How organization structures affect the success of open innovation has been illustrated by Laurier’s Executive Masters in Technology Management in a short paper (which is no longer available online). In this paper, the authors focus on the impact on open innovation performance within vertically and horizontally integrated companies.
Vertical integration is a corporate structure whereby product development through a supply chain is controlled/owned by one company. This structure allows the company to design and manufacture components, subsystems, and final product assembly before selling it to customers. GM or Ford’s power train systems are vertically produced because the companies perform the aluminum casting of the engine blocks and pistons, through to the assembly, and integration into the vehicle.
In horizontal integration the business focuses on one aspect of the value chain and integrates all product offerings at that stage of the supply chain. A successful example is Dell Computers; the company offers a full range of products but focuses on a thin band of the supply chain, while it continuously interacts with a dynamic supply chain.
Horizontally integrated companies will leverage their market position and network of suppliers/clients to become the nexus of the evolving open innovation network. Suppliers and small actors in the innovation network will submit ideas to the company. In this way, central companies like Dell can greatly increase the number of ideas coming into their product development funnel, while they simultaneously can decrease their R&D costs. They can utilize their value chain position to attract the type of ideas they want and commercially leverage the best ideas by integrating them into their new products.
Vertically integrated companies normally have strong product development capabilities. For instance, Tetra Pak has 60 years of experience leading the industry in cardboard containerization and DuPont has a core expertise in commercializing chemistry breakthroughs. Traditionally, these companies have been working in a closed innovation fashion, based on strong internal capabilities, but due to market forces they are now embracing open innovation.
These firms have a different way of profiting from open innovation compared to the horizontally integrated companies.
These firms have a different way of profiting from open innovation compared to the horizontally integrated companies: they may focus on early stage technologies via corporate venturing initiatives, research collaboration with universities or research labs, or they form strategic alliances and participate in informal innovation networks. Outside-in open innovation allows these companies to benefit from a wealth of ideas, but they can at the same monetize on these technologies through alternative / external paths to market.
It is not our intention to compare the effectiveness of the use of open innovation in both types of integrated companies. It is however obvious that successful open innovation creates different opportunities and has to be structured differently in both types of firms. It also implies that open innovation is relevant for different types of firms and industries as long as the open innovation is structured in an appropriate way to achieve firms’ innovation strategy objectives.
In more general terms, it is tempting to examine under which organizational conditions open innovation can flourish. Some authors suggest that some organizational structures may facilitate open innovation and others may hinder it. Naqshbandi and Kaur (2012) for instance claim that:
“An informal organizational structure is positively related to the creation of open innovation by an organization. A formal organizational structure is negatively related to the creation of open innovation by an organization.”
This statement provides a black and white picture indicating that formal structures create problems for the smooth implementation open innovation projects. Yet, the question is whether it is a productive to look which type of organization is better for open innovation. We come back on this question when we provide some insights from the MOOI-forum discussion (see below).
Other authors have been more nuanced in their approach. Linda Beltz, came up with the following overview of organizational structures for open innovation when she discusses the benefits and drawbacks of centralized and decentralized ways of organizing open innovation.
Source: Linda Beltz, organizational structures for open innovation
Both centralized and decentralized ways of organizing open innovation have their pros and cons as presented in the table above. In most cases, companies have a central organization of open innovation at the beginning. It then becomes more like a hybrid structure once companies understand that they need to impact more people in order to bring openness into the firm’s innovation DNA. A lot of the companies move towards hybrid models as their organizations have matured at open innovation.
Both centralized and decentralized ways of organizing open innovation have their pros and cons.
The centralized organization is the easiest to manage, but it is sometimes difficult for the business units to feel enough ownership. The author concludes that having some form of hybrid is probably the best, as it provides ownership from the businesses, yet it gives a center of expertise. If business buy-in is not an issue, it is more efficient to have a centralized function since in this way you open innovation expertise is used optimally – no need for duplication across the organization.
The MOOI-forum discussion on this topic was inspiring and refreshing. I focus on a few topics only. Giving an overview of all the topics would lead me too far.
Few open innovation experts would agree with a simple, linear link between organizational structure and the success of open innovation. During the MOOI-forum some participants claimed that the vast majority of organizations are formally organized. Formal structures pose indeed a lot of difficulties for implementing open innovation.
Yet, according to them, the real question is not which type of organization is better for open innovation, but how we design and run open innovation programs in structured and formally organized companies. It is only possible to design and run open innovation within structured and formally organized companies if open innovation is a strategic goal and when it is driven by explicit leadership.
Trying to adapt open innovation to fit existing organizational structures can only lead to failure.
Trying to adapt open innovation to fit existing organizational structures can only lead to failure. We have to look for other approaches to accelerate open innovation adaptation. Open innovation can only be successful within a fertile organizational structure and a collaborative culture.
Moreover, formal organization of open innovation does not necessarily imply that this is hierarchical way of organizing it. We can have formal structures that are not hierarchical and extremely bureaucratic (e.g. matrix type structures). There is no evidence, which formal types of organization fit best as archetypes for open innovation, but it is obvious that we should think in a nuanced fashion about the distinction between formal and informal structures. Yet, many formal structures are just not workable in practice for implementing open innovation.
Probably the only way to get open innovation implemented at the start is to ignore the structure and processes and using personal networks to do so. One member referred to one company that has a formal structure and a parallel informal structure and managers move between the two, following the first for compliance/reporting and using the later for commitment/ results. In this way, we find ‘hybrid structures’ which have elements of both formal and informal.
In sum, “hybrid structures” combining formal and informal or / and centralized and centralized structures are important to get open innovation implemented successfully in organizations. These new, hybrid structures thus deserve much more attention from both open innovation practitioners and scholars.
In other words, implementing open innovation successfully also requires organizational innovation: new structures are required for open innovation to thrive, rather than simply survive. MOOI-forum members provided examples of semiformal arrangements such as BP’s Peer Assist Program, Nokia, Google’s “grouplets” and Johnson & Johnson’s “Stretch for Success”. Another successful example is Danone’s communities of practice: it is an internal ‘online’ platform where employees could exchange ideas, answer each others’ questions etc. on a voluntary basis. Engagement rates were very high. Siemens is moving in the same direction. Hence, the ‘semiformal’ can take a life of its own, and might eventually become formal – which again, may not be the best thing.
Some members were even more critical. It is not unusual that open innovation does not happen as a result of defined processes and organizational structures but in spite of them, that is, new things only happen because brave souls go against the status quo! Internal structures and processes vary by BU, are complex and volatile and poorly adapted to the reality of what needs to happen so that they are universally by-passed. Systems mandated to support these processes add no value to those in the front-line and are primarily designed for ‘command & control’ and not to ‘enable’.
Implementing open innovation in this environment can only be done by developing and using strong personal networks to make things happen in spite of the system. Is this an extreme scenario? Not really, it is more common than we would imagine. We may have to change our views on what is ‘legitimate’ and recognize ‘subversion’ for what it usually is – an honest attempt to do something that needs to be done but prevailing structures, processes and culture prevents from happening.
It is however obvious that successful open innovation in the end requires a smooth integration of open innovation in the daily business.
It is however obvious that successful open innovation in the end requires a smooth integration of open innovation in the daily business. Just having a separate open innovation process will not be enough. Open innovation has to become part of the corporate innovation DNA. Subversion and personal networks may play a crucial role during the introduction and the first phases of open innovation, but in the end these factors will become less important and open innovation should be part of the daily business, which in turn may entail risks of formalization and rule based – instead of opportunity based -thinking.
There was agreement among the MOOI-forum members that structure is most important and that process is something that emerges rather than being pre-defined, an almost impossible task at the beginning. Tools and data play a key role in rolling out open innovation and are more important than process as they provide the foundations for generating and sharing new insights that are essential to the OI activity.
By the MOOI-team:
Prof. Wim Vanhaverbeke, Hasselt University, ESADE& National University of Singapore
Prof. Henry Chesbrough, University of California, Berkeley &ESADE, and
Dr. Nadine Roijakkers, Hasselt University.
Read more about the MOOI team members and the project.
These are just a few thoughts that have been developed by forum members in an interactive way. There were other interesting threads of thought but it would drift us too far away from the current theme of the month. The discussions developed in the forum show that high quality discussions could be generated online between knowledgeable people that share the same passion.
We hope the OI themes are especially valuable to practitioners working inside organizations. You’re invited to share the daily challenges and experiences you face in the workplace and discuss possible solutions.
Once all themes are discussed in the forum, the MOOI-team will write an e-book that explains the best practices in open innovation management.
Click here to find more information about the MOOI-forum or to join it.
Naqshbandi, M and Kaur, S. (2011); A study of Organizational Citizenship Behaviours, Organizational Structures and Open Innovation, International Journal of Business and Social Science, 2 (6), 182-193.
Beltz,L. (2011) organizational structures for open innovation, http://www.15inno.com/2011/09/02/organizationalstructures/