Industrial Economics angle of Organizational Innovation

In the last blog, we did look at the concept of organizational innovation using the classification of Contingent Theories. In today's blog we look at organizational innovation using the lenses of Industrial Economics.

The micro-economists in the field of strategy consider organization structure as both cause and effect of the managerial strategic choice in response to the market opportunities. The central argument here is that - certain organizational types or attributes are more likely to superior innovative performance in a given environment because they are more suited to reduce transaction costs and cope with alleged capital market failure.

The theory of "the innovative enterprise" focused on how strategy and structure determine the competitive advantage of the business enterprise. The theory postulates that over time, business enterprises in the advanced economies have to achieve a higher degree of "organizational integration" in order to sustain competitive advantage. The model most supported by the success of the Japanese against the American companies.  However it is important to note that such an integrated approach would be best suited in case of incremental innovation, but there isn’t sufficient proof that it works well in the cases of radical innovation as a means to competitiveness.

Another theory by Teece suggests that the formal (governance modes) and informal (culture and values) structures, as well as firms' external networks powerfully influence the rate and direction of their innovative activities. He classifies innovation into "autonomous" and "systemic" and relates it to the organizational structure. The definition of these 2 innovations is itself pretty clear and helps understand the relation:

1. An Autonomous innovation is one that can be introduced to the market without massive modification of related products and processes. - A classical example is that of introduction of power steering where no much modification had to done to the existing set up to introduce this change.
2. Systemic Innovation on the other hand, favors integrated enterprise because it requires complex coordination amongst various subsystems and hence is usually accomplished under one "roof" - The introduction of front wheel drive requiring the complete redesign of many of the automobiles is an example of such systemic innovation.