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Process management and technological innovation: a longitudinal study of the photography and paint industries

Administrative Science Quarterly, Dec, 2002 by Mary J. Benner, Michael Tushman

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Table 7 reports results for the paint industry of tests of hypothesis 3, that the increased process management activity decreases exploration and tips the innovation balance toward increasing exploitation. Models 1, 3, and 5 show the effects of the controls on our three alternative measures of exploitation's share of total innovation, while models 2, 4, and 6 add the ISO 9000 variable. Increases in process management had a significant positive effect on exploitation's share of a firm's innovation when innovations relied more than 60 percent on prior firm knowledge. The results are not significant for the other ratio categories, likely reflecting very low numbers of patents meeting these more stringent criteria. Thus, while the effect is not as strong as in the photography industry, in the paint industry, increases in process management activity are also associated with increases in the share of more exploitative innovations. These effects are found most strongly in innovations that are quite exploitative of previous firm knowledge. The results suggest that in both the paint and photography industries, as process management activities increase, exploitation increases at the expense of exploratory innovations.

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DISCUSSION

Organizational evolution and learning literatures suggest that as organizational routines become entrenched and are repeated, organizations tend to exploit existing knowledge and capabilities, possibly crowding out variance-increasing, exploratory activities (e.g., March, 1991; Levinthal, 1997b; Repenning and Sterman, 2002). Our research, based on a longitudinal study of business units in the photography and paint industries, supports and extends these ideas. Research in these streams has relied on computer simulations (e.g., Levinthal, 1997b) or age and size (e.g., Sorensen and Stuart, 2000) as proxies of the extent of bureaucratic routinization that creates inertia and leads organizations to exploit existing knowledge. Our work goes beyond prior research by incorporating measures of managerial practices that are comparable across firms and that may directly contribute to greater routinization and create innovation traps. Our results indicate that process management activities spur exploitation over and above the natural tendencies that unfold with age and size. These results suggest that it is not organizational age or size per se, but routinization that gives rise to increasingly exploitative behavior. This paper, then, highlights the importance of going beyond the proxy measures of age and size to pinpointing the specific organizational practices that are the roots of inertia.

Our measures of exploitation and exploration also go beyond existing research. Whereas much of the research on exploration uses dichotomous measures of exploration, we have measured exploitative and exploratory innovation along a continuum. These more comprehensive methods provide fine-grained measures of exploration and exploitation. Our findings using these measures suggest that notions of exploration as extremely distant search, departing entirely from existing organizational knowledge, should be modified. While we found that organizations had difficulty retaining the most exploratory forms of innovation in the face of rapid exploitation, we also found that this challenge persisted even as the innovations became quite exploitative. In the photography industry, even innovations that leveraged existing knowledge (innovations that relied up to nearly 40 percent on knowledge used in prior innovations) were squeezed out in favor of extremely exploitative innovations, those based 80 percent or more on knowledge the firm had used in prior innovation efforts. These results suggest that firms' challenges in maintaining exploration may be more difficult than previously suggested. Organizations face a challenge in sustaining highly risky, distant search and exploration into new domains, but it appears that this challenge extends even to sustaining moderately exploratory innovations that leverage existing organizational knowledge. In addition, process management activities and the culture associated with exploitation appear to drive extremely local search and exploitation based almost entirely on familiar knowledge. It may be that the combination of learning and selection effects drives more incremental innovation and stunts the firm's ability to acquire new competencies (Gatignon et al., 2002).

Business Services Industry

Process management and technological innovation: a longitudinal study of the photography and paint industries

Administrative Science Quarterly, Dec, 2002 by Mary J. Benner, Michael Tushman

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