Managing the Efficiency‐Flexibility Tension in Innovation: Strategic and Organizational Aspects

This special issue is based on papers presented at the 8th International CINet conference in Gothenburg, Sweden, 7–11 September 2007. The Continuous Innovation Network (CINet) is an international network constituting a platform for research and knowledge sharing in the field of continuous innovation. The articles in this special issue were selected among the 69 papers presented at the conference. A total of 13 papers were selected and invited to this special issue, which after the review process were reduced to the five articles that follow this editorial introduction. The overall theme of this special issue is a central challenge posed to many of today's firms, namely how to simultaneously handle flexibility and efficiency in innovation. This is a relevant question for research on continuous innovation, where topics related to exploration and exploitation of knowledge (March, 1991) have a central position. When focusing on how firms can manage their innovation activities in a way that combines operational excellence with long-term innovation and renewal, conflicting demands regarding strategy and organizing stemming from arguably incommensurable objectives rise to the surface. Much of the literature addressing new product development activities of a ‘steady-state’ innovation type deals primarily with efficiency in terms of cost and lead time reduction in development projects, e.g., through the use of stage-gate models and lean principles (Cooper & Edgett, 2008). At the same time, it is also argued that radical, discontinuous or breakthrough innovations in many cases are fundamental for long-term survival and success. These types of innovations include more substantial components of newness, uncertainty and ambiguity, and require radically different prerequisites compared with traditional new product development projects of a more incremental nature. In fact, the tools and methods used to search for, select and implement steady-state innovations may act as obstacles to radical and discontinuous innovations. While the need to balance these different innovation types is not new, the competitive landscape of today forces firms to reach new levels of performance for both categories of innovation. The result is a delicate situation that many firms find themselves in, having to deal with long-term demands on renewal, change and flexibility in parallel with short-term needs for efficiency and profitability. Researchers as well as practitioners have had to deal with this problem for a long time, even to the point that it has become recognized as an unavoidable managerial trade-off or dilemma. However, as firms face increased pressure for cost reduction and at the same time need to radically change and improve products and processes, this trade-off is becoming increasingly difficult to handle, to the extent that there is a need to reconsider earlier suggested solutions and embrace new management ideas that can shift performance beyond the perceived trade-offs (Magnusson & Martini, 2008). That companies face problems when trying to attend to both flexibility and efficiency is, as mentioned earlier, definitely not new, and was noted already by Thompson (1967), who labelled it the ‘paradox of administration’. Several other authors have subsequently treated this specific trade-off (e.g., Adler, Goldoftas & Levine, 1999), sometimes using the terms dynamic and static efficiency (Ghemawat & Ricart I Costa, 1993). Surprisingly enough, there is little evidence for the established trade-off postulate (Adler, Goldoftas & Levine, 1999), and a number of companies over substantial periods of time have managed to defy the trade-off and remain both flexible and efficient. A question that arises from this observation is how companies that move beyond the trade-off actually manage to do so, and also what perspectives, frameworks and models can be applied in order to understand and contribute to this practice. The articles in this special issue address a number of aspects that are central to this question. Before turning to their specific contents, we will, however, outline the challenges involved in more detail through an exposition of some developments in the fields of strategic management and organization studies that can help us delineate some of the managerial challenges. The idea that a central part of strategic management is to choose between different incompatible alternatives, or to make trade-offs between them, has a long tradition. In the strategy field, Porter (1980) points out the risk of getting stuck in the middle that firms run if they do not focus exclusively on a single basic strategy, such as, e.g., differentiation, cost leadership, or a focus strategy. Similar ideas have also been presented in the resource-based view of strategic management, in which the distinctiveness of resources has been advanced as a key source of competitive advantage. Also in this stream of strategic management theory, the trade-off between flexibility and efficiency is highlighted. As Grant (1991, p. 123) puts it: ‘there may be a trade-off between efficiency and flexibility. A limited repertoire of routines can be performed highly efficiently with near-perfect coordination – all in the absence of significant intervention by top management. The same organization may find it extremely difficult to respond to novel situations.’ Over time, this has been questioned and a more dynamic and processual view of strategic management has started to gain ground. In the more recent writings on dynamic capabilities (Teece, Pisano & Shuen, 1997; Eisenhardt & Martin, 2000; Teece, 2007), the emphasis on change in order to continuously match firm capabilities with a changing business environment has led to a need to value the adaptation and transformation of resources and capabilities over time. In the light of this development, the flexibility of resources also holds a potential value for firms, as underscored by Sanchez (1993, 1995) and Boccardelli and Magnusson (2006). The resulting need for a split strategic focus, taking into account both flexibility and efficiency is in line with the suggestion of Brown and Eisenhardt (1997) that firms competing in relentlessly shifting business environments need to develop semi-coherent directions, and follow and realize seemingly incompatible goals. One way of complementing established strategic management models would be to combine them with ideas from the field of entrepreneurship, where potentially useful models are emerging. Turning early-stage companies into established and successful firms requires a sequence of different changes to the bundles of resources and capabilities, which in many cases are driven by, or at least co-aligned with the evolution of business models, strategies and competitive dynamics (Teece, Pisano & Shuen, 1997; Boccardelli & Magnusson, 2006). With regard to organizing for flexibility and efficiency, we can first of all note that most established organizing principles are based upon an explicit focus on efficiency, and that these principles in many cases constitute an obstacle to innovation (Lester, Piore & Malek, 1998). On the other hand, the organizing solutions suitable for innovation may not attend sufficiently to efficiency. A common suggestion is therefore that these different types of activities should be organizationally separated in order to allow for the existence of differentiated sub-units applying different organizing principles within firms (see e.g., Christensen, 1997). Surprisingly, few attempts have been made to come up with principles and guidelines that can help managers create organizations that make it possible to combine flexibility and efficiency. One well-known exception is the work of Tushman and O'Reilly (1996), who use the notion of the ambidextrous organization, initially introduced by Duncan (1976). To remain successful over a long period, organizations must handle both radical and incremental change. The difficulty is that success tends to cause structural and cultural inertia, which often leads to failure when the environment changes. Therefore managers must periodically destroy the organizations that they have created in order to be able to reconstruct them in a way that better suits the changed situation (Tushman & O'Reilly, 1996). Ambidextrous organizations build in contradictions by taking the future as well as the present into consideration. Hence, the management of continuous streams of innovation is about the management of contradictions, a central one being that between flexibility and efficiency. Tushman and O'Reilly (1997) argue that management needs to accept and embrace these contradictions, or paradoxes, and they propose the concept of juggling as a metaphor for the necessary simultaneous handling of several inconsistent organizational architectures and cultures. While this analysis indicates the need to deal with both innovation and efficiency, it is slightly surprising to find that the authors propose a rather traditional way for how this should practically be done. During periods of incremental change, organizations require an efficiency-oriented focus. The resulting knowledge systems, however, tend to become ingrained and taken for granted. There is thus also a need for entrepreneurial parts in an organization, which result in new experience bases and knowledge systems. The coexistence of these traits requires that ‘the management team must not only protect and legitimize the entrepreneurial units, but also keep them physically, culturally, and structurally separate from the rest of the organization’ (Tushman & O'Reilly, 1997, p. 171). The conclusion that isolation of new innovation initiatives is a fruitful way to overcome large size and conservative culture is a suggestion that is far from new and has not always shown good results (Dougherty & Hardy, 1996). Hence, even though the analysis made by Tushman and O'Reilly (1997) is insightful and their suggested approach appears to be promising, it leaves both researchers and practitioners wanting as it does not try to move beyond the perceived trade-off, something that becomes fundamental if we instead attend to the flexibility-efficiency issue as a tension, duality or a paradox (Magnusson & Martini, 2008). In terms of innovation management practice, it can also be noted that there is a need for more explicit solutions not only at an overall firm level, but also at departmental and project levels. The articles in this special issue contribute to this need by addressing the flexibility-efficiency tension at different levels, ranging from business and technology strategies to project management and innovation audits. With the presented setting in mind, we will now turn to a brief outline of the individual articles and their contributions. Christian Sandström and Mats Magnusson at Chalmers University of Technology have, together with Jan Jörnmark at the University of Gothenburg, investigated mechanisms at work when incumbents try to react to disruptive innovations. In the article ‘Exploring Factors Influencing Incumbents’ Response to Disruptive Innovation', the authors focus their attention on the role of heterogeneity of incumbents as a factor to consider when trying to understand the effects of radical technological changes. In particular, they explore how the ability of incumbent firms to respond to disruptive innovations is influenced by their size and strategy. The ability to benefit from disruptive innovations has traditionally been assigned to entrepreneurial firms, which appear more capable of embracing discontinuities without locking their innovation options within the realm of the existing domains. Established firms, on the other hand, tend to lose out when faced with technological discontinuities. By conducting an in-depth case study of Hasselblad, a Swedish manufacturer of high-end professional cameras, this article explores some particular challenges that a firm with resource constraints and limited size encounters when its market is subject to radical discontinuities. Moreover, it indicates the usefulness of collaborations with external parties as a means to overcome the problems faced by incumbents when responding to a technological disruption. The observations from the study underline some earlier recommendations to management regarding how to deal with discontinuous innovations, but the article also highlights the need to carefully consider the heterogeneity of incumbents when elaborating upon suitable responses. The article ‘Re-orienting the Corporate Entrepreneurial Journey: Exploring the Role of Middle Management’ by Astrid Heidemann Lassen, Brian Vejrum Waehrens and Harry Boer at Aalborg University explicitly addresses the balancing act between exploration and exploitation in terms of the perceived difficulties for technology-based firms to catch up with market changes. From a theoretical point of view, the two notions are well known; however, there is relatively little known about how this sense of balance is actually achieved. The article points to the role of middle managers, who hold a central position in the firm and also simultaneously have influence. As argued in the article, middle managers are crucial for the negotiation between planned and emerging activities and their subsequent decisions – a social act and very often beyond their formal assignments and responsibilities, yet urgent. Furthermore, middle managers have key roles in reconciling market and technological knowledge, as well as negotiating and sanctioning ideas, and thus hold a central role in creating dual organizations. Nevertheless, this important role for middle managers is not given, but must be achieved through continuous development and implementation activities. Eric Brun from the University of Stavanger and Alf Steinar Sætre from the Norwegian University of Science and Technology in Trondheim address the management of ambiguity in innovation activities. In their article ‘Managing Ambiguity in New Product Development Projects’ they investigate how ambiguity, the existence of different interpretations of one and the same cue, can be handled in the early stages of development projects. Drawing on four case studies of product development projects in medical device companies, they illustrate a number of aspects that are not dealt with when focusing on the reduction of uncertainty. While the differences in dealing with ambiguity and uncertainty, respectively, have been outlined in earlier works, the contribution of Brun and Sætre lies in proposing a structured model that facilitates the understanding of what gives rise to ambiguity in innovation and how it is manifested. Even more importantly, they also outline how ambiguity can be managed to strike a balance between the needs for flexibility and operational efficiency in new product development projects. A key to doing so is to focus not only on the reduction of ambiguity, but its deliberate management, something that can imply that ambiguity at times is sustained or even increased. The proposed ideas are important for project management as they constitute a complement to the more established approaches, and open up for a more nuanced balancing of flexibility and efficiency at the level of the single innovation project. Lars Bengtsson and Robin von Haartman from the University of Gävle have, together with Mandar Dabhilkar at the Royal Institute of Technology in Stockholm, written the article ‘Low-Cost vs. Innovation: Contrasting Outsourcing and Integration Strategies in Manufacturing’. This article offers an investigation of the influence different outsourcing strategies have on the innovative performance of firms. A distinction is made between, on the one hand, low-cost-oriented outsourcing and, on the other, innovation-oriented outsourcing. Using data from a survey of a large number of Swedish manufacturing companies, the authors find that firms are faced with a trade-off between innovation and cost when it comes to outsourcing. A first important implication for management is therefore to strike the right balance between these two performance dimensions when considering outsourcing. Furthermore, the effect of integration when outsourcing, both between product development and manufacturing and between companies, is investigated. It is seen that integration plays an important role when complexity is high, but is less relevant when outsourcing is focused primarily on lowering costs. Altogether, the findings in the article shed new light on the need to manage firm boundaries in a way that takes into consideration both efficiency and flexibility. Among other things, this calls for a more nuanced view of redundancy in terms of activities and knowledge, as well as considerations of benefits and costs in both a short-term and a long-term perspective. In the article ‘How to Use an Innovation Audit as a Learning Tool: A Case Study of Enhancing High-Involvement Innovation’, Erik Hallgren from the Technical University of Denmark deals with auditing innovation and innovative activities in firms. Innovation auditing is getting more diffused, but what is really known about how and what and why to measure? Many types of innovation auditing exist, although there are few descriptions of them being tested. Hitherto, quite little research effort has been put into examining their use and effect on companies, and even less into investigating if and how these audits could be used more efficiently. Also, when discussing innovation auditing and measurement, one must be clear about what kind of innovativeness or innovation capability that is being addressed: discontinuous radical new thinking or the need to be innovative in exploiting already known offers and technologies. In the article, Hallgren discusses some of the reasons for doing an innovation audit and examines a new, facilitated, interactive way of using an innovation audit to achieve or improve high-involvement innovation. With a focus on small- and medium-sized enterprises, the article proposes a new perspective on innovation audits, building on a criticism of traditional ways of doing them, and suggests that a learning and participation perspective needs to be included in the audit in order to facilitate real change. Of particular value are the practical implications of this article, as most other works on innovation audits focus primarily on what to measure and put less emphasis on how the audit should be used. Based on the short descriptions above, it is easily seen that the scope of the articles taken together is wide, covering both strategic and organizational aspects at different levels of analysis. However, this broad approach to the overall question of flexibility and efficiency in innovation can be seen as a strength rather than a weakness as it should open up new opportunities for managing this complex issue. As mentioned initially, the flexibility-efficiency tension is a key issue for managers in many companies, and several established perspectives, frameworks and models used in strategy and organization studies no longer seem to be well suited for today's more challenging competitive environment, in which the simultaneous handling of flexibility and efficiency often is a necessity and the need to shift beyond the perceived trade-offs or dilemmas become imperative. To take on this challenge is an and a special issue can of only present a few to the of the overall researchers and Nevertheless, we that the subsequent articles will constitute a few in a potentially fruitful and new in this central field of continuous innovation. The would to all for their to improve the and the of and Innovation for their most in the of the special issue. Mats Magnusson is at Chalmers University of Technology and of the Institute for of Innovation and In was also at Aalborg University and at the University of In is at Chalmers of and of the Continuous Innovation research are innovation management, resource-based strategy, management of knowledge and innovation and continuous Boccardelli is of strategy at the of and at in holds a in of Innovation from research include and of the dynamic capabilities, entrepreneurship, and strategic management of innovation. has on these topics in and international is in technology management at Chalmers University of Technology and is research for the for research field of how organizations change and develop with a focus on the management of and innovation research innovation management, innovative capabilities, and innovation as change.