Innovation and the dynamics of capability accumulation in project-based firms.

SUMMARY

Project-based firms face particular difficulties in managing innovation. This paper builds on the literature on concepts of project-based firms to develop an approach to innovation management linking work acquisition, execution and learning. The conceptual framework is expressed in diagrammatic form, providing a succinct representation of the complex relationships and a starting point for analysis of the opportunities and challenges facing the management of project-based firms, including those impeding success, in particular the role of time pressures. The analysis helps to elucidate findings from prior in-depth studies of a large number of engineering and design firms. The paper also provides pointers for future research.

KEY WORDS

capabilities; innovation; project-based firms; modelling; system dynamics; learning

1. INTRODUCTION

This paper examines the relationship between project acquisition practices and innovation in project-based service organisations. Analysing project acquisition and innovation alongside project execution exposes key issues for commercial success in project-based firms (PBFs). While the acquisition of work is an essential condition for survival in the short term, innovation and the development of new capabilities are preconditions for the exploitation of new markets and the adaptation to a shifting environment. Work acquisition and innovation are closely linked within project organisations. Not only does innovation enable the acquisition of new, complex and demanding work; the acquisition of work in turn, influences the potential path of learning and innovation as learning occurs predominantly in the context of project execution. The paper highlights the way in which current practices and strategies for acquiring work relate to the development of innovative capabilities in PBFs. In this, particular attention is paid to the influence of time availability in the execution process on capability accumulation and innovation.

The paper aims to clarify the relationships between strategies for acquiring new orders, the type of work delivered, and the capability of PBFs to innovate, by drawing together existing knowledge. It builds upon results from a research project in which a system dynamic model was developed and used in a PBF to assist the management of bidding processes in order to improve the selection and delivery of innovative projects. Previously, one of the authors had conducted intensive research with a large number of PBFs in a variety of sectors (including IT, engineering, construction, architecture), focusing in particular on innovation in those organisations. Research as well as long-term consultancy relationships with companies of different sizes (from SMEs to large multinationals) allowed the identification of generic challenges facing project organisations at different levels within these organisations (from project team level to board level). Through workshops, interviews and the observation of work practices, this research resulted in a detailed understanding of how professionals in these organisations undertake work, how they are managed, and how learning from and across projects is possible. Many different PBFs encounter particular difficulties in planning and sustaining systematic learning and capability development over time within the vagaries of the project environment. The relationships and interdependencies between activities on the project and at the business level of the organisation presented particular challenges for innovation in a diverse set of PBFs.

The paper is divided into seven sections. This introductory section is followed by a literature review. Section three describes the approach taken in this work. The fourth section systematises lessons from previous research in diagrammatic form. Section five presents an analysis of the factors influencing capability accumulation and the feedback loops linking different elements of the project-based organisation, concentrating in particular on the role of time pressures. In section six, we discuss the findings and use the conceptual insights gained through this process to view the experience of project based-firms and their challenges in developing innovative capabilities in a new light. Section seven presents our conclusions, discusses the limitations of this paper and raises new questions for research and practice.

2. CAPABILITIES AND PROJECT-BASED FIRMS

The contributions of Edith Penrose (1959) and subsequent scholars employing related approaches have supported the central role that resources play in the performance of the firm. The resource-based approach investigates resources as the source of competitive advantage (Wernerfelt, 1984; Rumelt, 1984; Barney, 1986; Diericks & Cool, 1989; Montgomery & Wernerfelt, 1988; Peteraf, 1993; Mahoney & Pandian, 1992). The competence literature focuses on the ability to manage, maintain, renew and deploy resources (Prahalad & Hamel, 1990). Resources include both tangible and intangible assets and capabilities. Here they are understood as comprising assets (both tangible, such as environmental equipment, and intangible, such as contracts), and capabilities (loosely understood as the skills of the organisation). Following Winter (2003) we define organizational capabilities as high-level routines an organisation has available for producing significant outputs of a particular type. Although having the capabilities to do something does not mean that the firm actually undertakes this activity, the capability is a necessary condition for this activity (Prahalad and Hamel, 1990). Moreover, capabilities that are not exercised add to the cost-burden and are liable to decay (Winter, 2003).

While the resource-based view acknowledges the differences of firms in regard to their resource endowment (Peteraf, 1993) and concentrates on the conditions under which resources (assets and capabilities/competences) become valuable and difficult to replicate, related and subsequent contributions to the debate take a more dynamic perspective and inquire into the building and sustaining of these capabilities and in particular dynamic capabilities that 'operate to extend, modify or create ordinary capabilities' (Winter, 2003).This 'dynamic capabilities' literature stresses the crucial importance of the high-level capability to develop resources (Teece et al., 1997). The dynamic resource based view of strategy (Warren, 2002) stresses the accumulation of resources and capabilities over time as well as the impact of these dynamics on performance. This approach is of particular relevance here as it employs a similar mapping approach based on the tool set of system dynamics (Sterman, 2000) to the one suggested in this paper.

While fundamental changes in product strategy and form including capabilities can be essential in rapidly changing markets, the preservation of a degree of continuity and coherence in firms is necessary to exploit existing capabilities. (Rindova and Kotha, 2001) In the case of product development, Verona and Ravasi (2003) have suggested that dynamic capabilities are developed in a process involving knowledge creation and absorption, knowledge integration, and knowledge reconfiguration. They stress that knowledge creation and absorption are only the prerequisites for innovation, while the capability of integrating specialized dispersed knowledge trigger continuous innovation. The reconfiguration or recombination of knowledge allows then to make this continuous innovation process sustainable. Similarly, it is a theoretical and practical challenge to establish the underlying elements of stability and routine that allow PBFs to develop capabilities which provide sustainable competitive advantage in changing markets.

The current paper builds on insights provided by the literature in focusing on the resources of the project-based organisation. Our analysis is based on examination of the causal links between resources, their accumulation, depletion rates, and different work acquisition and innovation strategies. PBFs often innovate in collaboration with other organisations; clients, suppliers or project partners, rather than in isolation. Their activities draw on knowledge from sources, such as universities, which are not directly involved in the projects they carry out. A complex web of relationships underlies the innovative process, as the 5th generation of innovation models recognises (Rothwell, 1992). For the purpose of this paper we have chosen to focus on specific issues of innovation in the PBF itself--the resources and capabilities, work acquisition and innovation strategies of the firm. Setting the boundary of the study does not imply that relationships beyond this definition are unimportant for innovation in project enterprises. We restrict ourselves to studying the resources of the firm and factors under its control, because we contend that--at least in first approximation--the firm environment beyond the system boundary is not changed by the choices made within the firm, and its effect on the firm and subsequent performance is therefore not changed by the firm. The firm will, for example, through its activities not add significantly to the stock of knowledge available from external sources. This approach allows us to identify the processes and mechanisms linking work acquisition and innovation and the management levers available to the firm. It will be amongst tasks left for future study to refine these findings by putting more emphasis on changes in the firm environment.