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

These reinforcing feedback loops are a familiar occurrence in many PBFs where fire-fighting and time famine (Perlow, 1999) are common. Reinforcing loop 3 'Too busy too capture knowledge' is exemplified by the case of the project-based division (PBD) of a pan-European company, analysed by Davies and Hobday (2005: 134) where:

despite good individual project performance, in the previous two

years the high-pressured work environment had left little space

for-formal training or staff development, either in technical or

commercial areas. It was apparent that many of the formal and

informal activities associated with organisational learning and

improvement (e.g. post-project reviews, technical mentoring and

informal communications) were not being performed. Lessons learned

from particular projects were not shared formally because there

were no structures or incentives for cross-project learning or

communications. It had become hard to learn from project to

project, leading to worries within PBD over its long-term

effectiveness.

[FIGURE 4 OMITTED]

[FIGURE 5 OMITTED]

In addition to the reinforcing feedback loops discussed above, there are also counteracting balancing loops which tend to drive workload back into equilibrium. A balancing feedback loop counteracts for example the effect of excessive workload. As the project completion rate drops (due to quality problems) the intangible resource reputation drops over time as well. This causes the company to secure less new work and workload normalises as a consequence--with the unwelcome consequence of diminished reputation (Figure 6).

This type of analysis can help to identify short-term costs (in terms of resources and potentially reputation) from taking on too great a volume of projects, or projects that are too complex, as well as the trade-offs between exploitation and exploration. Similarly, the relationship between reputation and winning more complex projects with better learning opportunities (and better access to skilled labour) or the effects of financial success on the availability of resources for learning can be investigated.

[FIGURE 6 OMITTED]

A company specializing, for example, in simple projects might rarely be able to move to highly complex projects because opportunities to acquire new skills are lacking. Both capability accumulation and reputation (which constrains winning projects and subsequently acquiring capabilities) act as barriers to rapid change. A vicious circle can result in companies remaining locked into a particular application area, or in simple and low complexity projects. Breaking out of such traps can be difficult in project-based environments if specific resources for capability development are not available and time pressures are high. Consequently, there can be different paths of evolution (e.g. high and low complexity projects) between which companies cannot easily switch.

6. DISCUSSION

The feedback loops analysed in the previous section interact with each other and with other influences laid on in the map of relationships (Figure 1). The interrelatedness makes managing such organisations difficult. Actions might have unintended consequences which often are not immediately visible. Concentrating on project execution without due regard to the consolidation of capabilities will harm the firm in the longer term. Low quality project outcomes as result of a rushed job will harm reputation.

Of particular importance is to understand the 'fit' of project level knowledge to the potentially evolving requirements of the project-based organisation. Available capabilities shape the potential to win new projects with distinctive learning opportunities. The type and complexity of a project will influence whether more experience in an area; more advanced skills within a particular knowledge domain; or knowledge in new areas can be accumulated.

Resource allocation to a project determines the scope for innovative problem-solving within such projects. The strong potential for unforeseen developments in current projects and the variability of bid success add to uncertainty in workload planning. It is typical that market demand and local decision-making determine the type, size and complexity of projects. Therefore, the scope for learning and capability accumulation is often determined by activity at the local level, rather than by planning from the centre of the organisation. This limits the extent to which capability accumulation can be managed within project-based environments through conventional hierarchical management processes. Knowledge capturing activities, whose benefit might only be reaped by future projects, and potentially by other parts of the organisation, are often of low priority for project teams.

The time shortage in project environment militates against the investment of time spent in developing solutions which consider a broader account than the current crisis. While time restricts the ability to innovate in PBFs, the risks related with excess time are less relevant in project-based environments than in manufacturing. PBFs are often under such severe time constraints that the danger that 'pet projects' and unfocused (and therefore ultimately unsuccessful) innovative activities are undertaken is small. The focus on projects and the close client relations ensure in addition that innovative activities remain concentrated and targeted.

The accumulation process of resources and capabilities introduces a strong element of history dependence: the reputation and the knowledge gained in past projects influence work acquisition, execution and learning in the present. Lock-in into particular types of projects can occur and the path of capability development can be severely constrained, significantly more so than in non-project organisations where often more substantial resources can be made available for dedicated learning not directly connected to current work. Therefore, overcoming the capability barriers for new areas of work or more complex work is difficult. PBFs are likely to be even more limited than other companies to change course and acquire radically new or far more advanced capabilities.

Work acquisition practices are the key lever to steer the course of capability development and innovation in PBFs. Current work affects the future potential to develop capabilities and skills to innovate. This limits the growth of the firm and development of its strategic resources. The type of work currently carried out is determined by the firm's approach to acquiring work and the strategic choices that are made in winning orders. This sets limits on the firm's ability to win better work that could create learning opportunities to build capabilities that assist the firm to innovate and develop its reputation. However, the control decision makers have over this lever is limited by the dependence on the external environment in respect to the demand for projects, the uncertainties in winning work and the discrete, often large size of projects which can give the unmanageable event of bid success a large influence over the future development of capabilities within the firm. Control over the development of the knowledge base and therefore the potential to develop innovative solutions and migrate into new and more advanced areas of work is therefore necessarily imprecise and limited.

7. CONCLUSIONS

This paper has focused on the dynamics of capability accumulation in PBFs. Understanding these dynamics provides an appreciation of some of the challenges faced by PBFs in managing innovation. The paper has provided a model for considering ways in which knowledge develops and how new knowledge can be consolidated in changing environments. It has identified key issues and levers available to managers in developing capabilities in dynamic environments.

Learning in PBFs occurs first and foremost within projects. 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 relative autonomy at the project level in project execution often acts as a disincentive for the transfer of knowledge to the organisational core. There is a problem in linking learning within project processes to learning in core business processes in PBFs. Time pressures are a consequence and a cause of the challenges of project execution, innovation and learning in PBFs. Our model illustrates the problem and can help to develop strategies for overcoming these challenges.