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

PBFs operate in many sectors of the economy: from advertising and the creative industry, to IT, engineering and construction. The characteristics of PBFs and the environment within which they operate make it difficult for decision-makers to see the consequences of their project acquisition activities in regards to their potential to build innovative capabilities. These issues are significant because of the contribution of PBFs to the economy, and because of the desirability of improving performance of these businesses through systematic learning and innovation processes. Research into innovation in PBFs and new insights into the levers available to managers in such organisations have the potential to help these organisations and society to benefit from innovations originating within PBFs.

For many PBFs, especially those providing professional services, such as consultancy, advertising, or engineering design, capabilities are their main asset.

Innovation is particularly important, but also subject to particular challenges in PBFs. Since innovation in PBFs occurs regularly during project execution and more infrequently within dedicated R&D efforts, the nature of innovative activities in these organisations is episodic (Gann & Salter, 2000) and difficult to plan. Learning is crucially influenced by learning opportunities in projects, determined both by the nature of the work, and the resources available within project execution for innovative problem solving. The organisational context of PBFs as well as the particular characteristics of the markets within which some PBFs operate, such as the construction industry, can present challenges for carrying out innovation (Gann & Salter, 2000; Nam & Tatum, 1997).

Capabilities are accumulated on the project level and specific efforts are required to ensure the transfer of knowledge to other projects and to the organisation. A key challenge therefore is to overcome the limitation of a discontinuous learning process (Brady & Davies, 2004). Time-constraints and the lack of slack in PBFs severely constrain learning activities and innovation. The speed and focus of projects can nevertheless, lead to targeted learning, although the contribution of this accumulated knowledge at the project level to the strategic requirements of the wider organisation and its performance over time remains uncertain. Project-level knowledge must be captured and made accessible in order to be available across the organisation. The loss of valuable knowledge and obsolescence can threaten the organisational knowledge base, particularly in complex and rapidly evolving knowledge areas. The literature on knowledge management has considered some of these issues and recommended strategies and techniques for tackling them. However, time pressures as well as the relative autonomy at the project level in many organisations often act as a disincentive to the transfer of this knowledge to the organisational core. There is a challenge in linking learning within project processes to learning in core business processes in PBFs. Nam and Tatum (1997) have identified slack as a prerequisite for innovation in construction companies yet clearly, slack can also be costly and wasteful. There are also concerns that excess slack might even have negative consequences for innovation itself. In manufacturing, an inverse U-relationship between slack and innovation has been found as the result of two counterbalancing effects: while lack of slack prevents experimentation, too much slack can result in unfocused and undisciplined experimentation, not resulting in positive innovative outcomes (Nohria & Gulati, 1996).

3. APPROACH

In this paper we draw together a conceptual framework of the relationship between work acquisition and the development of innovative capabilities based on theories captured in the growing literature of PBFs. Building on the theoretical conceptualisations on aspects of the problems found in the literature, we develop a more comprehensive picture of the relationships. We synthesize the existing literature in diagrammatic form as a coherent and consistent expression of a theory. We follow the approach used by Sastry (1997) as well as Rudolph and Repenning (2002), who characterise this as a special case of grounded theory building--based not on primary empirical research, but on learning from previous theoretical conceptualisations.

The use of causal-loop diagrams and other tools from System Dynamics (Sterman, 2000) facilitates the analysis of the feedback loops in the system in which PBFs operate. This is a powerful way of examining the resistance of the system against a desired change (e.g. the development of capabilities to move into a new market) or to understand the reasons why managerial actions do not have the desired consequences. This approach also gives the opportunity to draw on findings and methods of system dynamics work in related areas such as project management (Cooper, 1980; Lyneis, 2001), innovative organisations (Saeed, 1998), innovation and diffusion (Milling, 2002), work acquisition and workload fluctuations (Bayer & Gann, 2006).

In the diagrams presented below, variables correspond to real-world phenomena, which can be operationalized and are, in principle, measurable, even if this may be more difficult for those corresponding to intangible concepts (such as reputation or capabilities). We follow the standard conventions used in causal-loop diagrams and in system dynamics (Sterman, 2000) more widely and denote causal connections with arrows. The variable at the origin of the arrow influences (possibly in conjunction with others) the variable at the head of the arrow, the + (or -) sign denotes that--all else remaining equal--a small increase in the value of the variable at the origin will result in an increase (or decrease) of the variable at the head, compared to the value it otherwise would have. In addition to these causal links, normally found in causal loop diagrams, we also distinguish state (stock, level) variables from auxiliary and flow (rate) variables. State variables are marked with a box around the variable name. This distinction is useful in the further analysis of relationships since the resources of an organisation are state variables which accumulate over time, and can therefore only indirectly be changed by changing the associated flow variables.

4. WORK ACQUISITION, WORK EXECUTION AND INNOVATION IN PBFS

In this section, a conceptualisation of the project-based organisation is further developed. This will form the basis of our analysis of the relationship between work acquisition, work execution and innovation. We begin by identifying key resources and capabilities, and then map out the effects of these resources and the factors which influence resource accumulation. Necessarily this will require a certain degree of simplification. We look at three areas in turn: work acquisition, work execution and finally, at innovation and capability building as the particular interest of this paper. By doing this we are able to construct a map of the key relationships influencing performance and behaviour of the PBF (Figure 1).

4.1 Resources and capabilities

Competitive advantage derives from the capabilities of an organisation. Resources (productive assets of the firm) working together create capabilities (what a firm can do) (Grant, 2005: 139). Following Warren (2002) we define asset stocks as including both tangible and intangible resources and capabilities. The key assets for the project-based professional services firms are considered to be its staff, knowledge, financial resources and its reputation. In order to offer new products and services, different types of capabilities have to be accumulated. These include functional and organisational capabilities, in addition to specific project capabilities such as effective bid and project management (Davies & Hobday, 2005). Capabilities are partly embodied in the staff of the organisation. Reputation, gained through successful project outcomes, is a key resource for winning new work and attracting highly skilled staff. In our analysis we will concentrate on the asset stocks reputation, capabilities, workload and financial resources (Table 1).

Divisions within a PBF, between projects, and between projects and the central organisation can be pronounced (Gann & Salter, 2000). The resources in PBFs are often not controlled centrally and considerable discretion is left to project managers and baron-like group leaders (Gann & Salter, 2003). The many interfaces which have to be considered in the management of projects result in a crucial role of negotiations and power games to reach compromises (Courpasson, 2000). This recomposition, though not abolishment of the hierarchical organisation (Clegg & Courpasson, 2004), leaves considerable scope for interpretation and negotiation of rules by project managers (Clegg, 1975).

[FIGURE 1 OMITTED]

Hobday (2000) identifies the coordination of processes, resources and capabilities across the organisation as an inherent weakness in a project-based organisation. Knowledge can be held by individuals or groups of staff and might be explicit and tacit. These characteristics will influence the permanence and accessibility of the knowledge base (Davies & Hobday, 2005).

Resources and capabilities accumulate and deplete over time. The asset stock at present is the sum of all the inflows minus all the outflows in the past (starting from its initial value). In the diagrams asset stocks are shown as boxed variables.

4.2 Work acquisition and workload