The long-running Selected Paper Series features notable work by University of Chicago faculty. This essay is an edited excerpt; the original was presented as a speech at an Executive Programme Club luncheon on 29 October 1964, and reprinted as Selected Paper No. 14 under the title The Innovative Organization.

We all belong to many organizations, formal and informal. Almost everyone who works for a living is a member of a formal organization. If my belief is correct, most people either belong to an innovative organization or would like to. But when we talk about innovative organizations, many of us actually have in mind a specific innovative act or decision, rather than the organizational characteristics that elicited and nurtured that act or decision.

If this is a fair representation of your approach to the question, “What is an innovative organization like?" you are no worse off than (fellow Booth faculty member) Tom Whisler and I were about a year ago when we asked ourselves the same question. We found we had no satisfactory answers; nor could we find any by searching through the literature. We then decided to put the question to the most eminent among our colleagues, and organized a conference of some 20 of the leading social scientists in the country for the sole purpose of getting an answer or answers.

Types of organizational innovation

We can start by defining an innovative organization, very simply, as that which is first among a set of organizations to do something that none of the set has done before. Whisler sharpened this definition by pointing out that innovation can be contrasted with invention by the infinitives “to use" and “to conceive". The first one to use an idea is an innovator, and she may or may not be the inventor—the one who conceived it.

Innovation also can be contrasted with adaptation. Adaptive behaviour implies a response to environmental stimuli that is successful in terms of organizational survival. An innovation need not be adaptive, but when it is adaptive it is more than just a response to a stimulus. It is also an anticipation of the stimulus, and a response to it before it appears in the environment. Such an innovation might be Eastman’s patenting a manufacturing process for colour film just as a competitor develops a radical new camera that can use only this kind of film.

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Accepting these thoughts on innovation, we can specify the kinds of innovation that can occur in an industrial organization.

First, we can have product innovation: development of completely new products, or changes in existing ones, or combinations of existing products into new ones.

Next, we can have what I term “process innovation": innovation anywhere in the organization that changes the method by which the product is produced. This includes change in the form of administration, or in the relative size of the administrative component—changes that can affect the process of production as much as the introduction of new and more efficient machinery.

Third, we can have marketing innovation: innovation in packaging, distribution, or the measurement and prediction of demand. Any changes made in the organization as a result of changes in the requirements of consumers are marketing innovations—as are changes in consumer behaviour and attitudes brought about by the organization. Changing a housewife’s belief that she’s “cheating her husband" because she uses a cake mix to a belief that she is helping him if she does use one because that makes her a more efficient homemaker is a marketing innovation—as much of a marketing innovation as the pop-top can.

With this frame of reference, we can examine the issues our social scientists thought important, and see how they might affect product, process, or marketing innovations.

The issues they explored fall under three general headings: a concern with the organization’s personnel, with its structure and with its external environment. Let us go into the personnel area first.

Inside the organization: Personnel

In discussing the personnel of an innovative organization, the social scientists considered such matters as personal and job security, educational processes and decision-making criteria, among others. They agreed that psychological and job security are both necessary for creativity. Only someone who is personally secure can deviate from the group solution and suggest the novel approach; just as some modicum of job security is necessary before he can afford to propose a deviant solution that might be upsetting to various elements of the organization.

Security as a general stimulus to creativity clearly can be associated with all three categories of organizational innovation. The same can be said about diversity of educational backgrounds in personnel: if the members of a decision-making group in an organization were all exposed to the same educational discipline, they would tend to consider the same sorts of alternatives as possible solutions.

Almost all decisions in the product and marketing areas could be based on abstract criteria

Perhaps related to the individual’s education, but more probably a personality factor, is the kind of decision-making criteria she employs. One of our social scientists thought it crucial to innovation whether an individual uses abstract or concrete decision-making criteria. The scientist asserted that there is a tendency to decide in favour of the alternative that can be supported by objective, countable, quantifiable attributes. Alternatives supported by abstract criteria dealing with the unverifiable and the future tend to be disregarded. If, as he argued, there is a general preference for the concrete over the abstract, then surely that preference will bias decisions against innovation.

Here, perhaps we can make a useful distinction. Almost all decisions in the product and marketing areas could be based on abstract criteria, while some of the decisions in the process area can only be based on concrete criteria (i.e., what kind of punch press to use). Thus, increasing the use of abstract decision-making criteria will lead to greater product and marketing innovation relative to process innovation.

The organization: Structure

The personnel-oriented issues generally focused on conditions that both stimulate personal creativity and inhibit, through group action, the adoption of conformist alternatives. In a like manner, the issues involving organizational structure focused on how differing structures evoke innovation, and how they facilitate the adoption of change.

One such issue is the degree to which organizational functions are differentiated. It has been demonstrated, at least among scientists, that persons whose tasks are highly specialized are less innovative than those who perform in, and are responsible for, a number of task areas. It would seem to follow that an organization that demands as little specialization as possible maximizes the probability of innovation.

A closely related idea is that rates of executive succession are correlated with innovation. The hypothesis here is that a deliberate increase in executive turnover will increase innovation. It is based on the idea that new executives infuse new ideas into existing group structures. The difficulty with this notion is that the technique used to increase the flow of ideas also decreases job security and perhaps personal security as well—factors that, at the individual level, are linked to less innovative behaviour.

Scarcity versus slack

Organizational slack—unused and uncommitted resources—can exist at the administrative and technological levels, or simply in the form of money and facilities. The question of whether innovation was a function of a lack of slack or of an abundance of it was difficult to resolve. As many case studies could be produced in support of the necessity-is-the-mother-of-invention view as could be produced favouring the argument that for the most part only successful firms can afford to innovate.

The argument of slack versus necessity as a spur to innovation was resolved by a political scientist. He equated the politics of scarcity with repressive law, with law indistinguishable from custom, with redistribution of existing resources, and with suppression, as techniques of conflict resolution. The politics of abundance he equated with restitutive law, with variability between law and custom, and with the resolution of conflict by increasing the resources of competing groups.

“Abundance," he said, “permits social choice to replace central decision-making," so that “scarcity is associated with centralization, abundance with decentralization."

Extrapolating from these statements, we find that firms near failure, if they innovate administratively, would tend to centralize and cut costs by firing people, dropping unprofitable lines, etc. These changes almost always occur in the area I call process innovation. They are introduced into the organization from the top down.

A successful firm, perhaps decentralized, permits decision- making at hierarchic levels below the top so that innovations can be introduced at many levels, including those in close contact with the environment. This increases the probability of marketing innovations as well as product and process innovations.

Outside the organization: Environment

In what kind of environment is an innovative organization most likely to flourish? The most obvious location is one where a pool of innovative people may be found, some of whom the organization can employ. For the constant stimulation of new ideas, there should be other organizations nearby that encourage innovation and employ innovators. Such conditions are met in areas that include universities and large numbers of independent research and development laboratories; in these areas there is likely to be considerable interchange of ideas among innovative people.

Information may be more rapidly metabolized if the organization is located near others that have the same or similar personnel requirements. This increases individual job mobility, and the individuals bring new ideas with them as they change from one organization to another. However, this has possible drawbacks. Creativity and innovation have been related to conflict, the resolution of which often requires innovation. Locating an organization near others similar in nature reduces the probability that conflicting ideas will penetrate the organization; and this, in fact, is what frequently happens.

Thus it appears that the organization must be located near similar ones to increase worker mobility, and near dissimilar ones to induce conflict and its subsequent resolution. The environment that provides both, as well as access to large numbers of innovative individuals, is that of an urban complex.

The innovative bureaucracy

What, then, would an innovative organization look like? Every variable we examined so far seemed to apply equally well to product, process, or marketing innovations, except one: decision-making criteria. Here we found that decision-making based on abstract criteria would stimulate greater innovation in the product and marketing areas compared with the process area. The reason is that decisions about actual production of a product generally involve concrete phenomena. If we classify all organizational decisions into two kinds—those based only on concrete criteria and those based possibly on abstract ones—we find that at the same time we have separated decisions made under certainty from those made under uncertainty.

Almost all the marketing and product-oriented decisions fall into the uncertain category, as do the personnel, financial, legal, and (some) administrative decisions from the process area. Only actual production decisions are made under certainty.

A semi-bureaucratic organization

Organize all the functions that develop from decisions under certainty into a monocratic bureaucracy and all the others into one almost-structureless unit without hierarchy.

The monocratic bureaucracy should be highly centralized so that product innovations or innovations in the process of production—innovations that arise in the structureless unit—can be installed quickly and efficiently. As a rule, the centralized bureaucracy will be concerned only with the actual process of manufacture. This is an arrangement with which we are familiar, but what about the other unit?

The structureless unit should be the organizational superior to the top of the already-established monocratic bureaucracy. Within this unit, teams are assembled around problems, with each executive a member of three or four different problem teams. No one heads more than one problem team at a time, but when head of a team she has responsibility for the final decision. The head also rates each team member for search and innovativeness, and for effective use of abstract criteria. All members in the unit receive bonus payments according to their ratings. Problem teams are dissolved as soon as a decision is reached. New teams and heads are assembled as problems arise. Everyone in the unit simultaneously is head of one team and a member of some others.

The ‘farm system’

By eliminating status we increase personal security, but job security is a more difficult matter. Perhaps the answer is for the organization to buy another organization and maintain it in a more traditional fashion. Then the latter organization could be used to guarantee jobs for anyone who wishes to be moved—or who should be moved—out of the statusless unit. The innovative organization would then maintain the manufacturing version of a bush league system, and positions in the “farm" organization could be guaranteed for everyone in the statusless unit. This would not be detrimental to the farm organization, for certainly everyone selected for the innovative unit already would have demonstrated competence more than sufficient for success in the farm organization. As a further benefit, those in the farm organization who exhibit unusual ability and the desire to participate in the work of the innovative organization could be moved up to it.

Executive exchange programme

To infuse new ideas into the organization, rather than require an artificially high turnover rate, the organization could establish an exchange programme with other organizations in similar activities, as well as with those in very different ones. Each person in the structureless unit would get leave, to be spent working in one of the cooperating organizations, which would send someone as a replacement. In this way the first unit would get the benefit of the visitor’s experience, and when the original member returned he would bring fresh ideas from his contacts in the second.

The exchange plan achieves the same things as enforced rates of executive turnover, and does so while maintaining stability in the system. In addition, it artificially solves the environmental problem of locating near and interacting with both similar and non-similar organizations.

Perhaps the remaining issue to be dealt with in the present context concerns the necessity for such an organization. Remember that the Weberian bureaucracy is still the most efficient form of organization for dealing with a stable environment. It is up to each organization to determine the characteristics of its present and future environment. Each organization must determine how much of a return it can expect from reliability, and also the rate at which reliability leads to obsolescence.

The resolution of these questions requires, of course, an innovative approach!

Selwyn W. Becker is professor emeritus of psychology and quality management at Chicago Booth, where he has served on the faculty since 1959.

Drawing a blueprint for innovation ran in the Winter 2015 issue .

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