Organizational Design for Knowledge Absorption

The role in the innovation process of knowledge sources that are external to the firm has drawn increasing research attention, as witness much work on “absorptive capacity”, “user innovation” and “open innovation.”

Nicolai Foss“However,” notes Professor Nicolai Foss, SMG, “virtually no-one have examined the role that organizational design plays for knowledge absorption. One would expect that this matters. For example, how much decision power middle managers have may be expected to influence their ability to engage with knowledge sources outside the firm, such as customers, suppliers, universities and so on. It is exactly this organizational design dimension that Keld Laursen, Torben Pedersen and I examine in this recent paper”.

The July/August issue of the highly influential journal Organization Science brings an article by the three CBS Keld Laursenprofessors, Linking Customer Interaction and Innovation: The Mediating Role of New Organizational Practices. The article explores the notion that firms can improve their innovativeness by tapping users and customers for knowledge as it has been suggested in both the innovation and marketing literature. The main contribution to this discussion is to introduce the dimension of firm organization into the user innovation literature.

The article argues that firms that attempt to leverage user and customer knowledge in the context of innovation must design their internal organization appropriate to support this goal. A number of new organizational practices can be used, notably, intensive vertical and lateral communication, rewarding employees for sharing and acquiring knowledge, and high levels of delegation of decision rights.

From a theoretical perspective, the study develops a model that highlights the role of certain organizational practices as mediators between firm’s interactions with customers and their innovation performance. This model is tested on an empirical data set of 169 Danish firms from a 2001 survey of the 1,000 largest firms in Denmark. A key result is that the link from customer knowledge to innovation is completely mediated by organizational practices. The implication is, that firms can only leverage the full potential of their interaction with customers by taking into account the organizational contexts of these encounters.

“What is really striking in the study,” says, Nicolai Foss, “is that the influence from external knowledge to innovation performance is fully mediated by organizational practices. We hadn’t expected the organizational dimension to be this important. To us, this strongly suggests that firms need to think very consciously about they gear their organization for the absorption and use of externally held knowledge”.

Foss, Nicolai J., Laursen, Keld & Pedsersen, Torben (2011) Linking Customer Interaction and Innovation: The Mediating Role of New Organizational Practices. Organization Science. vol.22 no.4.