By: Henry W. Chesbrough, David J. Champions of virtual corporations urge managers to subcontract anything and everything.
And because several high-profile corporate giants have been outperformed by more nimble, "networked"…. Get access to this material, plus much more with a free Educator Account:.
Already registered? Sign in. This article includes a one-page preview that quickly summarizes the key ideas and provides an overview of how the concepts work in practice along with suggestions for further reading. And because several high-profile corporate giants have been outperformed by more nimble, "networked" competitors, the idea of the virtual organization is tantalizing.
Many executives have come to believe that a company that invests in as little as possible will be more responsive to a changing marketplace and more likely to attain global competitive advantage. But is that really the best way to organize for innovation? If you think you should have access to this content, click to contact our support team. Contact us. Please note you do not have access to teaching notes.
Other access options You may be able to access teaching notes by logging in via your Emerald profile. Join us on our journey Platform update page Visit emeraldpublishing. A new turbocharger to increase horsepower in an automobile engine, for example, can be developed without a complete redesign of the engine or the rest of the car.
In contrast, some innovations are fundamentally systemic—that is, their benefits can be realized only in conjunction with related, complementary innovations. To profit from instant photography, Polaroid needed to develop both new film technology and new camera technology.
Similarly, lean manufacturing is a systemic innovation because it requires interrelated changes in product design, supplier management, information technology, and so on. The distinction between autonomous and systemic innovation is fundamental to the choice of organizational design. When innovation is autonomous, the decentralized virtual organization can manage the development and commercialization tasks quite well. When innovation is systemic, members of a virtual organization are dependent on the other members, over whom they have no control.
In either case, the wrong organizational choice can be costly. Consider what happened to General Motors when the automobile industry shifted from drum brakes to disc brakes, an autonomous innovation. GM was slow to adopt disc brakes because it had integrated vertically in the production of the old technology. As a result, they were able to beat GM to market with the new disc brakes, which car buyers wanted. When companies inappropriately use centralized approaches to manage autonomous innovations, as GM did in this case, small companies and more decentralized large companies will usually outperform them.
To understand why the two types of innovation call for different organizational strategies, consider the information flow essential to innovation.
Information about new technologies and products often develops over time as managers absorb new research findings, the results of early product experiments, and initial customer feedback. To commercialize an innovation profitably, a tremendous amount of knowledge from industry players, from customers, and sometimes from scientists must be gathered and understood.
This task is easier if the information is codified. Codified information—for example, specifications that are captured in industry standards and design rules—can often be transferred almost as effectively from one company to another as it can within a single company.
Because such information is easily duplicated, it has little natural protection. Sometimes, bits and pieces can be protected by intellectual property rights, but those pieces, especially trade secrets and patents, are small islands in a broad ocean of knowledge.
Other information does not travel as easily between companies. Tacit knowledge is knowledge that is implicitly grasped or used but has not been fully articulated, such as the know-how of a master craftsman or the ingrained perspectives of a specific company or work unit. Because such knowledge is deeply embedded in individuals or companies, it tends to diffuse slowly and only with effort and the transfer of people. Established companies can protect the tacit knowledge they hold, sharing only codified information.
They can be quite strategic about what they disclose and when they disclose it. The information needed to integrate an autonomous innovation with existing technologies is usually well understood and may even be codified in industry standards.
Systemic innovations, on the other hand, pose a unique set of management challenges regarding information exchange. By their very nature, systemic innovations require information sharing and coordinated adjustment throughout an entire product system. Here is where a market-based, virtual approach to innovation poses serious strategic hazards.
Each company wants the other to do more, while each is also looking for ways to realize the most gain from the innovation. In most cases, the open exchange of information that fuels systemic innovation will be easier and safer within a company than across company boundaries. Coordinating a systemic innovation is particularly difficult when industry standards do not exist and must be pioneered.
In such instances, virtual organizations are likely to run into strategic problems. Consider how technical standards emerge. Market participants weigh many competing technologies and eventually rally around one of them.
There are winners and losers among the contestants, and potential losers can try to undermine the front-runner or to fragment the standard by promoting a rival.
Until a clear winner emerges, customers may sit on the sidelines rather than risk making the wrong choice. By virtue of its size and scope, an integrated company may be able to advance a new standard simply by choosing to adopt a particular technology. If a large company commits itself to one of a host of competing technologies, consumers as well as companies promoting rival technologies will probably be persuaded to follow suit.
Once a standard has been established, virtual organizations can manage further innovation quite well. But when an industry begins to advance technology to a new level, the cycle can begin anew.
Again, technically feasible choices present new strategic trade-offs. Suppliers, competitors, and customers may fail to agree on a common path. Unless a big player emerges to break the logjam among rival technologies, the existing standard will prevail long past its usefulness. Today, computer floppy disks are frozen in an old standard because no single company has been able to establish a new one. IBM pioneered the 3. Within two years, the memory capacity of 3.
The technical capability to expand diskette capacity is available, but no company has the reputation and strength to set a new standard. Through the s, IBM was large enough to coordinate standards among the key participants in the industry: personal computer manufacturers, diskette makers, and software publishers.
If IBM told the industry it would use a particular capacity on its next generation of machines, others did the same. A simple rule of thumb applies: When innovation depends on a series of interdependent innovations—that is, when innovation is systemic—independent companies will not usually be able to coordinate themselves to knit those innovations together. Scale, integration, and market leadership may be required to establish and then to advance standards in an industry.
When IBM launched its first PC in , the company elected to outsource all the major components from the marketplace. By tapping the capabilities of other companies, IBM was able to get its first product to market in only 15 months. The microprocessor the was purchased from Intel, and the operating system which became PC-DOS was licensed from a then-fledgling software company, Microsoft.
The high-powered incentives of the marketplace could coordinate the roles of component manufacturers and software vendors. IBM successfully promoted its open architecture to hundreds of third-party developers of software applications and hardware accessory products, knowing that those products would add to the appeal of the PC.
IBM also relied on the market to distribute the product. Eventually, there were more than 2, retail outlets. By using outside parties for hardware, software, and distribution, IBM greatly reduced its investment in bringing the PC to market. More important, those relationships allowed IBM to launch an attack against Apple Computer, which had pioneered the market and was growing quickly.
The IBM PC was an early success, and it spawned what became the dominant architecture of the entire microcomputer industry.
More than a few business analysts hailed the IBM PC development as a model for doing business in the future. The early years of the IBM PC illustrate many of the benefits of using markets and outside companies to coordinate innovation: fast development of technology and tremendous technological improvements from a wide variety of sources. The company failed to anticipate that its virtual and open approach would prevent it from directing the PC architecture it had created.
The open architecture and the autonomy of its vendors invited design mutinies and the entry of IBM-compatible PC manufacturers. And once that happened, manufacturers could purchase the same CPU from Intel and the same operating system from Microsoft, run the same application software from Lotus, Microsoft, WordPerfect, and others , and sell through the same distribution channels such as ComputerLand, BusinessLand, and MicroAge.
IBM had little left on which to establish a competitive advantage. To do that, IBM needed to coordinate the many interrelated pieces of the architecture—a systemic technology coordination task. And third-party hardware and software companies made investments that extended the usefulness of the original PC architecture.
Today, its PC business is rumored to be modestly profitable at best. Most of the profits from the PC architecture have migrated upstream to the suppliers of the microprocessor Intel and the operating system Microsoft and to outside makers of application software. Virtual approaches encounter serious problems when companies seek to exploit systemic innovation.
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