Innovation and Organizational Management

Innovation and Organizational Management

Innovation is normally considered as new idea, creative thought, and new imagination in form of device or method. It is often viewed as the application of better solutions which meet new requirements, unarticulated needs, or existing needs of the market. It is also considered as the process of translating an idea or invention into a good or service which creates value or for which customers are going to pay. It often results when ideas are applied by the organization in order to further satisfy the needs and expectations of the customers. It is crucial to the continuing success of any organization. Hence the need of innovation is essential for the organization to be successful.

The organizational management is required to stimulate, direct, and make effective innovation. It is one of the administrative functions of the management. It is the management task of keeping going and of improving what is already known and what is already largely being done. It is normally devoted to the entrepreneurial function of creating effectively and purposefully the new and the different. The neglect of the innovation by the management can have dire consequences. Hence, the management is to stress the need to innovate. It has to organize innovation as a distinct and major task.

Innovation is often being seen as a separate job, a job done by the individual by himself, by the inventor. It is also being seen as a predominantly technical job, that of research. In the past, there was not too much scope for innovation, when most of the basic work on management was being done. For contrary to common belief, this was the time of rapid change, either in technology or in society. This was the time when, by and large, technology built on foundations, when the political turbulence, social and economic institutions were stagnant. Indeed, the same can be said for social and economic ideas. However, in the recent past there were many great revolutionary ideas which had been at work. These ideas were innovative and were built on foundations which the economists of the period had already put securely in place.

Now, however, organizations are entering a period of rapid change more comparable in its basic features to the period of the past than to the immediate past with which everyone is familiar. In that period of the past, a new major invention leading almost immediately to the emergence of a new major industry, surfaced frequently. The examples are developments of dynamo, modern electronic tube, typewriter, automobile, electric light bulb, man-made fibres, tractors, streetcars, synthetic drugs, telephone, radio, and airplane, to mention only a few. In other words, during this period came the modern world. By contrast, no truly new major industry was started after this past period until the time, when computers first became operational.

The past was a period of tremendous innovative activity in technology, and in social and economic institutions. Then there were years of continuity rather than of rapid change and innovation. It had been the period, when the development was linear, with fundamentally the same strategies and tactics and indeed even the same stress on the ‘hardware technology’. Even the radical technical innovations were largely integrated into traditional structures and traditional doctrines.

Now the need for social and political innovation is becoming urgent again. The relationship between man and his environment has to be thought through and restructured. In today’s environment, organizational management, for being effective, needs innovation. It has to respond quickly to the rapid and fundamental change. It has to learn how to manage innovation.

The structure and the organization, the way in which it integrates knowledge into work and work into performance, and the way in which it integrates organization with society and government, are also areas of major innovative need and innovative opportunity. Hence, there is  a need for innovative activity in the social and economic sphere.

However, in sharp contrast to the earlier times, in the present environment, innovation is required to be built into existing organizations. It is especially essential for a large organization to become increasingly capable of organizing itself for innovation as well as for administration.

In the present day scenario, the large organization commands access to manpower and capital to a degree which was not dreamed earlier. But also the ratio between research/invention and the efforts needed to convert the results of research/invention into new products or new technologies, have changed significantly. It is by now accepted, if only as a rule of thumb, that for every money unit spent on generating an idea, ten money units are to be spent on ‘research’ to convert it into a new discovery or a new invention. For every ten money units spent on ‘research’, at least a hundred money units need to be spent on development, and for each of the of money units spent on development, something between a thousand or ten thousand money units are needed to introduce and establish a new product in the market. And only after a new product has been established in the market, is there an ‘innovation’.

Innovation is not a technical term. It is an economic and social term. Its criterion is not science or technology, but a change in the economic or social environment, a change in the behaviour of people as consumers or producers. Innovation creates new wealth or new potential of action rather than new knowledge. This means that the bulk of innovative efforts need to come from the places which control the manpower and the money needed for development and marketing, that is, from the existing large aggregation of trained manpower, disposable money, and the organization.

This does not mean that the small organizations, or even the lone entrepreneur, do not continue to play an important role. It is not true that the small entrepreneur is being squeezed out of the marketplace by the giants. A good number of the present day large organizations have started as small organizations. And by and large the small organizations have done far better than the giants. In every industry, there are several examples, where small upstarts which a few short years ago were unknown have attained major market positions and have proven themselves more than capable of competition with the giants. The giants in the industry have lost market position and market share in many markets largely to small or medium-sized newcomers with an innovative set up.

An established organization which, in an age demanding innovation, is not capable of innovation is destined to decline and extinction. And a management which in such a period does not know how to manage innovation is incompetent and unequal to its task. Managing innovation is increasingly becoming a challenge to management, and a standard of its competence.

While in a minority, especially among big organizations, innovative organizations do exist. There are several examples in the world. These organizations seemingly have no difficulty innovating and no difficulty getting accepted the change in the organization. Their managements rarely have occasion to ask how they can keep their organization flexible and willing to accept the new. These managements remain busy finding the manpower and the money to run with the innovations in the organizations.

Innovative organizations are not confined to business. There are examples of innovative organizations where the organizations have been heavily staffed with university professors who, in their nature, are remarkably resistant to change and particularly slow to innovate. These examples indicate that an organization’s ability to innovate is a function of management rather than of industry, size, or age of the organization, let alone to be explained with that common excuse of poor managers, as well as on ‘culture and traditions’ of the place.

The organizations spending substantial resources on productive research may not be innovative, while other organizations which are not particularly distinguished for their research can be innovative. Examples are car manufacturers and banks. What makes the car manufacturers innovative organizations is their ability to get new designs and new models rapidly into production and on the market. The banks innovate mainly in their customers’ businesses, and in terms of financial structure and credit, inventory and marketing policies.

These examples imply that the innovative organization institutionalizes the innovative spirit and creates a habit of innovation. At the beginning of these organizations there may well have been an individual, a great innovator. He might have succeeded in building around him an organization to convert into successful business reality his new ideas and inventions. But there are innovative organizations where no such great innovator individuals have been there. The innovative organization manages to innovate as an organization, that is, as a human group organized for continual and productive innovation. It is organized to make change into norm. These various innovative organizations are very different indeed in their structures, their businesses, their characteristics, and even in their organization and management philosophies. These organizations have the following positive characteristics in common (Fig 1).

  • The innovating organization knows what the meaning of innovation is.
  • The innovative organization understands the dynamics of innovation.
  • The innovative organization has an innovative strategy.
  • The innovative organization knows that innovation requires objectives, goals, and measurements which are different from the objectives, goals, and measurements of a managerial organization, and appropriate to the dynamics of innovation.
  • Management plays a different role and has a different attitude in an innovative organization.
  • The innovative organization is structured differently and set up differently from the managerial organization.

Fig 1 Positive characteristics of innovative management

Meaning of innovation

Organization with innovation knows first what the meaning of innovation is. It is aware that innovation is not science nor technology, but value. It is aware that innovation is not something which takes place within the organization but a change outside. The measure of innovation is the impact on the environment. Hence, innovation in the organization is always to be market focused. Innovation which is product focused is likely to produce ‘miracles in technology’ but disappointing rewards.

The outstanding innovating organization defines its goal to develop and produce a new product which is going to make a significant difference in the market and consumer. It does not define innovation in terms of research, but in terms of the influence on the market and service to the consumer.

Not surprisingly, however, it is precisely the most market focused innovator who has come up with some of the most important technical or scientific advances. To start out with the customer’s need for a significant change is often the most direct way to define new science, new knowledge, and new technology, and to organize purposeful and systematical work on fundamental discovery.

Dynamics of innovation

Innovating organization is aware of the dynamics of innovation. It does not believe that innovation is determined. It knows that there are so many factors in various causal patterns may exist that no one can possibly unravel them. Neither, however, does it share the usual belief that innovation is haphazard and incapable of being predicted or foreseen. It knows that innovation follows a probability distribution. It knows that it is possible to say what kind of innovation, if successfully brought about, is likely to become a major product or process, and a major market. It knows how to look systematically for the areas where innovative activity, if it produces results, is likely to enjoy success and to be rewarding.

A major innovation which changes process, product, distributive channel, or customer expectations, produces high rewards. There are plenty of examples for this. Also, innovative opportunity exists where there is glaring disparity between various levels of an economy or of a market.

Another area of innovative opportunity is the utilization of the consequences of events which have already happened but have not yet had their economic impacts. Demographic developments, i.e., changes in population, are among the most important. They are also the most nearly certain. Changes in knowledge are less certain since the lead time is difficult to predict. But they too offer opportunities. And then, most important, but least certain, are changes in awareness, changes in vision, changes in people’s expectations. Also, there are the innovations which are not part of the pattern, the innovations which are unexpected and which change the world rather than exploit it. These are the innovations in which an organization sets out to make something happen. These are the truly important innovations.

These innovations lie outside of the probability distribution—or, at least, they place so far toward the extreme as to be grossly improbable. These are also clearly the most risky ones. For every one such innovation which succeeds, there are ninety-nine which fail. It is important for the innovating organization to realize that these unusual innovations exist and that they are of supreme importance. It is important to keep watching for them. But, by their very nature, they cannot be the object of systematic, purposeful organized activity within the organization. They cannot be managed. And they are sufficiently rare to be treated as exceptions, despite their overreaching importance. The organization, which focuses on the probability pattern and organizes its innovation strategy to take advantage of it, innovates. And the organization in the process becomes sensitive to the exceptional, the great, the truly historic innovation, and is equipped to recognize it early and to take advantage of it.

For the management of innovation, a manager need not be a technologist. Truly, a good technologist is seldom good in managing innovation. He is so deeply engrossed in his specialty that he rarely sees development outside of it. It is not a metallurgist who is likely to recognize the importance of basic new knowledge in plastics even though it can, within a reasonably short time, obsolete a good many of his satisfied products. Similarly, the innovative manager need not be an economist. The economist, by definition, can worry himself with the impact of innovations only after they have become enormous. The innovating manager needs to anticipate weaknesses and opportunities which is not the economist’s focus. The innovative manager needs to study innovation as such and to learn its dynamics, its pattern, and its predictability. For managing innovation, a manager has to be at least literate with respect to the dynamics of innovation.

Innovative strategy

Like all other strategies, an innovative strategy starts out with the question ‘what the organization is and what it is to be’. But its assumptions regarding the future are different from the assumptions made with respect to the present organizational activities. There the assumption is that present product lines and services, present markets and present distribution channels, and present technologies and processes are going to continue. The first objective of a strategy for the present organization is to optimize what already exists or is being established. On the other hand, the ruling assumption of an innovative strategy is that whatever exists is aging. The assumption assumes that existing product lines and services, existing markets and distribution channels, existing technologies and processes are to go down rather than up sooner or later and generally sooner.

The governing device of a strategy for the present organization thus can be said to be ‘better and more’. For the innovative strategy the method has to be ‘new and different’. The foundation of innovative strategy is planned and systematic removing of the old, the fading, and the obsolete. Innovating organization spends neither time nor resources on defending the past. Systematic abandonment of the past alone can free the resources and especially the scarcest resource of them all, capable people, for work on the new. Unwillingness to do this can be the greatest impediment to innovation in the existing organization.

The new and especially the as-yet unborn, that is, the future innovation, always looks insignificant compared to the large volume, the large revenue, and the manifold problems of the present organization. Hence, it is all the more important for the present organization to commit itself to the systematic abandonment of the past if it wants to be able to create future. Secondly, in a strategy of innovation is the clear recognition that innovation efforts are to be aimed high. It is just as difficult, as a rule, to make a minor modification to an existing product as it is the innovation of a new product.

There is a rule of thumb which states that the projected results of innovative efforts are to be at least three times as large as the results needed to attain the organizational objectives. This is perhaps an underestimate. In improvement work such as adding a new product, upgrading a product line, and expanding the market etc., people can assume a success rate of 50 %. No more than half the projects are expected to be total failures. This is not the way innovation works. Here the assumption is to be that the majority of innovative efforts are not going to succeed. Nine out of every ten ‘brilliant ideas’ can turn out to be nonsense. And nine out of every ten ideas, which after thorough analysis, seem to be worthwhile and feasible, can turn out to be failures or, at best, tiny weaklings. The mortality rate of innovations is normally very high.

Hence, innovative strategy aims at creating a new organization rather than a new product within an already established line. It aims at creating new performance capacity rather than improvement. It aims at creating new concepts of of value rather than satisfying existing value expectations a little better. The aim of innovating efforts is to make a significant difference. What is significantly different is not a technical decision. It is not the quality of science which makes the difference. It is not how expensive an undertaking is or how hard it is to bring it about. The significant difference lies in the impact on the environment. Success in innovating efforts is an average of 10 %. This is, of course, the reason for aiming high in innovative efforts. The one winner has to make up for the nine losers and has to produce its results.

The innovative management looks for new and innovative areas. It knows apparently little about technology. It invests in the people rather than in the idea. And it invests at the very early stage at which the budding organization, as a rule, does not need much money beyond a few years’ support for a person with an idea. It invests on the principle that nine out of every ten investments are going to turn out failures and are to be written off. But it maintains that if only one out of ten which turns out to be successful, is going to reap a far larger harvest than the very wise management can possibly achieve in already existing area.

An innovation does not proceed in a nice linear progression. For a good long time, sometimes for years, there are only efforts and no results. The first results are then usually very small. Indeed, the first products are rarely what the customer is eventually going to buy. The first markets are rarely the major markets. The first applications are rarely the applications which, in the end, turn out to be the really important ones.

The impacts of new technology are very difficult, and sometimes impossible, to predict. But this difficulty extends to everything connected with the truly new. But even more difficult to predict than the eventual success of the genuinely new technology is the speed with which it is going to establish itself. Timing is of the essence, above all, in innovation. Yet timing is totally incapable of being predicted. There are several innovations which swept the market. But for every successful innovation which has results faster than anyone anticipated, there are several others, in the end perhaps, equally successful ones, but which for long years seem to make only frustratingly slow headway.

The outstanding example is the steam-driven ship. By 1835, its superiority had been clearly established. But it did not replace the sailing ship until fifty years later. Indeed, the ‘golden age of sail’ in which the great sailboats reached perfection began only after the steamship had been fully developed. For almost fifty years, in other words, the steamship continued to be the ‘future’ and never seemed to become the ‘present’. But then, after a long, frustrating period of gestation, the successful innovation rose swiftly. It became within a few short years a new major industry or a new major product line and market. But until it had reached that point it could not be predicted when it is going to take off, nor indeed whether it ever is going to take off.

Measurements and budgetary controls

Innovation strategy needs different measurements and a different use of budgets and budgetary controls from those appropriate to present operations in the organization. To impose on innovating efforts the measurements, and especially the accounting procedures being followed for the present operation, is not proper. It cripples the innovative effort. It also fails to give true control. Finally, it can become a threat when the innovation becomes successful. In contrast, it needs controls which are suitable to rapid growth, that is, controls which show what efforts and investments are needed to exploit success and prevent overextension. The successfully innovating organizations have learned this long ago.

The oldest, best-known, and most successful managerial control system perhaps has developed a model which is focused on the return on investment (ROI). But innovations are not included in this famous model. As long as a product line, or a process is in the innovating stage, its capital allocation is not included in the capital base on which the organization has to earn a return. Nor the expenses are included in its expense budget. Both are kept separate. Only after the new product line has been introduced in the market and has been sold in commercial quantities for certain period, its measurements and controls are merged into the budget of the organization. This makes sure that management does not have resistance for the innovation as a threat to the organizational earnings record and performance. It also make sure that expenditures on, and investments in, innovative efforts can be tightly controlled. It makes it possible to check at every step what the risk factor is, that is, the likelihood of its non-success, and whether the continuing of this particular innovative effort is justified or not.

Budgets for the present operations and budgets for innovative efforts are not only to be kept separate, but they also are to be treated differently.  In the organization, the issue is always whether this effort is necessary or the organization can carry on without it. And if the answer is that it is needed then it is to be determined the minimum level of support which is needed. In the innovative effort the first and most serious requirement is the right opportunity and the requirement of the maximum of worthy people and key resources which can productively be put to work at that stage.

A separate measurement system for innovative effort makes it possible to appraise the three factors which determine the innovative strategy. These factors are (i) the ultimate opportunity, (ii) the risk of failure, and (iii) the effort and expenditure needed. Otherwise, efforts are going to be continued or are going to be even stepped up where the opportunity is very limited and the risk of non-success is high.

Traditional market thinking, that is, thinking which looks at the size of the market and infers therefrom great success for a new product which is ‘better’, is totally misleading. Hence, nothing is as hostile to successful innovation as a goal of ‘5 % growth in profits’ every year. Innovations for the first three or five years (sometimes for longer) show no growth in profits. They do not even show any profits at all. And then their growth rate for 5 to 10 years is to be closer to 40 % a year or so than to 5 % a year growth. It is only after they have reached relative maturity that they can be expected to grow year by year by a small percentage. But then they are no longer innovations.

Hence, innovative strategy requires a high degree of discipline on the part of the innovator. He has to operate without the support of the conventional budget and accounting measures which feed-back fairly fast and reasonably reliable information from current results to efforts and investments. The temptation is to keep on increasing manpower and money into innovative efforts without any results. Hence, it is important in managing innovation to think through what to expect, and when. Inevitably, these expectations are changed by events. But unless there are intermediate results, specific progress, ‘fallouts’ to actual operation along the way, the innovation is not being managed.

Risk of failure

A strategy for innovation has to be based on clear acceptance of the risk of failure and perhaps of the more dangerous risk of ‘near-success’. It is as important to decide when to abandon an innovative effort as it is to know which one to start. In fact, it may be more important. Successful research institute directors know when to abandon a line of research which does not yield the expected results. The less successful ones keep hoping against hope, are astonished by the ‘scientific challenge’ of a project, or are fooled by the repeated promise of a ‘breakthrough in coming year’. And the unsuccessful ones cannot abandon a project and cannot admit that what seemed like a good idea has turned into a waste of men, time, and money. But a fair number of innovative efforts end up in near-success rather than in success or failure. And near-success can be more dangerous than failure. There is, again and again, the product or the process which has been  innovated with the expectation that it is going to ‘revolutionize’ the industry only to have it become a minor addition to the product line, neither enough of a failure to be abandoned nor enough of a success to make a difference.

There is the innovation which looks so ‘exciting’ when work on it has begun, only to be overtaken, during its gestation period, by a more innovative process, product, or service. There is the innovation which has been intended to become a ‘household word’ which ends up as another ‘specialty’ which a few customers are willing to buy but not willing to pay for. Hence, it is mainly important in managing innovation to think through and to write out the expectations. And then, once the innovation has become a product, or a process, the expectations are to be compared with the reality. If reality is significantly below expectations, one does not pour in more resources.

Innovative attitude

Resistance to change, by the employees alike, has for many years been considered a central problem of the management. Still there are doubts that substantial progress has been made in resolving the problem. Indeed, it is incapable of being resolved as long as it is considered to be ‘resistance to change’. Not that there is no such resistance, or that it is not a major obstacle. But to focus on resistance to change is to mis-define the problem in a way which makes it less, rather than more, controllable. The right way to define the problem so as to make it capable of resolution is as a challenge to create, build, and maintain the innovative organization, the organization for which change is norm rather than exception, and opportunity rather than threat.

Hence, innovation is attitude and practices. Above all, it is management attitude and practices. The innovative organization casts management into a different role and represents a different concept of the management’s relationship to the organization. In the traditional organization, management is the final judge. This means, in effect, that management’s most important power is the veto power, and its most important role is to say no to proposals and ideas which are not completely thought through and worked out.

In the innovative organization, the first and the most important job of management is the opposite. It is to convert impractical, half-baked, and wild ideas into concrete innovative reality. In the innovative organization, management sees it as its job to listen to ideas and to take them seriously. In the innovative organization, management knows that new ideas are always unrealistic. It also knows that it takes a great many trivial ideas to brood one viable one, and that in the early stages there is no way of telling the trivial idea from the stroke of genius. Both look equally impossible or equally brilliant. Hence, management in the innovative organization always encourages ideas, as all managements are told to do. It asks continuously whether this idea is going to be practical, realistic, and effective. It organizes itself to think through rapidly even the wildest and apparently trivial idea for something new to the point where its feasibility can be appraised.

Management in the innovative organization is the major drive for innovation. It uses the ideas of the organization as stimuli to its own vision. And then it works to make ideas a concern of the entire organization. It fashions thought and work on the new into both organizational energy and entrepreneurial discipline. However, this presupposes restructuring relations between management and the human group within the organization. The traditional organization, of course, remains. Indeed, on the organization chart, there may be little to differentiate the innovative organization from the most rigidly bureaucratic one. Also, an innovative organization need not be permissive or democratic at all. But the innovative organization builds a nervous system next to the bony skeleton of the formal organization. Where traditional organization is focused on the logic of the work, there is also an additional relationship focused on the logic of ideas. In innovative organizations management often meets employees in scheduled sessions to find out what are the new ideas and opportunities which are seen by the employees.

This is explained by the following example. One of the organizations in the period of its greatest growth and development has been anything but a permissive organization. It was tightly run by two or three people at the top who have been making all the decisions. But even the most junior engineer has been encouraged, indeed practically commanded, to come to the management with any idea, no matter how wild. And again and again he has to be told that the idea makes no sense to the management, but whether he is willing to work on it. If the engineer reply is yes then he has been asked to write up his idea, together with a budget request and more often than not he is freed from his other responsibilities, given a modest sum of money for a year or two, and being told to go ahead. As a result, the organization grew from a small and obscure producer into one of the leading organization in the industry. Yet the young engineers of the organization have been held strictly accountable. Of course, not all of them have succeeded. Indeed, only one or two out of every ten have been successful. And failure of an idea has not held against them, at least, not the first time. But failure to take responsibility, to organize the task, to work at it, and to appraise progress realistically, let alone to keep management fully informed of the progress of the project have not been tolerated.

The innovative organization requires a learning environment throughout the entire organization. It creates and maintains continuous learning. No one is allowed to consider himself ‘finished’ at any time. Learning is a continuing process for all the ppeople of the organization. Resistance to change is grounded in ignorance and in fear of the unknown. Change is to be seen as opportunity by people, and then there is no fear. It is to be seen as opportunity by the employees because they are guaranteed their jobs and are not afraid of putting themselves or their colleagues out of work by proposing something new. But fear and ignorance are also to overcome in employees by making continuing change the opportunity for personal achievement, for recognition, for satisfaction. The employee who in an employees’ training session comes up with a new idea receives no monetary reward, even if his idea is a big and profitable one. But even if it is a very small improvement he derives stature, recognition, intense pleasure.

Every suggestion of a suggestion scheme which is normally being used in the organization, teaches the same lesson. The suggestion scheme in which the reward is recognition, achievement, participation, is the successful scheme. And in those departments of the organization where the suggestion scheme is being implemented in this way, there is very little resistance to change. Where this does not prevail, the suggestion scheme is not a success, no matter how well it pays for successful suggestions. It also has none of the effect on the employee’s behaviour and attitude which the supporters of the suggestion scheme promise.

Innovation structure

The search for innovation needs to be organized separately and outside of the ongoing managerial work. Innovative organization understands that a person cannot simultaneously create the new and take care of what he already has. It realizes that maintenance of the present work is far too big a task for the people in it to have much time for creating the new, the different work of tomorrow. It also realizes that taking care of tomorrow is far too big and difficult a task to be diluted with concern for today. Both tasks are to be done. But they are different. Hence, innovative organizations put the new into separate organizational components concerned with the creation of the new. The job of the development department is to develop new areas in production, finance, and marketing which are as much its concern as technology, products, and processes.

The true innovation is rarely an extension of the already existing work. It rarely fits into the scope, objectives, goals, technologies or processes of today. But, of course, one can define only the scope, products, technologies, processes, even the markets, of today. The most important innovative opportunities always fall outside existing definitions and thereby outside the ‘assigned scope’ of an existing decentralized product. Experience in several organizations indicates that innovative efforts best be organized separately and outside of existing managerial organization.

Innovation as a business

The innovative organization realizes that innovation needs from the beginning to be organized as a business rather than as a function. In concrete terms, this means setting aside the traditional time sequence in which research comes first, followed by development, followed by manufacturing, with marketing at the very end. The innovative organization considers these functional skills as part of one and the same process, the process of developing a new business. When and how each of these tools is to be put into play is decided by the logic of the situation rather than by any preconceived time sequence.

Hence, a manager is put in charge of anything new as soon as it is decided to pay attention to it. He may come from any function or from no function at all. And he can draw on all the functions right from the beginning. He may use marketing, for example, before there is any research, or work out the financial requirements of a future business before he even knows whether he will have products. The traditional functions organize work from where the organization is today to where it is going. The innovative function organizes work from where the organization want to be, back to what it now has to do in order to get there.

The design principle for innovation is the team, set up outside of existing structures, that is, as an ‘autonomous unit’. It is not a ‘decentralized unit’ in the traditional sense of the word, but it has to be autonomous and separate from operating organization. One way to organize innovative units within a large business might well be to group them together into an innovative group, which reports to one member of the management who has no other function but to guide, help, advise, review, and direct the innovating team at work.

Innovation has its own logic, which is different from the logic of the present organization. No matter how much the innovative units may themselves differ in their technologies, their markets, their products, or their services, they all have in common that they are innovative. Even such autonomous team organization may be too restricted for the kind of innovation which is increasingly needed, innovation in fields which are quite different from anything that the organization has done so far. The organization may need to set up the innovating unit as a genuine entrepreneur.

Several large organizations set up innovative efforts in the form of partnerships with the ‘entrepreneurs’ in charge. The innovative effort is organized as a separate company, in which the parent organization has majority control and usually a right to buy out the minority stockholders at some prearranged price. But the entrepreneurs, that is, the people who are responsible directly for developing the innovation, are substantial shareholders in their own right.

One advantage of such a relationship is that it eases the compensation problem. Innovative people can command substantial salaries in the managerial organization, as senior research scientists or as senior marketing people. Yet it is highly undesirable to burden an innovative venture with high salary costs since it cannot afford them. At the same time, it is highly desirable to compensate the entrepreneurs for results. But results in the innovative effort are unlikely to be known for a good many years. A method of compensation which induces these entrepreneurs to work for modest salaries until results are achieved, while promising substantial rewards in case of success, is therefore appropriate. A ‘partnership’ makes this possible. It also, and this is no small advantage, lessens the friction which setting up separate innovative units within the organizational structure otherwise creates.


Whether the innovating team is a separate organization or simply a separate unit, an innovating organization is likely to apply some of the design principles of systems management. There are to be managerial units engaged in managing what is already known and what is already being done. And there are to be innovative units, separate from them, working with them but also working on their own, and charged with their own responsibility. Both are to report independently of each other to the management and work with the management personnel. To innovate within existing organizations requires acceptance of a hybrid and rather complex organization design. It is neither centralized nor decentralized. Within such an organization, functional units, federal decentralization, simulated decentralization, and teams may all be found next to each other and working together.

The innovative organization, the organization which resists stagnation rather than change, is a major challenge to management. That such organizations are possible, it can be asserted with confidence. But how to make such organizations general, and how to make them productive for society, economy, and individual alike, is a major task for the management. The management is to presume that the period ahead is going to be an innovative one with rapid change in technology, society, economy, and environment. Hence, the aim of the management is to develop the organization as the innovative organization considering these factors.

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