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Innovation in the 21st Century: Architectural Change, Purpose, and the Challenges of Our Time

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Understanding the process of innovation has been a central concern of management researchers, but despite this progress, there remains much that we do not understand. Deepening our knowledge is critically important given the enormous environmental and social challenges we face as a society. Pursing incremental innovation will continue to be hugely important, but this paper argues that building a richer understanding of architectural or systemic innovation will also be crucial. This paper suggests that the study of organizational purpose may provide a particularly fruitful avenue for future research. This paper has been accepted by David Simchi Levi for the Special Issue of Management Science: 65th Anniversary.
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Innovation in the 21st Century: Architectural Change,
Purpose, and the Challenges of Our Time
Rebecca Henderson
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Rebecca Henderson (2020) Innovation in the 21st Century: Architectural Change, Purpose, and the Challenges of Our Time.
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MANAGEMENT SCIENCE
Articles in Advance, pp. 110
http://pubsonline.informs.org/journal/mnsc ISSN 0025-1909 (print), ISSN 1526-5501 (online)
Innovation in the 21st Century: Architectural Change, Purpose, and
the Challenges of Our Time
Rebecca Henderson
a
a
Departments of General Management and Strategy, Harvard Business School, Boston, Massachusetts 02163
Contact: rhenderson@hbs.edu,https://orcid.org/0000-0001-5902-1891 (RH)
Received: October 29, 2019
Revised: May 27, 2020
Accepted: June 5, 2020
Published Online in Articles in Advance:
October 30, 2020
https://doi.org/10.1287/mnsc.2020.3746
Copyright: © 2020 The Author(s)
Abstract. Understanding the process of innovation has been a central concern of man-
agement researchers, but despite this progress, there remains much that we do not
understand. Deepening our knowledge is critically important given the enormous envi-
ronmental and social challenges we face as a society. Pursing incremental innovation will
continue to be hugely important, but this paper argues that building a richer under-
standing of architectural or systemic innovation will also be crucial. This paper suggests
that the study of organizational purpose may provide a particularly fruitful avenue for
future research.
History: This paper has been accepted by David Simchi Levi for the Special Issue of Management Science:
65th Anniversary.
Open Access Statement: This work is licensed under a Creative Commons Attribution- NonCommercial-
NoDerivatives 4.0 International License. You are free to download this work and share with others, but
cannot change in any way or use commercially without permission, and you must attribute this work as
Management Science. Copyright © 2020 The Author(s). https://doi.org/10.1287/mnsc.2020.3746,used
under a Creative Commons Attribution License: https://creativecommons.org/licenses/by-nc-nd/4.0/.
Funding: This work was supported by the Division of Research, Harvard Business School.
Keywords: innovation purpose sustainability
Introduction
Understanding the process of innovation has been
a central concern of management researchers since
Schumpeter raised the question of whether large rms
were likely to be more innovative than smaller ones or
whether entrepreneurial rms were likely to be the
fundamental drivers of innovation in an economy
(Schumpeter 1942). Researchers have continued to
explore the role of rm size and structure in driving
innovation and have also studied a wide range of
additional topics. In the last 10 years alone, for ex-
ample, Management Science has published at least 68
papers explicitly focused on the forces that shape
innovation. These papers have explored such topics
as the allocation of control rights, the nature of in-
tellectual property policies, the structure of social
networks, the design of innovation contests, and the
role of unions, alliances, and chief executive ofcer
skillsamong other thingsin driving innovation.
Despite this progress, however, there remains
much that we do not understand. Much of our work
to date has focused on the problem of incremental
innovationinnovation that is a logical extrapolation
of existing ways of doing things. Of course, incre-
mental innovation is often a powerful engine of
progress. The explosion in digital technology that has
reshaped the world has been driven almost entirely
by incremental innovation, most famously through
the power of the processes that are embedded in
Moores law. Professor Magnantis wonderful history
of the development of linear programming (2020)is
another illustration of the power of cumulative incre-
mental improvements to generate order-of-magnitude
improvements in performance. He documents, for ex-
ample, that linear programs that took a month to solve in
1988 could be solved in less than a second by 2004.
Pursing incremental innovation will undoubtedly
be important in solving many of the social and en-
vironmental challenges we now face. For example,
the recent breathtaking drop in the costs of solar
powersolar now costs less than 25% of what it did in
2009 and is now cost competitive with fossil fuels in
many regions of the worldhas been driven almost
entirely by incremental innovation (International
Monetary Fund 2019). But, to a rst approximation,
the basic design of the solar cell and the core physics
on which it rests have not changed in more than 20
years. Progress has come from a steady progression of
tweaks: thinner, more efcient coverings; better collection
mechanisms; and more efcient installation techniques.
ButIsuspectthatmakingprogressagainstmanyof
the problems that we face will often require systemic
or architecturalinnovation. Deploying renewable
energy at scale, for example, requires a comprehensive
rethinking of the power distribution gridataskthat
is both highly technical, drawing on many of the
1
optimization techniques pioneered by management
scientists, and simultaneously deeply political because
it often requires rethinking the nature of regulation
and the balance of power within and across the in-
dustry. Building a truly circular economyensuring
that as much as possible of what we build, manu-
facture, and sell is reused or recycledrequires
everything from rethinking how we design to revo-
lutionizing how we think about the ow of material
throughout our economy. Decarbonizing our trans-
portation systemmoving to an entirely renewable
power grid and an electrically powered eetopens
up the possibility of a whole range of systemic so-
lutions to the problem of congestion. Should a city, for
example, be able to coordinate the ow of trafc
through its streets? Should we think of a world in
whicheverycarisrentedasneeded,andifso,howdo
we optimize loading across an entire eet or an entire
community? In both cases, traditional incremental
innovation will be incredibly important. But without
the ability to put the pieces of the puzzle together in
new waysto recongure the social and technical
architecture of the productwe will be unable to
realize the full value of incremental innovation.
In short, I think we need to double down on the
study of architectural or systemicinnovation. I de-
ne architectural innovation as innovation that changes
the architecture of a product or a system while keeping
many of its components relatively unchanged (Henderson
and Clark 1990). The concept of architectural inno-
vation was originally developed in the context of the
physical architecture of a product. In the case of
photolithographic aligners, for example, relatively
small changes in individual components triggered a
cascadeofchangesinthewaysinwhichthesecom-
ponents interact with each other that proved to be
sufciently challenging to understand that between
1962 and 1986, new entrants replaced the industrys
leading rm on ve separate occasions. However, the
concept has since been applied successfully to changes in
the architecture of entire industries (see, e.g., Brusoni et.
al. 2009,Garudet.al.2013).
The rst digital cameras, for example, were es-
sentially conventional cameras tted with electronic
image sensors rather than conventional lm. The
image sensors were a radical innovationacomplete
departure from conventional lmbut the funda-
mental architecture of the camera remained unchanged.
It is perhaps not surprising that Kodakthe dominant
player in the conventional photographywas an
early pioneer in the development of digital photog-
raphy and indeed dominated the market for digital
cameras for several years. The inclusion of digital
cameras in phones, in contrast, was a signicant ar-
chitectural innovation that changed not only the
architecture of the product but also the architecture of
the entire industry (Swasy 1997).
In general, rms appear to nd architectural in-
novation signicantly more difcult to handle than
either incremental or radical innovation (the chal-
lenge of creating something entirely different). The
pursuit of incremental innovationalthough never
easyusually can be accommodated within existing
organizational structures and patterns of behavior, al-
though it is well understood that radical innovations are
best pursued through acquisitions or the creation of
stand-alone entities. Architectural innovation, in con-
trast, creates problems because it requires access to
the organizations current assets and skills while si-
multaneously requiring that both be recongured
into quite different patterns. In most organizations,
the focus of attention is on component knowledge
knowledge of how particular pieces of the puzzle
workand architectural knowledgeknowledge of
how the pieces are put togetheroften becomes em-
bedded in the tacit routines, structures, and processes
of the organization, in such things as the mental
models of its employees, in patterns of communica-
tion, and in incentives that reinforce particular patters
of attention in ways that make architectural knowl-
edge both difcult to access and resistant to change. In
most rms, most people know a great deal about their
own jobs but relatively little about exactly what goes
on elsewhere in the organization.
Despite its importance, we know relatively little
about how to handle this kind of innovation. Sig-
nicant progress has been made in understanding
how to create the organizational structures and gover-
nance routines that can increase the odds of mastering
architectural innovation within individual rms (see,
e.g., Tushman and OReilly 2002). But our knowledge
of how rms can help support the kinds of systemic,
industry-wide transformations inherent in, say, greening
the worlds transportation systems is still radically
incomplete (Gans 2016).
What might further research in this space look like?
How can we go about learning how to support rms
in handling these kinds of complicated, interrelated
problems in a world in which it is always easier to
study the components than the architecture? Here I
sketch out a way of thinking about these kinds of
problems that I hope might be helpful, focusing
particularly on the ways in which building a better
understanding of the role that purpose and the ability
to build relational contracts might play in making it
easier to handle architectural change.
Purpose and Innovation
My working intuition is that there may be particularly
high returns to focusing more attention on the
Henderson: Innovation in the 21st Century
2Management Science, Articles in Advance, pp. 110, © 2020 The Author(s)
so-called softer aspects of management. This is a
suspicion that ows from my own research. I have
spent more than 20 years studying the problem of ar-
chitectural innovation in a wide variety of rms and have
come to believe that the single most important deter-
minant of whether a rm is able to master it successfully
is its commitment to a shared purpose or to a goal be-
yond simple protmaximization.
What does it mean for a commercial rm to have a
purpose? There are almost as many denitions of
purpose as there are papers about it in the literature,
but as a rststep,letmesuggestthatacompanyis
purpose driven if it is publicly committed to a goal
beyond prot maximization and if it routinely sac-
rices short-term prots to the pursuit of this purpose.
This is not to suggest that the embrace of purpose
necessarily implies accepting lower levels of prot-
ability in the long run. As I argue, there is good reason
to believe that the embrace of purpose brings with it a
range of advantagesparticularly with respect to the
pursuit of innovationthat are often sufcient to
compensate for the cost of having a purpose in the
rst place.
Why might the embrace of purpose increase a rms
ability to innovate and, in particular, to enable it to
tackle architectural or systemic innovation signi-
cantly more effectively than its more conventional
rivals? My own research and the literature suggest
three broad hypotheses.
Purpose Drives Both Vision and Alignment
An extensive literature suggests that managers are
deeply constrained by the frames or schemas through
which they see the world and that shape their diag-
noses of strategic opportunities and threats (see, e.g.,
the review in Kaplan 2011). Path-breaking studies of
strategy formation in photography (Tri psas and Ga vetti
2000) and internet software (Gavetti and Rivkin2007)
suggest that in both cases deeply held mental models
made it difcult for the senior team to respond ef-
fectively to the transformations that were reshaping
their business.
A less-developed stream of research further sug-
gests that managers who embrace a widely shared
prosocial purpose may be better positioned to iden-
tify new opportunities because this purpose leads
them to take a more expansive view of the world and
to see opportunities that others may miss. Psychol-
ogist Robert Kegan, for example, suggests that
exceptionally highly psychologically developed indi-
viduals possess what he calls a self-transforming
mindthe ability to see and to act on the knowledge
that people are mutually interdependent and that our
behavior is shaped by the systems in which they are
enmeshed. His work can be read as suggesting that
these kinds of individuals are more likely to be able to
see systems as malleable and to be able to imagine
systemic transformation (Kegan 1982).
The embrace of a shared purpose also plausibly
increases strategic alignment across an organization,
ensuring that the strategy of the rm is widely un-
derstood and that the rms structure and processes are
designed to support it. Shared purpose may embed
shared views of the world in organizational rituals
and widely accepted ways of behaving that together
make certain patterns of behavior both widely ac-
ceptable and natural (Kreps 1996,Schein1985).
As strategy scholars have stressed since Chester
Barnard (1968), organizational and strategic align-
ment can also increase the odds that units, teams, and
individuals understand how their respective contri-
butions add to the rmsperformance,allowingem-
ployees to spend less time managing conicting
objectives or navigating cumbersome organizational
barriers and instead concentrating on executing tasks
more effectively (Baron and Kreps 1999;Kaplanand
Norton 2005; Van den Steen 2010a,b).
Does purpose in fact lead rms to identify oppor-
tunities that others do not and to greater strategic
alignment? The empirical work in this area is still at a
preliminary stage. Tushman and OReilly (2016), in a
richly detailed series of case studies of rms that have
successfully navigated major architectural transfor-
mations, nd that a strong sense of shared purpose
plays a central role in identifying new opportunities
and in building alignment across the organization on
the need to address them and the means by which to
do so. My own experience with successful transfor-
mational leaders similarly suggests that a commit-
ment to a purpose beyond simple prot maximization
often alerts them to opportunities for protable new
businesses that others fail to see (Henderson 2020).
Gartenberg et al. (2019) present compelling evidence
drawn from more than ve million employee surveys
to suggest that when purpose is closely connected to
the strategic goals of the rm, it is correlated with
nancial performance. So theres reason to believe
that theres something going on here but much that
remains to be understood.
Purpose and Engagement, Effort
and Creativity
In general, people work hard for money, status, and
powerso-called extrinsic motivators. But, for many
people, once their core needs are met, the sheer interest
and joy of the work itself intrinsic motivationis much
more powerful (Ryan and Deci 2000a,Cerasolietal.
2014). There are a number of mechanisms through
which the adoption of a shared purpose plausibly
increases the odds that employees are intrinsically
motivated. The embrace of an authentic purpose
Henderson: Innovation in the 21st Century
Management Science, Articles in Advance, pp. 110, © 2020 The Author(s) 3
increases the odds that onesworkhasmeaning,oneof
the core drivers of intrinsic motivation and a driver of
higher-quality, more creative work (Pink 2011). It can
also create a strong sense of shared identityanother
important source of intrinsic motivation (Akerlof and
Kranton 2005, Henderson and Van den Steen 2015).
To the degree that shared purpose supports genuine
authenticitythe ability to live a life in accord with
ones deepest valueit also increases the presence of
positive emotionssomething that is strongly cor-
related with the ability to see new connections, to
build new skills, to bounce back after difcult times,
and to be more resistant to challenges or threats
(Amabile et al. 2005, Lyubomirsky et al. 2005,Boiral
et. al. 2009). This is an enormous literature, and I
cannot possibly summarize it here. The Oxford
Handbook of Positive Organizational Scholarship,for
example, includes 79 chapters on topics as diverse as
resourcefulness, spirituality, appreciative inquiry, and
organizational energy (Cameron and Spreitzer 2012).
Much of the research uses methods that may be un-
familiar to readers of Management Science, but it is
deeply thought provoking and, taken together, sug-
gests, I believe, that the employees of purpose-driven
rms are likely to be signicantly more productive,
happier, and more creative than those at more con-
ventional rms. All these qualities plausibly make it
easier to embrace architectural innovation.
Purpose and Trust
The twin ideas that shared purpose might increase
trust and that, in turn, the presence of trust is cor-
related with the ability to tackle architectural inno-
vation are much less developed in the literature. An
abundant literature suggests that trust is correlated
with performance (see, e.g., Bachmann and Zaheer
2008; Edmondson 1999,2014). But this stream of work
has notso far as I am awareexplored either the
ways in which shared purpose might support the
developmentoftrustorthemechanismsthrough
which trust might enable the pursuit of architectural
innovation. What follows therefore should be taken as
speculation or hypothesis development rather than
established fact.
My belief that purpose might drive the trust that
might, in turn, drive the ability to handle complex,
systemic problems is rooted in a close engagement
with the literature that has explored the nature and effects
of what is sometimes called the Toyota production system
or, more broadly, high-performance work systems.
An extensive body of research has demonstrated
that there are persistent performance differences among
seemingly similar enterprises (Bartelsman and Doms
2000,Syverson2011). For example, Syverson (2004b)
found that within four-digit Standard Industrial Clas-
sication industries in the U.S. manufacturing sector, the
average difference in logged total factor productivity
between an industrys 90th and 10th percentile plants
was 0.651 or that the plant at the 90th percentile of the
productivity distribution made almost twice as much
output with the same measured inputs as the 10th
percentile plant. These ndings have been replicated
in a wide range of time periods and geographies
(Dwyer 1998, Disney et al. 2003,Eslavaetal.2004,
Gibbons and Henderson 2013). They are surprisingly
robust to controls for competition (Syverson 2004a),
for the measurement of output in physical units rather
than revenue (Foster et al. 2008), and for problems of
selection and simultaneity (Olley and Pakes 1996,Van
Biesebroeck 2008).
Thequestionofwhatpreciselycauses these per-
formance differences remains hotly contested, but
there is increasing evidence that one important source
is persistent differences in management practices. A
long tradition among labor economists and others
studying blue-collar work has suggested that high-
performance work systems are closely correlated with
superior organizational performance (e.g., Kochan et al.
1986; Huselid 1995;MacDufe1995; Huselid and
Becker 1996;MacDufeetal.1996;Ichniowskietal.
1997;IchniowskiandShaw1999; Appelbaum et al.
2000,BlackandLynch2001;Gantetal.2002; Hamilton
et al. 2003; Boning et al. 2007). These largely micro-
and industry-level studies have recently been supple-
mented by an important research program pioneered by
Nicholas Bloom, John Van Reenen, and their collabo-
rators that draws on survey data obtained from thou-
sands of plants across many countries to conrm that a
very signicant fraction of the variance in productivity
across plants and rms is driven by variation in the
adoption of management practices (Bloom and Van
Reenan 2007,2010,2011; Bloom et al. 2015).
Thereisnosingledenition of a high-performance
work system, but three overarching elements can be
identied in the literature. In general, rms with high-
performance work systems use high-powered incen-
tives, pay a great deal of attention to skills development,
and do everything they can to support dense commu-
nication and local problem solving. Table 1lists some of
the particular practices identied by some of the key
studies in the eld.
But these results raise another, even more puzzling
question, namely why donttheydiffuse?Atrst
glance, it seems unlikely that differences in mana-
gerial practices could drive performance because they
have been extensively documented and would ap-
pear to be relatively easy to adopt. For example, the
Toyota production system, an early and spectacularly
successful instantiation of a high-performance work
system, has been explored in hundreds of books and
thousands of academic articles. If the adoption of
Henderson: Innovation in the 21st Century
4Management Science, Articles in Advance, pp. 110, © 2020 The Author(s)
these work practices can make such a difference to
performance, why dont they diffuse more quickly?
One possibility is that managers simply dontsee
that they are behind. We know that the cognitive
frames of individual managers and the ways in which
information processing is structured within the rm
may lead rms to have quite different perceptions of
their environments and the capabilities of their com-
petitors (Kaplan et al. 2003, Kaplan 2011). In addition,
much of the knowledge fundamental to building
management practices is tacit or deeply embedded
in individuals or organizational routines, so it is
simply unclear how to mimic a high performer (see,
e.g.,Zollo and Winter 2002). Several studies suggest
that management practices are much easier to learn
if one has access to individuals who have experienced
them rsthand (Lacetera et al. 2004,Breschiand
Lissoni 2009).
Another possibility is that managers fail to adopt
better practices because they are insufciently incen-
tivized to do so, and the above-mentioned sequence of
papers by Bloom, Van Reenen, and collaborators does
indeed nd that family-owned rms and rms in less
competitive environments adopt leading-edge prac-
tices more slowly than their rivals. But none of these
explanations can account for the cases in which man-
agers know about the new practices, are convinced that
they would be effective, and have strong incentives to
adopt them. General Motors (GM), for example, took
nearly 20 years to respond effectively to Toyotasentry
intotheU.S.marketdespitethefactthatithadajoint
venture with Toyota that gave it deep insight into
Toyotas practices (Henderson and Helper 2014).
Gibbons and Henderson (2013)arguethatoneof
the reasons these kinds of implementation failures
ariseisbecausetheadoption of high-performance
work systems requires the development of deep levels
of trust across the organization or the development of
relational contractscontracts predicated on subjec-
tive metrics that can only be enforced by the shadow
of the future. For example, one important source of
the extraordinary levels of productivity and quality
obtained by Toyota in the late 1980s and 1990s was the
rms ability to make continuous improvements to its
production processes. Shop-oor workers were grouped
into problem-solving teams that were encouraged to
identify bottlenecks and inefciencies in the production
process and to explore potential solutions to them.
Workers were asked to be alert for potential opportu-
nities for improvement and to be creative and innovative
in their search for solutions. Gibbons and Henderson
(2013) argue that successful participation in these
kinds of activities relies on a set of behaviors that
could not be articulated ex ante or veried ex post
and, hence, could not be rewarded through a for-
mal contract and that this made them almost
impossible for GM to imitate (see also Henderson and
Helper 2014)
Table 1. Management Practices Underlying High-Performance Work Systems
Practice
a
Appelbaum
et al. (2000)
Ichniowski
et al. (1997)
Bloom and Van
Reenen (2007) MacDufe(1995) Pfeffer (1998) Huselid (1995)
Black and
Lynch (2001)
High-powered incentives
Incentive pay X X X X X X X
Employment security X X X X X
Merit-based
promotions
XX X
Reduced status
distinctions
XXX
Performance review X X
Skills development
Skills training X X X X X X X
Selective recruiting X X X X X X X
Flexible job assignment X X X
Dense communication and local problem solving
Teamwork X X X X X X X
Communication X X X
Information sharing X X X
Total quality
management/
process control
XX X
Source. Gibbons and Henderson (2013).
a
These practices are not necessarily mutually exclusive. For instance, some authors specically focus on the importance of communication and
information sharing in developing well-functioning teams, others directly measure the use of such teams, and still others measure a specic type
of team that might be used in lean manufacturing, total quality management programs, or statistical process control. These may all be capturing
similar successful work practices.
Henderson: Innovation in the 21st Century
Management Science, Articles in Advance, pp. 110, © 2020 The Author(s) 5
The idea that the presence of relational contracts
contracts that rely on subjective measures enforced
through the shadow of the future rather than through
the courtsmight improve performance is well estab-
lished in the literature, but we have much less under-
standing of why new relational contracts cannot simply
be declared. Why could GM not just announce that it
had recently learned that high levels of mutual trust
would increase performance and that, therefore, from
henceforth, it had decided to perform in a trustworthy
manner? An intriguing sequence of recent papers that
model the conditions under which a relational con-
tract develops suggests that if the subjective measures
on which they must be built can only be communi-
cated over time, relational contracts can only be built
through shared experience (see, e.g., Chassung 2010,
Halac 2012, Bachmann and Zaheer 2008).
I believe that these ideas are consistent with the idea
that the adoption of authentic purpose greatly ac-
celerates the adoption of high-performance man-
agement practices because the presence of purpose
greatly increases the ability to build trust and hence
relational contracts within the organization. Gibbons
and Henderson (2013) speculate that it is useful to
thinkofthedevelopmentofrelationalcontractsas
being predicated on the development of clarity and
credibility, where clarity is a shared set of beliefs
about the nature of the world, the strategy of the rm,
and the likely effects of a set of plausible actions on
possible outcomes, and credibility is an informed
belief thatall other things equalthe parties to the re-
lational contract are likely to live up to their commitments.
As I have explored, there are good reasons to be-
lieve that the adoption of shared purpose increases
clarity within an organization, and I think that it is
also plausible to assume that it increases credibility.
Purpose-driven rms are more likely to attract pro-
social individuals, and it is much easier to build co-
operationwhensomesignicant number of the parties
involved has a positive preference for cooperation
(Moorman and Blakely 1995,DeCremerandVan
Lange 2001). Similarly, rms can only build a repu-
tation for being authentically purpose driven if they
deeply embed their purpose in the strategy and
processes of the rm and if they consistently show
themselves to be willing to accept lower returns (at
least in the short term) in its service. All of this feels
like the kind of demonstrable commitment to doing
the right thingthat is likely to build credibility. In
short, I suspect that purpose may play an important
role in enabling the adoption of high-performance
work practices.
Here again, the empirical evidence as to whether
this is indeed the case is more intriguing than de-
nitive. Zeynep Ton (2014), who has studied the
adoption of high-performance work systems in retail,
argues that shared purpose may be an important
complement to their success, citing the experience of
rmssuchasMercadonaandCostcoasevidence.
Scholars who study Toyota often stress the fact that
Toyotas culture is central to the successful working
of the Toyota production system (Liker and Hoseus
2008, Ledbetter 2018). In my own experience, rms
that have succeeded in adopting high-performance
work systems are nearly always run by senior teams
who have, at the very least, committed to the idea
that the well-being of their employees is at least as
important as maximizing prot(Henderson2020).
But this an area ripe for more systematic research.
Of course, making the case that shared purpose
makes development of the trust that underlies the
adoption of high-performance work systems possible
is not the same thing as making the case that this kind
of trust is likely to make tackling architectural in-
novation easier. But, here again, I believe that it to be a
plausible hypothesis.
The relational contracts that support high-performance
work systems are, by their very nature, deeply ambiguous
and very much subject to interpretation. The case of
Nordstroms employee handbook, which, for many
years, was a single sheet of paper on which was written
Welcome to Nordstrom
Were glad to have you with our Company. Our number
one goal is to provide outstanding customer service. Set
both your personal and professional goals high. We
have great condence in your ability to achieve them.
Nordstrom Rules: Rule #1: Use good judgment in
all situations.
There will be no additional rules.
Please feel free to ask your department manager, store
manager, or division general manager any question at
any time.
The company meant it. Nordstrom is in the retail
business and built an impressive track record on the
basis of employees who used good judgment. In a
series of famous cases, one sales associate accepted
the return of snow tires (Nordstrom does not sell
snow tires), another drove for hours to deliver a set of
clothes so that a customer could attend a family oc-
casion, and a third changed the tires of customers
stranded in the company parking lot. Stories such as
these gave Nordstrom a reputation for excellent cus-
tomer service that was the envy of its competitors and
created deep customer loyalty. (And, yes, for many
years, Nordstrom has been regarded as a highly purpose-
driven organization.)
Tackling architectural innovation requires precisely
the ability to deal with this kind of ambiguityto be able
to tell employees to do the right thing even when
theres no easy way to credibly commit to rewarding
them if they do. We know from years of research that
Henderson: Innovation in the 21st Century
6Management Science, Articles in Advance, pp. 110, © 2020 The Author(s)
rms that master architectural innovation are ambi-
dextrous, that is, that they combine the ability to
manage conventionally operationally focused orga-
nizations with much more dynamic, faster-moving
units and that this ability is rooted in the ability of
the senior team to develop a shared understanding of
the world and the rmsstrategysoastocommunicate
this to the rest of the organization and to manage the
organization through a judicious mix of subjective
and objective measures that must be constantly revisited
(see, e.g., Tushman and OReilly 2002). In short, man-
aging architectural change requires the ability to build and
modify new relational contracts on the ysomething
that is likely to be, I believe, much easier in an or-
ganization characterized by authentic purpose.
Complements?. In short, authentic purpose seems
likely to increase the odds that an organization will
seethe need for architectural innovation as it emerges,
that it will develop a shared sense of strategy and an
organization aligned with that strategy, that its em-
ployees will work harder and be signicantly more
engaged and productive than those in conventional
rms, and that it will have an advantage in developing
the trust that is essential to effective action under am-
biguity. (See Figure 1and Table 2for an overview of
the linkages I have outlined.)
What is the evidence that this is indeed the case?
There is a large and lively debate as to whether the
quantitative evidence suggests that the adoption of a
purpose is correlated with improvements in nan-
cial returns (see, e.g., the excellent summary in
Edmans (2020) and the research available at https://
www.unpri.org/academic-research/top-academic
-resources-on-responsible-investment/4417.article). For
my purposes here, however, this is not a useful de-
bate. In the rstplace,Isuspectthatiftheadoptionof
purpose were obviously correlated with nancial
performance, we would see a lot more of it. In the
second place, I am much more interested in the degree
to which purpose might drive the ability to innovate
particularly in the face of architectural or systemic
innovationsomething that may or may not be sys-
tematically correlated with nancial returns, and here
again, I cannot offer much beyond qualitative evidence.
Research in transformational leadership contrasts
transformational leadersleaders who internalize
purpose, reinforce collective commitment, build com-
mon interests, and change the way that followers see
themselveswith transactional leadersleaders who
are motivated primarily by self-interest and appeal
to followersself-interest through incentives (Kaiser
et al. 2008). This literature suggests that because
transformational leaders have a strong set of inter-
nalized values, they make exceptional managers who
can help the rm navigate short- versus long-term
pressures and manage the balance of both social and
nancial responsibilities (Boiral et. al. 2009). These
qualities also serve to inspire other employees to
identify with the rms purpose and to cooperate in the
pursuit of organizational goals, which, in turn, leads
to improved performance (Kuhnert and Lewis 1987).
The presence of authentic leadership has been cor-
related with performance in retail (Clapp-Smith et al.
2009)andtechnologyrms (Peterson et al. 2009), and
the idea is consistent with an intriguing literature that
suggests that the qualities I have identiedmeaning,
identity, authenticity, and prosocialityare comple-
ments in driving performance (see, e.g., Grant 2008,
Clapp-Smith et al. 2009, Grant and Berry 2011). Here
again, though, performance is often measured as -
nancial performance rather than as a superior ability
to innovative.
Allofthisisbywayofendingas you might
expectin a call for further research. We will not
solve the massive global problems we face without
being able to catalyze great waves of architectural
innovation. Developing a deeper understanding of
the forces that enable rms to move in this direction
is thus potentially of enormous value. I am not sug-
gesting that we abandon prot maximization or the
tools of quantitative analysis, but I have come to
believe that a richer focus on issues that have his-
torically been considered soft”—and, in particular,
Figure 1. (Color online) Links Between Purpose and Performance
Henderson: Innovation in the 21st Century
Management Science, Articles in Advance, pp. 110, © 2020 The Author(s) 7
on questions of meaning and purpose and how they
might shape organizational capabilitymight pay
off handsomely in both refereed journal articles and
truly useful knowledge.
What might research in this area look like? Clearly,
there will always be a role for the kinds of detailed,
qualitative studies of particular rms and single in-
dustries that have always been central to work in
innovation. I suspect that longitudinal studies ex-
ploring the development and rollout of electric ve-
hicles and renewable energy, for example, may prove
to be particularly fruitful. Similarly, studies of the
publicprivate partnerships that are emerging to tackle
problems such as labor conditions in the supply chain
and the continuing challenge of deforestation, and the
slew of innovations they are attempting to coordinate in
response, are also likely to yield important insights.
But I suspect that these issues are also amenable to
more conventional modes of research. Research in
behavioral economics is increasingly demonstrating
that human motivation is much more complex than
many classical models assume. Might it be possible to
bring some of these methods into eld settings to
explore the degree to which so-called purpose-driven
rms do indeed succeed in changing the perceptions
and motivations of their employees? Advances in
textual analysis applied at scale are increasingly
generating new measures of the culture of organi-
zations and the ways in which work is structured.
Could they be applied to track the evolution of culture
over time, potentially exploring the interaction be-
tween the adoption of purpose by a senior team and
its diffusionor notwithin an organization? Could
both be combined with additional measures to ex-
plore the degree to which they help drive innovation?
Let me close by making the case for taking more
risks in our professional lives. Doctoral students are
told to focus, to pick problems that are well bounded
and that are likely to advance the state of the art. They
are also taught that the process of research is a deeply
ethical endeavor, that a commitment to truth and to
the good of the community is fundamental to the
progress of science. But, in general, those of us who
are more established do not spend much time en-
couraging them to think through the broader con-
sequences of the work they do or suggesting that they
choose problems not only for their own inherent in-
terest and tractability but also because they offer the
opportunity to tackle our most pressing problems.
Perhaps we should.
This is not a matter of losing our analytic selves.
This is a matter of integrating into our analytics the
awareness that humans are driven by much more
than short-term interest and much more than simply
money and power, and the recognition that tapping
into this kind of motivation may have signicant
effects on behavior. If we can help rms harness this
additional motivation, we can perhaps help them to
take more risks and, in so doing, increase the odds
that they will innovate in the ways we so desperately
need as a society to deal with the problems we face.
I do not believe, of course, that private-sector action
will be enough to solve problems such as climate change
or inequality. But I suspect that purpose-driven rms
may have the ability to catalyze transformational change
across industries and regions and perhaps even at the
national and global scales (see Henderson 2020).
Tom Magnantis paper in this volume (2020)is
emblematic of the power of mathematics and ana-
lytics and the enormous difference they have made in
advancing human well-being over the last 50 years. In
thenext50years,wemustdoubledownonevery-
thing we know about quantication and careful re-
search. Moreover, I believe that we need to combine
this with a larger concern for human ourishing and
human well-being and with an increasing sense of the
Table 2. Unpacking Purpose
From To Link References
Purpose Shared beliefs 1 Van den Steen (2010b)
Authenticity and meaning 2 Kaiser et. al (2008), Boiral et al. (2009)
Identity and prosociality 3 Fehr and Fischbacher (2002), Akerlof and Kranton (2005), Henderson and
Van den Steen (2015)
Shared beliefs Alignment 4 Kreps (1996), Rotemberg and Saloner (2000)
Trust 5 De Cremer and Van Lange (2001), Gibbons and Henderson (2013)
Authenticity and meaning Intrinsic motivation 6 Deci and Flaste (1995), Ryan and Deci (2000a,b), Zhu et al. (2004)
Trust 7 Moorman and Blakely (1995), Henrich et al. (2001)
Identity and prosociality Intrinsic motivation 8 Deci and Flaste (1995), Ryan and Deci (2000a), Grant (2008), Pink (2011),
Henderson and Van den Steen (2015)
Trust 9 Moorman and Blakely (1995), Henrich et al. (2001), Tyler (2001)
Alignment Performance 10 Baetz and Kenneth (1998), Baron and Kreps (1999), Kaplan and
Norton (2005), Desmidt et al. (2011)
Intrinsic motivation Performance 11 Deci and Flaste (1995), Ryan and Deci (2000a,b), Osterloch and
Frey (2000), Cerasoli et al. (2014)
Trust Performance 12 Edmondson (1999), Baer and Frese (2003), Gibbons and Henderson (2013)
Henderson: Innovation in the 21st Century
8Management Science, Articles in Advance, pp. 110, © 2020 The Author(s)
power of unfamiliar concepts, such as purpose, trust,
and meaning, if we are to make the kind of difference
we need to make.
Lets do the research that helps rms change
the world.
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... We explain the scarcity of empirical testing in prior studies on organizational purpose by the lack of a clear construct definition, which also hinders an empirical measurement operationalization. Prior research found no agreement or consistency in the definition of organizational purpose (Gartenberg et al., 2019;Henderson, 2021;van Tuin et al., 2020) and applied broad and rather vague definitions (e.g., Henderson and van den Steen, 2015;Mayer, 2021). However, a clear and distinct construct definition is essential to develop and empirically test theory (Post et al., 2020;Suddaby, 2010). ...
... Currently, there is no academic consensus on the definition of the construct or a validated measurement instrument to appropriately capture the multifaceted concept of organizational purpose (Gartenberg et al., 2019;van Tuin et al., 2020). As Henderson (2021) pointed out '[t] here are almost as many definitions of purpose as there are papers about it in the literature' (p. 5481). ...
... This 'inspires them to go the extra mile' ( Birkinshaw et al., 2014, p. 49). Accordingly, organizational purpose possesses an inherent inspirational and motivational quality (Henderson, 2021;van Tuin et al., 2020) and produces a sense of being part of something bigger (Collins and Porras, 1994;Ellsworth, 2002;Pradhan et al., 2017). Following an organizational purpose means 'creating an organization with which members can identify, in which they share a sense of pride, and to which they are willing to commit' (Bartlett and Ghoshal, 1994, p. 81). ...
... We explain the scarcity of empirical testing in prior studies on organizational purpose by the lack of a clear construct definition, which also hinders an empirical measurement operationalization. Prior research found no agreement or consistency in the definition of organizational purpose (Gartenberg et al., 2019;Henderson, 2021;van Tuin et al., 2020) and applied broad and rather vague definitions (e.g., Henderson and van den Steen, 2015;Mayer, 2021). However, a clear and distinct construct definition is essential to develop and empirically test theory (Post et al., 2020;Suddaby, 2010). ...
... Currently, there is no academic consensus on the definition of the construct or a validated measurement instrument to appropriately capture the multifaceted concept of organizational purpose (Gartenberg et al., 2019;van Tuin et al., 2020). As Henderson (2021) pointed out '[t] here are almost as many definitions of purpose as there are papers about it in the literature' (p. 5481). ...
... This 'inspires them to go the extra mile' ( Birkinshaw et al., 2014, p. 49). Accordingly, organizational purpose possesses an inherent inspirational and motivational quality (Henderson, 2021;van Tuin et al., 2020) and produces a sense of being part of something bigger (Collins and Porras, 1994;Ellsworth, 2002;Pradhan et al., 2017). Following an organizational purpose means 'creating an organization with which members can identify, in which they share a sense of pride, and to which they are willing to commit' (Bartlett and Ghoshal, 1994, p. 81). ...
Article
Organizational purpose has recently gained great popularity in research and practice. However, the development of this nascent research field has struggled with definitional ambiguity, the lack of a measurement instrument and little empirical testing of potential outcomes. In our paper, we first introduce and define the multidimensional construct of perceived organizational purpose, which sheds light on the individual and subjective experiences of organizational purpose. Second, building on our construct definition, we develop and validate a four‐dimensional Perceived Organizational Purpose Scale. Third, we disentangle the related yet differentiated concepts of perceived organizational purpose and meaningful work and theorize how substantial knowledge in the field of meaningful work can be transferred to the relatively new and untested field of perceived organizational purpose. Fourth, we critically elaborate and empirically test the relationship of perceived organizational purpose with employee job satisfaction, subjective well‐being and work‐life conflict.
... Purpose-driven companies exhibit qualities of authenticity, integrity and benevolence (Jasinenko and Steuber, 2022), which can engender trust from community members (Henderson and Van den Steen, 2015). Trust in turn enables relational governance that reduces the cost of coordination (Bacq and Aguilera, 2022;Henderson, 2021), facilitating collective action and even social change. Social purpose, therefore, boosts the effectiveness and efficiency of community engagement initiatives, increasing their ability to create civic wealth. ...
... By carefully investigating different practices of community inclusion and their effects on civic wealth, this study has responded to calls for better evidence on 'how different types of CSR … [create] differential effects in fostering social change' (Aguilera et al., 2007, p. 856). The analysis integrates evidence from diverse disciplines in purposeful organizing, including research in social purpose (George et al., 2021;Henderson, 2021;Kraatz et al., 2020), civic wealth creation (Bailey and Lumpkin, 2023;Lumpkin and Bacq, 2019), BoP strategies (Halme et al., 2012;Khavul and Bruton, 2013), and stakeholder theory (Desai, 2018;Laplume et al., 2008). Our analysis of primary data from seven African countries has provided granular evidence on how the pursuit of social purpose in for-profit businesses alleviates systemic inequality. ...
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In countries where systemic inequality is pervasive, purposeful businesses that assume wider societal responsibilities try to counteract its effects by including marginalized social groups in their value creation processes. While current research documents a variety of business approaches for community inclusion, the nature, drivers and effectiveness of these inclusionary practices are not fully understood. We develop and empirically validate a framework of community inclusion that explicates the mechanisms through which purposeful businesses generate civic wealth – or economic and social benefits – to disadvantaged community groups. We differentiate between commercial practices that recast existent firm‐centric processes towards creating value for marginalized groups and collaborative practices that aim to devise novel, participatory processes for engaging marginalized groups. Analysis of primary data from a sample of 430 small businesses in seven African countries confirms that the effect of social purpose on civic wealth is partially mediated by the two inclusionary practices. Businesses are more likely to extend the scope of their inclusion through collaborative practices when they receive favourable external validation and when institutional voids are low. We contribute to the literature by documenting the role of social purpose in motivating the pursuit of community‐level goals and by unpacking the specific inclusionary practices used to achieve them.
... Similar alignment benefits may also apply to how leaders navigate intertemporal and intraorganizational tradeoffs (Helfat and Eisenhardt 2004), including the ability of leaders to defer financial rewards to pursue other meaningful or purpose-related goals, as well as to maintain principles of fairness across time and throughout the organization. Decision patterns that support purpose and justice principles may also focus creativity, guide discretionary behavior, and contribute to breakthrough innovations (Henderson 2021). A track record of adherence to purpose and justice may also help in recruiting and retaining a skilled workforce (Carnahan et al. 2012, Burbano 2016, Carnahan et al. 2017, particularly one that values the advocated principles of purpose and justice. ...
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Research in the “theory of the firm” tradition has often characterized firms as subeconomies, in which economic exchange is shaped by a central authority. We propose an expanded view of firms as subsocieties, in which authority is also responsible for establishing principles that shape cooperation among members. We draw on insights from political theory, sociology, and, to a lesser degree, legal theory to discuss how employees become members of subsocieties by exchanging rights, such as formal control over their work, for the benefits of membership. With this rights exchange, subsociety members develop expectations that those in positions of authority will use their control to define and sustain principles of justice and common purpose consistent with members’ moral sentiments. This view suggests expanded roles for authority and firm boundaries from what are incorporated into standard theories of the firm. These expanded roles have implications both for internal governance and for the boundary itself: When considering boundary changes, leaders must weigh both the economic and the social consequences of their decision. Funding: C. Gartenberg recognizes financial support from the Wharton School at University of Pennsylvania. T. Zenger recognizes the financial support of the Eccles School at the University of Utah.
... They distinguish between incremental innovation (which involves minor changes in the already existing components of the product) and radical innovation (in which the result of innovation is a product with new components and new relationships among them). For example, gradual improvements in the quality of the film in analogue cameras were incremental innovations, but digital cameras, which replaced film with electronic image sensors, were a radical innovation (Henderson, 2021). ...
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Technological innovation is almost always investigated from an economic perspective; with few exceptions, the specific technological and social nature of innovation is often ignored. We argue that a novel way to characterise and make sense of different types of technological innovation is to start considering uncertainty. This seems plausible since technological development and innovation almost always occur under conditions of uncertainty. We rely on the distinction between, on the one hand, uncertainty that can be quantified (e.g. probabilistic risk) and, on the other, deep forms of uncertainty that may resist the possibility of being quantified (e.g. severe or fundamental uncertainties). On the basis of these different ingredients of uncertainty in technological innovation, we propose a new taxonomy that reveals the technological nature of innovation. Unlike previous taxonomies employed to handle different types of technological innovations, our taxonomy does not consider the economic value of innovation alone; it is much more oriented towards societal preferences and forms of technological uncertainty. Finally, we investigate the coherence of our proposal with the dual nature of technological artefacts, showing that innovation can be grounded on structural and functional factors and not just on economic ones.
... manage system-level architectural changes is the ambiguity accompanying those changes, which often provokes resistance to transformational processes (Henderson, 2020). The transition to stakeholder management implies a system-wide change, and the success of its implementation depends on sharing a vision and trust that overcomes this ambiguity. ...
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In recent years, interest in corporate purpose has gained momentum among both practitioners and academic researchers. Despite this, the construct of corporate purpose is still under-conceptualized and suffers from multiple – and partly divergent – understandings. Given that a field’s development is shaped by the clarity of its constructs, this paper strives to evolve the construct of corporate purpose from a ‘tower of babel’ phenomenon towards construct clarity. To this end, it reviews and synthesizes the literature on corporate purpose and proposes a definition that integrates different approaches. In addition, this paper underpins the definition with seven core characteristics of corporate purpose, delineates scope conditions and elaborates on the relationship of corporate purpose with related concepts including mission, vision, corporate social responsibility and sustainability. By enhancing construct clarity, the paper paves the avenue for further research on corporate purpose and the further development of the field.
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Analyzing data from approximately 1.5 million employees across 1,108 established public and private U.S. companies, we find that the strength of employee beliefs related to purpose is weaker in public companies. Among public companies, those beliefs are stronger for firms with more committed owners. These patterns are most pronounced within the salaried middle and hourly ranks rather than senior executives. Differences across firms can be attributed, in part, to differences in leadership and incentive characteristics. Our findings are consistent with higher owner commitment and the corresponding policies that arise alongside this higher commitment, enabling a stronger sense of purpose inside organizations. This paper was accepted by David Simchi-Levi, organizations. Funding: C. Gartenberg recognizes financial support from the Wharton School at University of Pennsylvania. G. Serafeim recognizes financial support from the Division of Research and Faculty Development of the Harvard Business School. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2022.4618 .
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Corporate purpose should be at the heart of corporate law. This article addresses objections that corporate law already permits firms to determine their purposes, and companies would not in any event do more than at present in formulating their purposes. It argues, first, that critics of the law of corporate purpose have failed to recognize that purpose can address divergences of private interests of corporations from public interests of society and the natural world. Second, the law provides a means of commitment to delivery of long-term prosperity. At present, the law fails to protect companies seeking to create long-term prosperity through committing to other parties’ interests. It can and should ensure alignment of corporations’ incentives with individual, societal, and planetary interests and enable firms to commit credibly to resolution of their problems.
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Studies highlight how the once envied US national innovation system (NIS) is now showing signs of slowing down. In this article, we unpack this issue from an industrial R&D perspective. First, we highlight that open innovation (OI) practices (i.e., external sources and markets for technologies) have increased the rate of inventive activity in the current wave of industrial R&D, but financialization skews the firms’ focus on short-term profits and shareholder value maximization. When OI intersects with an institutional context that propagates such shareholder-centric governance of R&D, three social costs are incurred by the US NIS: (i) irrational relationship between risks and rewards, (ii) weak antitrust and intellectual property (IP) rights that result in a lack of business dynamism, and (iii) austerity and weak demand-side policies. We contend that these social costs tilt the R&D trajectory toward incremental R&D at the expense of the blue-sky science needed to retain US leadership in technological innovation. Second, we document three social benefits that public-sector R&D agencies generate for the US NIS: (i) undertaking a technology brokerage role, (ii) creating radical R&D markets, and (iii) embracing stakeholder governance. We emphasize how a hidden “entrepreneurial network state” subtly creates and shapes breakthrough R&D and markets for private sector firms but cannot recoup the rewards for society due to political rhetoric that favors incumbent market power. Third, we recommend both incremental and radical policies to drive institutional reforms that promote a stakeholder-centric form of R&D governance so that the future wave of industrial R&D creates value for society. Overall, we draw attention to the role politics plays in industrial R&D and the US NIS and how small adjustments in institutional dimensions and governance modes can impact the US R&D trajectory and competitiveness.
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Optimization has been one of the most fundamental and extensive contributions of management science/operations research, with an enormous number of contributions and subfields developed by many researchers and practitioners. When the journal Management Science launched in 1954, little was known about optimization, including some results in nonlinear optimization and the simplex method and duality developed for linear programming. However, linear programming computations were limited to problems with at most 101 linear constraints. Then some early contributions by seminal researchers began to develop foundations for the field. I will review a few of these early contributions, focusing on the traveling sales problem and integer programming, decomposition, and column generation. I will summarize some research and applied contributions since then, including the enormous development of computations. I will focus on linear and integer programs with some material on combinatorial optimization. This paper was accepted by David Simchi-Levi, Special Section of Management Science: 65th Anniversary.
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We construct a measure of corporate purpose within a sample of U.S. companies based on approximately 500,000 survey responses of worker perceptions about their employers. We find that this measure of purpose is not related to financial performance. However, high-purpose firms come in two forms: firms characterized by high camaraderie between workers and firms characterized by high clarity from management. We document that firms exhibiting both high purpose and clarity have systematically higher future accounting and stock market performance, even after controlling for current performance, and that this relation is driven by the perceptions of middle management and professional staff rather than senior executives or hourly or commissioned workers. Taken together, these results suggest that firms with midlevel employees with strong beliefs in the purpose of their organization and the clarity in the path toward that purpose experience better performance. The online appendices are available at https://doi.org/10.1287/orsc.2018.1230 .
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