Master Thesis Can an innovative organization be designed?

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Master Thesis

Can an innovative organization be designed?

Exploring the influence of organization design on the innovative

capacity of the organization

Date: 24/03/2013 Version 1.0 Author: K.C. Verwoerd (S1995766) koen@kverwoerd.nl

University University of Groningen

Economics and business

General Management

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Abstract

For many organizations innovation is necessary for survival. To do this on a structural basis, this means they should possess innovative capacity, the ability to innovate. It is expected that the design of the organization can enhance this innovative capacity but how this is done is unclear. There is a lot of literature regarding theories about organizational design and many studies about innovation, often in combination with knowledge or learning. The relation between both types of theories, leading to a comprehensive model of an organization that supports innovation (an innovative organization), seems to have received less attention in the literature. The aim of this study is to

contribute to such a theory by studying the relation between essential elements of an organizational design and the innovative capacity of the organization. The concrete research question pursued is: ‘to what extent do organizational design characteristics have on the impact of innovative effectiveness of the

organization?” From the theory there are a couple of areas extracted, with regards to the design of the organization. The choices made in each of these areas (basic design, knowledge acquisition and planning and control systems) can influence the innovative capacity of an organization. These choices are studied further using qualitative research. This research includes a case study and desk research. From the study, it can be concluded that features in the areas of basic design, knowledge acquisition and planning of control all influence the innovative capacity of the organization. In the area of basic design horizontal differentiation and technocratization have a positive relation with innovative capacity, whereas vertical differentiation and formalization have a negative relation. For centralization, an intermediate level is most appropriate. The integration mechanism used should allow the exchange of rich information (multi-‐functional teams). The three dimensions of knowledge acquisition

(frequency, quality and diversity) all relate positively to the innovative capacity. In the area of planning and control; personnel controls are found to have a positive influence on innovative capacity. Furthermore goals and boundaries for innovations, rewarding experimentation, knowledge sharing and organizational slack are positively related to the innovative capacity. The study is concluded

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1 Introduction

Many organizations refer to innovation in their communication with different stakeholders. In today’s world continuous innovation seems almost essential for the survival of organizations. According to Westland (2008, p. 10) innovation is no longer optional, but a necessary activity in every competitive business. Innovations are the lifelines of organizations (Cavusgil & Calantone, 2003). A secret of a successful organization is the ability to combine different types of knowledge (technological, market, organization and strategic) in order to create new products and stay ahead of the competition (Boersma, 2002, p. 14).

Successful product innovation and the ability of companies to continuously improve their innovation processes are becoming essential requirements for competitive advantage and long-‐term growth (Liao, 2007). Both competitive advantage and long term growth can be regarded as constituents for the survival of an organization. An explanation for the claims regarding the necessity of innovation can be found by looking at the economy from an evolutionary perspective. As mentioned by Jacobs (2007, pp. 77-‐97) the economic

environment is never static. In order to survive, the organization has to create value in this constantly changing environment, which essentially means adapting products and services to fit in to this environment i.e. innovate. Hence the

question arises: how can (top) management enhance the innovative capacity of their organization?

Innovative capacity refers to the ability of an organization to innovate. The larger the firms’ innovation capacity, the better is the firms’ innovation performance (Cavusgil & Calantone, 2003). Innovative capacity could be regarded as a precondition for structural innovation. Without it innovation is possible but more or less the result of chance. Innovation can be defined as an idea, practice, or object perceived as new by an individual or other unit of adoption (Rogers, 2003, p. 12). It is a product or service with a bundle of features that is new in the market, or that is commercialized in some new way that opens up new uses and consumer groups for it (Westland, 2008, p. 6). Often innovation is about

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Westland (2008, p. 8) quotes Porter about innovation being a new way of doing things (invention) that is commercialized.

Since innovating is about creating something that is new, it seems virtually impossible to describe how to do it. It is not something that can be prescribed by a set of rules that have to be followed by employees. It rather requires certain competencies such as creativity, which makes it impossible to force employees to become innovative. Boersma (2002, p. 29) states that human knowledge

(humanware) is the only creative form of knowledge. As discussed previously, in order to survive, the organization must innovate, however since innovation is intangible, the organization should try to create circumstances that make innovation possible or at least more plausible. Thus it should enhance its innovative capacity. The question on how to do this still remains open.

There are a lot of theories about organizational design and many studies about innovation, often in combination with knowledge or learning. The relation between both types of theories, leading to a comprehensive model of an organization that supports innovation (an innovative organization), seems to have received far less attention in the literature. In order to develop an innovative organization, innovation should be an integrated part of both the vision and the business of the organization (Lee, 2004). The remark that

innovation must be integrated in the organization suggests incorporating it in to the design of the organization. In other words theories about design and theories about innovation should be combined in order to support managers in creating an innovative organization.

This study aims at contributing towards such a theory by studying the relation between the essential elements of an organizational design and the innovative capacity of the organization. Although the implementation is out of scope due to limitations of the size of this study1_{,
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essential elements that will be studied, should be directly controllable and manageable by the directors of the organization.

After the methodology has been explained, the prerequisites for innovation will be investigated by studying the available literature2_{on
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these findings and literature about organizational design and control, a model will be constructed regarding the influence of organizational design on the innovative capacity of that organization. After the model has been constructed, a case study will be conducted in order to study if and how the theoretical findings are applied in a Dutch ICT company consisting of eight subsidiaries with a total of 1800 employees. Besides the case study mentioned above, a number of companies well known for their innovative capacity, and which have proven to be innovative according to the criteria of this study, will be researched using public sources in order to see how the model applies. By combining these three sources (literature, findings from the case study and information about

innovative organisations), the author aims at contributing to the existing knowledge on how directors of organisations can change essential elements in the design of their organization so that it becomes more innovative.

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2 Methodology

In this chapter the methodology of the study is explained. First the objective of the study and the problem statement are described. A preliminary conceptual model and research questions are then presented. This model will be refined in later chapters based on the theoretical exploration. Finally the limitations and boundaries of the study are discussed.

2.1 Objective

The objective of this study is to contribute to the body of knowledge regarding the relationship between the design of the organization and the innovative capacity of an organization.

Since it becomes increasingly difficult to compete in the existing markets by increasing either the efficiency or quality, innovating seems necessary for many organizations in order to survive. Being innovative however requires another kind of organization (Ghoshal & Bartlett, 1997, pp. 217-‐236) and thus research on this subject seems relevant. If the implementation of a certain design could actually improve the innovative capacity of the organization, these insights would be very useful to managers who would like their organization to become more innovative. Managers are, after all the employees responsible for designing the culture and structure of the organization so that the goals are met

successfully (Jones, 2010, p. 52). According to a study, structure is the most significant factor which can be modified and thus have an impact on the

innovation within an organisation (Prakash & Gupta, 2007). This study however was conducted within a very specific framework (manufacturing in India), using a limited set of variables of which, was not made clear why these specific

variables where chosen. Therefore more research would be needed using a wider range of variables with regards to the organizational design. In this thesis a broad range of design variables related to innovative capacity of an

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2.2 Problem statement

If innovation is important for organizations to flourish and survive, then the chance of developing successful innovation should be maximised. The organization should be designed in such a way that innovation is stimulated rather than hindered, or in other words by maximizing the innovative capacity of the organization. Currently organizational design theory regarding building an innovative organisation seems to have received less attention than would have been expected based on the apparent importance of the subject.

The goal of this study is to contribute to a theory about designing an innovative organization.

The concrete research question pursued is: ‘To what extent do organizational design characteristics have on the impact of the innovative effectiveness of the organization?’

2.3 Conceptual model and research questions

The conceptual model, which is used in this study, depicts the assumed relation between organizational design and the innovative capacity of an organization (Figure 1 Conceptual model). Put in words, changing elements of the design of an organization has an impact on the ability of an organization to innovate. This rather generic model will be extended based on a review of the available

literature surrounding this topic. The generic concept ‘organizational design’ will be elaborated by more specific design features, which can be more effectively measured and used in concrete research.

Figure 1 Conceptual model

The research questions that will be investigated derive directly from this model, firstly by defining both variables to a larger extent and then researching their relation:

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2. What are the essential elements of organizational design?

3. To what extent do the different aspects of organizational design influence the innovative capacity of an organization?

2.4 Research method

This study consists of two major parts: a theoretical exploration of the available literature and, qualitative research. For the theoretical exploration, literature on innovation, organizational design and especially about the relation between both will be used. Basically the first two research questions will be answered and hypotheses will be formulated with regards to the third research question. The conceptual model will be extended based on the results of the theoretical exploration.

The findings of the literature will be used as a starting point for the qualitative research. This research will include a case study at a large Dutch ICT company who frequently use innovation and other related concepts in their

communication. Furthermore two ICT companies will be investigated using desk research. They are both well known for their innovative capabilities and have proven to be innovative over the past few years. The choice of organizations in the ICT industry for the research part of this study is because the author is employed in this industry. It must be stipulated however that a broader application of the findings outside the ICT industry will be pursued.

By combining the information from the theoretical exploration with the findings of the qualitative research, the author aims to contribute to the theory about how to design an organization where innovation is supported at the maximum level.

2.5 Limitations and boundaries

There are certain limitations and boundaries applicable to the study at hand. These are discussed below.

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ICT related organizations. The consequence of this is that the findings cannot be generalised beyond this branch without reservations.

2. This study will focus on the design aspects and not on the cultural aspects of organizations. Although culture is sometimes regarded as part of the design, the author does recognize that culture is very relevant for innovation

however, cultural elements have been left out of the analysis. Firstly because culture cannot really be designed like other aspects such as structure.. The main focus of this study is on the controllable and manageable aspects of the construction of an organization. The choices of design will however influence the culture of the organization and culture will in turn influence the effects of the design. Given this complexity, the second reason is that studying the relation between culture and innovative capacity requires a separate study in order to meet the complexity of the subject at hand.

3. The study focuses primarily on innovation with regards to developing new products and/or services. This means that innovations with regards to management, business models and such are out of scope of this study. 4. The study is of an explorative nature, which means that hypotheses and

theories are formed. The conclusions drawn from this investigation should be tested more thoroughly in subsequent research to see whether they hold true.

5. Although measures have been taken to rule out the influence of other variables, which have not been investigated, this risk cannot be completely ignored. By investigating different and largely independent business units during the case study, and also conducting a desk research of two other companies, this risk is however reduced to a minimum.

2.6 Concepts

There are several types of actors mentioned in this study. In order to allow the reader to grasp the full meaning of what is written, the different types of actors are defined below.

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Director: administrator of an organization or business unit responsible for designing the organization/business unit in such a ways that its goals are met. The highest-‐ranking director in the organization is often referred to as the CEO. Manager: employee in charge of a group of employees. The manager is

responsible for allowing the team to perform their jobs.

Expert: Employee within the organization with extensive knowledge on a

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3 Theoretical exploration

In this chapter the available knowledge regarding the relation between

innovation and organizational design is studied. Firstly the concept of innovation and the necessity for an organization to be innovative are discussed in more detail. Since earlier research suggests a relation between learning and

innovation and between knowledge and innovation, these concepts are used as a starting point for studying the conditions for innovation. Next the relevant controllable and manageable dimensions for organizational design are

established using the earlier mentioned conditions for innovation. After this has been done, the influence of organizational design on innovative capacity is discussed. The chapter commences with a conclusion resulting in an updated conceptual model, which will be used to conduct both the case study and the desk research.

3.1 What is innovation?

As described in the introduction of this paper, innovation is a combination of invention and commercialization. Innovation could be seen as the process of transforming new ideas (new knowledge) into new products and services (Ramadani & Gerguri, 2011). The process is complex and consists of multiple phases moving from initiation to adoption and implementation (Pierce & Delbeco, 1977). Innovation does not always have to result in new products or services as stated above, but could also be something that changes the method of production which leads, for example to an increased output or reduced unit costs (Ramadani & Gerguri, 2011).

There are some related concepts that are sometimes confused with innovation. Elaborating on the differences between these concepts and innovation helps to understand the nature of innovation. The first of these concepts is invention, which is, as stated above, not the same as innovation. Invention is the creation of a new concept; innovation is reducing3_{that
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a commercial success (Ramadani & Gerguri, 2011). Innovation thus adds the practical and commercial dimension to the invention. Another related concept that is related to innovation is creativity. Amabile (1998) regards creativity as a function of three components: expertise, creative-‐thinking skills and motivation. Creativity put simply is thinking about new ideas; innovation also includes commercializing these ideas. Finally innovation is not the same as science: science is the conversion of money into knowledge. Innovation is the conversion of knowledge into money (Ramadani & Gerguri, 2011).

There are various degrees of innovation, ranging from incremental innovation to radical innovation. The criterion is the degree to which something differs from something that already exists. Incremental innovation is about improving current routines in order to enhance for example reliability or reduce costs. There is no radical change with current routines but rather a new combination of the existing routines (Volberda, 2004, pp. 90-‐92). In this case the organization keeps doing more of the same things but with (somewhat) better results (Ramadani & Gerguri, 2011). Radical innovation on the other hand is about letting go of existing routines and commitments and fundamentally developing new ones (Volberda, 2004, pp. 93-‐95). This type of innovation changes the

fundamentals of business, creating a new industry and a new avenue for creating extensive wealth. (Ramadani & Gerguri, 2011). Between these two extremes other types of innovation can be positioned. Ramadani and Gerguri (2011) distinguish between additive innovation, which is about exploiting already existing resources more fully, and complementary innovation where something new is offered which changes the structure of the business.

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products and services will commoditize due to globalization, which means that competition will primarily be based on price. When an organization is not the cheapest producer, its only option is to differentiate its products, and this usually requires innovation (Westland, 2008, pp. 3-‐9). Even though companies in

developed economies are seldom the low-‐cost producer (Westland, 2008, p. 9), most companies are still developed for continuous improvement, rather than for discontinuous innovation (Lee, 2004). When using the concept innovation in this paper, innovation is meant on the radical side of the earlier mentioned spectrum rather than incremental innovation.

3.2 What are the conditions for innovation?

In the literature concepts such as learning and knowledge are often related to innovation. The importance of cooperation between the people in the

organization is also frequently mentioned, especially with regards to knowledge transfer and knowledge integration. This paragraph explores the conditions for innovation from a knowledge and from a learning perspective. In consequent paragraphs these conditions are related to controllable and manageable aspects of an organizational design. The conditions influence the innovative capacity through the design of the organization. Thus the design of the organization creates the conditions for innovation, which in turn enhances the innovative capacity of the organization. Firstly the importance of knowledge and knowledge acquisition for innovation will be discussed. Based on these findings it is

concluded that knowledge management is important for innovative companies but that this is not easy to implement, especially when tacit knowledge is concerned since this knowledge is implicit and therefore difficult to exchange. Argued is that experts are needed to process the knowledge in their area and that the role of the organization is to facilitate the cooperation between experts on different areas so that the new combinations can be made.

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primary sources of value is knowledge (Grant, 1996; Yang, 2005;Cavusgil & Calantone, 2003). This makes the gathering and usage of (new) knowledge very important. Innovation is a product of organizational learning. Learning

organizations continuously acquire, process and disseminate knowledge about markets, products, technologies and business processes (Lee, 2004). The

management of knowledge and the management of innovation are highly related. Knowledge is the core component of innovation (Goh, 2005). Especially in a fast changing environment the manipulation of knowledge resources is critical (Eisenhardt & Martin, 2000).

Knowledge can either be developed within organizations (for example through R&D), acquired from the environment, or a combination of both. This distinction however, is rather artificial. On one hand even internally developed knowledge will be based on existing knowledge acquired from the environment. On the other hand an innovation could be regarded as new knowledge, meaning that the organization is never just applying acquired knowledge, but also creating

knowledge. Either way, external sources of knowledge are often critical to the innovation process, and the ability to exploit external knowledge is thus an important component of innovative capabilities (Cohen & Levinthal, 1990).Uzzi (1997) mentions in this respect the positive effects of being part of an integrated network, where fine-‐grained tacit knowledge is exchanged, on the acquisition of new knowledge. In a study about the potential sources of innovations, it was found that most CEO’s (76%) ranked business partner and customer

collaboration as top sources for new ideas instead of R&D. They also mentioned that unexpected market or industry structure changes could provide potential innovative opportunities (Ramadani & Gerguri, 2011). Research, which found a significant effect of market knowledge on product innovation performance, seems to confirm this (De Luca & Atuahene-‐Gima, 2007). Based on the above, the conclusion seems justified that an innovative organization should be open for external information and should even actively gather it.

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learning of new knowledge. This prior knowledge consists of both skills (a shared language) and knowledge of scientific or technical developments in a certain field (Cohen & Levinthal, 1990; Jensen, Johnson, Lorenz, & Lundvall, 2007). To be truly innovative, the available knowledge has to be both extensive and varied. New products often derive from the combination of different areas of knowledge. (Volberda, 2004, p. 140). Knowledge diversity facilitates the

innovative process because novel associations and linkages can be made (Cohen & Levinthal, 1990).

However since the information processing capability of individuals is limited, it is necessary that individuals specialize in a particular area of knowledge (Grant, 1996). This limitation on the information processing capability is known in (psychological) literature as the principle of bounded rationality. Humans are by definition limited in problem solving. They try to use ratio but are not always able to do so. This limitation can partly be overcome by experience and by storing possible solutions in their memory to retrieve them when necessary (Leyden, 2000, pp. 214-‐215). Specialization (having a lot of experience and knowledge in a certain area) seems necessary to overcome the problem of bounded rationality, but on the other hand, it is a combination of several knowledge areas (i.e. specializations), which are often required for innovation. The logical consequence of this paradox seems to be that cooperation between specialists with different areas of knowledge is necessary for increasing the innovative capacity. The facilitation of this cooperation can be done by the organization. Firms can create conditions under which multiple individuals can integrate their specialist knowledge. In other words the firm is a knowledge-‐ integrating institution (Grant, 1996). It has to offer a structure of communication between the external environment and the organization, as well as among the subunits within the organization itself (Cohen & Levinthal, 1990).

This communication structure is sometimes referred to as knowledge

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practice of creating, acquiring, capturing, sharing and using knowledge. Boersma (2002, p. 37) mentions several definitions including ‘knowledge management is the coordinated control of all types of knowledge with human knowledge as a central source’. Yet another definition of knowledge management is: ‘a generic process through which organizations generate value from knowledge’ (Goh, 2005).

There is a distinction between explicit knowledge and implicit knowledge. Explicit knowledge is about the ‘what’ and is based on universally accepted and objective criteria. Implicit knowledge or tacit knowledge is non-‐verbal, intuitive and unarticulated; it is about ‘know how’ and difficult to interpret. Explicit knowledge can easily be transferred, while implicit knowledge cannot (Cavusgil & Calantone, 2003; Grant, 1996). Explicit knowledge can often be aggregated through the use of a common language such as statistics, which makes transfer even easier (Grant, 1996). Implicit knowledge can only be shared by making it explicit or by socialization (Nonaka, 2007). This distinction between explicit and implicit knowledge should not be seen as a dichotomy, but rather as a spectrum with explicit and implicit knowledge as poles on opposite ends (Cavusgil & Calantone, 2003). In the article of Jensen et al. (2007) the different types of knowledge in this spectrum are know-‐what (explicit), know-‐why, know-‐how and know-‐who (implicit). It has been suggested that new product development requires both explicit and tacit knowledge (Yang, 2005; Nonaka, 2007). On the other hand, it could be so that implicit knowledge might be more important for innovation because it is harder to transfer and hence more unique, rare and difficult for competitors to replicate (Cavusgil & Calantone, 2003).

The distinction between explicit and implicit knowledge is important with regards to the implementation of knowledge management systems. The more explicit certain knowledge is the more the codification strategy can be used. This is basically storing the knowledge in a database, in such a way that it is

accessible (Liao, 2007). Implicit knowledge by definition cannot be stored as described above. It has been suggested to convert this implicit or tacit

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inefficient approach (Grant, 1996). Others consider this a key process in creating new knowledge (Boersma, 2002; Liao, 2007). Besides converting the implicit knowledge, the strategy of personalization (or socialization) seems useful. This is the process of sharing the knowledge by the person who developed it through person-‐to-‐person contacts (Liao, 2007). It is important that the organization does not just facilitate the transfer of knowledge, but rather aims at the

integration of knowledge (Grant, 1996) because in the end it is about applying the combined knowledge for commercial use (i.e. innovation). Knowledge integration depends on how individually held knowledge is integrated by the individual (Yang, 2005). Mechanisms should therefore be devised for integrating individuals’ specialized knowledge (Grant, 1996). Thus useful knowledge has to be spread and ideas should be used. Complementary yet independently held knowledge must be combined (Yang, 2005). This view is supported by the research done by De Luca and Atuahene-‐Gima (2007) who found that the effect of cross-‐functional collaboration on innovation was mediated by knowledge integration mechanisms (KIM’s). They define KIM’s as structures and processes, such as the use of documentation, information-‐sharing meetings, analysis of successful and failed projects, project reviews, and briefings by external experts and consultants, that ensure the capture, analysis, interpretation, and

combination of knowledge within the firm. Both the codification strategy and the personalization strategy had a positive effect on innovation (Liao, 2007)

The conclusion of the above is that knowledge management and especially knowledge acquisition and knowledge dissemination play an important role in innovation. New combinations of knowledge can be used for developing new products or services. Both explicit knowledge and implicit knowledge play an important role in this process. Due to cognitive limitations, specialists within a specific field are necessary. But since innovation often derives from the

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following paragraphs explore which design elements a director can use to accomplish this.

3.3 How can organizations be designed?

In this paragraph organizational design will be defined without explicitly

referring to innovation. The purpose is to investigate which choices can be made with regard to the design of an organization. In the following paragraph this information will be used to study how a certain design choice can facilitate innovation.

According to Galbraith (1974) the goal of organizational design is to create mechanisms that permit coordinated action across large numbers of

interdependent roles. Jones (2010, p. 31)defines organizational design as the process by which managers select and manage aspects of structure and culture so that an organization can control the activities necessary to achieve its goals. Since the cultural aspect of organizational design is out of scope, the emphasis will be placed on the structure of the organization, which includes the planning, & control systems and process regulation.

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two categories of design choices he mentioned, are used to give structure to the theory of organizational design4_{:
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-‐ Basic design

the formal distribution of responsibilities and authorization amongst the members of the organization resulting in a certain shape or configuration.

-‐ Planning & control systems

systems and procedures to manage both the priorities and the results of aspects like budget, HRM and information within an organization.

3.3.1 Basic design

One of the first basic design choices of an organization is allocating people and resources in to organizational tasks, roles and subunits. This includes the establishment of tasks and the authoritive relationships. This is known as differentiation. Horizontal differentiation refers to task division and vertical integration to the hierarchy. The greater the horizontal differentiation within the organization, the more people become specialized and productive (Jones, 2010, pp. 114-‐120). The grouping (i.e. horizontal differentiation) could be based on function, product or service or customer group (Volberda, 2004, p. 73). Vertical differentiation can be distinguished between a flat (a few hierarchical levels) and a tall hierarchy. Choosing a number of levels and managers is important because it influences the required communication, motivation and bottom-‐line

profitability (Jones, 2010, p. 145) The differentiation of an organization can be represented graphically in a so called organization chart(Volberda, 2004, pp. 136-‐137) .

The next design choice is selecting the integrating mechanisms. The horizontal differentiation described above leads to specialization. However, specialization reduces communication between the subunits and prevents learning, especially

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since specialists often do not have a common language. In order to avoid these communication problems, the functions have to be integrated (Jones, 2010, pp. 120-‐121). Jones (2010, pp. 122-‐125) mentions eight integration mechanisms with increasing complexity: hierarchy of authority (higher ranking manager integrates between subordinates), direct contact (manager of subunits meet), liaison role (specific manager is responsible for coordinating with managers from other units), task force (temporary committee for coordination), team (permanent committee for coordination), integrating role (new role to coordinate between more subunits) and an integrating department (new department to coordinate between more subunits). Mintzberg (1980) also mentions the standardization of work processes, standardization of outputs and the standardization of skills as a coordinating mechanism. Jones also mentions standardization, but not specifically as one of the integration methods, but rather as a separate design choice, or in his words a design challenge. This challenge is about balancing standardization and mutual adjustment, in other words the balance between following rules and using judgement (Jones, 2010, pp. 128-‐ 130). The concept of formalization is highly related to the standardization. Formalization is the degree to which a codified body of rules, procedures or behaviour prescriptions are developed in order to handle decisions and work processing, (Pierce & Delbeco, 1977) or the degree to which jobs within the organization are standardized. If a job is highly standardized the job incumbent has a minimum amount of discretion over what is to be done, and when and how (Liao, 2007). There must be an appropriate balance between differentiation and integration in order to coordinate the activities within an organization effectively (Jones, 2010, p. 125).

Another important feature of the design is the centralization or decentralization of the authority to make important decisions. In a centralized organization this authority is given only to managers found at the hierarchical top of the

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permitting employees minimum input in their work. The goal of decentralization would be that parts of the organization become self-‐reliable which also means that staff departments are dismantled (Boersma, 2002, p. 7).

A less often mentioned dimension of organizational design is technocratization. This is defined as the concentration of technical and scientific knowledge (Liao, 2007).

3.3.2 Planning & control systems

Planning and control systems are also referred to as management control systems. Management control includes all the devices or systems managers use, to ensure that the behaviour and decisions of their employees are consistent with the organizations objectives and strategies. There are three reasons why these systems are necessary: 1. Lack of direction, in other words employees do not always know what is required from them, 2. Motivational problems and 3. Personal limitations. Good control leads to a higher performance but the

implementation of control systems also comes with a cost. When deciding which management control systems to implement, a balance must be found between revenues (less control loss) versus the cost of implementing control (Merchant & van der Stede, 2007, pp. 3-‐11). The systems to plan and control can either be simple or very extensive. When the systems are very extensive the self-‐direction and the potential for flexibility of individual employees is limited (Volberda, 2004, p. 181). Employees will have less opportunity to gather information from the environment and act upon this information. Some indicators to measure whether systems are either simple or complex are:

• The extent to which the setting of goals and priorities are quantified and regulated;

• The extent to which the input in control systems is structured and thus does not allow for the input of less structured and new data;

• The extent of control and evaluation of results (Volberda, 2004, pp. 181-‐183).

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Instead of implementing systems it is also possible to avoid control problems. This can be done by activity elimination, which means handing over the activity to a third party. Other ways are automation, risk sharing and centralization (Merchant & van der Stede, 2007, pp. 12-‐15).

Management control systems can, according to Merchant and Van der Stede (2007)be roughly divided in to result controls, action controls, personnel

controls and cultural controls. Result controls are about rewarding performance. They influence action because they cause employees to think about the

consequences of the actions that they take. These are often financial and

implemented in combination with decentralization. Action controls are the most direct form of management control because the actions themselves are

controlled by behavioural constraints, preaction reviews, action accountability or creating redundancy. Personnel controls build on employees’ tendencies to control and motivate themselves. Three methods are selection and placement, training and job design and provision of necessary resources. Finally Cultural controls are designed to encourage mutual monitoring by creating a shared culture. This can be done for example by drawing up a code of conduct or using group rewards (Merchant & van der Stede, 2007, pp. 25-‐92). More or less the same types of systems are mentioned by Ouchi (1979). He distinguishes between the measurement of behaviour, the measurement of output and clan control. Clan control is similar to cultural controls.

The conclusion is that there are a lot of choices to be made when designing an organization, ranging from the organization structure to the management control systems used. It is also clear that there is no single correct design. In the next paragraph the design choices that influence the innovative capacity of the organization are discussed.

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3.4 What influence does the organization design have on innovative capacity?

In this paragraph the relation between organizational design and the innovative capacity of an organization is examined. The starting point for this examination is formed by both the conditions for innovation from a knowledge and learning perspective and the design choices, which have been described in previous paragraphs. Volberda (2004, p. 77)states that success does not depend on one structural variable but on the combination of all structural variables. Therefore it is important that the design as a whole is viewed. This seems to be confirmed by Ramadani and Gerguri (2011) who mention that innovation needs a system since informal channels are untidy and inefficient.

As discussed before, innovation requires the presence of specialists to process the knowledge needed for innovation. Since innovation often takes place by combining knowledge from different areas, these specialists must cooperate. Furthermore the process of innovating cannot be prescribed since it is always about creating something new and novel. The consequence is that the innovative organization must support the cooperation of experts, whilst allowing them maximum freedom to do what they deem fit in order to get the job done. After all they possess the necessary knowledge and skills that their managers do not (Grant, 1996), making it impossible for the managers to decide what is right. Managers have after all a coordination and facilitating role and are more

generalist than specialist. This means that they possess less information than the specialist and hence are less capable of making decisions regarding the content. The consequences for the choices in design and management control systems are described hereafter. Although part of the basic design is the interaction with the external environment, this part of the basic design is discussed separately given the importance it has for innovation.

3.4.1 Basic design

The first design feature that will be discussed is the required amount of

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relation between horizontal differentiation and innovation is confirmed by previous research (Prakash & Gupta, 2007). According to Pierce and Delbeco (1977) horizontal differentiation allows for constructive conflict, absence of a single professional ideology and cross-‐fertilization of ideas.

This large degree of horizontal differentiation requires an integration mechanism. The question is, which mechanism contributes most to the

innovative capacity? Since developing novel products and services is a complex task with a high level of uncertainty, the organization should rely upon high-‐ interaction, non-‐standardized coordination mechanisms (Grant, 1996).

As mentioned before the integration mechanism should allow specialists to share their knowledge and work together in order to develop new products and services. In other words there should be a high degree of lateral communication (Lee, 2004). Direct contact seems to be the best mechanism because it allows for the sharing of (tacit) knowledge while a hierarchy for example does not (Grant, 1996). This direct contact should not be a meeting between managers however, like mentioned by Jones (2010, p. 122), but rather frequent interaction between the experts themselves (Grant, 1996). Many studies mention multidisciplinary teams as a central integration mechanism (e.g. Eisenhardt & Martin, 2000; Grant, 1996;Jensen, 2007; Lee, 2004; Goh, 2005; Ghoshal & Bartlett, 1997). Amabile (1998) also support this view in her article about creativity and innovation by stating that ‘one common way managers kill creativity is by assembling