Organizational design as an enabler for innovation: evidence from a German Mechanical Engineering Company

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P A R E C E R

Projeto de Dissertação

Dissertação (Versão Preliminar)

Dissertação (Versão Final)

1. IDENTIFICAÇÃO

Título:

ORGANIZATIONAL DESIGN AS AN ENABLER FOR INNOVATION: EVIDENCE FROM A GERMAN MECHANICAL ENGINEERING COMPANY

Mestrando(a): SEBASTIAN EISOLD

Orientador(a): DR. PAULO N. FIGUEIREDO (Ph.D.)

1. AVALIAÇÃO

APROVO APROVO COM RESTRIÇÕES NÃO APROVO JUSTIFICATIVA: ( )

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CURSO DE MESTRADO EXECUTIVO

ORGANIZATIONAL DESIGN AS AN ENABLER FOR INNOVATION: EVIDENCE FROM A GERMAN MECHANICAL ENGINEERING COMPANY

Dissertation presented to the Escola Brasileira de Administração Publica e de Empresas

for obtaining a master degree in International Management

Supervisor: Dr. Paulo N. Figueiredo (Ph.D.)

SEBASTIAN EISOLD

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ABSTRACT

Over the past two decades there has been a profusion of empirical studies of organizational design and its relationship to efficiency, productivity and flexibility of an organization. In parallel, there has been a wide range of studies about innovation management in different kind of industries and firms. However, with some exceptions, the organizational and innovation management bodies of literature tend to examine the issues of organizational design and innovation management individually, mainly in the context of large firms operating at the technological frontier. There seems to be a scarcity of empirical studies that bring together organizational design and innovation and examine them empirically and over time in the context of small and medium sized enterprises. This dissertation seeks to provide a small contribution in that direction.

This dissertation examines the dynamic relationship between organizational design and innovation. This relationship is examined on the basis of a single-case design in a medium sized mechanical engineering company in Germany. The covered time period ranges from 1958 until 2009, although the actual focus falls on the recent past. This dissertation draws on first-hand qualitative empirical evidence gathered through extensive field work. The main findings are:

1. There is always a bundle of organizational dimensions which impacts innovation. These main organizational design dimensions are: (1) Strategy & Leadership, (2) Resources & Capabilities, (3) Structure, (4) Culture, (5) Networks & Partnerships, (6) Processes and (7) Knowledge Management. However, the importance of the different organizational design dimensions changes over time. While for example for the production of simple, standardized parts, a simple organizational design was appropriate, the company needed to have a more advanced organizational design in order to be able to produce customized, complex parts with high quality. Hence the technological maturity of a company is related to its organizational maturity.

2. The introduction of innovations of the analyzed company were highly dependent on organizational conditions which enabled their introduction. The results of the long term case study show, that some innovations would not have been introduced successfully if the organizational elements like for example training and qualification, the build of network and partnerships or the acquisition of appropriate resources and capabilities, were not in place. Hence it can be concluded, that organizational design is an enabling factor for innovation.

These findings contribute to advance our understanding of the complex relationship between organizational design and innovation. This highlights the growing importance of a comprehensive, innovation stimulating organizational design of companies.

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LIST OF FIGURES

Figure 1.1. Gaps in the literature and dissertation overview...3

Figure 1.2. Analytical model and focus of the dissertation...5

Figure 3.1. Operational levels of innovation within the firm...18

Figure 3.2. Organizational design as enabler for innovation ...22

Figure 3.3. Organizational “Five-Star” model of Galbraith ...27

Figure 3.4. Organizational „Seven-S“ model of Athos et. al...28

Figure 3.5. Organizational „Four inputs“ model of Gaynor ...32

Figure 3.6. Organizational design dimensions of the Framework ...42

Figure 5.1. Suggested process for the data collection of the case study ...77

Figure 6.1. First assembly line for glow wires for customer Niehoff (1974)...89

Figure 6.2. Energy recover system for the use of wasted heat (2008)...100

Figure 6.3. Summary of performance of organizational dimensions...101

Figure 7.1. Enabling organizational dimensions and innovations in phase 1 (1958-1988)...116

Figure 7.2. Enabling organizational dimensions and innovations in phase 2 (1988 - 2004)...122

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LIST OF TABLES

Table 3.1. Organizational “Ten Components” model of Tidd et al. ...37

Table 5.1. Six sources of evidence: strengths & weaknesses...74

Table 5.2. Likert scale for performance evaluation of organizational dimensions ...81

Table 6.1. Evolution of organizational design and innovations in Phase 1 (1958-1988)....85

Table 6.4. Performance of strategy & leadership dimension of Fa. Putzin...102

Table 6.5. Performance of resources & capabilities dimension of Fa. Putzin...104

Table 6.6. Performance of structure dimension of Fa. Putzin...106

Table 6.7. Performance of culture dimension of Fa. Putzin...107

Table 6.8. Performance of network & partnership dimension of Fa. Putzin...108

Table 6.9. Performance of processes dimension of Fa. Putzin...110

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ABBREVIATIONS

ATT American Telephone and Telegraph

CNC Computer Numeric Controlled

DIN Deutsches Institute für Normung (“German institute for standards”)

Fa. Firma (“company”)

GM General Motors

GmbH Gesellschaft mit beschränkter Haftung (“limited company”)

ICI Idea-Concept-Invention

ISO International Organization for Standardization

IT Information Technology

NIH Not Invented Here

R&D: Research and Development

SME Small- and medium sized enterprises

TEUR Thousand Euro

USD United States Dollar

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CHAPTER 1. INTRODUCTION

The purpose of this chapter is to provide a brief overview of the dissertation. The chapter

is divided into three parts. It begins with a short description about why innovation and

organizational design is important, what kind of studies already exist and why this

dissertation makes a contribution to the body of already existing research. Further, the

chapter explains the focus and objectives of the study. Finally the chapter gives an brief

overview of the dissertation's structure and layout.

1.1 Overview of the dissertation

The emergence of new technologies, increasing global competition and fast changing

customer demand are challenges for every company. The globalization brings

opportunities but also pressures for domestic firms and forces them to innovate and

improve their competitive position (Gorodnichenko et al., 2008). As Davila et al. (2006)

notes, "Companies cannot grow through cost reduction and reengineering alone.

Innovation is the key element in providing aggressive top-line growth and for increasing

bottom-line results".

In order to win the race of innovation a company needs to have people who can collect

ideas, select the right ones rapidly and put them into action that generates value. The key is

to have the right people doing the right things the right way at the right time (Hering &

Phillips, 2005). But people vary and change over time in terms of skills, motivation and

creativity and also the requirements of processes and organizations change. Therefore the

need for an effective managed innovation process appears to be widespread. As Gaynor

(2002) stated: “Innovation is a management discipline; it does not come about through a

random or hit-and-miss approach, but it requires design.”

Many authors have pointed out the importance of organizational design and its relationship

to strategy, technology, performance and culture. Burn & Stalker (1961) have described

the need for adapting organizational structures to environmental changes. Miller (1989)

and Mintzberg (1989) have written extensively about the importance of organizational

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within a organizational design of a company. Pascale et al. (2000) considers design as the

invisible hand to bring organizations to life and life to organizations.

The dynamic and complex character of the innovation process results in the evolution of

alternative organizational forms. While there is no single organizational design that is best

for every situation, there are important factors that should be considered in designing and

developing an appropriate innovative organization.

There is a wide range of existing empirical studies which explains the link between certain

organizational elements and innovation. For example Sternberg (1999) wrote about the

impact of organizational networks on innovation, Edwards et al. (2002) contributed with a

study about the influence of culture on innovation and Verona and Ravasi (2003) described

the effects of organizational structure on innovation. Other studies of for example Kim

(1998) or Figueiredo (2000, 2003) are focused on the implications of the learning process

on innovation. Sternberg (1999) did a empirical study about the innovation network of

Small and Medium Sized Firms in German. Qian (2002) analyzed in a extensive empirical

study a large dataset of 1000 Chinese and 500 German mechanical engineering companies

in terms of their innovativeness and the stimulating factors behind it. Also Mothe and

Brion (2008) looked empirically at a large dataset of 174 companies in order to analyses

the relationship between specific competencies and different types of innovation.

However, most of the existing case studies are very narrowed and concentrate their

research on the effect of a single organizational dimension like for example culture or

structure. Further most of the case studies take rather a static point of view by analyzing

companies in a certain point of time, than considering the dynamics behind organizational

design and innovation over a long term period of time. Finally, most of the studies analyze

large enterprises and companies, because they provide normally a better set of data and are

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Hence there is a scarcity of studies which:

a) take a comprehensive view on organizational design and its effects on innovation

b) focus on the dynamics behind organizational design and innovation by analyzing their

relationships over a long period of time

c) focus on the long term development of a single SME company

Beside the scarcity in the literature of a case study which takes a comprehensive, long term

perspective on the organizational design and its effects on innovation of a SME company,

there are also some gaps in theory of organizational design and its relationship to

innovation. McMaster (1996) claims, that organizational design is not well understood.

Rosenheck (2001) criticizes the existing organizational models as too superficial and

complicated for practical implementations. Lam (2004) states that the separation of the

research streams of organizational studies and innovation studies has prevented us from

developing a clear view of how organizational design dimensions are interrelated with

innovation.

Figure 1.1. Gaps in the literature and dissertation overview

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Finally Tidd et. al. (2005) proposes a solution, by arguing that it is possible to create a

“crude blueprint” for effective innovation management, based on the conclusions of

various single studies and research streams.

The author of this dissertation likes to contribute to fill this gap in the literature and likes

to improve the understanding about organizational design and its effects on innovation.

1.2 Focus and objectives of the dissertation

This dissertation examines the impact of organizational design on innovation at the level of

a company.

It will integrate the research streams of organizational studies and innovation studies.

Therefore it will review some organizational models and organizational design approaches

in order to link them with innovation. Based on the reviewed organizational approaches

and the conclusions of scholars of innovation management, the dissertation will propose a

comprehensive framework which combines the major organizational dimensions and

components related to innovation. That set of relationships is examined through a single,

long term case study in a medium sized mechanical engineering company in Germany.

The covered time period ranges from 1958 until 2009, although the actual focus falls on

the recent past.

Based on first- hand qualitative empiric evidence, gathered through extensive field

research, the dissertation likes to answer the following research questions:

1. How have the main organizational dimensions of the company evolved over time

(1958 - 2009)?

2. What have been the implications of the changes in organizational design on the

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While the dissertation gives a short overview about the empirical context of the case study

(see Chapter 4), the focus of the study is set to the company level. Within the company, the

dissertation examines the relationship between (A) organizational design and (B)

innovation (see Figure 1.2).

Figure 1.2. Analytical model and focus of the dissertation

Source: Expanded and adapted from Figueiredo et al., 2007

The relationship is analyzed over a period of 51 years. Due to the different characteristics

of certain periods of time, the analysis is split in three phases:

Phase 1 describes the organizational design and the performed innovations from the start

of the company in 1958 until 1988. During this time, the company developed itself from a

producer of standard parts (mainly gear pumps) to an specialist for complex, customized

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Phase 2 describes the innovations and organizationals changes from 1988 until 2004. This

phase is characterized by the development of the company from a specialist for complex,

customized parts with high quality to a technological network partner.

Phase 3 describes the ongoing development of Fa. Putzin from 2004 until today. It is

characterized by the development from a technological network partner to the supplier of

complete technological solutions.

It is obvious, that the availability and amount of data was better at the end of phase 3 than

during the development steps in the history of the company. Hence the analysis of

company Putzin at the end of phase 3 will be more detailed in comparison to the other

phases.

This dissertation is based on the empirical evidence gathered from first-hand qualitative

data. The data were collected by structured interviews on all hierarchy levels, own

observations and the review of historical qualitative and quantitative data and

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1.3 Dissertation structure

This dissertation is structured in eight chapters and starts with a short introduction which

presents the relevance, objectives, focus and the structure of the dissertation.

Chapter 2 - “Empirical background” gives an overview about existing empirical studies

and shows, why this dissertation is relevant.

Chapter 3 - “Analytical background and framework” discuss the different existing

interpretations of the subject and explains the chosen definitions of the author as a basis of

this dissertation. Further it reviews existing organizational models and approaches.

Because of the lack of a satisfying existing framework, the new synthesized framework is

described in detail by its dimensions and components. It represents the basis for the

empirical analysis.

Chapter 4 - “Empirical context: a brief overview” gives a short overview about the

mechanical engineering industry in Germany within Fa. Putzin is operating. Further it

shows the selection criteria of the case study and provides a short company profile of Fa.

Putzin.

Chapter 5 - “Methodology” describes how the empirical analysis of Fa. Putzin has been

done. It explains the applied methodology, the used tools and the process of data

collection.

Chapter 6 - “Empirical analysis of the organizational design of Fa. Putzin” provides the

collected empirical data and shows the results of the analysis.

Chapter 7 - “Analysis and discussion” relates the results of the empirical study to theory

and will discuss the findings.

Chapter 8 - “Conclusions and implications for management” will provide some general

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CHAPTER 2. EMPIRICAL BACKGROUND

The purpose of this chapter is to give a short summary of the empirical background of the

dissertation. The chapter is divided into three parts. It begins with a short description of the

two main different research streams and will explain why the separation of these research

stream prevented the development of a common theory of organization design and

innovation. Further the chapter presents an short overview about some empirical studies

and their merits and limitations. Finally it will close with a short conclusion about the

empirical studies.

2.1 Different streams of empirical studies

Over the past two decades there has been a profusion of empirical studies of organizational

design and its relationship to efficiency, productivity and flexibility of an organization. In

parallel, there has been a wide range of studies about innovation management in different

kind of industries and firms. However, with some exceptions, the organizational and

innovation management bodies of literature tend to examine the issues of organizational

design and innovation management individually, mainly in the context of large firms

operating at the technological frontier.

As recognized by Lam (2004), the separation of the research streams of organizational

studies and innovation management studies causes a lack of a clear view of how

organizational design dimensions are interrelated with innovation. The separation of this

research stream can be also observed by the review of empirical studies.

Since the beginning of the 20th

century, organizational scholars analyzed the effect of

organizational design on productivity, efficiency and flexibility. One of the first empirical

studies have been conducted by Taylor (1911). He concentrated his work mainly on time

studies which examined the relationship between an optimal organizational design and

performance.

Further studies have been made by other organizational scientists like for example the

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(1924-1927). Over the years many studies contributed to the understanding of the relationship

between organizational design and company performance. While none of these studies

were directly related to innovation, some of them had at least some implications for it. For

example Abernathy’s study of the auto industry indicated that sustained performance was

rooted in a firm’s ability to move along a particular learning curve as well as create new

learning curves (Abernathy, 1978).

While organizational scientists focused their research on productivity, efficiency and

flexibility of organizations, the scholars of technology innovation management concentrate

their research on the innovation process (Nelson & Winter, 1982, Dosi, 1988 and

Fagerberg, 2006). However, some of these studies also relate innovation to some

organizational design elements (Kim, 1998, Figueiredo, 2000 & 2003, Edwards et al.,

2002, Verona and Ravasi, 2003, Mothe and Brion, 2008, Vahtera, 2008, see Appendix A).

The results of these both, different research streams include a high diversity of viewpoints

and sometimes contradictory conclusions. This suggests that the field has not yet

converged on a common theory of organization design for innovation (Westermann et. al,

2006). Hence existing empirical study differ not only by the view on different industries,

company sizes, and different frameworks, but also by the perspective of different research

streams.

2.2 Relevant empirical studies and their limitations

There is a wide range of empirical studies which explains the link between certain

organizational elements and innovation.

One stream of empirical studies examines the relation between organizational learning and

innovation. An empirical study about organizational learning and crisis construction at

Hyundai Motors was done by Kim (1998). As a relatively new automotive company in a

developing country, Hyundai Motors faced a clear gap of capabilities to the technological

frontier. To close this gap and to accelerate the learning process, the management used a

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presented a clear performance gap to the employees, shifted learning orientation from

imitation to innovation and increased the intensity of effort in organizational learning. As

a conclusion Kim (1998) suggests that effective organizational learning requires high

absorptive capacity, which has two major elements: prior knowledge base and intensity of

effort. In absence of an external evoked crisis, the intensity of effort can be stimulated by

the creation of an internal crisis. The study gives interesting insights about the learning

process of a company and also proposes a strategy how the learning process can be

accelerated. However, the learning process, embedded in the knowledge management, is

just one part of the organizational design of a company.

Organizational learning, the capability building process and the link to company

performance were also studied by Figueiredo (2000, 2003). He explored the link between

capability building and financial and operational performance by comparing two latecomer

steel-making companies (Usiminas and CSN) over the course of time. The two researched

companies displayed significant differences in terms of learning and capability building.

While Usiminas showed continuity in in-house technology accumulation efforts over time,

CSN was characterized by discontinuity of capability building efforts. These unequal

approaches to technology accumulation and capability building resulted in discrepancies in

financial and operational performances. Usiminas displayed efficiency and productivity

gains as well as improvements in quality and financial performance that were significantly

above those that had been achieved by CSN. Like the study of Kim (1998) the study of

Figueiredo (2000, 2003) came up with interesting conclusions about the learning process

of a company. However, also this study did not cover different organizational design

elements.

Another stream of empirical studies cover the influence of single organizational design

elements on innovation. For example Sternberg (1999) did a empirical study about the

innovation network of Small and Medium Sized Firms in German. The paper supplies data

based research by analyzing several comprehensive surveys in three German regions. It

focuses on the role that spatial proximity of partners plays in the establishment of

innovative linkages between manufacturing SME’s and other actors, such as research

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strong and increasing intraregional linkages between innovative actors. The study confirms

the importance of innovation networks but does not draw on other organizational elements

which may stimulate innovation.

Also Edwards et al. (2002) concentrated their research on the effect of a single

organizational design element on innovation. They argued in a case study about a

Australian consulting company, that culture fosters innovation. They outline that the

innovative capability of the organization is dependent on the culture which refers to the

coherent system of a groups, distinct set of features or traits, which not only mean its basic

values but its beliefs, models of behavior, technology, symbols and artifacts. While they

reckon that innovation is also closely associated with the company’s intellectual capital

and its management, they concentrate their study mainly on cultural aspects.

Another example of the effect of an single organizational design element on innovation

was done by Verona and Ravasi (2003). They analyzed the organizational structure of

Oticon, a Danish electronics producer. They described the innovative organizational

structure of the company as a “spaghetti organization”, which is characterized by a flat,

loosely coupled, project-based organization with ambiguous job boundaries and extensive

delegation of task and project responsibilities to autonomous teams. Their findings were,

that the new, innovative structure lead to strong performance effects, resulting in a series

of remarkable innovations. Beside its valuable results, the study is limited to the effect of

structural changes and ignores the influence of other organizational design elements.

Empirical studies which analyze more than one organizational factor and their its

implications for innovation are rare. One recent example of a more comprehensive view on

organizational factors and their effects on innovation was done by Vahtera (2008). He

analyzed organizational factors and their effects on IT innovation adaptation. On the

examples of five cases within the public education sector, the author examines the

organizational factors that enhance or hinder organizational innovativeness. He identified

Organizational Size, Specialization and Complexity, Functional Differentiation and

Managerial attitude towards change, Slack and Technical Knowledge resources, Internal

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Change Agents as the main organizational determinants for innovation. While Vahtera

(2008) identifies a good selection of organizational design elements which favor

innovation, he lacks to combine them in a comprehensive framework.

Another stream of empirical studies are expressed by the examination of large data sets,

provided by a larger amount of companies. These studies focus more on quantitative data

and statistical evidence than on a deep analysis of a single company. For example Qian

(2002) analyzed in a extensive empirical study a large dataset of 1000 Chinese and 500

German mechanical engineering companies in terms of their innovativeness and the

stimulating factors behind it. The objective of the study was to identify common success

factors for a sustainable competitive advantage. The conclusion of the study was that

successful companies have a clear vision of the future, recognize high qualified employees

as a strategically resource, use dynamical strategies and have developed technological core

competences. Further he adds, that to reach a competitive advantages it is important to

perform a collective learning process and to build strategical alliances. The study had a

broad scope and was supported by a large data base. However, the study does not provide

a comprehensive framework of organizational elements but concentrates more on general

success factors in technology management. Further the large scope of the analysis and the

used methodology prevent from the author from getting detailed results.

Also Mothe and Brion (2008) analyzed a large dataset of 174 companies. They looked

empirically at the individual competences that should be developed in order to favor

specific types of innovation. Their findings confirmed that an appropriate organizational

context, long term orientation, risk taking practices and competence management increase

innovation performance. Implications include the need to look at how management may

increase innovation ambidexterity, and to chose appropriate combinations of competences

and organizational context. However they did not suggest a detailed, comprehensive

framework to cover all dimensions of how management can design an organization in

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2.3 Conclusions about empirical studies

As shown, with some exceptions, the organizational and innovation management bodies of

literature tend to examine the issues of organizational design and innovation management

individually, mainly in the context of large firms operating at the technological frontier.

There seems to be a scarcity of empirical studies that bring together organizational design

and innovation.

Further, most of the empirical studies which examines the relationship between

organizational design and innovation tend to be very narrowed and describe only the

relationship between a single organizational design element (for example structure or

culture) and innovation.

Other empirical studies are concentrated on the learning process of organizations. Existing

studies with a broader scope are often concentrated on general strategically success factors

or they lack to provide a comprehensive framework for the analysis of organizational

design elements.

Another stream of empirical studies are expressed by the examination of large data sets,

provided by a larger amount of companies. These studies focus more on quantitative data

and statistical evidence than on a deep analysis of a single company.

Hence, there seems to be a scarcity of empirical studies that bring together organizational

design and innovation and examine them empirically and over time in the context of small

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CHAPTER 3. ANALYTICAL BACKGROUND AND FRAMEWORK

The purpose of this chapter is to provide a brief overview about the analytical background

and to present the framework of the dissertation. The chapter is divided into six parts.

First it begins with a short definition of innovation and explains the chosen definition of

the author as a basis for this dissertation. After this, it describes innovation from a more

comprehensive, evolutionary perspective. Then the chapter defines organizational design

and outlines its relationship to innovation as an enabling factor. After this, the chapter

gives a brief overview about organizational models and approaches in order to finally

synthesize them to a comprehensive framework. The framework will be the basis for the

empirical analysis of the company.

3.1 Definition of innovation

Innovation has been studied in a variety of contexts and therefore there are various

definitions of “innovation” provided by the literature. Kline & Rosenberg (1986) point out

that it is a serious mistake to treat an innovation as if it were a well-defined, homogeneous

thing. An important distinction is made between invention and innovation. Invention is the

first occurrence of an idea for a new product or process, while innovation is the first

attempt to carry it out into practice (Fagerberg, 2006).

As one of the pioneers of innovation, Schumpeter (1934) defined innovation as “The

introduction of a new good - that is one with which consumers are not yet familiar - or of a

new quality of a good. The introduction of a new method of production, which need by no

means be founded upon a discovery scientifically new, and can also exist in a new way of

handling a commodity commercially. The opening of a new market, that is a market into

which the particular branch of manufacture of the country in question has not previously

entered, whether or not this market has existed before. The conquest of a new source of

supply of raw materials or half-manufactured goods, again irrespective of whether this

source already exists or whether it has first to be created. The carrying out of the new

organization of any industry, like the creation of a monopoly position (for example

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Giovanni Dosi characterizes in his text “The nature of innovative process “(1988) the

innovation process as having five properties.

First, innovation processes are surrounded by uncertainty. Since innovation involves the

search for new products, new production processes and new organizational set-ups, what is

searched for cannot be known with any reliable precision beforehand. Hence, both the

technical and the commercial outcome of the innovation process can only be known ex

post.

The second attribute assigned to contemporary innovation, describes its high dependency

on advances in scientific knowledge. According to Dosi, technological innovation has been

able to draw from new opportunities which are the result of scientific advances. This trend

has been particularly pronounced in more recent history.

As a next feature, Dosi highlights the nature of search activities leading to new products or

processes. Since research and innovation activities become ever more complex, formal

organizations as opposed to individual innovators have turned out to be the more

conducive environment for innovation processes to occur. In addition, formal research

activities in the business sector seem to be better integrated with more or less integrated

manufacturing firms nowadays.

Complementary to the third feature, a significant amount of innovation is originated by

means of “learning-by-doing” and “learning-by-using”.

Finally, Dosi mentions that the innovation process is a cumulative activity. The pattern of

technological change cannot be considered flexible and capable of reacting to each and

every change in market conditions. Rather, the direction of technical change is often

determined by the technologies that are already in use within the organization. Hence,

often it is the nature of technologies themselves that determines the range within which

products and production processes can adjust to new market conditions. Put differently,

technological advances are a function of the technological levels already achieved within

an organization. Innovation cannot be done in a formalistic way. The companies need to

understand first their own “innovation DNA” before they can establish a successful

innovation system.

Amabile (1996) suggests: "All innovation begins with creative ideas. We define innovation

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creativity by individuals and teams is a starting point for innovation; the first is necessary

but not sufficient condition for the second". For the existence of innovation something

more than the collection of creative ideas is required. The idea must be put into practice to

make a genuine difference, for example the implementation of a new business processes

within the organization, or changes in the products and services provided. Therefore,

creativity may be displayed by individuals, but innovation occurs in the organizational

context only.

A further definition of innovation from an organizational perspective is given by Luecke

and Katz (2003): "Innovation is generally understood as the successful introduction of a

new thing or method. Innovation is the embodiment, combination, or synthesis of

knowledge in original, relevant, valued new products, processes, or services.”

McKeown (2008) defined the term “innovation” as radical or incremental changes in

thinking, in things, in processes or in services.

For the dissertation, the author takes the perspective of McKeown (2008). Further the

author agrees with Amabile (1996), who stressed the term “implementation” as a important

fact, which distinguishes innovation from a creative idea.

3.2 Innovations from a comprehensive perspective

As suggested by the definition of McKeown (2008), innovation can be radical or

incremental. Hence not every innovation is equal in its degree of impact.

Nelson & Winter (1982) were one of the first authors who introduced a more

comprehensive view on innovation. Their evolutionary perspective on innovation suggests

that there is a permanent change in technology and routines within a company. They

conclude that there is a market driven Darwinian mechanism in place which provides

selection, generates variation and establishes self-replication.

Dosi (1988) suggests that the innovation process is a cumulative activity. He argues that

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use within the organization. Hence, often it is the nature of technologies themselves that

determines the range within which products and production processes can adjust to new

market conditions. He concludes that technological advances are a function of the

technological levels already achieved within an organization.

Also Fagerberg (2006) comes to the conclusion that a new innovation induces and

facilitates other innovations in the same or related fields. He describes this phenomena as a

“creative process, in which one important innovation sets the stage for a whole series of

subsequent innovations.” Thus, subsequent improvements in an innovation after its first

introduction may be even more important, economically, than the initial and original

innovation.

Based on this evolutionary theory and the view on innovation as a cumulative process,

further scholars defined different levels of innovation at the operational level of a firm For

example Altshuller (1984) proposed five levels of innovation. Level one describes a simple

improvement of a technical system. It requires knowledge available within the trade

relevant to that system. Level two describes an invention that includes the resolution of a

technical contradiction. It requires knowledge from different areas within the industry

relevant to the system. Level three describes an invention containing a resolution of a

physical contradiction. It requires knowledge from other industries. Level four describes a

new applied technology. This new technology includes a breakthrough solution that

requires knowledge from different fields of science. Level five describes the discovery of

a new phenomena or substances. This new knowledge provides for the development of

new technologies with utilization of the new phenomena.

Drucker (1993) differs between four levels of innovation. The first level, the incremental

innovation, describes the achievement of better results by just minor change of the current

processes and inputs. The second level, additive innovation means a more intensive

exploitation of already existing resources, like for example product lines extensions. The

third level, the complementary innovation, offers something new and changes the structure

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changes the fundamentals of the business, creating a new industry and new avenues for

extensive wealth creation.

Pleschak & Sabisch (1996) describe five levels of innovation, depending on customer

benefit and degree of renewal. The first level is a pseudo innovation, were the degree of

renewal is close to zero and the customer benefit also tends to be zero. The second level is

described as imitation innovation, were products of competitors are copied without adding

additional value to it. The product might be new to the company, but not new to the

market. The third level is called adaptation innovation, were the copied products or

processes are adapted to the companies or the customers context. The fourth level is

described as improvement innovation, were the company significantly increases customer

benefits and add a new feature to the product or process. The fifth level is described as

basis innovation. The company not only adds new feature to a product, but define a

completely new product or process which has a very high customer benefit and a high

degree of renewal.

Figure 3.1. Operational levels of innovation within the firm

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Garcia & Calantone (2002) did an extensive literature review to the topic of innovation

levels. As a result, they propose to differentiate between three major types of innovation:

1) Incremental innovation 2) Really new innovation and 3) Radical innovation.

Incremental innovations can be defined as products that provides new features, benefits or

improvements to the existing technology in the existing market. Really new innovations

are new products which go along with a market discontinuity or a technological

discontinuity. Radical innovation results in market- and technological discontinuity.

Tidd et. al. (2005) describe the degrees of novelty as running from minor, incremental

improvements over innovation which are new to the enterprise, right through to radical

changes which transform the way we think and use them. In a matrix he further differs

between innovation on the component level and system level.

Independently from the used model for describing the different levels of innovation it is

important to understand, that the intensity of innovation can differ. Although innovations

sometimes involves a discontinued shift, most of the time incremental innovation takes

place. Ettlie (1999) suggests that only 6%-10% of all innovation projects are disruptive.

Hollander (1965) concluded, that the cumulative gains in efficiency are often much greater

over time than those from radical innovations. Empirical studies of Tremblay (1994) in the

pulp and paper industry and Figueiredo (2002) in the steel industry confirmed this

conclusion.

As suggested by these studies, the dissertation will consider innovation as ranging from a

incremental level within a company to radical innovation which is new to the world.

3.3 Definition of organizational design

An organization is a social arrangement which pursues collective goals, which controls its

own performance, and which has a boundary separating it from its environment (Scott,

1998). Also Daft (2000) defined organizations as social entities, that are goal orientated,

designed as deliberately structured and coordinated activity systems which are linked to

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elements of organization are not the building of policies and procedures but the

relationships of the involved people, which goes beyond defined boundaries. Thats why

nowadays the boundaries of defined structures, like departments of companies, become

more and more permeable and flexible. The focus of the dissertation is set to the micro

economic level, which implies that the discussed organizations are mainly companies. The

expanded definition of Daft (2000), which goes beyond department boundaries will be

considered within the dissertation.

It is important to distinguish between organizational design and organizational structure.

An organizational structure is a mostly hierarchical concept of subordination of entities

that collaborate and contribute to serve one common aim. The five common types of a

organizational structure are: simple structure, machine bureaucracy, professional

bureaucracy, divisional structure, and adhocracy (Mintzberg, 1983). The organizational

structure is expressed by the organizational chart. The organizational chart shows the

hierarchy of a company and how the division of work is defined. This includes the

definition of responsibilities and relations of each member of staff. According to Steward

(2006), organizational design has five basis dimensions: hierarchy of authority, division of

labor, span of control, line and staff position and decentralization.

However, organizational design is more than only organizational structure. Thompsen

(1967) describes the organizational design as the internal structure of a company,

expended by all patterns of relationships which will be influenced by its environment. This

contains both, human and nonhuman resources and facilities. He argues that the major

components of a complex organization are determined by the design of that organization.

Mullins (1993) and Mabey et al. (2001) also define the design of an organization as a

pattern of relationships between roles in an organization but they expend the definition by

considering also relationships between the company and external institutions and players.

In their point of view, organizational design should help to allocate the work and to enable

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Žugaj & Schatten (2005) define organizational design in a much broader scope. They see it

as a sum of human resources, formal organization, informal organization, business

processes and strategy. Hence, organizational design covers all formal and informal

dimensions of a company which can be designed, changed and managed.

Within the dissertation, the perspective of Žugaj & Schatten (2005) will be applied and all

argumentations will be grounded on their definition of organizational design.

3.4 Organizational design as enabler for innovation

Every human being comes with the capability to find and solve complex problems. If such

creative behavior can be harnessed among a group of people with different skills ad

perspectives, extraordinary results can be achieved. As suggested by Tidd et. al. (2005),

innovation is increasingly about teamwork and the creative combination of different

disciplines and perspectives.

Studies of successful companies in UK and Germany confirm, that the source of

competitiveness is lying in the collaboration of people (Francis, 1997 and Huselid, 1995).

Also Hering & Phillips (2005) argue, that key for success is to have the right people doing

the right things the right way at the right time. Hence, companies try to organize the

involved people, tasks and processes in an effective way, to boost innovation and to get a

competitive advantage over the competitors. The dynamic and complex character of the

innovation process results in the evolution of alternative organizational forms.

While there is no single organizational design that is best for every situation, there are

important factors that should be considered in designing and developing an appropriate

innovative organization. Tidd et. al. (2005) warns to reduce the view on organizational

design only to the formal organizational structure. Innovative organization implies more

than a structure. It is an integrated set of components which work together to create and

reinforce an environment where innovation can flourish. The objective of the dissertation

is to identify organizational dimension and components which indicate a positive influence

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Figure 3.2. Organizational design as enabler for innovation

Source: Own elaboration

While the approach to link organizational elements to innovation performance is not new,

most of the existing studies are too narrowed and concentrate their research on the effect

on a single dimension like for example company culture (Edwards et al., 2002). There are

only a few studies which provide a comprehensive framework about organizational design

and its effects on innovation. McMaster (1996) argues in the same direction and criticized

that organizational design is not well understood. Lam (2004) identified the separation of

the research streams of organizational studies and innovation management studies, as the

reason for the gap of the literature. Further criticisms are made by practitioners who

struggle to implement the often complex or very theoretical concepts into practices

(Rosenheck, 2001).

In order to establish a comprehensive framework about organizational design dimensions

and components which stimulates innovation, some existing organizational models and

organizational design approaches need to be reviewed. As suggested by Tidd et. al. (2005),

the various studies about success and failure in innovation can be used to construct a

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the reviewed models and approaches are consolidated at the end of this chapter and build

the basis for the developed framework.

3.5 Organizational models and approaches

In response to environmental changes and influences of emerged organization theories, the

organizational design of companies has been developed over time. In the same way like

the evolution of organizational theories, the models of innovation evolved. For example

Rothwell (1992) describes five generations of innovation models, starting with simple,

linear models up to the fifth generation which focuses more on system integration,

extensive networking and continuous innovation.

This section of the thesis gives an short overview about existing theoretical models and

approaches. It considers influential conclusions from classical organizational theories like

for example Taylor (1911), Fayol (1916) or Weber (1921) as well as implications of new

innovation management approaches like for example Gaynor (2002) and Tidd et al.

(2005). The theoretical background will be the fundament of the developed framework

which is introduce at the end of the chapter.

3.5.1 Scientific management approach

Pioneered by Frederick Winslow Taylor, Scientific management was the first approach to

analyze scientifically the way how work is organized and how standard procedures have to

be defined in order to improve productivity and efficiency.

In Taylors point of view the manager had to do five tasks in order to improve efficiency.

First he had to develop standards for each job and describe the best way how to do it.

Second he should select the workers with appropriate skills for the defined job. Third he

has to train the selected worker in the developed standard method. Fourth he should

investigate the workers performance and eliminate possible interruptions. Fifth he should

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The devision of work and the described scientific methods can be tracked until today.

However, the Scientific management approach has been criticized because it lacks to look

on the company as a whole, the different physiological and psychological aspects of the

different workers are not considered, the collected data for standardization are not

sustainable, the high devision of work exhaust and discourage the worker (Bonazzi, 2008).

3.5.2 Administrative management approach

While Scientific Management concentrates more on work performance on the shop floor,

administrative principles looked at design and function of the organization as a whole.

Henry Fayol was one of the most influential contributors to modern concepts of

management. In his work he focused on the personal duties of management.

In his book “General and Industrial Management” he claimed, that managers have to make

sure, that the objectives of each part of the organization are securely welded together

(unity), that both short- and long term planning is used (continuity), that a plan has needs

to be adapted in the light of changing circumstances (flexibility) and that action has to be

carried out without errors (precision).

Further he described fourteen principles of management (Derek & Hickson 2000):

1. Division of work (specialization and expertise)

2. Authority (issue of commands)

3. Discipline (workers obey orders, manager take care of workers)

4. Unity of command (one boss principle)

5. Unity of direction (same objectives of people to single plan)

6. General interests before general interests (firms goals are more important)

7. Remuneration (important factor of motivation)

8. Centralization or Decentralization (depending on conditions and people)

9. Scalar chain (hierarchies are necessary, but also lateral communication is allowed)

10. Order (material availability and social order by organization and selection)

11. Equity (kindliness and justice, treating of employees)

12. Stability of tenure (stable managerial personal)

13. Initiative (all personal should show initiative)

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These principles formed the basis for modern management. Fayol believed that these

principles can be applied in any organizational setting (Daft, 2001). Unfortunately his

principles of "unity of command" and "unity of direction" are consistently violated in

"matrix management" the structure of choice for many of today’s companies.

3.5.3 Bureaucracy approach

The administrative principles contributed to the development of bureaucratic

organizations. One of the most influential authors was Max Weber. He stated that the

features of organization derive directly from its underlying power basis and that the

organization is founded on rational-legal power (Strati, 2000).

Weber developed six principles of a bureaucratic organization (Bonazzi, 2008):

1. Management follows rules, rational and impersonal view

2. Organization by functional specialty

3. Hierarchy and levels of graded authority

4. Management is based on official documents

5. Employment based on technical qualifications

6. Full time work of the official

Although the word bureaucracy is nowadays associated mostly negative, bureaucratic

characteristics worked extremely well for the needs of the industrial age.

3.5.4 Human relationship approach

Because of the prominence of the Scientific Management, the human relationship

approach received initially little attention. However, the breakthrough originated in the

1920s' Hawthorne studies, which examined the effects of social relations, motivation and

employee satisfaction on factory productivity. The conclusion of the study was, that

positive treatment of employees improves their motivation and productivity (Daft, 2001).

As a result of the publication of this study, many companies began understand the

importance of leadership, motivation and human resource management. Being aware of the

limitations of the traditional, mechanical view on the organization, the firms start to care

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Until today, many companies try to improve the work conditions of their employees, not

only to deal with legal restriction but also to motivate employees and to achieve better

results. But also the relations between employees are getting more important. Because of

the high specialization of work and the increasing need for communication and

collaboration with different people from different companies and cultures, the so called

“soft skills” of managers and employees are getting more and more important. Firms need

their employees to be able to successfully communicate, to be able to interpret others'

emotions, to be open to others' feelings, and to be able to solve conflicts and arrive at

resolutions (DuBrin, 2007).

3.5.5 Organizational “Five-Star” model of Galbraith

In his book “Organizational design” Galbraith (1977) developed the star model as an

organizational design framework. The framework contains five categories: (1) strategy, (2)

structure, (3) processes, (4) reward systems and (5) people.

The strategy of a firm is developed out of the companies goals, objectives, values and or

missions. The strategy is the basis for selecting an organizational structure. Since strategies

of firms differ, the other four categories of the model have to be different as well in order

to fit to the strategy.

The structure determines the location of decision making power. Structural design can be

developed regarding specialization, span of control, distribution of power, the level of

centralization versus decentralization. Departments can be created by function, product,

process, market or geography.

The processes take into account how the flow of information and the decision processes is

organized. Processes and information flow can be vertical, horizontal or informal. They

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The reward system should influence the motivation of staff and stimulate behavior to be in

line with the companies’ goals and objectives. It contents the compensation system,

promotion basis, leadership style and job design.

Having a high skilled and motivated staff is crucial for the success of an organization. The

human resource management has the task to select the right people during the recruitment

process, to promote the best ones and to offer training and job rotation to develop their

skills.

Figure 3.3. Organizational “Five-Star” model of Galbraith

Source: Galbraith (1977)

The five factors must be consistent to ensure a balanced, high performing organization. If

one category is changed, the manager need to adapt the other categories. For the basic

implementation of the model, Galbraith (1977) proposes to start with the strategy

definition. The strategy drives organizational structure. Processes are based on the

organizational structure. Strategy and Processes should be supported by an appropriate

reward system and be driven by appropriate skilled people.

The Star Model stresses that organizational design is more than only a organizational

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Galbraith (1977) understand organizational design as an process which involves

continuously change and adaptation. He suggests to start the change process by defining

the strategy of the company and then move on to with the other categories. However,

Galbraith model lack to take the history and the developed skills of firm into

consideration. Further he does not draw on the importance of external links of an

organization or on implications of company culture. Beside this weaknesses, the model of

Galbraith was and still is widely used to guide change processes in companies and to

analyze them in terms of their efficiency.

3.5.6 Organizational “Seven-S” model of Athos et al.

The McKinsey consultants Anthony Athos, Richard Pascale, Tom Peters and Robert

Waterman developed in the early 80s the 7-S model as a analytical framework for

organizational effectiveness (Waterman et al. (1980), Pascale & Athos (1981), Peters &

Waterman (1982)).The model starts on the premise that an organization is not only

structure, but consists of seven different elements.

Figure 3.4. Organizational „Seven-S“ model of Athos et. al.

Source: Recklies (2001)

These seven interdependent elements which are categorized as either "hard" or "soft"

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and to analyze. They can be found in mission statements, strategy papers, organizational

charts and other documentations. The soft elements 4) Style, 5) Staff, 6) Skills and

7) Shared values are more difficult to identify and less tangible. They are not easy to

measure and they are continuously developing and changing. The soft elements are highly

influenced by the culture and the behavior of people of an organization.

Although the soft factors are below the surface, they can have a great impact on the hard

elements of the organization. To be effective, an organization should have a high degree of

internal alignment among all seven elements. However, the time for changing the elements

differs. The so called hard elements such as strategy, structure and systems can be changed

in short term. The soft factors such as style, staff, skills and shared values can only be

affected long term. Peters (1982) stated that true competitive advantage originates from

these soft factors.

While some models of organizational effectiveness go in and out of fashion, one that has

persisted is the 7S framework. Many companies applied the model to evaluate their

organization and to improve effectiveness. The model itself is focus more on effectiveness

of an organization than on its potential of innovation. However, it seems to be the case that

the capability to innovate and effectiveness of a company are based on some similar

elements.

All the seven elements can be found in the more innovation focused model of

Leonard-Barton (1995) or Tidd et al. (2005). One can claim that people and skills are linked close

together and therefore should be in one category. The so called “Systems” element

contains more the processes of a company than real systems. It seems that fit of the letter

to “S” was more important than a logical category name.

3.5.7 Organizational “Core Capability” model of Leonard-Barton

In his book „Wellspring of knowledge: Building and Sustaining the Sources of

Innovation“, Leonard-Barton (1995) states that companies compete on the basis of their

ability to create and utilize knowledge. The companies have to develop core capabilities.

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advantage for a firm. They have been build up over time and can not be easily imitated. To

manage the core capabilities, managers need to know what are the core capabilities and to

know how to manage the activities that create knowledge.

Core capabilities can not be seen as static. They have been developed over time and they

need to be enriched and improved in the future. Continuous innovation provides an

gateway for new opportunities but it involves also the need for a permanent change, often

characterized as an act of “creative construction”. Leonard-Barton (1995) argues that the

core capability of a firm can be examined by four dimensions:

(I) Employees knowledge and skills (II) Physical technical systems (III) Managerial system (IV) Values

(I) The skills and knowledge of the employees is the dimension most often associated with core capabilities. The expertise of a firm is embedded in the skills and energy of the

people. Most of the knowledge is tacit and in the peoples head. As an ideal pattern of

skills, Leonard-Barton (1995) explains the “T-shape of skills”. It includes a deep

knowledge in one special field and a very broad knowledge to be able to connect ideas and

see interfaces with other areas. Leonard-Barton differs between three kinds of knowledge,

(1) scientific, (2) industry-specific and (3) firm specific. Scientific knowledge is quite

easily accessible. Industry specific knowledge is more difficult to acquire but the most

challenging thing is to get firm specific know how. Here it becomes crucial to transfer the

tacit knowledge of people into an organizational embedded knowledge.

(II) Knowledge is not only embedded in peoples head. The accumulated knowledge of different experts will flow also into the used technical systems and equipments. These

physical, technical systems contain knowledge for example in databases, machinery or

software programs. A recent example is the intensive effort of Google to collect data of

Internet users in order to get knowledge about user behavior and personal preferences.