PEER Stage2 10.1016%2Fj.Jebo.2

Leveraging Resistance to Change and the Skunk Works Model of Innovation Andrea Fosfuri, Thomas Rønde To cite this version: Andrea Fosfuri, Thomas Rønde. Leveraging Resistance to Change and the Skunk Works Model of Innovation. Journal of Economic Behavior and Organization, Elsevier, 2009, 72 (1), pp.274. 10.1016/j.jebo.2009.05.008. hal-00699208 HAL Id: hal-00699208 https://hal.archives-ouvertes.fr/hal-00699208 Submitted on 20 May 2012 HAL is a multi-disciplinary open access L’archive ouverte pluridisciplinaire HAL, est archive for the deposit and dissemination of sci- destinée au dépôt et à la diffusion de documents entific research documents, whether they are pub- scientifiques de niveau recherche, publiés ou non, lished or not. The documents may come from émanant des établissements d’enseignement et de teaching and research institutions in France or recherche français ou étrangers, des laboratoires abroad, or from public or private research centers. publics ou privés. Accepted Manuscript Title: Leveraging Resistance to Change and the Skunk Works Model of Innovation Authors: Andrea Fosfuri, Thomas Rønde PII: S0167-2681(09)00136-X DOI: doi:10.1016/j.jebo.2009.05.008 Reference: JEBO 2395 To appear in: Journal of Economic Behavior & Organization Received date: 14-8-2007 Revised date: 4-5-2009 Accepted date: 6-5-2009 Please cite this article as: Fosfuri, A., Rønde, T., Leveraging Resistance to Change and the Skunk Works Model of Innovation, Journal of Economic Behavior and Organization (2008), doi:10.1016/j.jebo.2009.05.008 This is a PDF ﬁle of an unedited manuscript that has been accepted for publication. As a service to our customers we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and review of the resulting proof before it is published in its ﬁnal form. Please note that during the production process errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain. 1. Introduction Innovation is one of the main drivers of a firm's competitive advantage. Innovation may, however, challenge the status-quo, and force change and adjustment within the organization (Henderson and Clark, 1990; Henderson 1993). Change is costly, not only for the firm as a whole, but also for each of its individual members. For instance, Morrill (1991) identifies several potential sources of costs: loss of power and prestige, need to retrain and relearn, changing definition of success, fear of technology, etc. In an attempt to avoid these costs, the employees of the firm may sometimes react to change by fighting it back rather than adapting to it. In large corporations, this resistance to change can develop into potential conflicts between functions or departments, insofar as an innovation championed by one function inflicts some costs upon another function. Interdepartmental conflicts have been analyzed extensively in the new product development (NPD) literature (e.g. Luo et al., 2006). An established wisdom argues that conflicts are counter-productive because they disrupt teamwork and harmony within the organization (Griffin and Hauser, 1996). However, a growing number of studies has shown that “a healthy dose of conflict also plays an important role in fostering innovation” (Dyer and Song, 1998; Xie et al., 1998). While little systematic evidence exists for how pervasive interdepartmental conflicts due to innovation and resistance to change are, the aforementioned debate within the NPD literature suggests that the phenomenon is of practical relevance and worthy of deeper consideration (Birkinshaw and Lingblad, 2005). How should a firm manage resistance to change and the resulting conflict between functions? To address this question, we build a game theoretical model where the implementation of a successful innovation, backed by a R&D department, results in costly changes for a production department. In response, the productionAccepted department tries to improve the currentManuscript technology in an attempt to convince the management not to implement the innovation. The two departments are, in other words, involved in a 2 Page 1 of 43 contest of technologies.1 As an example of the type of situation we have in mind, Foster (1986) describes the case of DuPont and its decision in the 1950s to move from the established nylon technology to the new polyester technology for the production of car tires. Behind the decision there was a conflict between production engineers at the nylon plant and researchers supporting the new technology. The production engineers managed to push the nylon technology to the limits, and provided sufficient evidence to convince the management that the nylon technology would remain competitive. The polyester technology was eventually shelved. We show that organizations with greater resistance to change, i.e. firms whose production departments face larger costs of re-adjustment, exhibit a lower probability of introducing a new technology. However, this is not always profit reducing for the firm as a whole. Indeed, it is shown that firms with highly motivated and productive R&D departments might benefit from a stronger resistance to change. By contrast, firms whose R&D departments are weak or badly motivated suffer from stronger resistance to change. More in general, our findings suggest that firms that maintain a balance of powers between the two departments outperform firms where one department largely dominates the other.2 Although our analysis stresses the positive effects of internal competition, we argue in the second part of the paper that (the threat of) internal competition might entail important costs for the firm. In particular, the prospect of a costly contest of technologies might push the R&D department towards low risk, incremental projects that entail low adaptation costs for the production department. Such incremental innovations meet much less internal resistance than radical innovations that require the production department to undertake more costly changes. Thus, the R&D department refrains from investigating more path-breaking research trajectories at the detriment of long-run firm profits. We analyzeAccepted an organizational solution to this problem, Manuscript known as the skunk works model of 1 Contests are situations in which the participants expend money or effort to increase their chances of winning a prize. Examples include rent-seeking and lobbying situations, tournaments, arms races, political campaigns, athletic contests, patent races and procurement of innovations (Taylor 1997; Che and Gale 2003; Ganuza and Hauk 2006). 2 Evidence consistent with the notion that this type of organizational competition spurs innovation can be found in Ginn and Rubinstein (1986). They study 61 new product introductions in a major chemical company. They show that product introductions leading to more intense competition, measured by how incompatible the R&D department's and the production department's goals are, tend to be more successful than product introductions causing less competition. 3 Page 2 of 43 innovation, which consists in isolating the team of researchers from the influence of the rest of the organization.3 The skunk works model of innovation has received lots of attention from management scholars and has been implemented by many large technology firms, such as IBM, Siemens and Intel, but we are not aware of any formal economic model that attempts to pin down the virtues of this organizational solution. We show that adopting the skunk works model of innovation can induce the R&D department to choose a radical research trajectory in situations where an integrated R&D department would have chosen an incremental trajectory to avoid the competition with the production department. This paper is related to several bodies of literature both in economics and management. Resistance to change is a source of inertia in our model both because it reduces the probability that new technologies are implemented and because it distorts the search process of the R&D department towards an incremental research trajectory. Scholars in evolutionary economics have investigated extensively the sources of inertia within organizations. Nelson and Winter (1982) and Dosi (1982), among others, have stressed how scientists and engineers tend to myopically focus on existing technological trajectories and paradigms, overlooking opportunities lying outside their search range. While the latter is undoubtedly an important motivation behind organizational inertia, our model provides a complementary explanation based on interdepartmental conflict as discussed above. The adoption of a new technology is a decision that has important redistribution effects within the organization. The economics literature has argued that such decisions are subject to influence activities by the involved parties, i.e. efforts aimed at affecting the decision maker (Meyer et al. 1992; Milgrom 1988; Milgrom and Roberts 1988). Such efforts distort resources from more productive uses, slow down the decision making process, and sometimes prevent organizational changes altogether (Schaefer 1998). Our approach can be thoughtAccepted of as representing a different time Manuscript horizon. Shortly before the management decides which technology to use, the performances of the technologies are more or less given. The 3 A windowless facility built by Lockheed at the airport of Burbank, California, during the Cold War was known as the skunk works. There, secret

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