Page 1 of 24 ANZAM 2009 Propensity to Innovate: Driving Innovation in a Professional Services Firm Associate Professor Desmond Klass* Curtin University of Technology, GSB, 78 Murray Street, Perth, Western Australia, Australia, 6053 E-mail [email protected] Dr Margot Wood Curtin University of Technology, GSB, 78 Murray Street, Perth, Western Australia, Australia, 6053 E-mail: [email protected] ANZAM 2009 Page 2 of 24 Propensity to Innovate: Driving Innovation in a professional Services ABSTRACT : Innovation has been widely recognised as a means of achieving a sustainable, ompetitive advantage and an important determinant of business performance. Less clear is an understanding of the drivers of the propensity to innovate and their inter-relationships. This paper develops and examines a structural framework that accommodates several constructs concerning the potential impact they have on a professional services firm’s propensity to innovate. A Structural Equation modelling approach was undertaken to inform the design and development of a program aimed at enhancing innovation within a professional services organisation. Keywords: Innovation; Change process; Propensity to Innovate; Leadership; Culture; Values; Program development Innovation has been widely recognised as an important means of achieving a sustainable, competitive advantage (Barsh et al., 2008, Hult et al., 2004), with innovative organisations out- competing rivals through greater value creation (Dobni, 2006). Less clear is an understanding of the drivers of the propensity to innovate and their inter-relationships. This is especially true in the context of law firms which are generally seen as conservative, cynical and somewhat averse to thinking differently (Maister, 2006, Mankin, 2006). This paper describes the collaborative partnership between the Centre for Innovation in Decision Quality (CIDQ) and the Perth branch of an international Law firm in developing a research project to better understand the constructs that drive the propensity to innovate in a Professional Services Organisation. The insights gleaned from the research would then be used to inform the development of an Innovation program woven around the central theme of Thinking Differently – Our Journey Continues . The project involved co-creation of internal processes, development of support systems, tools and processes, an organisation wide experiential Retreat and development of follow up systems to encourage the generation of ideas and potential development of both incremental and breakthrough innovations. A three phase Innovation Research Program was developed in parallel with this project in order to gather quantitative empirical evidence regarding the firm’s propensity to innovate, to identify key drivers and to objectively gauge the value of the various interventions. This paper explores the 1 Page 3 of 24 ANZAM 2009 outcomes of the first stage of this research and involves the use of structural equation modelling (SEM) to determine key drivers for innovation propensity. The more descriptive, nuanced story regarding the design, delivery and enjoyment of the overall project including the Retreat and Phase 2 of the Research Program, is discussed in Vitasovic and Wood (Vitasovic and Wood, 2009). Data collection for Phase 3 (Innovation Outcomes) was conducted in June 2009 six months after the Retreat and used to access progress. CONSTRUCT DEVELOPMENT It has been claimed that without a propensity to innovate, innovation will not occur (Dobni, 2006). Therefore, as a critical precursor for innovation, this became the central concept in this first phase. Propensity to Innovate encompasses the motivation to think differently; a heightened risk propensity (Dobni, 2006, Sloan, 2008); the ability to copy and adapt ideas from outside (Cannon, 1985, Hansen and Birkinshaw, 2007, Sloan, 2008) and a willingness to accept new ideas (Morris, 2005, Sloan, 2008). Thus Propensity to Innovate is defined here as a willingness to explore, accept and adopt external ideas, to take risks without fear in areas sometimes outside the organisation’s immediate field, to value the ability to think differently and be willing to support and invest in sometimes quite radical ideas. This definition is similar to Hurley and Hults’ (Hurley and Hult, 1998) notion of innovativeness, defined as the organisation’s capacity to engage in innovation, and encompassing the generation of new processes and products. However, as it is important to distinguish between a firm’s willingness or ‘readiness’ to innovate and the outcomes which result from this, we have split this notion into separate constructs - the Propensity to Innovate and the resulting Innovation. This very issue is discussed and the need to differentiate supported in a paper by Hurley, Hult and Knight (Hurley et al., 2005) in their response to a similar conceptual challenge raised by Woodside (Woodside, 2004). A review of the literature, expert opinion and input from executives involved with promoting innovation within the firm, surfaced perceived antecedents to developing a propensity to innovate. 2 ANZAM 2009 Page 4 of 24 This included the following constructs: competitive environment, market orientation, development and implementation of an innovation process, an innovative culture (incorporating leadership, organisational learning and people development), provision of adequate resources and a clear innovation strategy. A brief description highlighting the spirit underlying each of the construct is provided below. Table 1 contains the references used to support the development of these constructs. Competitive Environment and Propensity to Innovate The competitive environment forms a critical backdrop for professional service firms. This entails recognition of the need to be innovative in order to respond to competitive threats and grasp market opportunities . The ability to address the competitive environment encompasses the perception that creativity and innovation impact on the success of the organisation and are required to excel in the market place. This led to our first hypothesis: H1: There is a positive and significant relationship between ‘Competitive Environment’ and ‘Propensity to Innovate’. Market Orientation and Propensity to Innovate Market Orientation primarily relates to understanding the needs of clients through information acquisition so as to ultimately create value. Formal measurement of client satisfaction is central to this understanding. It is inferred, if one adopts a resource based view of the firm, that there are four capabilities - market orientation, entrepreneurship, innovativeness, and organizational learning – which contribute to the creation of positional advantages. The literature argues that marketing and learning orientations are required to maximise the effectiveness of innovation processes. Following from the above we thus hypothesise: H2: There is a positive and significant relationship between ‘Market Orientation’ and ‘Propensity to Innovate’. Innovation Processes An organisation’s Architecture – including processes and the business model – needs to support innovation and opportunities for emergence. Clear processes are also a key factor impacting on the ability to manage innovation. This led to the third hypothesis: 3 Page 5 of 24 ANZAM 2009 H3: There is a positive and significant relationship between ‘Innovation Process’ and ‘Propensity to Innovate’. The Role of Culture Organizational culture is an important determinant of sustained innovativeness and financial performance. In terms of culture, leadership and innovation, it is imperative that innovation forms a core part of the leadership’s agenda, followed by modelling the right behaviour and improving processes for managing innovation risk. An innovative culture is one where leadership attempts to make it easier to innovate where knowledge and information sharing propels innovation, employees are valued and believe their work has meaning and organisational learning is part of this. A culture of innovation facilitates the generation of novel ideas that are supported in both tangible and intangible ways, rather than providing mere lip service. H4: There is a positive and significant relationship between ‘Innovation Culture’ and ‘Propensity to Innovate’. Innovation Strategy A clear Innovation Strategy may be a necessary precursor to developing an innovative organisation, with market orientation also playing a role here. ‘Innovation Strategy’ focuses on the organisation having a strategy for innovation that is clearly communicated and allows for the accommodation and evaluation of suggestions. We hypothesise that: H6: There is a positive and significant relationship between ‘Innovation Strategy’ and ‘Propensity to Innovate’ H8: There is a positive and significant relationship between ‘Market Orientation’ and ‘Innovation Strategy’. H10: ‘Innovation Strategy’ positively and significantly mediates the relationship between ‘Market Orientation’ and ‘Propensity to Innovate’. Innovation and Resources It is inferred that the provision of relevant resources clearly contributes to innovation. The resource construct includes measurement items that account for sufficient funds being directly allocated to encourage innovation. The construct also factors in the recognition and provision for “time to think” 4 ANZAM 2009 Page 6 of 24 about new ideas and the future and includes the monetary and non-monetary rewards for new ideas that are implemented. Thus: H5: There is a positive