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49 NO 4 NOVEMBER 2002 The Impact of Environmental and Organizational Factors on Discontinuous Innovation Within HighTechnology Industries Dawn R DeTienne and Christine S Koberg Abstract This study examines the influence of environmental organization

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352 IEEE TRANSACTIONS ON ENGINEERING MANAGEMENT, VOL. 49, NO. 4, NOVEMBER 2002 The Impact of Environmental and Organizational Factors on Discontinuous Innovation Within High-Technology Industries Dawn R. DeTienne and Christine S. Koberg Abstract This study examines the influence of environmental, organizational, and managerial characteristics on discontinuous innovation across three industries (aerospace, electronic compo- nents, and telecommunications) that are highly dependent upon innovation for survival and competitive advantage. The authors randomly mailed survey

questionnaires to 900 chief executive officers located across the U.S. and obtained quantitative data from 192 individuals. To validate these results, they conducted structured follow-up interviews of 25 executives. The findings sug- gest that discontinuous innovation increases with environmental dynamism and that structure and processes (intrafirm linkages, experimentation and transitioning, or sequencing from one product/project/program to another) contribute to discontinuous innovation. These results suggest that top managers are active, not passive, in influencing discontinuous innovation

within their organizations. Index Terms Discontinuous innovation, environmental dy- namism, experimentation, intrafirm linkages, transitioning. UCH has been written about the increasing importance of discontinuous innovations for economic growth in the U.S. economy [20], [68]. A number of well-managed highly innovative U.S. companies have tried to put in place structure and systems explicitly designed to discover (or create) and exploit discontinuous innovations [56]. In order to accomplish this, firms need to recognize that three forces—environmental, organizational (characteristics,

structure, and process), and managerial—affect such innovation. Relatively few researchers have investigated whether these forces operate separately or in combination. In this research, we investigated the effects of the following factors: environment (dynamism); organization (age and size of the firm); structure (intrafirm structural linkages); process (improvization, experimentation, and transitioning across projects); and managerial characteristics (chief exec- utive officer (CEO) age, and tenure with the company). We measured these factors through the perceptions of CEOs in three different

industries—aerospace, electronics, and telecom- Manuscript received February 27, 2001; revised April 23, 2002. This paper was presented in part at the USASBE meeting in Orlando, Florida, 2001. Re- view of this manuscript was arranged by Special Issue Editors S. K. Kassicieh, B. A. Kirchhoff, and S. T. Walsh. D. R. DeTienne was with the College of Business, University of Colorado, Boulder, Colorado 80309 USA and is now with the Department of Management and Human Resources, Utah State University, Logan, UT 84341 USA (e-mail: C. S. Koberg is with the College of Business,

University of Colorado, Boulder, Colorado 80309 USA (e-mail: Digital Object Identifier 10.1109/TEM.2002.806719 munications—chosen because they are highly dependent on innovation for competitive advantage and survival. I. D ISCONTINUOUS NNOVATION A clear distinction is not always made between discontinuous and incremental innovations. The term discontinuous innova- tion is usually reserved for major product/services and techno- logical developments based on significant innovation. Some in- novations change the entire order of things, making obsolete the old ways

([67, p. 171]). Discontinuous innovations permit entire industries and markets to emerge, transform, or disappear. They are often described as technological breakthroughs that help companies rewrite industry rules or create entire new industries ([32, p. 2]). Discontinuous innovations are analogous to Kuhn’s [36] “paradigm shifts”; they permit entire industries and markets to emerge, transform, or disappear, providing a firm a signifi- cant competitive advantage [20]. Examples from the electronics industry include self-healing computers; from the aerospace in- dustry, commercial satellites;

and from the telecommunications industry, the Wireless Web. Discontinuous innovations are not necessarily a matter of magnitude but can comprise altered variations in technology that over time shift the direction of an industry. Whether de- veloped in-house or generated outside the firm, discontinuous innovation or variations in technology will augment, shift, and change the firm’s technological processes and products/ser- vices/programs. The term incremental is reserved for those minor innovations or components of technology. Incremental innovations are minor changes more like Kuhn’s [32]

“normal science.” Examples of incremental innovation from the aerospace industry include designing parts digitally rather than on paper; from the electronics industry, using copper-circuitry to form chips, providing video banking, and digital movies; and from the telecommunications industry, firewall software and storage networks. One electronics executive we interviewed summarized incremental innovation in this way: “It is kind of like the evolution of the PC. The basic structure is the same, but you change a chip here and a diode there and it gives you better performance. It is this type of

innovation. The notion of discontinuous change (and thus innovation) is captured in punctuated equilibrium or metamorphosis models of convergence and reorientation [24]. According to this model, 0018-9391/02$17.00 © 2002 IEEE
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DETIENNE AND KOBERG: IMPACT OF ENVIRONMENTAL AND ORGANIZATIONAL FACTORS ON DISCONTINUOUS INNOVATION 353 organizations evolve through relatively long periods of stability, that is, most innovations simply build on what is already there, requiring modifications to existing functions and practices. These periods of stability, however, are punctuated by rela-

tively short periods of fundamental change or “technological discontinuities in which new, radically superior technologies displace old, inferior ones” [52]. Gersick [24] and Meyer et al. [42] also characterize organizational change and innovation as consisting of long periods of stability (undefined) or first-order change that involves small or incremental changes punctu- ated by environmental jolts or relative short or revolutionary periods of second-order change that involves technology and systems that are significantly transformed [24], [42]. “Once a dominant design emerges, [however]

technological advance returns to incremental improvements and elaboration of the dominant technology occur. Although there is some debate about the universality of this technology cycle, it has proven illuminating in a wide variety of industries” [42]. Tushman et al. [65] studied four major organizations and found that their technology did indeed evolve through relatively long periods of incremental change punctuated by relatively rare innovations that discontinuously improved the state of the art. Tushman and Anderson [64] found that discontinuous innovations occurred only eight times in the

190 total years they observed. Although these scholars have expressed con- cern about researching the relatively small number of actual “discontinuous innovations” within an industry, “research following the history of industries over generations has shown that there are always sharp discontinuities, often occasioned by new technologies ([39])”. In addition, there is a multiplicity of definitions of “discontinuous.” For purposes of this study we define “discontinuous innovations” as major changes or innovations in basic products or services or programs offered or markets served, or the

creation of new major product/service programs leading to new or expansion of current markets. This definition is consistent with work by Herbig [28] who refers to radical or discontinuous innovations as “higher order innovations” that create new industries, products, or markets (for example, lasers). Herbig [28] found that the conditions that favored high-order or discontinuous innovations (for example, the very first computers) differed from those that favored incre- mental innovation (for example, updated computer software). Our definition includes those innovations that are major in scope,

breadth, and cost, and as involving strategic innovations or the creation of new technologies, products, services, or mar- kets. Other researchers distinguish between administrative and technical, product and process, technological and architectural, and incremental and radical (discontinuous) innovation [9]. Schumpeter [55] states that entrepreneurs, the drivers of economic change, “creatively destroy” existing markets. He stresses that the scale of innovation is important—incremental innovations are those which efficient markets seize whereas en- trepreneurial opportunities creatively

destroy whole industries. Schumpeter [55] provides several examples of entrepreneurial opportunities (discontinuous innovations) to underscore his point: 1) the introduction of a new product or service; 2) the introduction of a distinctive improvement in the level or quality of a product or service; 3) the introduction of a new method of production or distribution; 4) the opening of a new market; 5) the capture of a new source of supply; and 6) new forms of organization within an industry [22], [56]. Our definition is consistent with that provided by Schumpeter in that our definition includes

not only new products 1) and distinctive improvements 2) but also new markets 4). Our definition is also consistent with the work of Tushman and Anderson ([64, p. 441]) who state “Product discontinuities are reflected in the emergence of new product classes …in product substitution …or in fundamental product improve- ments .” Discontinuous innovation was summarized by one executive we interviewed as: “Fiber optic is going to be a paradigm change. It is going to add another level of technology to our industry. It won’t completely replace everything, but it will over time change the leading edge

technology of the industry. Fiber optic interconnect capability will route data 1000 times faster than we do today. By assessing factors contributing to discontinuous innova- tions or alterations in technology, we hope to provide utility or information for other firms that are dependent upon innova- tion. Innovation can be carried out in a number of different ways and can develop along many different routes [67]. The environ- mental, organizational, and managerial factors we studied (for example, dynamism) are thought by scholars to affect and stim- ulate discontinuous innovation. Though

seldom investigated, we chose to investigate these forces because of their potential for the long-term economic sustainability of firms in industries that are dependent upon innovation for comparative advantage and long-term survival. In this study, we use CEO perceptions to measure discon- tinuous innovation. Although some scholars have expressed concern about using self-report measures of innovation, others [30], [31] have found a strong correlation between perceptual measures and objective measures of innovation. In addition, the approach of using one informant per organization has been

supported when survey instruments were well designed and executed [29], [54], [60]. II. T HEORETICAL VERVIEW Complexity theory, which argues that organizations import energy from the outside and that they are capable of main- taining themselves on the basis of input from the environment, [1], [40], [57] is the orienting framework for this research. Strategic managers are connected and interdependent with their environment, with new ideas imbedded both inside and outside the organization. Given their perceptions of the environment, agents (strategists) with schema, that is, cognitive

structures, determine what actions to pursue at a given time. Uncertainty and continually shifting environmental pressures drive orga- nizational agents (strategic managers) to make organizational changes and innovate. In addition, according to complexity theory, organizations embody conflicts between stability and instability, certainty and uncertainty, and between internal and external pressures.
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environment creates a set context or a set of conditions within which innovative ideas are fostered and developed. Perceived environmental dynamism (unpredictable change) is considered an important environmental variable leading to externally induced changes within organizations. This suggests that the more rapid tech- nological and market changes foster an environment favorable to innovation. An examination of dynamism flows from an interpretive or information-processing view of organizations, which holds that managerial cognitions and perceptions of the environment are useful for predicting

innovation responses [14]. An environment that is perceived as increasingly dynamic may serve to reduce organizational and managerial inertia, thereby enabling top managers to choose among a range of innovative options. One reason that unpredictable change is associated with successful multiple innovations is that a rapidly changing environment gives top managers more options for innovation [4]. In a study of a group of highly diversified Canadian firms, Miller & Friesen [44] found that when the environment is viewed as dynamic, successful firms employ a number of different innovative

responses. One aerospace executive we interviewed explained, “Our in- dustry changed in response to other industries. The primary product we make are parts for jet engines, so you have to ask how fast is the need for change in the industry you are serving. The more dynamic and unpredictable top managers perceive the external environment to be, the more favorable they perceive it to be to innovation. One executive from the electronics industry we interviewed remarked, “It’s usually outside influences that drive us to change.” Another commented, “If you look at the history of innovations, most

major things happen outside the in- dustry that they made their money in. I think that a lot of times, the idea comes from outside an industry, and then the industry develops around the idea. A lot of history will show that.” Brown and Eisenhardt [4], [5] found that firms in the computer industry that were successful innovators or who were able to innovate on more or less a regular basis operated in industries with rapidly changing technology characterized by short product cycles. An uncertain and rapidly changing environment reduces structural rigidity and organizational inertia, thereby

opening up opportu- nities to innovate. Accordingly, we give the following. H1: In the perceptions and reports of top managers, envi- ronmental dynamism will be positively related to discon- tinuous innovation. IV. R ELATING RGANIZATIONAL AND TRUCTURAL HARACTERISTICS TO ISCONTINUOUS NNOVATION A. Age of the Firm, Size of the Firm, and Intrafirm Structural Linkages Innovative organizational behavior is not only affected by en- vironmental forces, but is facilitated or hindered by forces in the organization, including the age and size of the firm. As firms age and become larger, structural

rigidity and inertial forces in- crease, potentially constraining the ability of top managers to innovate. Top managers can exercise a greater discretion when there are fewer constraints imposed by an organization’s con- text [26]. Older organizations often are less able to innovate because they have formalized procedures, centralized authority, and standardized routines [33]. The older and larger organiza- tions become, “the more likely there are to have a large reper- toire of structures and systems that discourage innovation [66]. “While resources (both capital and human) are necessary to

innovate on a consistent basis, there do not appear to be sub- stantial economies of scale in the discovery of new ideas. Thus small firms may well innovate where larger firms often fail ([46, p. 302]). Indeed, with increasing size and age come bureau- cratic procedures that often “constrain innovation unless special systems are put in place to motivate and enable innovative be- havior” ([67, p. 201]). As one electronics executive remarked, “We’re very small and we face formidable foes—the likes of Sony, Hitachi, and Sharp. What we do innovate on what I will call multiple technologies, but we

don’t just use polysilicant as the technology of choice…we use DLP, a distilled light pro- cessing, a technology from Texas Instruments.” As firms age and become larger, they may become less entrepreneurial, al- though a desire to “invent and make” may still remain [21]. On the basis of the above, we have the following. H2a: In the perceptions and reports of top managers, age of the firm will be negatively related to discontinuous in- novation. H2b: In the perceptions and reports of top managers, the size of the firm will be negatively related to discontinuous innovation. According to

complexity theory, organizations are comprised of self-organizing networks, sustained by importing energy from the outside. This implies those ideas for innovators come from inside as well as outside the organization and that innovation is a network building process [1], [66]. Network theory suggests that organizations can best be understood as the structure and patterning of relationships within an organization [63]. In addition, complexity theory argues that the work of organizations is carried out by agents [individuals] who are “partially connected to one another, so that the behavior of a

particular agent depends on the behavior (or state) or some subset or all the agents in the system” ([1, p. 219]). “When an individual is ’switched on’ by some issue, that individual links up with others in his or her network, potentially, ’switching them on’ too” ([57, p. 488]). The cross flow of information and the collective efforts of a wide variety of people, concurrently working on different as- pects of a project, is needed to develop a work environment con- ducive to innovation [59]. Bringing a product to market requires that managers “form linkages, upstream and downstream, lat- eral

and horizontal” ([34, p. 1166, 1171]). Intrafirm linkages en- sure collaboration among organizational subunits and individ- uals. Tight vertical relations together with poor lateral relations offer no possibilities for cross fertilization of ideas within an or- ganization. Brown and Eisenhardt [4] in a study of nine SBU’s across nine computer firms found that firms that had multiple successful innovations had sharply defined project priorities, frequent cross-project communication, teams consisting of a mix of old and new team members, and a core team that carried a
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AND KOBERG: IMPACT OF ENVIRONMENTAL AND ORGANIZATIONAL FACTORS ON DISCONTINUOUS INNOVATION 355 project from concept to development. A study of top-level mar- keting managers from firms in the motorcycle industry showed that innovation could be stimulated by interfunctional groups and business program managers who coordinated the innova- tion process [45]. Of course, all innovation does not occur through collective action. However, many successful innovators bridge conceptu- ally and analytically different contributions by individuals or- ganized by a specialty of research ideas. Although this

may prove difficult, particularly in the case of a large number of individuals, ideally, an effort should be made to integrate the various members of the team; a lack of interplay among ideas can be an important impediment to innovation. Commenting on teams within his organization, one electronics executive we in- terviewed remarked: “When we form teams, we group ’em together so there’s a project manager and there is an engineering team. With all of the disciplines and the disciplines are pretty varied here that from electrical to mechanical to product design to the optics to the thermal part,

it’s a big issue. So we put the disciplines together in team areas and work with them there. Kolodny et al. [35] studied the introduction of innovative flexible technologies in 12 companies in Sweden, France, and Canada and found that successful companies moved toward flatter organizational structures with more horizontal communication. We predict the following. H3: In the perceptions and reports of top managers, in- trafirm structural linkages will be positively related to dis- continuous innovation. V. R ELATING RGANIZATIONAL ROCESSES TO ISCONTINUOUS NNOVATION A. Experimentation

Improvization and Transitioning Across Projects Organizational innovation is not only affected by environ- mental, organizational, and structural factors, but is facilitated or inhibited by processes implemented by top managers. Brown and Eisenhardt [5] in their study of firms in the computer in- dustry found that successful innovators were able to encourage experimentation, improvization, and to choreograph of transi- tions from one project or product to another. Complexity theory argues that innovation cannot be planned but must evolve; it requires experimentation, openness, and

improvization ([40, p. 215]). Both experimentation and improvization characterize inno- vation, and are separate but not entirely mutually exclusive constructs. Both imply “making it up as you go along” and “trial and error learning” and an innovation process that is opportunistic, tumultuous, and nonlinear [4], [25]. The extent to which top managers promote experimentation within the organization affects the ability of engineers and scientists to experiment and “prototype efficiently and competently, thereby creating a competitive advantage to the firm [39]. A manager who is able to

experiment will have an comparative advantage over rivals because of an ability to react to today’s moves by rivals without losing the flexibility to react to the future and proactively pursue new opportunities that do unfold ([5, p. 131]). As one executive remarked “We’re operating in areas we’ve never been before so you don’t know what you’re going to get. So there are a lot of stops and starts and a lot of blind alleys.” Ideally, managers gather information necessary to envision the future while simultaneously maintaining an ability to see unexpected opportunities in the present and to move

quickly and shift strategies in response to unforeseen market, competitive, technological, and regulatory changes. A manager who is able to improvise balances “the structure that is vital to meet budgets and schedules with flexibility that ensures the creation of innovative products and services that meet the needs of changing markets” ([5, p. 28]). Clearly some coordination is required and crucial to innovation, but too much or tight coordination impedes an organization’s capacity for in- novation, given how uncertain and technically complex inno- vative work is. Innovation by a project team

generally by no manner of means occurs in a systematic way nor thrives under structured systems. Describing how improvization worked in his firm, one electronics executive commented: If someone has an idea, they can come up to this team and say here’s my idea. I need $10 000 to $20 000 to do it. If the team decides, they don’t even have to fill out a piece of paper other than write a memo to the comptroller. Those are what we call our ’wild-hair’ projects. That is just what it is for. To let people have a way of trying things without having to deal with the bureaucracy. Firms with multiple

projects will require varying degrees of coordination. Rather than leave transitions to chance, top managers of successful firms “create an almost seamless switch from one project to the next” [4]. To ensure a smooth transition from one project to another, successful managers of innova- tive firms introduce new products or services at predictable intervals, follow explicit procedures for projects, synchronize projects with the needs of key customers and suppliers, and create routines for leaving old business areas. To the extent that it becomes technologically possible, managers create

processes so that projects are “broken down into small tasks and then passed through a structured sequence of steps from concept specification to preprototype and so on. As each step is com- pleted, the project is passed to the next step. The whole process is governed by specifications, procedures and checkpoints” [4]. Successful innovators typically have an oversight manager or committee who ensures a smooth transition from one project to another. H4a: In the perceptions and reports of top managers ex- perimentation will be positively related to discontinuous innovation. H4b: In the

perceptions and reports of top managers, improvization will be positively related to discontinuous innovation. H4c: In the perceptions and reports of top managers, tran- sitioning across projects will be positively related to dis- continuous innovation.
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356 IEEE TRANSACTIONS ON ENGINEERING MANAGEMENT, VOL. 49, NO. 4, NOVEMBER 2002 VI. R ELATING ANAGERIAL HARACTERISTICS TO ISCONTINUOUS NNOVATION What role do CEOs play in influencing discontinuous innova- tion? The firm that successfully innovates may depend as much on characteristics of management as on characteristics of the

environment and the organization. “Complex adaptive systems evolve over time through the entry, exit, and transformation of agents” [1]. Upper echelon theory argues that the composition, biases, values, and perceptions of top managers are important in creating an environment favorable to innovation. “It is ex- pected that in high-discretion situations, chief executives will tend to be relatively young” ([26, p. 396]). CEO age is linked to risky strategies that favor innovation. Younger managers typi- cally have less commitment to the status quo and adopt favorable attitudes toward a greater

risk orientation that favor innovation [2]. By virtue of their personal characteristics, managers will vary in the degree to which they develop and promote different types of innovation. Research shows, for example, that long tenure is associated with performance conformity [18], while short tenure may be a means by which an organization over- comes inertia and makes strategic change [70]. Accordingly we expect the following. Hypothesis 5a: In the perceptions and reports of top man- agers, age of the top manager will be negatively related to discontinuous innovation. Hypothesis 5b: In the

perceptions and reports of top man- agers, tenure of the top manager will be negatively related to discontinuous innovation. VII. M ETHODS A. Organizations and Executives The sample frame for this study was selected from the 1998 and 2000 editions of Ward’s Business Directory of U.S. Private and Public Companies . The study was conducted in 1999 using the 1998 edition. However, because of undeliverable question- naires (particularly among telecommunications firms), we sur- veyed a smaller number of firms early in 2000 using the 2000 edition of Ward’s Business Directory of U.S. Private and

Public Companies . The directory contains a complete list of public companies and is also a leading source of information about companies that are either not publicly traded or are subsidiaries of larger companies. The directory contains information on over 132 500 companies (90% of which are private), listing CEO names, addresses, sales information, employee figures, and five and six digit Standard Industry Classification (SIC) codes. To select the sample, we used a two-step approach. First, we se- lected three industry strata: (1) aerospace (SIC 336 411 through 336415, and 336 419); (2)

electronic components and supercon- ductors (SIC 334 415 through 334 419); and (3) telecommuni- cations (SIC 513321, 513322, and 51 331 through 51 333). We then randomly selected samples of 300, 350, and 250, respec- tively, from the three industry strata, for a total of 900 firms. Uneven sample numbers were selected to be consistent with the sample frame, which contained significantly different numbers of firms in each industry. Although these industries vary in tech- nical development and batch processing, all are highly depen- dent on innovation for competitive advantage and survival. B.

Aerospace While sales of planes, jets, missiles, and other space vehicles have declined since 1991, space and defense spending has recently increased ([7, p. 114]), and military exports and the civilian side of the business offer promise for growth and innovation in this industry. Aerospace companies are actively seeking to develop wireless telecommunications, laser com- munications, and antennas for commercial markets. Menes summarizes the aerospace and high technology industries as follows: “The ten fastest growing manufacturing industries are heavily dominated by high tech industries. At

the top is computer equipment, followed by the six aerospace industries. This is a dramatic turnaround for these industries since, with the exception of aircraft engines, they all ranked near the bottom in growth for 1995 and 1996” (1998: xxxiii). C. Electronic Components and Chips The electronic and superconductor industries have seen rapid technological progress and innovation. In the microprocessor industry, R&D can amount to 25%–30% of firm sales [46]. Ex- amples of innovations in this industry are “handheld PC’s, dig- ital videodisk players, smart phones, digital TV’s, and set-top boxes”

([6 p. 89]). D. Telecommunications The Telecommunications Act of 1996 has opened up compe- tition and made possible new kinds of service for new classes of customers in this industry. Wireless, an unregulated service, continues to explode ([7 pp. 98–99]), with the “U.S. government lending a hand, funneling money for wireless research to univer- sities” ([8, p. 68]). Telecommunication firms want to carry data of all sorts—voice, video, and graphics—and provide faster ac- cess to the Internet. E. Survey Design In accordance with the total design method (TDM) described by Dillman [12], we mailed

questionnaires, accompanied by postpaid return envelopes and cover letters, to the chief exec- utive officers (chairman, CEO, and president) of the 900 firms in the sample frame. The cover letters served to identify the sponsor of the study and to explain its purpose and importance. We assured executives of confidentiality and promised them a report of the aggregated findings once the study was completed. A reminder letter with a replacement survey questionnaire was mailed three weeks after the initial mailing. Some researchers question the validity of studies that rely on a single informant’s

perceptions [37]. However, there is little con- vincing research that either supports or contradicts the generally accepted belief that CEOs and top administrators can provide reliable information about the basic environmental and organi- zational characteristics of their firms. Our approach of using one informant per organization has been supported when survey in- struments were well designed and executed [30], [54], [60].
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managers typically is lower than for other mail surveys, because top managers have relatively less discretionary time to devote to completing questionnaires sent to them by academic re- searchers. We obtained response rates of 24.3%, 23.7%, and 14.8%, respectively, for the aerospace, electronic components, and telecommunications industries; these response rates are consistent with Stimpert’s [61] report that in studies using CEOs as addressees, response rates range from 14% to 34%. Nonresponse bias is always a concern when response is volun- tary; nonresponding firms, however, did not differ

significantly from responding firms in annual sales or geographic area. However, a disproportionate number of nonresponding firms were from the telecommunications industry. This industry is experiencing a complete overhaul and shakeout, with many small wireless operators going out of business because of a decline in the price of wireless minutes and an increased com- petition for capital [6]. The executives who responded included 182 males and 10 females, and had a mean age of 41 to 50 years. They had been in their present position a mean of 6 to 10 years or more, and had been with the company

a mean of 11 to 15 years or more. A large number held a college or advanced degree ; the others held an associate degree or had a high school education The analysis is undertaken at an organizational level. Approx- imately 24% of the responding firms employed fewer than 100 workers, with 19% employing over 500 workers. The majority of firms had between 100 and 500 employees. The mean age of the companies sampled was 34.36 years. A small number of firms, approximately 13% reported declining sales over the last three years. About 18% of the firms reported a stable growth rate; 24% reported a

growth rate of less than 10%. A larger percentage of firms, approximately 33% reported a growth rate between 10% and 25% annually, and a smaller number of firms, approximately 12% , re- ported an annual growth rate over 25%. We conducted semistructured follow-up interviews of a total of 25 executives who volunteered to talk with us. We conducted interviews to help generate descriptive indicators of discontin- uous innovation, to avoid misrepresentation or misinterpretation of the results from the questionnaire data, and to validate the results of the quantitative analyses. The interviews were

con- ducted on the telephone and lasted between 30 and 40 minutes. All interviews were taped and transcribed. VIII. M EASURES We employed scales that had been standardized and validated by other researchers, e.g., [4], [5], [13]; we also developed other scales specifically for this study, basing them on a review of the literature and interviews with executives from each of the three industries. See Appendix 1 for a complete description of items, scale, alpha coefficients, eigen values, and loadings. A. Discontinuous Innovation A major drawback of any innovation research is measure- ment; there

is no easy way or standardized way to measure organizational innovation. We asked executives to indicate the frequency of their firm’s discontinuous innovation. We told executives that organizational innovations refer to a broad range of innovations, either internally developed or externally acquired, that firms use to meet customer demand and to maintain or improve performance. Discontinuous innovation involved those strategic innovations such as basic product or service programs offered or market served or creation of new major product/service programs leading to expansion of current

markets. We asked executives to report the frequency of these innovations over the last three-year period. B. Environmental Dynamism Dynamism, the extent of unpredictable change in the external environment, is considered a perceptual phenomenon, inasmuch as the uncertainty resides “in the perceptions and minds of man- agers in terms of their ability to predict future environmental states” ([3, p. 166]). One executive describing the unpredictable change in the electronics industry stated “As far as the future we only go out two or three years because things are happening so fast that it is

impossible to predict. We would make terrible communists—a five-year plan would not work!” We measured perceived dynamism using ten items developed by Duncan [13]. To test the dimensionality of the scale, the ten items were factor analyzed using principal components analysis with varimax ro- tation, yielding one identifiable factor. C. Intrafirm Structural Linkages We measured intrafirm structural linkages, defined as cross functional and coordination mechanisms, designed to increase integration, by eight five-point Likert items based on the works of Brown and Eisenhardt [5] and Muffatto and

Panizzolo [45]. D. Size and Age of Firm To measure size we used the logarithm of the total number of employees for each firm. This measure was used because the majority of these firms are privately held companies. A loga- rithmic transformation provides the most generally useful pro- cedure for effecting linearity. Although some researchers have used different measures, such as volume of sales or income, the number of employees has been used as a measure of organi- zation size in many empirical studies [43]. Consistent with re- search by Powell [49], the age of each participating firm was

determined by the firm’s founding date. E. Improvization and Experimentation To measure improvization and experimentation, we em- ployed a group of paired statements developed by Brown and Eisenhardt [5] from their in-depth study of firms in the com- puter industry in Asia, Europe, and North America. We asked executives to rate the extent to which the paired statements, separated by a five-point Likert scale, best approximated or described their firm. Improvization is defined as too much versus too little structure consisted of five paired statements. Experimentation , defined as being able to

focus on both the present and the future without losing the flexibility required to react to unexpected events ([5, p. 131]), consisted of six paired
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358 IEEE TRANSACTIONS ON ENGINEERING MANAGEMENT, VOL. 49, NO. 4, NOVEMBER 2002 TABLE I EANS ,S TANDARD EVIATIONS AND ERO RDER ORRELATIONS MONG THE TUDY ARIABLES statements. The factor analysis indicated to us that the items for measuring improvization and experimentation appear to capture aspects of the processes that were considered theoretically and practically meaningful by Brown and Eisenhardt. F. Transitioning Across

Projects We measured transitioning, defined as transitioning or se- quencing from one project to another, by three items developed by Brown and Eisenhardt ([4, p. 21]). Using a five-point Likert scale anchored from 1 never to 5 frequently, the executives were asked to rate the frequency of the actions. One identifiable factor was obtained. G. CEO Characteristics—Age and Tenure We asked executives to categorize their age: 1) 30 or under; 2) 31–40; 3) 41–50; 4) 51 and over. In addition, we asked exec- utives to state how long they had been with this company. CEOs were given seven choices ranging

from less than 1 year to over 20 years. We acknowledge that field studies using self-report cross-sectional data are particularly susceptible to errors resulting from consistency, priming, and problems associated with common method variance [48]. Factual data of which the respondent possesses direct knowledge pose less serious problems, since such data are in principle verifiable. Some of the data collected in the present study (age and size of the firm) were of this type. Also, Spector [58] proposed that method variance might well be more of a problem with single items or poorly designed

scales and less of a problem with multi-item and well-designed scales. Realizing the difficulties associated with common method bias, every attempt was made both to minimize the methodological difficulties of this bias by using both quantitative and qualitative data collected from our sample organizations. Also, on the basis of theoretical arguments made by the researchers who developed the scales, the measures were conceptually different. However, when interpreting findings from survey research, some allowance should be made for the general problem of common method variance. One statistical

procedure for estimating the portion of variance attributable to method is through Harmon’s single-factor test [48]. This test considers the first unrotated factor to be a good approximation of method variance; the higher the variance that is accounted for by the first factor, the higher the common method variance. The first unrotated factor in this study was found to account for a modest amount of variance (17.36%), indicating that problems of common method variance should therefore be somewhat attenuated. IX. A NALYSIS OF ESULTS AND ESEARCH INDINGS Data on the distributional characteristics

of the scaled variables, along with the bivariate relationships (correlations) among the variables (without controlling for the effects of other variables) are given in Table I. Predictably, the process variables (experimentation, improvization, and transitioning), and age and size of the firm positively related to each other. Intrafirm structural linkages were positively related to size of the firm and to the three process variables. Age of the CEO was positively related to tenure with the company. X. R ESULTS :R ESEARCH YPOTHESES We used hierarchical regression, an efficient analysis alter-

native that allows blocking on variables, to test our research hypotheses that the environmental, organizational, structural, process, and managerial variables would all be related to dis- continuous innovation (see Table II). As explained by Cohen [9], hierarchical regression allows sets of independent variables rather than single IV’s to be entered cumulatively in a hierar- chical order, and upon the addition of each new set, an -square is determined. Although the standard deviations of the research variables are smaller for some variables (for example, environ- mental dynamism) than for

others (for example experimenta- tion), regression coefficients are not affected by range restriction
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DETIENNE AND KOBERG: IMPACT OF ENVIRONMENTAL AND ORGANIZATIONAL FACTORS ON DISCONTINUOUS INNOVATION 359 TABLE II ESULTS OF IERARCHICAL EGRESSION OF ISCONTINUOUS NNOVATION when assumptions of linearity and homoscedasticity are met [9]. An examination of the scattergrams showed no gross violations of these assumptions. We performed one-way analysis of variance (ANOVAs) to determine whether we should control for the effects of industry in our data analysis. We found no

significant differences (with one exception age of the firm [ ]-the aerospace firms were significantly older than the elec- tronics/telecommunications firms) in the research variables: en- vironmental dynamism ( , n.s.); size of the firm ( , n.s.); intrafirm linkages , n.s.); experimentation ( , n.s.); improvization ( , n.s.); transitioning across projects ( , n.s.); CEO age ( , n.s.); CEO tenure ( , n.s.) and innovation ( n.s.). Because “the processes of innovation are fundamentally the same across very different organizational structures and set- tings” ([67 pp. 17]), and because we found no

differences in the research variables across industries, we aggregated data across the three industries for purposes of data analysis. Multicollinearity (which should be avoided) is present in a multiple regression equation if the independent variables are highly correlated among themselves. The intercorrelations among the research variables, in particular, improvization, experimentation, and transitioning were 0.56, 0.23, and 0.31. Traditionally, a high intercorrelation is defined as one that exceeds 0.70 [62]. “Moreover, a variable must pass both tolerance and a minimum tolerance test to

enter and remain in a regression equation. Tolerance is the proportion of a variable’s variance not accounted for by other independent variables in the equation [62].” An examination of the collinearity statistics (tolerance) for the variables in the regression equation revealed acceptable levels of tolerance; all the research variables there- fore remained in the regression equation. To determine the unique contribution of the environmental, organizational, process, and managerial variables to discon- tinuous innovation, we examined the change in the adjusted -square. Table II reveals that

the environmental, organi- zational, and process variables were significant predictors of discontinuous innovation, while the managerial variables were not. Because theory and previous research indicates that manage- rial characteristics are significantly related to discontinuous in- novation, we examined the data further to better understand why our findings were inconsistent with previous research. Under further examination we found the relationships to be more com- plex than a simple main effect. To understand the nature of the significant interactions, the interactions were plotted as

shown in Fig. 1. Specifically, we found that CEO age moderates the relationship between age of the firm and discontinuous innova- tion (AxCEOAGE). That is, discontinuous innovation decreases with the age of the firm but at a slower rate for firms with younger CEOs than firms with older CEOs. Similarly, size of
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360 IEEE TRANSACTIONS ON ENGINEERING MANAGEMENT, VOL. 49, NO. 4, NOVEMBER 2002 the firm is significantly related to discontinuous innovation but differently for managers with higher tenure in the company (Sx- TENURE). That is, discontinuous innovation decreases with the

size of the firm but at a slower rate for firms with low tenured CEOs than firms with high tenured CEOs. Finally, CEO age moderates the relationship between intrafirm linkages and dis- continuous innovation (LxCEOAGE). That is, discontinuous in- novation is increased in firms with intrafirm linkages, but at a faster rate for firms with younger CEOs than firms with older CEOs. The impact of these interactions is shown in Table II. We used three alpha levels of significance (0.01, 0.05, and 0.10), which are appropriate in studies that are considered exploratory [17]. Hypothesis 1 related

perceived environmental dynamism to discontinuous innovation. We found it to be a significant positive predictor of discontinuous innovation. Contrary to what we predicted, age of the firm (Hypotheses 2a) was not a significant predictor of discontinuous innovation. However, Hypothesis 2b, size of the firm, was a negative predictor of discontinuous innovation. That is, as firms increase in size they are less likely to be involved in discontinuous innovation. Hypothesis 3 related intrafirm structural linkages to innovation, and we found them to be positive predictors of innovation. Hypotheses 4

and 5 related the process vari- ables (improvization, experimentation, and transitioning) to innovation. Both experimentation and transitioning positively predicted innovation. Lastly, Hypothesis 6 related managerial characteristics to innovation. Managerial characteristics were not significant predictors of discontinuous innovation. In sum- mary, there is support for Hypotheses 1 and 3, partial support for Hypotheses 2 and 4, and no support for Hypotheses 5. To determine the unique contribution of the environmental, organizational, process, and managerial variables to innovation, we examined

the change in the adjusted -square. Total ex- plained by the complete model was 25.5%. Table II reveals the and the change in upon the addition of each new set of variables. In addition, Table II gives the complete model, which includes the results for the full model entering all the variables simultaneously. Table II reveals that environmental, organiza- tional, process variables and the interactions contributed signif- icantly to discontinuous innovation while the managerial vari- ables did not. The statistical power of the tests was checked to determine the possible effect of sample size on

the findings. On the basis of a conventional medium-size effect, as indicated by a population of 0.30 [9], we determined that the odds that a test would be significant to be 0.90. This value exceeds the acceptable signif- icant value of 0.80 indicated by Cohen [9] and suggests that the size of the study’s sample did not significantly bias the findings. XI. D ISCUSSION AND ONCLUSION Developing and fostering discontinuous innovation is critical to the growth of economies and remains a prime way by which firms maintain a competitive advantage [68]. Discontinuous in- novation may require a larger

investment and entail higher risk than incremental innovation, but it can also earn higher returns. One telecommunications executive we interviewed said, “I be- lieve that the risk is great and the reward is greater when you are Fig. 1. Graphical representation of interaction effects. the innovator and you are there first. And yeah, you’re going to have problems, so learn how to deal with those types of prob- lems. Be nimble. But a fast second or even a second is safer, but it’s kind of uninteresting. Although our findings require corroboration because they come from only three

industries—aerospace, electronics, and telecommunications—they suggest that top managers in these industries undertake discontinuous innovations. Among the innovations identified by the aerospace executives we inter- viewed were domestic or commercial satellite communications services, and the expansion into mobile devices that combined voice and Internet access. Executives from the electronics industries reported developing application-specific integrated circuits (ASIC chips), digital consumer-electronic devices (for example, digital videodisk players and cameras), and mobile

DETIENNE AND KOBERG: IMPACT OF ENVIRONMENTAL AND ORGANIZATIONAL FACTORS ON DISCONTINUOUS INNOVATION 361 devices that combined voice and Net access. Executives from the telecommunications industry reported developing a tech- nology called asynchronous digital subscriber line (ADSL), IP services, and softswitch platform services. Our finding that discontinuous innovation increased with environmental dynamism is consistent with Tushman et al. ’s [65] suggestion that “effective organizations in environments with substantial technological and/or legal/social uncertainty tend to undertake

reorientations or quantum (discontinuous) changes. This finding is also consistent with complexity theory [1], [40], [57] and with Oster’s ([46, p. 120]) suggestion that organizations are “embedded in an environment in which new ideas are constantly developing”. Among the environmental changes and uncertainties described by executives in both the aerospace and the electronics/telecommunications industries were global economic fluctuations and uncertainty, cyclical demand, the Asian crisis, increased partnering across indus- tries, double-digit growth, and the broadband revolution. One

telecommunications executive detailed how his firm developed a “business plan of 5 years, every year we revise it, and that takes a good look at what is happening in the next 12–18 months…. We get into trends, government actions, what is the consumer/customer is doing, etc.” Future research is necessary to investigate whether, in accord with prospect theory, strategic managers typically take greater risks and make larger, more discontinuous changes in response to threats than in response to opportunities in the environment [15]. Structure and processes within the firm contribute to

discontinuous innovation, specifically, intrafirm linkages, experimentation, and transitioning or sequencing from one product/project/program to another. Top managers can structure their firms and implement processes such as experimentation and transitioning in such a way as to contribute to the firm’s ability to innovate. This view reinforces work by Van de Ven and associates [67], who found that “management cannot en- sure innovation success, but can influence its odds.” Firms with intrafirm structural linkages were found to play a significant role in promoting discontinuous innovation.

Organizations characterized by considerable interdependencies require coor- dinating and integrating mechanisms for innovation to occur [21]. Intrafirm linkages provide a free-flowing exchange and cross pollination of information. In many instances, innovation depends on team rather than individual effort, and the cross flow of information among a wide variety of people working concurrently on different aspects of a project helps develop an environment conducive to innovation [59]. Our results suggest that radical innovators experiment and move quickly and smoothly from one project or product

to an- other. The “innovation journey” is characterized by trial-and- error learning and “making it up as you go along” ([4, p. 15]), [17], [67]. Experimentation builds in flexibility (strategic re- sponsiveness); it creates a momentum for change, and improves the capacity of the firm to react quickly to a changing environ- ment while maintaining a focus on the present. Commenting upon the fact that innovative firms experiment, an aerospace ex- ecutive explained, “If you fire enough missiles, you’ll get one. If someone tries long enough, one of the ideas is going to work, but if you never have

an idea, it’s not going to work. There is a lot of accident in it. So you take the guys who are willing to go out on a limb; you look at them a little more favorably. Finally, some scholars argue that larger older firms experi- ence rigidity and inertial pressures and are therefore less likely to produce discontinuous innovations. We are unable to verify these assertions, although the model 5, which includes the in- teraction effects, shows that size of the firm is moderately nega- tively significant. This would be consistent with other research [26], [33] which suggests that as the size of

the firm increases, the firm is less likely to be involved in discontinuous innovation. Although others [2], [18] have found that age and tenure are associated positively with conformity and negatively with risk taking propensity, we were unable to relate age and tenure of the top managers to discontinuous innovation. Perhaps the reasons for inconsistency in the findings regarding managerial charac- teristics are as Gartner [23] in his work on entrepreneurship suggests, “who is the entrepreneur is the wrong question.” He suggests that it is the behavior of the individual that is rele- vant

rather than individual personality characteristics. In behav- ioral approaches, the CEO would be seen as a set of activities. Although we did not find any significant relationship between managerial characteristics (CEO age, and tenure with the com- pany) and discontinuous innovation, the significance of the in- teractions suggests that the relationships between the organiza- tion variables and the managerial variables and discontinuous innovation are more complex than a simple main effect. We found that discontinuous innovation decreases with the size of the firm, but at a slower rate for

firms with younger CEOs than firms with older CEOs. This finding suggests that even though larger firms are less likely to be innovative, this tendency can be arrested by the hiring of younger CEOs. Younger CEOs tend to slow down the rate at which larger firms lose their ability to innovate. Because this finding was significant at the 0.10 level, additional research is needed to confirm these findings. We also found that discontinuous innovation decreases with the size of the firm but at a slower rate for firms with low tenured CEOs than firms with high tenured CEOs. This finding was sig-

nificant at the 0.01 level providing evidence that as firms in- crease in size they are less likely to engage in discontinuous innovation. However, firms with CEOs that have been with the firm for a shorter period of time are more likely to engage in discontinuous innovation than those with CEOs that have been with the firm for long periods of time. Finally, we found that discontinuous innovation is increased in firms with intrafirm linkages but at a faster rate for firms with younger CEOs than firms with older CEOs. That is, firms that engage in intrafirm linkages are more likely to engage in

dis- continuous innovation, but those with younger CEOs are even more likely to engage in discontinuous innovation. This finding is significant at the 0.10 level and therefore should be verified by further research. Our findings are limited by the difficulties inherent in per- forming a cross-sectional study, drawing generalizations from three industries, and disentangling cause and effect. With such a wide variety of factors and relationships to be considered, an assessment of discontinuous innovation is particularly complex, and defining causal relations among component factors is diffi-

cult. We need, for example, to consider the extent to which per-
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362 IEEE TRANSACTIONS ON ENGINEERING MANAGEMENT, VOL. 49, NO. 4, NOVEMBER 2002 TABLE III EASURES ceived environmental dynamism contributes to innovation, and the reverse possibility that discontinuous innovation contributes to perceptions of environmental change. Also, directionality and feedback loops pertaining to the factors that impact innovation are not included in our study. For example, experimentation may increase within a firm as discontinuous innovation increases. Al- though we quantified the degree to

which managers undertake discontinuous innovation, we failed to measure the intervening variable of choice, and we did not examine the relationship be- tween innovation and firm performance. Despite its importance to scholars and practitioners alike, performance was difficult for us to measure because the majority of firms in our sample are not publicly traded, and reliable performance data are difficult or impossible to obtain. Future research is needed to investigate other environmental and organizational determinants of discontinuous innovation,
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OF ENVIRONMENTAL AND ORGANIZATIONAL FACTORS ON DISCONTINUOUS INNOVATION 363 such as interorganizational linkages. In his research in the bio- pharmaceutical industry, which is known for high number of strategic alliances, Rothaermel [53] found that “incumbents that focus their network strategy on exploiting complementary as- sets outperform incumbents that focus on exploring the new technology.” Interesting work by Powell et al. [50] found that firms without ties are becoming increasingly rare and that the field of biotechnology is becoming very tightly connected be- cause of the number of

partners involved in alliances. Chisholm ([10, p. 5]) states “the interorganizational network is rapidly emerging as a key type of organization and the importance of the network is expected to increase throughout the 21st century. One electronics executive explained that because his firm was very small he formed alliances with Texas Instruments, for ex- ample. “We work with them and they work with us. We know how to do things they don’t know how to do. We have a number of alliances, but we work with everybody differently.” These studies suggest that future research is needed to examine the re-

lationship between interorganizational linkages and discontin- uous innovation. Future research is indicated that examines how fast an inno- vative product or service enters the market (time-to-market from launch). One electronics executive explained: “Our business is programmable logic. A customer would have a software package and that has enabled the customer to define a logic block to build a piece of digital electronic equipment (for example, PC, piece of equipment, storage disks). The thing that separates us from the IC area—the software permits a customer to personalize the product. The

customer has an idea of what he want to build—dig- ital equipment—once he has the software and a piece of hardware. In as little as an after noon, he could transfer bit of information instantly (15 seconds), physically realizing what he wanted to have. Time to market is the most im- portant thing. The alternative is that the customer would have to do some design work and then wait anywhere from 3 weeks to 6 months before he gets a sample of that part. With us, once he know what he wants he can realize it in one day. Future research on innovation may have to take into account how each source of

uncertainty enhances and inhibits innovation within organizations. In our study, uncertainty was described broadly as the extent of unpredictable change in the external environment. However, innovation involves “three at least par- tially separable sources of uncertainty” ([46, p. 290]): 1) tech- nical (can we develop it?); 2) market (what are the needs and demands of the potential users?); and 3) competitive (who else can develop and sell it?). On market uncertainty, one electronics executive commented: “We have people on board who have the talent to develop the products. It’s

interesting—about 75% of our people are degreed engineers at all levels. Probably the thing we lack the most is people who understand markets and marketing. Because of that we have developed a lot of neat products, but there was no market or we did not know how to get to the market. Now we’ve come to the point where we have to have at least an understanding of where we are going to sell this thing, who the customer is, and how we are going to get to them, which is, for an engineer, like an epiphany. The objective of this study was to be primarily an aide to top managers interested in

discontinuous and other types of inno- vation. We attempted to identify the relevance of nontechnical environmental and organizational factors and their possible con- sequences for discontinuous innovation. For example, we em- phasized the importance to innovation of allowing specialists and professionals from different disciplines to be brought to- gether, although we did not specify the optimal size or time span of a research or project team. We hope our study sheds lights on aspects of environments and organizations conducive to inno- vation. Ultimately, top managers choose the structures

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received the Ph.D. degree in busi- ness policy and strategy with an emphasis in entrepreneurship in June of 2002 from the University of Colorado. She is currently an Assistant Professor in the Man- agement and HR Department, Utah State University. For 15 years prior to pursuing her Ph.D., she founded and co-owned a small business venture. Her current research interests include strategy and entrepreneur- ship at the individual and firm level and include opportunity recognition and firm change through innovation. Christine S. Koberg received the Ph.D. degree from the Graduate School of

Management, The University of Oregon, Eugene. She is an Associate Professor at The Leeds School of Business at the Uni- versity of Colorado, Boulder. Her research interests include innovation at both the micro and macro organizational levels. She has published over 30 articles in scholarly journals on a variety of management related topics.