Innovation is mandatory for organizations to survive in the high technology atmosphere of the 21st century. How to be innovative is a burning question for top management in the world today. Most organizations are looking for ways to improve their ability to create ideas and to develop the best environment for idea creation. More organizations are turning to the practice of knowledge management for sharing experiences and expertise, integrating knowledge, and generating new knowledge. What organizations need is a better understanding of how knowledge management is related to the innovation process and how it can be used to help foster innovation within organizations. This article will examine the relationship between knowledge management and innovation to create a working model that will assist organizations in building innovative qualities and knowledge management practices into their business processes. The article discusses the application of the model to various industry settings.
Over the past two or three decades the worlds has seen enormous growth in information and technology. This information boom has demonstrated rapid advancement in electronics, computing, communications, and data capture, to name just a few. While organizations demand the latest and the greatest information gathering they often struggle with how to handle the information overload and to turn the information into knowledge i.e. actionable information. The difficulty is not just in interpreting, transforming, and disseminating the data into knowledge; they must also worry about doing so as efficiently as possible. To gain this efficiency, processes and procedures are developed and refined. The refinement of these procedures is a function of operational stability and profit, which in today’s environment of immediate returns often becomes the focus for management. More often than not the result is process rigidity and stagnation of entrepreneurial thought. So it should come as no surprise those organizations of today that have become market leaders are not necessarily the organizations that produce the next generation of products and services. In their quest to become established companies they lose the innovative qualities that spawned the organization in the first place. This means that companies need not only turn their attention to improving efficiency and productivity, but to develop innovation mechanisms to stimulate knowledge creation, sharing, and integration.
Innovation and Knowledge
Innovation is the use of new knowledge to offer a new product or service that customers want. It is invention plus commercialization (Freeman, 1982; Roberts, 1988). According to Porter, 1990) innovation is a new way of doing things that is commercialized. The new knowledge (Afuah, 1998) can be technological or market related. Technological knowledge refers to components, processes, and linkages that contribute to an output. Market knowledge refers to the expertise of the specific market dynamics such as distribution channels and customer expectations. Amidon (2002) defines the fundamentals of knowledge as data, information, then knowledge. She notes, “data is a base representation of fact, information is data with context, and knowledge is information with meaning… fully actionable.” It is not by coincidence that “knowledge” is used so heavily in the descriptions of innovation. Davenport and Prusak (1998) defined knowledge as a fluid mix of framed experience, values, contextual information, and expert insight that provides a framework for evaluating and incorporating new experiences and information. Knowledge management includes two aspects, ‘managing’ the knowledge that already exists in the organization, as well as enhancing the ability to create ‘new knowledge’. When the management of knowledge is introduced it is the past events that are harnessed to promote and facilitate the innovation process. Knowledge management deals with the creation, acquisition, integration, distribution, and application of knowledge to improve the operation effectiveness and competitive advantage of an organization. Knowledge management is providing the right information to the right people at the right time. Most companies that have knowledge management programs emphasize knowledge sharing and integration which is what is referred to as first generation knowledge management. Companies are now just beginning to put more effort in the knowledge management programs in the area of knowledge creation and learning which is referred to as second generation knowledge management (McElory, 2003). In order to stimulate the invention part of innovation the organization needs to have innovation mechanisms that support knowledge creation, sharing, and integration. Thus, innovation is one of the objectives of an effective knowledge management program.
Table 1 links knowledge management elements to mechanisms that promote innovation within an organization (Hargadon & Sutton, 2000; Sutton, 2002). The associations in the table are general and intended to improve the ability for managers to spur innovations in any environment. This table is a good reference for any organization desiring to be more innovative.
Motivational carrots / Incentives
Introduce change – setting, groups, viewpoints
Cultural evaluation – organizational and group
Treat everything as temporary – teams, organizations, procedures, product lines
Reject underlying values and beliefs (personal and organizational)
Encourage experimentation and ignore experts
Environmental factors – working conditions, economic means, transfer mechanisms, mentors
Hire smart and different
Incite discomfort and dissatisfaction
Encourage education and learning – often alternative
Internal & external sources – user communities
Opportunism – look outside the box
Idea storage medium – enable storage of non-used or used ideas
Integration of functional knowledge with process knowledge
Challenge existing practices
Use different perspectives – idea sharing
Connecting those that know with those that need to know
Encourage idea sharing
Keep ideas alive – not just an archive, make tangible if possible
Spread information about who knows what – subject matter experts
Freedom to experiment – prototype, model, pilot, test good ideas
Organizational acceptance of short term financial loss
Table 1 Relation between Knowledge Management and Innovation Mechanisms
The evolution of the business environment to the business ecosystem results from companies working cooperatively with other organizations to support new products, satisfy customers, and create new market innovations. It is clear that organizations are becoming more aware of the benefits in their surrounding environment. Figure 1 (adapted from Gossain & Kandiah, 1998) illustrates the concept of the ecosystem and the cohesion of all the players in the environment. These relationships are fluid and change over time. Partner changes in the ecosystem, or even change to one organization within the ecosystem, may have an impact to multiple connected organizations in the environment. This impact may be positive or negative, and could possibly alter the ecosystem dynamic.
Figure 1 Business Ecosystem
Connectivity and communication are at the core of the ecosystem, and rely upon the supporting networked infrastructure between partners. This is made possible through business- to- business electronic commerce and has the following elements (Gossain and Kandiah, 1998)
· Connectivity exists between information systems.
· Communication is in real time.
· Communication is two-way.
· Businesses have access to shared information.
· Internet technologies are typically used.
Gossain and Kandiah note that few organizations are currently exploiting their ecosystem, likely because of the complex technical and integration issues. They contend that the Internet has advanced the ecosystem ideal beyond a good idea to a paradigm shift that outlines the future of business. Those that don’t realize this shift are not likely to survive.
To further support the benefits of cooperation between organizations Porter’s Diamond Model (Porter, 1990) shown in Figure 2 can be used to evaluate what drives innovation in an ecosystem. The factor conditions include factors of production including technological know- how and infrastructure necessary to complete in a given industry. The demand conditions deals with the home demand for the industry’s product or service. The presence or absence of relating and supporting industries has a direct impact on a firm’s ability to compete. And lastly the firm’s strategy and rivalry among the competitor firms have a direct impact on the firm’s pressure to innovate and improve efficiency. Traditionally the Diamond Model is used to evaluate an organizations ability to succeed within a nation and how national factors can affect competitive advantage.
The Diamond model demonstrates that each condition of the diamond can influence the other and illustrates that organizations in an industry are interdependent. Much of this interdependence relates directly to the knowledge essential to improve the competitive position of the firm. Examples include the following: 1) A factor condition such as technological know- how depends on knowledge possessed by personnel; 2) demand for product or service depends on the knowledge of consumer market and how the firm applies this knowledge to corporate strategy; 3) Extent of rivalry depends on the knowledge that is transferred within the industry by moving personnel, involvement in professional organizations, and cooperative agreements, 4) rivalry depends on the knowledge of competitors (industry knowledge) and how this knowledge is used in the firm’s strategy and 5) knowledge of related and supporting industries can have a direct impact on the firms strategy and how it leverages this capability.
Figure 2 Porter’s Diamond Model
This interdependence and reliance on knowledge is shared within and between organizations. When you examine the fundamentals of knowledge management with Porter’s Diamond Model you can see each condition is intertwined with various aspects of knowledge. Understanding the knowledge of each condition allows an organization to get a clear picture of an industry and where it is progressing. The organization that best understands this is in a front-runner position to develop a strategy to take advantage of knowledge and build an infrastructure to support the creation, acquisition, integration, distribution and application of this knowledge. Here in lies the roots of knowledge management where the knowledge management strategy supports the corporate strategy and the two collectively are aimed at fostering innovation. This brings us back to Porter who contends that competitive advantage can only be achieved through innovation. This assertion is also made by (Tidd et al, 2002; McElroy, 2003; Senge,1990). Taking this to the next level is to realize innovation is best sought from an interconnected environment where the flows of knowledge can be appropriately tapped.
It is no secret that veteran organizations are in large part less innovative due to their shear size and emphasis on operational efficiency where younger organizations virtually always demonstrate a greater creative capacity. Christensen (1997) notes the reason innovation is difficult for many established firms is that although they employ highly capable people and set them to work within organizational structures their processes and values weren’t designed for the task at hand. This highlights the opposite organizational forces at work between processes in start-up companies and established firms. Although more entrepreneurial, it is the commercialization and on going operational management that typically drags down or lags behind in the young company. This is why larger firms frequently harvest invention and/or innovation through financing smaller companies (venture capital with options), or creating smaller think tank companies (joint ventures or spin offs). Bower and Christensen (1995) support this by noting that established companies can only dominate emerging markets by creating small organizations. It is this incubation of innovation combined with the ecosystem that forms the basis for the Eco-Innovation Model (Figure 3). The broader challenge is to turn stagnant companies into vibrant ones by utilizing existing knowledge across the board while creating new knowledge to sustain continuous innovation. This is accomplished by making large market leaders capable of harvesting innovation from their own sources such as an Eco-Group within or from outside the organization. The Eco-Innovation model will aid in transforming large corporations from stagnant organizations that have stifled creative juices to organic, human-embracing ones that allow those highly capable and talented people to flourish in very ‘natural’ ways.
Figure 3 Eco-Innovation Model
In this model the focus is on the idea of the small start-up organization being the predominant player in innovation, and that organizations can acquire knowledge by experience, experimentation or acquisition (Tidd et al, 2002). Essentially the model creates an innovative ideas group comprised of members from all ecosystem organizations. This innovative ideas group is termed the EcoGroup. The purpose of the EcoGroup is to evaluate and/or explore problems and opportunities input from the ecosystem member organizations. EcoGroup members can come from any organization including suppliers, customers, partners, supporting firm or ecosystem leader. Many ideas can be obtained from members outside the organization and across the value chain. The ecosystem leader is any firm that dominates the ecosystem and is a leader in a particular industry. For example, Microsoft is an ecosystem leader in the software industry. The EcoGroup can be considered a community of practice that share a common purpose with 1) a desire to collaborate with colleagues 2) a commitment to learning and generating new capabilities, and 3) a need to find a solution to issues or problems related to their area of practice (Saint-Onge & Wallace, 2003).
The Eco-Innovation model can be applied to a wide variety of conditions such as 1) a loosely held federation of companies or coalition of companies (Keiretsu) 2) a large company with many suppliers, partners, and customers 3) a small company that operates in the larger business eco-system and 4) internal to a company that has several business units that need to stimulate innovation across the company. The model objective is to prevent stagnation from occurring in organizations, to facilitate creativity, to assist a new or established knowledge management program, and all members of the ecosystem. The primary purpose of the EcoGroup is to foster the invention or idea component of the innovation not to commercialize the product or service. The EcoGroup is not limited to get its ideas from just the members of the group but can get inputs from others in the organization that would like to contribute to the group. A federation of companies or a large company usually has the complementary assets to commercialize the invention or idea. However, a small company usually would have to form a partnership or alliance with others to commercialize the invention. Allen (2003) discusses more details of the commercialization process.
The EcoGroup is comprised of two groups:
Evaluation board – When the functional team members are supplied to the EcoGroup the group designates or elects a small team to evaluate problems/issues/ideas that come into or are created from the larger functional team. The evaluation board members can still be part of the larger functional team if time allows, but their main responsibility is evaluating feasibility and merit of problems and ideas posed to the group. The group may decide to make the evaluation board a rotating responsibility shared by all team members.
Functional team – The functional team is comprised of a select group of resources supplied by all members of the ecosystem. This group is the innovation engine for the ecosystem. This diverse group will take on problems from individual ecosystem organizations, and analyze the ecosystem as a whole to search for innovation opportunities.
As shown in Figure 3 each participating member of the ecosystem contributes both resources (personnel and financial) and knowledge to the EcoGroup. To best understand this relationship is to examine them in individual parts.
There is no perfect size or member ratio for an EcoGroup. The group size and member ratio will vary depending on the ecosystem it is supporting. Group size and the member ratio can also be experimented with to find a consensus optimum level. The EcoGroup structure should be completely flat, no titles, no organizational chart, no hierarchical structure at all. All members are equal including the Executive Board. Each member of the Executive Board has an equal vote on evaluating the ideas from the functional team and member organizations.
The unstructured environment introduces many of the innovation mechanisms illustrated in Table 1. This is designed to start the creative juices flowing. It fosters both uninhibited interaction and individual thought. Ideas are shared more freely without fear of, or pressure from, bureaucratic reprisal. Attempts to control and administer innovation and knowledge creation will fail to achieve the desired outcomes. Tacit knowledge is most prevalent during the innovation process and this type of knowledge requires a more caring and trusting culture because the knowledge process is a social and team-based relational activity (Von Knogh et. al., 2000). All should participate with the understanding that innovation for one organization may have benefits for many.
The EcoGroup will not have HR, finance, or other corporate supporting infrastructure. A small IT group, or other small support type groups, may be deemed necessary to ensure communication links or other functions. If possible, the EcoGroup should draw on the existing ecosystem IT infrastructure to aid in knowledge sharing, integration, and capture. Group members will continue to be financed though their member organizations. In contrast, funding for the EcoGroup should be appropriately distributed amongst the ecosystem members. All participating organizations should see this as a sunk cost and not focus on a return. Innovation processes require the acceptance of short-term financial loss. Michael Dell notes that in the early years of Dell Computers the organization suffered a severe setback when chip manufacturers transitioned to a new type of chip and Dell was left holding a large amount of the old chips. The company learned from that mistake and came up with a new business model to avoid it in the future. An anonymous author notes “that to tap into that kind of innovation, we do our best to ensure people aren’t afraid of failure, we do a lot of experiments” (Anon, 2002). The EcoGroup is a long-term investment designed to increase the overall value of the ecosystem to the consumer and failures are to be expected.
The participating organizations will also need to create a culture around the EcoGroup that fosters excitement and desire to participate. Acceptance into the EcoGroup should be a coveted position that allows one to make a difference in the world. Eventually the goal would be to transfer the same objectives of the EcoGroup to the entire organization. In organizations that already share these objectives the goal is to keep the employee excitement and satisfaction at a high level. If promoted correctly, requests for nomination into the EcoGroup should be overwhelming within an organization. The organizational incentive should be focused on peer recognition and team belonging. The EcoGroup incentives should be agreed upon but should expand on the peer recognition to include financial incentives for inventions that make it to market (or reach defined stages toward commercialization), or process improvements that are implemented. Other effective reward schemes may focus on the most original idea, the most creative resolution, the best use of an old idea, the ‘I would have never thought of that reward’, etc. It is important to build incentive structures that don’t just encourage creative thinking but reward it. The individual with the ideas that are brought forward by the Evaluation Board should be rewarded someway by the EcoGroup.
This model is the first step in generating innovation in the organization with the goal of moving the entire organization to become a learning organization. Most knowledge management programs start small with a pilot or prototype as an important first step in helping companies become a knowledge creating company. Success of the EcoGroup stimulates others to get on board in the organization and knowledge management efforts. The EcoGroup would seem to be a very good step for stagnant organizations to make. It is not substitute for organizational knowledge management; rather, it is a complimentary group designed to create and take advantage of a diverse resource pool with the specific intent of generating ideas outside standard organizational operation. Once the ideas are generated by the EcoGroup and evaluated then a participating organization will be able to commercialize the idea. The Eco-Innovation Model is intended to leverage the knowledge management systems and resources of participating organizations (or business units if within an organization). It is surmised that organizations not participating in knowledge management practices will have a hard time reaping the full benefits of this model.
EcoGroup Team Member Characteristics
To maximize effectiveness of the structure the resources supplied by the participating organizations should be motivated and diverse. Motivation can come in the form of an intelligent person that repeatedly challenges traditional processes, or someone who is highly driven (inside or outside their work environment). Diversity may take the form of subject matter experts, generalists, or organizational spanners. It also may be nationality, cultural, age, etc. A diverse combination of members who want to participate is most conducive to creativity. For instance you wouldn’t want everyone on the team to be engineers or computer programmers. You would want one or two individuals from differing backgrounds and areas of expertise. (McElroy, 2003) indicates the importance of the degree of diversity in philosophies and worldviews held by the population of workers in order to innovate.
The knowledge component of the Eco-Innovation Model involves both structure and resource components. To allow the resources the best access to ecosystem knowledge a two-stage knowledge management structure is proposed. The first stage is the ability to have access to subject matter experts within the ecosystem. This is not intended to be a mechanism for asking experts how to solve entire problems; rather, a way to tap specialized tacit knowledge quickly and efficiently. The second stage is a knowledge management system that allows for the capture, acquisition, integration, distribution, and application of knowledge. This allows the resources in the EcoGroup, and participating organizations, to build upon what others have done and contribute to future work. The system should accept and provide access to processes, ideas, questions, prototypes / models, and other relevant forms of data, information, and knowledge. Ideally access to all participating organizations would be desired.
As mentioned previously it is the understanding of past knowledge and events that leads to innovation. Many knowledge management applications are available on the market and those products are not the focus here. The focus should be developing a culture (O’Reilly III & Tushman, 1997; Knapp, 1999) that embraces innovation and knowledge management and realizes the benefits of utilizing and contributing to the process. Investment in organizational change management strategies and mechanisms used to promote knowledge management (Rumizen, 2002) is a key for long-term innovation and the success of the Eco-Innovation Model.
Application of Model to External Use
The aircraft industry is dominated by two major competitors, Airbus and the Boeing Company. Airbus is a consortium of airframe manufactures operating in Germany (Daimler-Benz Aerospace), Britain (British Aerospace), France (Aerospatiale), and Spain (CASA). The Boeing Company is the largest aerospace firm in the United States and the worlds’ leading manufacturer of commercial aircraft. The sheer size of these companies provides a challenge to stimulate innovation.
One of the major competitive advantages of Airbus has been its ability to innovate over the years. It is organized with six major directorates consisting of the following: Commercial, Engineering, Customer Services, Industrial & Transport, Programs and Processes, and Administration. It has in the past used the Engineering Directorate consisting of members from the four European countries to come up with new ideas. The Eco-Innovation Model could augment their ability to innovate by bringing together the various groups across the four companies including their customers and suppliers. They would have to establish innovation mechanisms as shown in Table I to encourage knowledge sharing, integration and creation among the various organizations. Examples of organizational mechanisms used to promote knowledge management include organization policies and standards, on-the-job training, employee rotation across departments, mentoring, face-to-face meetings, and establishing communities of practice.
Communities of practice are groups of people who are drawn to each other for a common purpose. They get together to share their existing knowledge, create new knowledge, and apply their collective knowledge to increase their capabilities. The communities of practice provide an opportunity for learning and a platform for innovation among its members. Communities of practice is one of the most effective ways to share and transfer tacit knowledge. Practical approaches for leveraging communities of practice in organizations are given in (Saint-Onge & Wallace, 2003)
Other ways to promote knowledge transfer in an organization is to have clear organizational goals, provide employees with a certain amount of autonomy, and encourage diversity of views. Enablers of knowledge creation include instilling a knowledge vision, promoting conversation between employees, mobilizing knowledge activists, and creating the right context for knowledge sharing (Von Krogh et. al., 2000)
Application of Model to Internal Use
The banking industry is dominated by large organizations steeped in tradition and steadfast in process. Chesbrough (2003) notes this type of industry is well suited for internally focused innovation management. He bases this assessment on the high regulatory restrictions, minimal occurrence of start-ups, and small amount of venture capital investment. Accepting this assessment may make one feel the Eco-Innovation Model is not suited for this environment. Looking at the organizations that comprise the industry it is clear the Eco-Innovation Model does have a place and that place is within the organization.
The organizational structure of a typical bank is staunchly segmented into business lines. A classic example is mortgage banking vs. consumer banking. Both business units are within the same company, but require specialized skills that seldom overlap, and often deal with unique customer segments. This leads to the building of two very different organizations under one corporate umbrella. The business units have traditionally built their own supporting structures from call centers to marketing to IT infrastructure and support. This segmentation has been acceptable until recently when customer focus moved into corporate strategy, and Internet technologies allowed the customer to view a more robust profile of their relationships (often times more robust than the segmented bank personnel expected to help them). Now many aspects of a customer relationship are crossing business lines. The corporate expectation is for mortgage customers to be able to walk into consumer banking branches and be assisted by non-mortgage personnel (and vice-versa). There is also an increasing expectation for cross selling of projects. The Internet and customer driven strategy is forcing two traditionally very separate business units to meld. The organizational challenge is to maintain the expertise and efficiencies while providing the corporate view of a single customer. Put simply the organization must innovate.
The Eco-Innovation Model can allow the business units to operate with minimal disruption, while bringing together the brightest of all segments to understand how to support the corporate vision. Since communication is critical to the success of the EcoGroup a strong knowledge management system should be in place or immediately initiated. The Eco-Innovation Model brings together all essential parties from systems support to business experts. Establishing an independent EcoGroup removes the political pressures from the business segments and allows for a team environment focusing everyone on the task of organizational innovation. The personnel are more apt to shed their business unit personalities and adopt a cohesive nature within the context of the small independent organization environment. It is critical for corporate management to give control over to the EcoGroup. They must be allowed to operate on their own and create. The principles of Table 1 are essential to evoke the best possible inventive strategies. This structure of this model will further support the organization in times of creativity lapses, economic downturns, and generally allow the business units a place to come together for corporate initiatives. The secondary benefits this creates in the organization are the relationships which will be forged, carried forward, and built upon. As you see this model is not restricted to ecosystems external to the organization but also within the organization. It allows organizations to capitalize on the knowledge possessed within.
The Eco-Innovation model is discussed in the context of a single ecosystem, but this is not a limitation. The model could be used as a mechanism for increasing cross ecosystem innovation, an industry innovation model, or a national innovation model. The model itself is designed to be a learning model encouraging others to contribute to its growth and proliferation. Expanding the reach of an ecosystem drives this model into universities, government research facilities, scientific communities, virtually any group that has knowledge and is thought to be a potential contributor to, or somewhat interdependent with, another group. The key to implementation in other areas is that members of the EcoGroup have a common interest to share and evaluate new ideas for the common good of the members of the group. Being based on knowledge, this model allows customization and implementation flexibility. Organizations are free to exploit the model to best fit their situation and needs. The framework is intentionally flexible to allow freedom to create within the EcoGroup. The only limitations faced with this model will be by the institutions and/or ecosystems utilizing it.
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Authors’ Background and Contact Information:
Dr. James A. Albers is a Faculty Fellow in Technology & Innovation Management in the School of Business at Pacific Lutheran University (email@example.com). He has led the formulation, development, and execution of the Technology & Innovation Management Program since 1995. He has twenty-two years of technology management experience with 12 years at senior executive level within NASA. His specialty areas in teaching and consulting include: knowledge management, strategic management of technology, information systems management and, innovation management. He can be contacted at Pacific Lutheran University, School of Business, Tacoma WA, 98447, Tel 253-5357301, Fax 253-5358718.
Steve Brewer is a Sr. Business Systems Analyst with Washington Mutual Bank (firstname.lastname@example.org). His responsibilities include automating financial center processes and organizational improvement. He has also worked as a project management and business process improvement consultant. His current focus is on organizational innovation utilizing knowledge management practices. He has recently received an MBA in Technology & Innovation Management from Pacific Lutheran University.