rm is ever more dependent on open communities, how do
leaders act to inuence these external communities? Finally, management teams must build
their own personal capabilities to deal with contradictions as well as their rm’s ability to
deal with contradictions. Building architectures to attend to contrasting innovation modes
will be particularly challenging, requiring an updated and expanded theory of organization
design.
references
Abernathy WJ. 1978. The Productivity Dilemma: Roadblock to Innovation in the Automobile
Industry. Johns Hopkins University Press, Baltimore.
Andriopoulos C, Lewis MW. 2009. Exploitation-exploration tensions and organizational
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Argote L. 2011. Introduction to the Special Issue. Organization Science 22(5): 1121-1122.
Benkler Y. 2006. The Wealth of Networks: How Social Production Transforms Markets and
Freedom. Yale University Press, New Haven, CT.
Burns T, Stalker GM. 1966. The Management of Innovation. Tavistock Publications, London.
Chandler AD Jr. 1977. The Visible Hand: The Managerial Revolution in American Business.
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Coase RH. 1937. The nature of the rm. Economica 4(16): 386-405.
Gulati R, Puranam P, Tushman M. 2012. Meta-organization design: rethinking design in
interorganizational and community contexts. Strategic Management Journal 33(6): 571-
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Jacobides MG, Winter S. In press. Capabilities, structure, and evolution. Organization
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Jeppesen LB, Lakhani KR. 2010. Marginality and problem-solving effectiveness in broadcast
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27
Michael Tushman • Karim Lakhani • Hila Lifshitz-Assaf Open Innovation and Organization Design
Michael TushMan
Paul R. Lawrence MBA Class of 1942 Professor of Business Administration
Harvard Business School
E-mail: mtushman@hbs.edu
KariM laKhani
Assistant Professor of Business Administration
Harvard Business School
E-mail: k@hbs.edu
hila lifshiTz-assaf
Doctoral Candidate
Harvard Business School
E-mail: hlifshitz@hbs.edu
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