Engaging Communities for Problem Solving and Innovation: Shifting Institutional Logics

With costs of information processing, storage, and communication radically decreasing, firms are becoming increasingly interdependent as they operate within networks of value-creating organizations and individuals. This trend... [ view full abstract ]

With costs of information processing, storage, and communication radically decreasing, firms are becoming increasingly interdependent as they operate within networks of value-creating organizations and individuals. This trend shows no sign of abatement. More and more, we see firms leveraging technological advances to engage with global communities of developers, customers, and workers to solve innovation problems. These shifts challenge our understanding of how organizations operate and innovate (see Tushman, Lakhani, and Lifshitz-Assaf, 2012; Davis, 2015; Altman, Nagle, Tushman, 2015). In this paper we address several questions: How do organizational and institutional logics shift as firms engage external communities for problem solving and innovation? Relatedly, is the nature of organizational adaptation to open innovation, and engagement with external communities, subject to similar inertial dynamics that firms face when dealing with more traditional organizational shifts?

Recombinant Innovation and Decreasing Information Costs

The fundamental nature of innovation dynamics are shifting due to: 1) exponentially increasing solutions spaces for innovation problems made possible by dramatically accelerating technological advances, particularly highly modular technological solutions (Baldwin and Clark, 2000; Baldwin and von Hippel, 2011), and 2) the reduction of information costs to near zero. Many scholars refer to the exponential increase in technological solutions as a recombinant process since existing components are combined in new ways (Fleming, 2001; Furman and Stern, 2006; Schumpeter, 1939). This exponential growth of possible solutions to innovation problems drastically increases the solution space that firms must explore as they innovate and compete (Gavetti and Levinthal, 2000; Jeppesen and Lakhani, 2010; von Hippel, 1994).

At the same time, information storage, processing, and communication costs are exponentially decreasing (Hilbert and Lopez, 2011). These decreasing costs allow organizations to more easily engage with external communities of developers, customers, and workers (Altman et al, 2015). For firms in competitive industries where innovation occurs rapidly and the solution space increases exponentially, engaging external communities offers the firm more effective ways of efficiently searching for an optimal solution that allow them to create a sustainable competitive advantage.

As more firms reach outside their boundaries to engage with external communities for problem solving and innovation, it is critical to understand the difficulties they face as they shift away from traditional Chandlerian logics, which are dominated by hierarchy and control (Chandler, 1977) towards Benklerian logics that revolve around openness, decentralized activities, cooperation, coordination, and external engagement (Benkler, 2006). Through this process, the nature and function of the firm shifts from problem solver (e.g., March and Simon, 1958; Nickerson and Zenger, 2004) to more of a solution seeker (Lifshitz-Assaf, 2015). As firms engage in fundamental shifts in their relations with external information sources, traditional firms will face contrasting and seemingly inconsistent organizational and institutional logics (Thornton, Ocasio, & Lounsbury, 2012). This paper seeks to understand the emergence of these inconsistent logics and mechanisms by which firms attend to and deal with these inconsistent logics.

Extending the Knowledge-Based View

The knowledge-based view (Eisenhardt and Santos, 2002; Grant, 1996; Kogut and Zander, 1992) considers how decisions related to organizing, and specifically related to internally integrating versus outsourcing, affect the production and protection of knowledge and capabilities (Nickerson & Zenger, 2004). We focus on the firm as a problem solver (Nickerson and Zenger, 2004) and expand this perspective to explore questions related to how firms that increasingly engage with communities are affected by their institutional logics. We develop a two-dimensional framework that enables us to explore governance forms along two related spectra: 1) the locus of innovation activity for a firm, and 2) the concentration of control. We compare governance forms along these dimensions as shown in Figure 1.

The literature considering the firm as a problem solver traditionally focuses on the left side of this figure, where the locus of problem solving activity is within the boundaries of the firm. Nickerson and Zenger (2004) use the term Consensus-Based Hierarchy to contrast to traditional Authority-Based Hierarchy, but both methods focus on managing internal activities of the firm. All other activities have traditionally occurred outside the boundaries of the firm in the open market.

We posit that when information costs radically decrease, and technological modularity increases, a new method of governance emerges, the managed market. In managed markets, there is a spectrum along which a firm engages with external communities for problem identification and solving in a manner that allows the firm to exert guidance and/or control over external actors more so than in traditional open markets. The managed market embraces Benklerian open logic and runs counter to traditional Chandlerian hierarchical logic resulting in a tension within the firm.

Shifting from Internal to External Focus: Institutional Logic Challenges

As an organization shifts from the left side of Figure 1 to the right, and particularly the top right, it undergoes a series of challenges because the shift challenges ingrained institutional logics. Across the stages of a firm’s value creation chain (innovation gathering, evaluation, production, distribution, and customer relations) how firms structure themselves changes. We identify five aspects that must be managed in new ways associated with these transitions: goal setting and specificity, coordination, communication, compensation, and intellectual property. For each of these five aspects, we discuss how activities shift as the firm moves from a Chandlerian Logic to a Benklerian Logic and highlight the implications for institutional logics as incumbent firms make this transition. This paper extends the knowledge-based and problem-seeking views of the firm to incorporate the ability of the firm to use managed markets to more efficiently examine increasingly large search spaces and engage effectively with a variety of external communities.

Expected Progress by August 1, 2016

We expect to have a fully draft of a paper by August 1. Therefore, the OUI conference would be a great change to get feedback before we push the paper to the next stage.