19 Dec 2013Working Paper Summaries

Innovating Without Information Constraints: Organizations, Communities, and Innovation When Information Costs Approach Zero

by Elizabeth J. Altman, Frank Nagle and Michael L. Tushman

Information is expensive to process, store, and communicate. At least, this has been the prevailing assumption upon which most of our organizational theories rely. Yet we now live in a world where information is no longer prohibitively expensive. Thus there is tension between logics focused on hierarchy and control and more open and community-centric logics. This calls into question many of the assumptions underlying the strategic and organizational research that has been treated as foundational wisdom in management scholarship. In this paper, the authors explore the implications for managing innovation as information processing, storage, and communication costs approach zero. Overall, they argue that when information constraints drop dramatically and the locus of innovation shifts from residing solely within the hierarchical firm to also encompassing the larger community, there are profound challenges to the received theory of the firm and to theories of organizations and innovation. The authors conclude with thoughts for how these changes present opportunities for research on innovation and organizations. Key concepts include:

The decrease in information processing costs is having a decentralizing impact on the locus of innovation and, in turn, on how organizations manage their innovation processes.
The locus of innovation for incumbent firms has begun to move from residing solely within the firm to also encompassing communities beyond their full control.
From a theoretical standpoint, the existing assumptions that many fundamental organizational theories are built upon may no longer be accurate portrayals of a world without information constraints.
Mature organizations are struggling with new levels of interdependency and complexity as they share and engage more broadly, and struggle to manage multiple logics simultaneously.
Entrepreneurial organizations are emerging with entirely new approaches to managing innovation in response to information costs approaching zero.

Author Abstract

Innovation has traditionally taken place within an organization's boundaries and/or with selected partners. This Chandlerian approach to innovation has been rooted in transaction costs, organizational boundaries, and information processing challenges associated with distant search. Information processing, storage, and communication costs have long been an important constraint on innovation and a reason for innovative activities to take place inside the boundaries of an organization. However, exponential technological progress has led to a dramatic decrease in information constraints. In a range of contexts, information costs approach zero. In this chapter, we discuss how sharply reduced information costs enable organizations to engage with communities of developers, professionals, and users for core innovative activities, frequently through platform-based businesses and ecosystems and by incorporating user innovation. We then examine how this ease of external engagement impacts the organization and its strategic activities. Specifically, we consider how this shift in information processing costs affects organization boundaries, business models, interdependence, leadership, identity, search, and intellectual property. We suggest that much of the received wisdom in these areas of organization theory requires revisiting. We then discuss the implications for an organization's management of innovation and conclude with research opportunities.