How external knowledge partners are involved with internal innovation in complex organizations : a comparative approach on process innovations from an it perspective

H O W E XT E R N A L K N O W L E D G E P A R T N E R S

A R E I N V O L V E D W I T H I N T E R N A L

I N N O V A T I O N I N C O M P L E X

O R G A N I Z A T I O N S

A COMPARATIVE APPROACH ON PROCESS INNOVATIONS

FROM AN IT PERSPECTIVE

Master’s Thesis Business Administration – Entrepreneurship & Innovation

Author:

J.A. Venema; Student No. 6137822

Supervisors: Professor W. van der Aa (Universiteit van Amsterdam)

MSc R. Barnhoorn (Accenture)

MSc M. Smeitink (Accenture)

MSc M. van Oers (Accenture)

Date:

June 2015

ABSTRACT

This study elaborates on the involvement of external knowledge sources in the

Innovation Value Chain in complex organizations. The structure of the three phases of

the Innovation Value Chain in three different complex Dutch organizations (Shell, Philips

and KPN) is analyzed and the influence of and effects from external knowledge parties is

assessed. The research is carried out in a qualitative set up and collects information

through a total of eighteen interviews with incumbents in these companies for an

internal perspective and Accenture employees for an external perspective on these

matters. Firms like Accenture are enablers of innovation, their expertise and knowledge

can be levered for innovation and their services can be used as a bridge for exploiting

innovation. The following important factors in the involvement of external knowledge

sources on the Innovation Value Chain emerged: Absorptive capacity, trust, degree of

influence in the company, type of relationship and internal structure of the Innovation

Value Chain. Furthermore, this research suggests options for external knowledge

partners for positioning themselves towards organizations.

Jasper Venema - Accenture | Statement of Originality

3

STATEMENT OF ORIGINALITY

Statement of Originality

This document is written by Student Jasper Venema who declares to take full

responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and

that no sources other than those mentioned in the text and its references have

been used in creating it.

The Faculty of Economics and Business (UvA) is responsible solely for the

supervision of completion of the work, not for the contents.

TABLE OF CONTENTS

Abstract ... 2

Statement of Originality ... 3

Table of Contents ... 4

Introduction ... 6

About Accenture ... 9

High Performance Business Review ... 10

About Shell ... 10

About Philips ... 12

About KPN ... 13

Goal and Research Questions ... 14

Literature review ... 17

Definition of Innovation ... 17

The Innovation Value Chain (IVC) ... 20

Absorptive Capacity ... 21

External Knowledge sources ... 23

The value of Innovation with External partners ... 24

Contingencies and Configurations ... 26

Methods and Design ... 29

Validity, Reliability and Generizability ... 30

Conceptual Framework ... 31

Mixed Method Research ... 34

Interviews ... 35

Questionnaire ... 40

Findings ... 42

How is the Innovation Value Chain in complex companies structured from an IT perspective?

... 44

What influence do external parties have on the execution of the different phases in the

innovation value chain? ... 50

How is influence on the phases of the innovation value chain from external parties perceived

by complex organizations? ... 56

Jasper Venema - Accenture | Table of Contents

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How is value from innovation in IT with external knowledge sources driven in complex

organizations? ... 61

How can external knowledge sourcing partners present themselves towards the innovation

process regarding IT in complex organizations? ... 63

Summary of findings ... 69

Questionnaire results ... 70

Discussion and Limitations ... 72

Discussing the sub questions ... 72

Limitations ... 80

Conclusion ... 82

Reflection... 85

Acknowledgements ... 87

Remarks for future research ... 88

INTRODUCTION

In line with its profile as a high-performance global consultancy company, Accenture

provides its clients with detailed advice concerning their strategy. With this study,

insight on the impact of external knowledge sourcing partners on innovation

management strategies is presented.

The perspective on innovation from this study’s point of view is on process

innovations because the topic inquires to look at improvements in the internal

organization of a company. This type of innovation is capable of improving structure and

increasing efficiency in organizations, which makes it relevant to complex multinationals

such as Royal Dutch Shell. Most innovation projects in these companies concern

technical improvements to existing business processes, of which digitalization of work

to mobile and cloud computing might be the most common in recent years (Gartner,

2014). Not only do technological advancements shape our personal lives and society,

they also become part of a clear competitive advantage in business (Evangelista and

Vezzani, 2010). Hence, the importance for any business to research the added value

process innovation can bring.

Innovation management and its relation to company performance and process

efficiency is proven to be of magnitude (Christensen (2002), Damanpour and

Gopalakrishnan (2001)). It is important to differentiate innovation management

strategy from management of technology. In this study, the following view on innovation

management is attained:

“Management of innovation refers to the strategic and organizational context for

the individual innovation processes with the objective to produce successful product and

process innovations while economizing on time and resources” (Christensen, 2002:

pp.263)

With innovation, the results or benefits are often only visible in the long-term

perspective on improvements in the business function (Dougherty and Hardy, 1996).

Because of this delayed display of results and other related measures, innovation

management is hard for complex organizations where focus from management mostly

lies upon making short term profit. Especially judgement as when and where to innovate

can be clouded because of this short-term focus (Dougherty, Hardy, 1996; Robertson,

Jasper Venema - Accenture | Introduction

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Casali, Jacobson, 2012). Cooper and Kleinschmidt (1993) have argued in their early

research that there is a gap between the perception of managers of successful criteria

for innovation and the reality they act in. The concept of innovation can be divided in a

framework concerning core concepts and core linkages, Henderson and Clark (1990)

distinguish between four types of innovations: Incremental, radical, architectural and

modular innovation. Most of the literature and professionals are familiar with the

concepts of radical and incremental innovation, the latter however, are more unknown.

As the concept of innovation is far reaching and comprises a lot of different

meanings, this study chooses to focus on process innovation and for these innovations;

modular and architectural innovation is taken into consideration. Modular and

architectural innovation differ in the following sense: Modular innovation takes place

when the structure of a process or product development chain remains the same, only

parts are renewed. Architectural innovation in this view, is considered to be the change

of the structure of these parts, whilst keeping the modules intact (Henderson and Clark,

1990). More detail on this can be found in the theory section of this study.

Since Accenture is highly renowned as an IT consulting company, the obvious

take on innovation in IT strategy is recommended because of the ease of access to

subject matter experts in this sector. Also, generating and applying architectural and

modular innovations is presumably the main source of work for consultancy firms:

thinking of new combinations of either new or old solutions and placing them in a

certain environment. The decision to engage in innovation projects in any of the four

types or specific innovation projects is influenced by the use of external knowledge

sources (Roper, Du & Love, 2008). These influences can benefit the innovating company

to a great extent as they extend the internal capabilities of the company’s internal R&D

(Roper, Du & Love, 2008).

The position of Accenture is that of an external, backwards knowledge sourcing

partner, as most consultancy firms are (Roper, Du and Love, 2008). However, Accenture

aspires to be more than just an external knowledge partner as the company is able to

execute operations, outsourcing and managed services and also delivers business

strategy services. This makes the study relevant for Accenture, to investigate where

their strengths as knowledge sourcing partner are situated. The involved companies

benefit from this study as it examines the role of knowledge partners on different levels

in their innovation management strategy.

When analyzing innovations, the Innovation Value Chain (IVC) model can be used

as a tool to identify strategy for a company on how to access its knowledge sourcing

partners (Roper, Du & Love, 2008). The IVC as argued by Hansen and Birkinshaw (2007)

is divided in three different phases: idea generation, idea conversion and idea diffusion.

Concerning this model, external knowledge sourcing partners can influence all three

stages. Moreover, external knowledge sources are a common party to help generate new

ideas (Hansen, Birkinshaw, 2007). In general, backward knowledge sourcing through

either suppliers or consultancy firms seems to benefit the decision to engage in process

innovation the most, resulting in sales growth and employee growth (Roper, Du & Love,

2008).

The IVC model fits in this research as a phased outline to assess the influence of

external knowledge sourcing partners on the innovation process. Interactions between

knowledge sources and innovations are apparent in every phase of the IVC and

innovative performance differs in each phase: finding new innovative opportunities,

determining value captured by the innovation and the decision making process to

engage in or diffuse a specific innovation. Each of these stages involves different people,

within Accenture, people involved might be: interns and consultants investigating

innovation opportunities differently from how internal R&D and other managers at

companies do; senior managers valuing new innovative possibilities together with

clients; managing directors and senior managers from both companies advising

executives in their final decision to engage in innovation.

The academic literature provides multiple models to assess performance of a

firm’s innovation strategy, the theories used here are explained in the literature

overview. Briefly now, the importance of contingencies like uncertainty and complexity

is argued, as well as the difference that configuration can make. To further examine the

effects of innovations on firm performance, background information about

contingencies is acquired. Effective innovation is affected by several contingency effects;

the most important effects are uncertainty and complexity (Tidd, 2001).

Increasing complexity in markets and industries generate difficult circumstances

to recognize and operationalize innovation. As Nooteboom (1999) argues, complexity

and variation in available technologies and industries creates an increased necessity for

external knowledge partners to increase innovation recognition of the company. The

companies in this research are all regarded as complex organizations, either due to their

Jasper Venema - Accenture | Introduction

9

global presence as in Shell and Philips or due to their complexity as a network and

services provider, as with KPN. In the short-term (E.g. When taking a new production

process in use), process innovation can actually lead to a decline in efficiency due to

disruption effects that innovations can have (Roper, Du & Love, 2008). This discrepancy

is a mature example of uncertainty (Tidd, 2001). Uncertainty about company

performance and future state is a common type of contingency (Tidd, 2001). Damanpour

(1996) empirically found that uncertainty concerning the outcome of innovation

opportunities, coming from environmental causes influences the size and source of the

innovation. Hauptman and Hirji (1999) agree with Damanpour and argue that

innovation management is affected by perceptions of environmental uncertainty.

Another important notice is that a large multinational company can have multiple

¨configurations¨ in place. A configuration is a certain combination of strategy, technology

and organization that proves to be superior in a given environment. (Dess, Newport &

Rasheed, 1993; Miller, 1996)

The theory section provides a more detailed vision on these topics. Besides

theory, more background information is retrieved from another Accenture study that

reviews the competitive position of Dutch top companies in regard to their main

competitors in their related industries: the High Performance Business review

(HPB)(Accenture, 2015). The HPB will be discussed in the section following the next.

ABOUT ACCENTURE

It is hard to encompass in a few lines what Accenture does as a company, Accenture self

has a fitting short profile of its activities:

“Accenture is a global management consulting, technology services and outsourcing

company, with more than 319,000 people serving clients in more than 120 countries.

Combining unparalleled experience, comprehensive capabilities across all industries and

business functions, and extensive research on the world’s most successful companies,

Accenture collaborates with clients to help them become high-performance businesses and

governments. The company generated net revenues of US$30.0 billion for the fiscal year

ended August 31, 2014.” (Accenture, 2015)

Accenture stands out when compared with other consultancy companies because of

their specialization in Information Technology consulting and the operational

capabilities to also execute projects or take over operations on a run and maintain basis.

Next to this, Accenture can also help IT departments set up their businesses or

outsource it. Because it is a global company, their client base is diverse and most fortune

100 companies are in Accenture’s client portfolio.

HIGH PERFORMANCE BUSINESS REVIEW

This section explains the relevance of the High Performance Business review (HPB) that

is conducted each quarter by Accenture. The study uses ten metrics to measure the

performance of the Dutch stock market (AEX) in sixty one industries. It measures how

incumbents are performing amongst global competitors in their industry, consisting of a

total of two thousand companies (Accenture, 2015). High performance in this regard

means sustained outperformance of peer companies, an increased ability to overcome

economic and business shocks, continuity and long term shareholder value. concerning

2014, the AEX companies have marginally improved performance relative to direct

international competitors in the HPB’s study’s regard. The improvements were found

due to a more efficient capital employment, being more consistent and improving

revenue growth (Accenture, 2015)

Shell, KPN and Philips are all present in this study and their competitive position

might influence the structure of their innovation strategies. Also, a forecast in terms of

projected future value of the companies is integrated in the HPB. This is an important

value regarding innovation and the innovation process on different levels in the

organization. As this value reflects the future position of the company, it is relevant to

future innovations that could change the business. The results are presented in the

background stories on these companies;

ABOUT SHELL

One of the largest organizations in the global Oil & Gas industry is Shell. It is Hollands

most well-known brand worldwide and because of its size and structure also one of the

most complex organizations in the world. The following are descriptions of the Shell

organization from their corporate website:

“We are a global group of energy and petrochemicals companies with

Jasper Venema - Accenture | Introduction

11

technologies and take an innovative approach to help build a sustainable energy future.’’

(Shell, 2015)

"Our headquarters are in The Hague, the Netherlands, and our Chief Executive

Officer is Ben van Beurden. The parent company of the Shell group is Royal Dutch Shell plc,

which is incorporated in England and Wales.” (Shell, 2015)

This study focuses specifically on innovation in the IT organization. Shell IT has a

total budget of around four Bn. Euro, this is one of the largest IT budgets in the world. IT

is structured across businesses; every business has its own Delivery Vertical that

executes IT strategy. These Delivery Verticals are instructed by IT/Information

Management (IM) managers that pass mature projects on to the global IT function:

Information Technology Service Operations (ITSO). The IT/IM managers report to the

leadership of their business, which in turn reports to the CEO.

ITSO is the organization of functional IT systems that maintains, supports and

delivers all major systems throughout Shell, ITSO also runs change orders from the

Delivery Verticals. The leadership of ITSO lies in the hands of Service and Operations

Managers (SOM), for every business in Shell there is a separate SOM as there is an IT/IM

Manager per Business. SOMs report directly to the CIO, which in turn reports directly to

the CEO.

Technical Competitive IT (TaCIT) is another IT organization that functions on

behalf of Projects & Technology (P&T). TaCIT investigates innovative projects that can

deliver competitive advantage, the systems ran, used and maintained cannot be

outsourced or delivered through a third party. TaCIT reports directly to the leadership

of P&T, which in turn reports to the CEO. It is also the department that Accenture is

lesser involved with regard to ITSO. Accenture provides the organization with support

in business functions, carries out projects and is willing to take more responsibility on

strategy.

Concerning the HPB results, Shell is performing in the higher regions of the

average scoring companies, meaning that it operates well within its industry.

Parameters such as Shareholder performance and Geographic revenue spread are where

Shell is amidst the top performers and company consistency is a harsh moderating

parameter for its performance. Relative to 2013, Shell slightly improves its competitive

positioning, mainly due to the increased shareholder performance (Accenture, 2015).

It is interesting to see how one of the largest complex organizations relates itself

to innovation. From an outer perspective, Shell is a well-organized company that has a

strict structure and a clear competitive position in a mature market. How does a

company of this magnitude and complexity cope with innovations intended for internal

use? How does Shell relate itself to the other Dutch companies in terms of innovating?

ABOUT PHILIPS

Philips is by its history Hollands most well-known technology inventor and a global

leader in lighting solutions and established player on the market for medical equipment.

Its structure has changed a lot since its establishment as a company, for now the focus is

on innovation.

Within Philips, its Innovation Group is the department that feeds the pipeline for

innovation. It enables the business partners for new business development. The

business partners are the three operating sectors (Healthcare, Consumer Lifestyle and

Lighting) and external partners. Philips adopts the Open Innovation paradigm as

explained in the literature review, and collaborates with institutes, academia and

industrial and consulting partners. The importance of innovation is visible through a

clear statement on the Philips website:

“Innovation is at the heart and soul of Philips – it is vital to the strategy of the entire

Philips organization as well as the individual businesses, and it is the key aspect of how

Philips has won in the past, is winning today, and will win in the future.” (Philips, 2015)

Philips structures its operations across a line that is similar to the Innovation Value

Chain by Hansen and Birkinshaw (2007): its operations are structured in Idea to Market

(I2M), Market to Order (M2O) and Order to Cash (O2C). Generating ideas for the market,

converting them into value and providing the ideas in the market. Besides technological

products and related services, Philips also has its own industry consulting department,

where it helps companies innovate, mostly in the ideation and idea conversion phases of

the IVC.

With regard to the High Performance Business Review (HPB), Philips scores

average whilst decreasing in overall performance considering their position in 2013.

The most interesting positive parameters are: Positioning for the future, Growth

expectation and Margin expansion. Especially Growth expectation is where Philips

Jasper Venema - Accenture | Introduction

13

scores remarkably high, meaning that the market sees Philips as an attractive player in

future markets. Their Positioning for the future also scores extremely well, confirming

the Growth expectations. On the other side are some drivers that moderate the current

performance such as: Shareholder performance and Revenue growth.

It is interesting to see how the company actually positions itself for the future and

what roles innovations in the internal organization mean to Philips. It is obvious that

Philips is putting effort towards a profitable future, how does external knowledge

contribute to this and how does Philips absorb this knowledge?

ABOUT KPN

As a former state company, KPN has had a volatile past with big up- and downturns.

Nowadays KPN’s mission statement consists of three pillars: Enforce, Simplify and Grow,

these pillars constitute the way KPN operationalizes the strategy for corporate social

responsibility themes. It stands for the transformation to a leaner and better operating

company (KPN, 2015). KPN is the largest telecom and ICT supplier of Holland, with a

network embedded in so much as every place in the country. With this network, KPN

wants to help the Netherlands take the next step. KPN has the resources, the

technologies and a reliable network to connect people at home, at work and on the go.

KPN has roughly three large operating businesses: Mobile, Fixed lines and IT

services for the small and medium enterprises. These operating business all consist of

departments structuring it; Network is internally responsible for the network

connections that constitute the physical network whilst Mobile is responsible for the

maintenance and structure of the mobile network and Residential on its turn is

responsible for the front end of the organization, the consumer-facing aspects of the

company. It is clearly a structured company but its performance on the Dutch market

has been declining for a while now and KPN is set to do things different in the future.

Concerning the HPB results, KPN has slightly improved their results compared to

2013. The most major positive change takes place in the tremendously improved

shareholder performance and capital efficiency parameters. However, a decline in the

parameters for positioning for the future and the fuel for growth is visible, determining

that direct competitors might be more efficiently grasping future revenue streams or

opportunities (Accenture, 2015). Also, KPN is currently underperforming in regard to

comparable companies in the telecom industry worldwide.

To summarize, it is well to say that KPN tries to advance the company in another

direction, more customer oriented and that this change is needed to compete in a

rapidly changing market as a telecom provider. It is therefore interesting to investigate

how the company makes use of external knowledge providers to secure positioning for

the future and regain a competitive position.

GOAL AND RESEARCH QUESTIONS

Accenture as a consultancy company provides insight on a strategy level and delivers

execution on an operational level, this is a feature in which Accenture as a consultancy

firms stands out for (Accenture, 2015). With regards to insight in company strategy, this

study elaborates on the impact of external knowledge sourcing partners on the

innovation process. It can be used to better interpret how companies can make use of

the added value that innovations through external knowledge sources bring and it

provides insight into the structure of the innovation value chain. With these insights

Accenture is able to stimulate the conception of strategy advice for managing innovation

to properly govern, manage and structure the process in which innovation is generated.

Accenture is currently one of the largest players in the consultancy branch that

helps organizations with innovation and leveraging value from innovation. This study

shows how external knowledge sources like Accenture can be structured in order to be

of best value to their partners. Particularly in the IT departments of complex

organizations. Therefore, it is necessary to investigate the relationship between

knowledge sourcing partners and companies to assess the added value of external

knowledge sourcing partners like Accenture. Besides this, the contribution of ideas or

opportunities that external knowledge sourcing partners are capable of making, are

important to take into account. These contributions occur during all phases of the IVC,

therefore the central research question is:

How can External Knowledge sourcing Partners enhance the Innovation Value

Chain in the IT Department of Complex Companies?

To answer this question correctly, it is important to distinguish different elements. First,

the structure of the innovation processes is examined, hence the following sub question

concerning the Innovation Value Chain at the focal company:

Jasper Venema - Accenture | Introduction

15



How is the Innovation Value Chain in complex companies structured from an IT

perspective?

Within the Innovation Value chain, the relationship between external knowledge

sources and the partner company must be examined. To examine the relationship, focus

is put on the influence external parties have and how this influence is perceived by the

partner. Hence the second and third sub question:



What influence do external parties have on the execution of the different phases in

the innovation value chain?



How is influence on the phases of the innovation value chain from external parties

perceived by complex organizations?

The fourth question that addresses the research goal comprises detailed information on

the overall relation between knowledge sources and innovators. To examine what value

a business can convert from innovations, one must understand what value is. It is

therefore important to discuss the following question in a more theoretical manner:

How is value from innovation in IT with external knowledge sources driven in

complex organizations?

The last question applies to the position of Accenture, to how an external knowledge

sourcing partner can position itself in order to be of value to the client/partner

company:



How can external knowledge sourcing partners present themselves towards the

innovation process regarding IT in complex organizations?

As the goal of the research is to identify how businesses can extract value and improve

economic performance, the research is explorative in nature to provide insights on how

to collaborate for innovation in complex multinational companies. Moreover, the study

tries to identify how, why, when and where innovation with external knowledge

sourcing partners is adding value.

In the next chapter a literature study on the related topics that are mentioned in

this introduction is provided. From there on the conceptual framework and research

methods are explained more in-depth. In order to answer the sub questions and the

central research question, propositions concerning the position of external parties

towards Innovation Value Chains are set-up. In the mid-section, the findings are

presented and later discussed. Finally, the results are concluded briefly in an answer to

the central question and remarks for future research are given. A reflection on the

overall process is available at the end of the paper.

Jasper Venema - Accenture | Literature review

17

LITERATURE REVIEW

In the introduction the most important concepts from the literature are stressed out.

These concepts are: innovation management in general, architectural and modular

innovation, the Innovation Value Chain, external knowledge sources, absorptive

capacity, innovation performance and configurations of a company and contingencies in

the form of uncertainty and complexity. This literature study now explains these

theories and concepts in more detail and shows their relevance to properly establish a

knowledge base from where the research is engaged.

DEFINITION OF INNOVATION

Often when discussing innovation, the definition about what constitutes an innovation

heats up the discussion. It is hard to give a uniform meaning to the word innovation,

because everyone has its own view on the term. Technically speaking, it can be very

hard to distinguish product from process innovations (Damanpour, 1991). To make the

understanding of types of innovations easier and to differentiate appropriately, the

framework of innovations as distinguished by Henderson and Clark (1990) is introduced

in the first part of this chapter. Their research uses a clear distinction of the concept of

innovation in a framework concerning core concepts and core linkages. Henderson and

Clark distinguish between four types of innovations: Incremental, radical, architectural

and modular innovation.

This study incorporates the definition of architectural and modular innovation

when investigating the management of process innovations in complex companies.

Incremental and radical innovations are also important in achieving a competitive

advantage. However, incremental innovation builds on the innovating company’s

existing competencies and radical innovation destroys the usefulness of the company’s

existing capabilities (Henderson, Clark, 1990). These types of innovation pose challenges

to large established organizations that are different when posed to more flexible firms.

Modular and architectural innovation are more difficult to recognize but posit a

great impact on the internal organization of a company. They do so by changing the

whole design of the (process or product) architecture or a component of it. This makes

the topic interesting to discuss in the field of innovation management. It is the

architecture from its components. A component is the element that implies a core design

concept (Clark, 1985). These core design concepts together form the system, the

architecture that the process or product (innovation) is constituted from. When

changing the underlying links between existing components, we speak of architectural

innovation whereas modular innovation comprises changes of the core concepts they

represent.

Modular innovation is linked closely to regular incremental innovation in this

view. This is because the linkages between the concepts and the components of the

system that the innovation takes place in, the core design, remain the same. The

concepts and components themselves however, are completely renewed or replaced

(Henderson and Clark, 1990).

With architectural innovation, the core design is reconfigured to link together

existing components in a new way (Henderson and Clark, 1990). Architectural

innovation is closely linked to radical innovation, a connection that one can easily draw

from its definition because it opens up new possibilities through new combinations. It is

striking to see the resemblance with Schumpeter’s definition of entrepreneurship: an

entrepreneur is one that finds “new ways of using existing means” (Schumpeter, 1934).

In this regard an entrepreneur would be someone who innovates by building a new

structure out of well-known concepts, an interesting idea for another study to

investigate corporate entrepreneurship on. Figure 1 shows conceptually what the four

types of innovation are about:

Jasper Venema - Accenture | Literature review

19

Modular and architectural innovations are however, far more difficult to spot in practice.

This is because a modular or architectural innovation could also work in an old

framework or organization of capabilities in which the innovation is brought forward.

Also, Henderson and Clark (1990) argue that architectural innovation is often ignited by

a modular innovation. The four types as defined by Henderson and Clark are matters of

degree, one should not need to try to put borders around these concepts and expect

every innovation initiative fits in one box. It is strongly advised to take the boundaries of

linkages between core concepts and the overturning of these core concepts or

components at heart. This is why this study’s interpretation on process innovation in the

IT sector focuses on architectural and modular innovation, since they are more difficult

to understand and thus organize, structure and govern (Henderson and Clark, 1990).

IMPLICATION Types of innovation: Changed linkages to core concept Architectural Modular Renewed structuring of existing core concept Unchanged linkages to core concept Implication of innovation during conversion: End result of innovation: Incremental Radical Unchanged linkages

to core concept Changed linkages to core concept

Start of new core concept Reinforcement of

core concept Complete renewal of

THE INNOVATION VALUE CHAIN (IVC)

As already introduced, the Innovation Value Chain by Hansen and Birkinshaw (2007)

plays a significant role in the design of this study. The research is performed along the

phases of the model in their respective order. The IVC can be used to consider

refinement of the processes in a company for creating ideas, converting ideas into value

and how they are spread around in the company. In the model, six important managerial

tasks concerning innovation are involved: internal sourcing; cross-unit sourcing;

external sourcing, selection, development and companywide spread (Hansen and

Birkinshaw, 2007).

The idea generation phase is the first phase in the chain. It all starts with creating

ideas, whether ideas are created internally or externally does not matter. Later on in this

chapter, the influence of external parties on the phases of the IVC is elaborated on.

The phase of Idea conversion consists of selecting and funding the right ideas to

apply in the organization. It is a critical capability in the innovation process because lots

of ideas can easily be generated but if you are not able to properly fail them, the

company is left with a lot of half-baked ideas that ultimately only brought along costs

and no innovations. The problem with this phase is mostly twofold; firstly, a lot of

companies have strict budgets for and a conservative view on innovative ideas, this

diminishes the motivation to generate ideas (Hansen and Birkinshaw, 2007). Secondly

the opposite is occurring: not being strict enough on the idea conversion. This occurs

when many ideas pass the bill but are executed, developed and funded poorly so they do

not fit the company properly.

The last phase considers idea diffusion, where ideas are disseminated throughout

the company or the market. This phase requires excellence in governing innovation in

order to be able to leverage it, because often it also comprises the last phase in

innovation funnels for a roll-out in the company (Chesbrough, 2005). As Hansen and

Birkinshaw (2007) position it: the concepts still requires a buy-in, not only from

customers but also from corporate, especially if the concepts concerns an internal

innovation. With architectural or modular innovation, this is almost always the case

(Henderson and Clark, 1990).

When considering improving the IVC of companies, the focus should lie on the

weakest link in the innovation value chain as this constitutes the company’s capacity to

innovate (Hansen and Birkinshaw, 2007). A chain is only as strong as its weakest link.

Jasper Venema - Accenture | Literature review

21

For example: if a faucet is able to put out twenty liters per minute but the hose

connected to the faucet is several millimeters smaller in diameter, then the output of

water on the crops would be less than twenty liters per minute and the excess power of

the faucet is put to waste. In the IVC, several links can be this weak spot, it is therefore

interesting to compare value chains from different industries to check what can be

learnt from these weakest links.

ABSORPTIVE CAPACITY

External knowledge plays an important role in the theory in the Open Innovation

paradigm as introduced by Chesbrough (2003). This study borrows aspects of the

theory when examining the use of external knowledge sourcing partners in the ideation

phase as every innovation process starts with generating ideas. In the paradigm,

external ideas and paths to market are on the same level of importance as internal ideas

and market strategies. The paradigm is relevant to this research because of the

acknowledged importance of constructs of external knowledge at its roots. Useful

knowledge is widely spread and distributed, even the strongest R&D organizations must

be able to identify (generate), connect (convert) and leverage (diffuse) external

knowledge as a core process in innovation (Chesbrough, 2005). The phases of the

Innovation Value Chain (by Hansen and Birkinshaw, 2007) are strikingly visible in this

different theoretical model. Besides the position that external knowledge partners can

take in the phases, the way complex organizations react to external sources is evenly

important. One of the capacities that defines how organizations cope with external

knowledge or information is absorptive capacity.

The concept of absorptive capacity constitutes that companies have to invest in

the R&D organization to be able to use external technology (Cohen, Levinthal, 1990).

Other areas of importance are the company’s employees’ knowledge base, motivation

and mind-set (Cohen & Levinthal, 1990). Rosenberg (1994) found out that by investing

heavily in R&D, the ability to use external knowledge is enhanced. Also, earlier research

by showed that failure in exploiting external R&D may come at great cost of competitive

disadvantage (Rosenberg and Steinmueller, 1988).

If this absorptive capacity cannot be developed or is not pursued by the

innovating firm, strategic alliances can be used as an alternative (Nooteboom, 1999;

Chesbrough, 2005). Strategic alliances can be defined as a network of firms that share

each other’s capabilities in order to achieve more competitive innovation. If placed in

one region (continent, country, region) it can constitute a Regional Innovation System

(RIS) (Yam, Lo, Tang, Lau, 2011). Networks of firms may become means to actively

generate, convert and diffuse ideas in firms (Chesbrough, 2005; Gomes-Casseres, 1996).

The acknowledgement for external knowledge sources is widespread in the

academic literature. The literature provides many research papers acknowledging the

importance of external knowledge for innovation (Kang and Kang, 2009; Hansen,

Birkinshaw, 2007; Robertson, Casali, Jacobson, 2012; Mansury, Love, 2008). In this

perspective, Cohen and Levinthal (1990) acted as thought leaders when they introduced

the term ‘Absorptive capacity’ as they argue it to mean “The ability of a firm to recognize

the value of new, external information, assimilate it, and apply it to commercial ends” (P.

128). Cohen and Levinthal also consider that absorptive capacity is critical to the firms

innovative capabilities.

Often, the term ‘capacities’ is used to refer to grouped capabilities (Lichtenthaler

and Lichtenthaler, 2009; Robertson, Casali & Jacobson, 2012). In 2012, Robertson et al.

also explicitly uncover the capabilities needed in the application of knowledge; they

introduce Innovative Management capacity as the higher-order dynamic capability that

controls and coordinates accessive capacity, adaptive capacity and integrative capacity.

In this theory, there is congruence with the phases of the Innovation Value Chain by

Hansen and Birkinshaw (2007);

Accessive capacity comprises internal and external knowledge generating and

gathering activities, it particularly concentrates on how internal and external knowledge

bases can be used together, complementary or supplementary (Robertson et al., 2012).

It appears to be consistent with the ideation phase of the IVC.

Adaptive capacity comprises converting knowledge generated for one purpose

into a new purpose (Robertson et al., 2012). The overlap with idea conversion is clearly

apparent, as it comprises adapting or converting new knowledge into a viable

innovation. Adaptive and integrative capacity are closely linked to each other just as idea

conversion and diffusion are locked into each other (Hansen and Birkinshaw, 2007).

Integrative capacity groups the capabilities to configure the innovation in such a

way that it is compatible with the existing configuration of the company. The

Jasper Venema - Accenture | Literature review

23

throughout the organization by eliminating resistance and placing the idea in the

organization (or outside, depending on the purpose of the innovation).

EXTERNAL KNOWLEDGE SOURCES

As introduced in the first part of this study, consultancy companies like Accenture are

considered backwards external knowledge sources (Roper du and Love, 2008). Not only

consultancy companies are considered as potential external knowledge sources for

innovation; universities, suppliers, public knowledge sources, customers and

competitors are also part of the spectrum of external knowledge sources albeit in other

constructs with different links. Roper, Du and Love (2008) consider innovation events

(product or process) as the end of the process of sourcing knowledge and transforming

this knowledge. It is clear that the phase of idea generation of the IVC is the start of this

process. The part that Roper, Du and Love call transformation of knowledge is linked to

the idea conversion stage in the IVC, a part that is presumably also largely played by

consultancy firms. Idea diffusion is the stage that is related with a concept the authors

call the process of exploiting the innovation.

External knowledge sources can express strong complementarity to a firms

internal innovation capabilities. As of today, when companies compete in a market

where technological changes are following each other more rapidly than ever, it is

almost impossible to properly innovate using only internal capabilities (Nooteboom,

1999). In the idea generation phase of the IVC, external knowledge partners can help

source for new innovative ideas that are generally out of the scope of the company’s

employees’ own paradigm (Hansen and Birkinshaw, 2007). Caloghirou, Kastelli and

Tsakanikas (2004) have identified externally acquisitioned knowledge as valuable

complements for innovation performance, especially in the ideation phase a great

benefit from these sources can be attained. It is because the fresh insights of

non-incumbents that the ideation performance on innovation opportunities can easily be

increased. It depends on the firm’s absorptive capacity how the opportunity is

acknowledged, it seems however that some sources of external knowledge can also use

leverage to make innovation happen in a company (Caloghirou, Kastelli and Tsakanikas,

2004; Cohen and Levinthal, 1990).

During the phase of idea conversion, external knowledge sources can improve the

way companies access and exploit information and knowledge to benefit the generation

of innovation (Caloghirou, Kastelli and Tsakanikas, 2004). It is often needed to build a

case to convert the value of an idea into real value to the business. Consultancy

companies like Accenture can apply their capabilities of transferring this information

and knowledge into forms that are appropriate to the innovating company through

partnering (Fey, Birkinshaw, 2005).

Lastly the influence of external knowledge partners on the diffusion of ideas is

directly connected to the conversion of ideas into value. Higher management needs to

buy-in on the same wavelength as the idea is originated. Hence, a strong business case

helps to convert the decisive powers in a company to accept and engage in the

innovation opportunity.

THE VALUE OF INNOVATION WITH EXTERNAL PARTNERS

Yam, Lo, Tang and Lau (2011) have analyzed the influence of sources of innovation,

technological innovation capabilities and performance for the manufacturing industry in

Hong Kong. With their analysis, they are able to show that interacting with external

sources and experts improves technological innovation capabilities to the extent that

they increase global competitiveness. Despite this study is not in the manufacturing

industry nor is located in Hong Kong, their findings do corroborate with the general

notion in the literature on external knowledge sources that external knowledge can

enhance internal capabilities to make them more competitive (Hansen and Birkinshaw,

2007; Nooteboom, 1999; Kang and Kang, 2009; Mansury, Love, 2008).

The results from Yam et al. integrate the use of Regional and Firm Innovation

Systems (RIS and FIS) in the study of innovation performance. Using these metrics, it is

empirically found that a firms technical innovation performance is determined by its

technical innovation capabilities, the higher the own capabilities, the higher the

performance (Yam et al. 2011).

Another interesting find by Yam et al. (2011) is the effect of external expert

organizations, referred to as: Knowledge Intensive Business Services (KIBS). These KIBS

can bring substantial improvements to internal technological innovation capabilities and

also improve performance with external sources of innovation in the RIS, resulting in

higher innovation performance. A quote from the results section demonstrates the

importance of these KIBS:

Jasper Venema - Accenture | Literature review

25

“... This implies that better utilization of KIBS will assist firms in better utilizing

external sources of innovation. At the same time, KIBS have a positive relationship with

R&D and resource allocation capabilities…” (Yam, Lo, Tang and Lau, 2011)

By now we are able to see consultancy firms amongst these KIBS. KIBS actually

have two roles for firms, the first being a source for innovation and the other being a

so-called bridge for innovation, as proposed by Muller and Zenker (2001).

Relating to the concept of absorptive capacity, which actually defines the way

firms are able to accept, extract and exploit external knowledge, is the core message

from the research from Caloghirou, Kastelli and Tsakanikas. This message is strikingly in

line with the perspective from absorptive capacity on innovation:

“The more openness a firms show to external sources of knowledge, the more it

develops information and knowledge sharing with positive effects on its innovative

performance” (Caloghirou, Kastelli and Tsakanikas, 2004)

Caloghirou et al. (2004) use items like openness towards knowledge sharing, the

capability to absorb knowledge, in-house knowledge development capabilities and even

the extent to which a firm undertakes R&D cooperation as factors that determine

innovative performance.

On the other hand, Lööf and Heshmati (2006) have a rather quantitative method

of measuring firm performance and innovation and have performed a sensitivity

analysis on the relationship of performance with innovation.

Basic econometrics with

regard to different measures such as sales, growth and expenditure figures have been

used to describe firm performance and performance of innovation (in all its forms). One

of the most important finds besides the positive relation between innovating as a

company and company performance, is that sales is a less appropriate proxy to

determine the added value from innovations in relation to performance (Lööf and

Heshmati, 2006)

The point of view made by Lööf and Heshmati is more in line with the vision on

added value according to Roper, Du & Love (2008). Their perspective on value from

innovation is that it can be measured in operational efficiency, company growth and

sales growth. These are ultimately predictors of how a company performs in the market.

Besides this, Lööf and Heshmati (2006) have found empirical result for a more positive

relation between innovation output and value added per employee, level of sales per

employee and sales margins for innovations that are new to the firm than for

innovations that are new to the market.

It is however difficult to define innovative performance within a confined set of

metrics, as Cruz-Cázares, Bayona-Sáes and García-Marco (2013) argue in their study on

measuring Technological innovation efficiency. Cruz-Cázares et al. use a well-designed

model to determine the relation between innovation and performance, a model which

detail’s go well beyond this study’s scope. However, their model proved technological

innovation efficiency to be positive for firm performance and strikingly: product

innovation is not detrimental for firm performance whilst having high-skilled staff is.

When analyzing innovation, productivity and growth in US business services,

external interaction is found to be detrimental to service innovation and the role of

external innovation linkages on business performance is highly apparent (Mansury, love,

2008). However, the difference between process and product innovations is not as

distinct to service companies as it is to manufacturing companies. This is important as

the focal companies in this study have several characteristics of being a service company

(KPN, Shell) or are in a major shift towards being more service-oriented (Philips).

Mansury and Love (2008) have identified, using a new model, that service innovations

have a positive effect on growth but no effect on productivity. It is expected that the

growth effect of innovating companies comes through the effect that external linkages

have on the firm, as external linkages have a strikingly strong positive effect on firm

performance, regardless of the innovation. Most interesting from this study is the fact

that Mansury and Love (2008) have identified evidence that hiring external consultants

for involvement in the innovation process triggers a positive reaction from innovation

on productivity. Regarding these outcomes concerning service companies, it is arguable

if the same holds for the complex organizations that are compared in this study,

CONTINGENCIES AND CONFIGURATIONS

The introduction already made clear that contingency effects like complexity and

uncertainty affect innovation in companies, of course contingencies have an overall

effect on firms. The topic of contingencies is so large, it could be used to design another

study, in this research however, contingencies are taken into consideration from a

theoretical perspective. The information presented here is used to fuel discussion on the

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27

findings of the research, not in order to formulate propositions nor have any effect on

the research design. In fact, all (innovation) projects are under influence of the most

important two contingencies: uncertainty and complexity (Tidd, 2001).

Organizational complexity is a harsh moderator on innovation performance, but

so is its solution: a strong organizational structure. Tidd (2001) argues that

organizational design is a detrimental aspect of innovation performance. Because all of

the focal companies in this study are structured differently, it is important to take the

organizational structure, or configuration, into account. Large multinational companies

on the other side, can have multiple ¨configurations¨ in place. The concept of

configuration means a certain combination of strategy, technology and organization

(Dess et al., 1993; Miller 1996), in any market, a configuration that proves to be superior

exists. It is therefore a continuous search for this so-called sweet-spot that defines the

superior combination. Again, finding this sweet-spot is a job that external knowledge

sourcing parties are detrimental too.

The impact of organizational values on process innovations and how managers

cope with innovation is important to take into account when speaking of organizational

complexity and configuration ( Khazanchi, Lewis and Boyer, 2007). Every manager can

have a different attitude regarding innovations, attitudes that are often even paradoxical

in nature because innovation is vital to managers, but requires flexibility and

empowerment whilst managers also need control and efficiency requirements

(Khazanchi et al., 2007). A disruption effected already discussed in the introduction of

this study is a perfect example of such a managerial paradox; process innovations can

have this disruption effect because they can lead to decline in efficiency after

implementation (for example a new production process in a manufacturing plant)

(Roper, Du & Love, 2008). This discrepancy is a mature example of the uncertainty

contingency (Tidd, 2001).

Technological complexity in markets and industries can blur the vision on

innovation for every incumbent (Nooteboom, 1999). A solution to this blurred vision can

come in the form of external knowledge sources who can provide a clearer vision on

technological changes in industry landscapes (Nooteboom, 1999). Another issue

following technological complexity is uncertainty about technological applications and

relevance to business operations. Uncertainty can relate to company performance and

the future state of the company, Damanpour (1996) has empirically found that the

uncertainty caused by environmental causes influences the size and the source of

innovations. Hauptman and Hirji (1999) agree and argue that innovation management is

affected by perceptions of environmental uncertainty.

In order to be able to withstand uncertainty and complexity, as well as finding the

right configuration, an organizational culture towards innovation can help. According to

Khazanchi et al. (2007) organizational culture can have a positive impact on process

innovations by being innovation-supportive. If the right leadership provides the right

culture and direction for the company, this is a strong positive predictor for innovation

performance (Khazanchi et al., 2007).

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METHODS AND DESIGN

This chapter starts with an introduction to qualitative research, Mortelmans (2007)

refers to different approaches to qualitative research. This study is executed in line with

the interpretivism perspective on research as described by Mortelmans: it tries to

formulate an approach to innovation management strategies by combining existing

models and theory with empirical findings. The research is explorative in nature and

because in-depth and rich information is needed in order to create a background of

knowledge, qualitative research is preferred.

‘Qualitative research is most appropriate when a researcher is looking for

understanding of a certain phenomenon in a context-specific setting’ (Golafshani, 2003).

Qualitative research makes use of inductive reasoning to present results based on

observations, desk research and expert knowledge from interviews and questionnaires.

Facts and theories are combined and evaluated in a systematic way, analyzing patterns

that emerge during the study. This research tries to explain the influence that external

knowledge partners like Accenture can have on the innovation process at clients and

businesses, structured from an IT perspective along the three phases of the innovation

value chain.

Patton (2002) argues that in order to investigate the unobservable, we cannot go

without asking for information concerning feelings, thoughts, intentions and even

behaviors. It is impossible to observe the structure of the world, modeled by people and

how these modelers value the world they created and the things that are part of it. The

only way to get this kind of knowledge is to ask for it, to ask what motivates people.

From this point of view, interviewing as a data collection method is valid, it is a method

for the researcher to enter the perspective of the modelers of the world you investigate.

Evers and de Boer (2007) propose several ways of getting information from

people: interviewing, submitting questionnaires, having informal conversations, making

observations of the environment. Informal conversations and observations give a large

amount of background information for the research. Qualitative researchers often refer

to this as ‘Field work’ (Evers & Boer, 2007). This kind of background information is used

throughout the research process. This study itself makes use of interviews to gather data

and a small questionnaire that has been developed by Hansen Birkinshaw (2006). This

questionnaire is used to let Shell, KPN and Philips rate their own innovation value chain

while the interviews deliver information through deep analysis and encoded bits of

conversation (Evers & Boer, 2007).

It is possible to roughly distinguish three types of interviews, in increasing order

of data quality these are: structured, semi-structured and open interviews (Mortelmans,

2007). However, open interviews are more intensive and hence, time consuming to

properly analyze. To counter this effect, interviews can be more structured, the pitfall

here is that less depth of the responses is achieved, which lowers the quality of the data

(Mortelmans, 2007). Because open interviews take much time to analyze, the choice for

the type of interviews is semi-structured, this is common practice in most qualitative

research (Evers and de Boer, 2007). Following the semi-structured interview

techniques, the interviews are conducted by taking a topic-controlled interview guide at

hand. For this variant of interviewing a list of topics is composed that all have sub

questions to be addressed during the interview. These questions are not defined and

deliberately stated, instead they are discussed during the conversation. A well-chosen

list of topics automatically points out a direction in the interview which feels natural to

the respondent (Evers & Boer, 2007).

When asking questions, the interviewer must express the art of perseverance

when following up on topics by questioning the responses the interviewer gets. The

more follow-up questions are asked, the more complex associations between interviews

can be made. When these complex associates are compared, the different feelings

concerning innovation management and the role of Accenture as an external knowledge

partner can be assessed in search of a single truth (Evers and de Boer, 2007). This way

of interviewing is often referred to as the tree-model of qualitative interviewing (Evers

& de Boer, 2007).

VALIDITY, RELIABILITY AND GENERIZABILITY

Here the concepts of validity, reliability and generizability are briefly introduced.

Validity and reliability are continuously safeguarded by the researcher and supervision

to make sure the study stays aligned with its purpose. Proper validity enhances

reliability as a consequence, as trustworthiness is a composed of reliability and validity

according to Mortelmans (2007). It is difficult to give a proper single definition of

validity as is has a wide range of different meanings across qualitative researchers

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31

(Golafshani, 2003). However, most definitions hint in the direction of research quality,

rigor and trustworthiness (Davies and Dodd, 2002). Reliability is actually what is

literally meant with it; how reliable the research is.

This study contains several measures to assure validity and reliability. During

the set-up of the interview guides, care is given to adjust the guides to the person that is

being interviewed. The interviewing techniques are integrated in the research design, in

the form of a tree-model. Validity is confined within the roster of the interview guides,

so they assure the study receives the right data. Also, to assure the point of view is less

biased, participants in the study consist of an even number of interviewees from

Accenture as well as from the focal companies. Per company, three employees from

Accenture that are working there as well as three incumbents are interviewed.

Relevance to the outcome is of greatest importance because the end deliverable is

advice to strategy on innovation management. The outcome also needs to be

generalizable, able to explain concepts that are relevant to study. Rigor and relevance

assess quality of the process and the end product. In order to make sure this study

remains relevant and has high rigor, mixed method design is used in setting up the

research.

CONCEPTUAL FRAMEWORK

As we have suggested from an academic point of view; Type of innovation, knowledge

absorption of the subject, complexity and uncertainty and configuration of a company

play a role on the structure of the innovation process. This study separates the stages of

innovation by means of the IVC from Hansen and Birkinshaw (2007) and expects that

these phases are affected by these theories described in the literature review. The

complementarity between internal capabilities and external knowledge acquisition has

been researched before by Cassiman and Veugelers (2006). However, this research

stretches beyond complementarity of internal capabilities and examines more in

breadth how external knowledge sources influence internal innovation in complex

organizations, from the perspective of the IT departments.

The conceptual framework is used to identify the influence from external

knowledge sources with more depth. The main concept that is going to be studied and

how the study is going to be executed can be identified from it because it is constructed

by beliefs, expectations, assumptions and theories. The description by Miles and

Huberman (1994) is appropriate: “it is the key part of the research design, that explains

what is going to be researched and the key factors, concepts or variables and their

presumed relationship”. In order to be able to answer the research questions, a

conceptual framework concerning the sub questions and four propositions is modeled,

incorporating the theory described in the literature review. The propositions, together

with the sub-questions, take a lead in generating the interview guide and structuring the

actual study. The propositions are stated in a way that matches the phases of the

innovation value chain and assumption a positive relation. The propositions are defined

as follows:

- P1: External KS contribute ideas in the ideation phase

- P2: External KS are used to select innovations and convert them into value

- P3: External KS diffuse innovations or support diffusion

- P4: External KS affect the structure of the whole value chain

The propositions, research questions and relevance of some topics from the literature

review is displayed in the conceptual framework in Figure 2:

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33

This schematic overview presents the idea that besides affecting IT innovation in

complex organizations, the type of innovation that is pursued; absorptive capacity of the

subject; its internal configuration and contingencies like uncertainty and complexity,

also affect the influence of external knowledge sources on the IT innovation value chain.

The central position of the propositions in this research becomes apparent through this

Sub question 5:

How can external knowledge sourcing partners present themselves towards the innovation process regarding IT in complex organizations?

Sub question 3:

How is influence on the phases of the IT innovation value chain from external parties perceived by complex organizations? Sub question 4:

How is value from innovation in IT with external knowledge sources driven?

Sub question 1: How is the IT Innovation Value Chain in complex companies structured? Factors that influence the IT

Innovation Value Chain: Sub question 2: What influence do external parties have on the execution of the different phases in the innovation value chain of IT?

P3: External KS diffuse innovations or support diffusion 1: Idea Generation 2: Idea

Conversion Diffusion 3: Idea Uncertainty concerning

results and the future Complexity of the

organization Absorptive capacity of

company

Configuration of a company

Type of innovation pursued

P1: External KS contribute ideas in the ideation phase

P4: External KS affect the structure of the whole value

chain

P2: External KS are used to select innovations and convert them into value