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Innovation is conceptualized in different ways in the literature, but the main idea is the introduction of a new idea or behavior. Damanpour (1991) gives a dual definition to innovation, referring to its technical (new products or services) and administrative aspects (new methods, procedures and information flows). An innovation orientation, which is an orientation that enables innovation, can have both positive and negative outcomes for organizations (Simpson et al., 2006). It seems, however, that in some knowledge-based organizations, negative implications of innovation can outweigh the positive ones; although they maintain a good level of innovation, they cannot achieve high efficiency. Why does this happen? Can technology help a knowledge-based organization achieve a good balance between innovation and efficiency?
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This essay aims to answer the previous questions. The first section focuses on knowledge-based organizations, identifying the key characteristics that enable innovation. The next section analyses the contradictory nature of innovation and efficiency and describes some of the potential challenges that knowledge-based organizations face, when an innovation orientation is adopted. This analysis gives an answer to the first question on why although an organization is highly innovative it may not be as efficient. The last two parts describe how knowledge-based organizations can achieve a balance between innovation and efficiency and the role of information technology in this objective.
INNOVATION IN THE KNOWLEDGE-BASED ORGANISATION
In the knowledge-based organization, knowledge is the key element that leads to efficiently turning inputs into valuable outputs (Teece et al., 1997). A common perception in literature is that knowledge should be privatized and restricted to the organization’s boundaries (Argyres, 1996). Its internalization and protection is the key to efficiency; organizations should prioritize exploiting their existing knowledge over creating knowledge (Grant, 1996). On the other hand, Anand et al. (2007) argue that it is innovative knowledge that can help organizations create value. As a consequence, the real challenge for a manager in a knowledge-based organization is not to protect and exploit current possessed knowledge, but to generate knowledge and capability, that is to innovate (Nickerson and Zenger, 2004).
Innovation is feasible in knowledge-based organizations for different reasons. First and foremost, in terms of organization structure, it is often either flat with little hierarchical level (Drucker, 1998), or hierarchical but flexible consisting of three levels; bureaucratic, project team and knowledge layer (Nonaka, 1994). A considerable number of authors also state that autonomy is a factor that assists innovation processes (Feldman, 1989). In addition, management’s role is to create and promote a vision of knowledge sharing and creativity both internally and in the external environment of the organization and to orient this flexible and less hierarchical structure ‘toward purposeful knowledge creation’, as Nonaka (1991) suggests.
According to the literature, innovation also requires knowledge acquisition and sharing within the organization. The acquisition depends both on the organization’s existing knowledge base (Salavou and Lioukas, 2003), as well as on knowledge and information coming from the external environments (Chang and Cho, 2008). Many knowledge-based organizations innovate because they have the capacity to absorb new ideas and to adjust new external knowledge to their operations (Cohen and Levinthal, 1990).
Knowledge sharing is essential, because it is easier to generate and formulate new ideas based on existing knowledge. Knowledge workers are the owners of knowledge, which is the most vital asset in a knowledge-based organization (Neagu, 2008). Knowledge can be explicit or tacit; the former is codified in systems or embedded in processes, while the latter is in people’s heads, highly personal and not easily expressible (Nonaka, 1991). It is therefore hard to capture tacit knowledge or to communicate it to others. Acquiring and sharing knowledge can be achieved in formal (e.g. meetings) or informal (e.g. chats) ways and it is the key facilitator of organization learning, which is the process of developing new knowledge from insights and experience of people in the organization (Jimenez-Jimenez and Sanz-Valle, 2010). Several knowledge-based organizations encourage social networking to enable information and knowledge flow and sharing of tacit knowledge and, lastly, to promote an environment of communication, trust and freedom to innovate (Wiig, 2000).
Last but not least, information and communication technologies can be both conditions and assisting tools for innovation in knowledge-based organizations, as managing and communicating information is essential to ensure that knowledge can be acquired and generated by knowledge-workers (Maier, 2002).
The above aspects help some knowledge-based organizations innovate. But what happens, in terms of efficiency, when emphasis is put on innovation? This question is discussed in the following section.
THE IMPACT OF INNOVATION ON EFFICIENCY
In literature there are management theories and practices (e.g Porter, 1980) which imply that when an organization tries to pursue multiple strategies at the same time, it is very likely to get stuck in between them. As a consequence, it is implied that an organization should select one of the two aspects to put emphasis on: either efficiency or innovation. However, selecting one of the two to put emphasis on can harm the other one and create long-term problems, leading to ‘management myopia’ of ‘organizational inertia’ (Sarkees and Hulland, 2009).
In addition, the characteristics of innovation and efficiency reveal a contradiction: an innovation task is based on prior knowledge and offers a solution to an unfamiliar problem, whereas an efficiency task involves repeatedly applying optimal solutions to a problem, focusing on speed and accuracy (Sears, 2006), standardization and economies of scale (Farrell and Saloner, 1985).
Knowledge-based organizations that choose to adopt an innovation orientation have to deal with challenges in the management of innovation (Van De Ven, 1986); these problems are often related to inefficiency. For instance, although Simpson et al. (2006) argue that innovative ideas result in the company adopting new processes and producing better products and services, leading to customer benefits and competitor-related advantages, this is not always the case. Innovation can sometimes be ‘novel’, but not ‘meaningful’ (Im and Workman, 2004). Some organizations seem to emphasize on innovation and take too many risks, without extracting profits (Levinthal and March, 1993). For example, several organizations invested heavily in innovation during the late 1990’s Internet boom, without achieving any profits or creating efficiencies that would help them gain the long term competitive advantage (Sarkees and Hulland, 2009)
Knowledge-based organization can also be innovative but not efficient as a result of inconsistent performance in different levels or departments. For instance, there might be an important time lag between the introduction of an innovation and its utilization, realization or commercialization by the respective department (Maier and Haustein, 1980). As mentioned in the previous section, innovative knowledge-based organizations are based more on autonomy and flexible structures and, as a result, less on hierarchy and control. Lack of control may result to inefficiency; Jensen (1993) highlights the significance of control systems, which can ensure that capital investments lead to real-value added innovations.
Another relevant risk is investing on innovations despite past failures and encouraging fast followers to imitate and copy innovative ideas, processes or products, without taking any actual innovation risks. For example, General Motors was one of the first carmakers that invested heavily in hybrid vehicle technologies research and development from the 1960’s. However the first hybrid car is yet to be launched (scheduled, end of 2010) as a result of inconsistent business and marketing decisions (Maynard, 2008). In contrast Toyota, known for its capacity to exploit new ideas and realize them before its competitors, managed to be the first to convert hybrid technology innovations into routines, manufacturing processes and products, launching the successful Prius in 2000.
Efficiency depends, to an extent, on knowledge worker’s performance. Although innovation can have a positive effect on their satisfaction and morale, which leads to improved productivity, Simpson et al. (2006) however identify job stress, dissatisfaction and turnover as a potential outcome of innovation that can directly affect individual and team performance and cause inefficiency. As previously mentioned, knowledge-based organizations are often flexible, open and creative and this could form an ideal environment for most knowledge workers to perform well, however there are people who cannot adopt in innovative environments. Lukas et al. (2002) agree that, inventions and new ideas ‘brought into being’ can increase organizational stress.
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Another argument is that some organizations ‘become too enamored with the idea of innovations, creating more innovations for the sake of innovation’ (Simpson et al., 2006). This applies to some knowledge-based organizations that over-emphasize on knowledge exploration and generation and forget their core competencies, fail to achieve cost-effective operations and ultimately forego efficiency. Laursen and Salter (2006) also argue that extensive and in-depth external knowledge search beyond a limit affects performance negatively.
Most significantly, activities related to innovation often demand increased substantial resources (Van den Ven, 1986) and involve high costs, which are rarely recovered. By definition, efficiency is ‘the output/input ratio that an organization can realize within the given economic circumstances’ (Maier and Haustein, 1980); minimizing use of resources (input) contradicts innovation initiatives that mainly rely on organizational slack, which is ‘the pool of resources in an organization that is in excess of the minimum necessary to produce a given level of organizational output’ (Nohria & Gulati, 1996). The same authors also suggest that slack might cause relaxation of internal controls and support of new ideas and projects with uncertain outcome. In addition, Leibenstein (1969) introduces the term ‘X-inefficiency’ that involves the discrepancy caused by the organizational slack, between the maximum output and the actual outcome for a certain amount of inputs.
Finally, we should not forget that knowledge-based organizations are based on knowledge, and innovation is to a large extent based on prior knowledge, experience and lessons learnt. In some knowledge-based organizations though, culture of low trust, competitive subcultures, as well as knowledge barriers and limitations can lead to innovation inefficiency (De Long, 1997). In an example of an electronic engineering company, the engineering team’s subculture was open to exploration, tacit knowledge-sharing and socializing, whereas the MIS subculture was based on rules, standardized processes and explicit knowledge (De Long, 1997). Efficient collaboration was difficult; strong subcultures, lack of knowledge sharing across teams and different definitions of knowledge hindered efficiency. Consequently, organizations that fail to acquire, transform and exploit existing knowledge and share it across are likely to be inefficient, as they will keep ‘re-inventing the wheel’ and waste valuable resources.
IS IT POSSIBLE TO HAVE IT ALL?
A global survey by Accenture (2005) revealed that organizations are continuously struggling to achieve a balance between efficiency and innovation, as a means of gaining the competitive advantage. Despite traditional theories suggesting that innovation and efficiency are incompatible, recent literature supports their compatibility or complementarity. Some authors have defined the ‘ambidextrous’ organization; an emphasis on efficiency ensures that the organization enhances the utilization of its resources, while an emphasis on innovation involves exploration, experimentation and introduction of new products and services, methods, processes and relationships (Sarkees and Hulland, 2009). In knowledge-based organizations, ambidexterity can be defined as balancing knowledge exploitation and exploration at the same time. Other authors argue that the answer in finding a balance lies in ‘punctuated equilibrium’, which suggests cycling through periods of experimentation and exploitation (e.g. Burgelman, 2002).
Nucor is an example of a knowledge-based organization that successfully balances both efficiency and innovation (Sarkees and Hulland, 2009). It is the greatest steel recycling company in the United States, with more than 12 billion dollars in 2005 sales. Nucor pursues a strategy that involves optimizing existing products and operations (efficiency) and revolutionizing the market, introducing new technologies (innovation). For Nucor, it is a priority to continuously explore and acquire new knowledge from the external environment as well as internally. This is also facilitated by its decentralized structure, almost flat hierarchy and team-oriented culture.
In the final section of this essay we will discuss how information technology can help a knowledge-based organizations find this balance.
THE ROLE OF INFORMATION TECHNOLOGY
Information technology (IT) can help knowledge-based organizations find a balance between innovation and efficiency through systems that effectively support innovation business processes, control and decision-making, as well as knowledge management (KM). According to Malone (1997), as communication costs decrease, control becomes decentralized and decision-making is divided among connected decision-makers. This encourages creativity and flexibility, as well as efficiency thanks to reduced costs.
In terms of knowledge management, the extent to which IT can assist in balancing innovation and efficiency in a knowledge-based organization depends on the organization’s approach; cognitive or community network (Scarbrough et al., 1999). The former emphasizes on static IT-based networks (IT has a crucial role) and information flows, whereas the latter focuses on communication and socializing (IT has an enabling role). Technology offers tools that organize knowledge and resources, enable social interactions internally and externally, encourage organizational learning and help knowledge-workers become more innovative and efficient.
Based on the complementarity of innovation and efficiency, Newell et al. (2003) argue that the concurrent implementation of Enterprise Resource Planning (ERP) and Knowledge Management (KM) systems can have a positive effect on both aspects. ERP systems focus on efficiency, integrating business operations and providing a database, in which all transactions are entered, processed, controlled and reported (Umble et al., 2003). On the other hand, KM systems focus on management of knowledge assets, knowledge sharing across the organization and knowledge creating, fostering innovation and flexibility (Von Krogh et al., 2000). Newell’s et al. (2003) research concludes that implementing ERP and KM technology in tandem can help an organization exploit existing knowledge, increase efficiency, and innovate simultaneously by sharing and creating knowledge. In knowledge-based organizations, this can assist in redressing the innovation-efficiency balance.
Lastly, IT should be adopted and shaped by the organization (Barley, 1990) according to its needs and objectives. IT initiatives should deliver business-value and take into account the organization’s cultural and socio-political perspectives. Swan et al. (1999) agree that IT-led initiatives aiming in knowledge exploration and exploitation should be combined with the development of a knowledge-sharing culture and social-networking initiatives.
Despite the difficulties involved, knowledge-based organizations can balance the competing nature of innovation and efficiency by addressing problems that an overemphasis on innovation causes: effectively managing knowledge, focusing on meaningful innovations, efficiently utilizing organizational slack and enabling social-networking, as well as culture of collaboration and knowledge-sharing. IT can assist in redressing the innovation-efficiency balance, however IT investments should be targeted and applied appropriately; technology is no panacea for an organization’s problems.
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