18 May 2012Working Paper Summaries

Organization Design for Distributed Innovation

by Carliss Y. Baldwin

MIT professor Eric von Hippel first coined the term "distributed innovation" to describe a system in which innovation emanates not only from the manufacturer of a product but from many sources including users and rivals. Over the years, systems of distributed innovation—so-called business ecosystems—have become increasingly prevalent in many industries. These entities generally encompass numerous corporations, individuals, and communities that might be individually autonomous but related through their connection with an underlying, evolving technical system. In this paper, prepared for the 1st Organizational Design Conference, held at Harvard Business School in August 2012, HBS professor Carliss Baldwin examines four central themes: 1) Distributed innovation as the unintended consequence of modularity; 2) The advantage of business ecosystems for creative problem-solving; 3) Organizational design of business ecosystems; and 4) Competition and technological innovation in business ecosystems. Overall, Baldwin argues that the potential benefits of distributed innovation must be recognized, and the field of organization design must broaden its traditional focus on the individual firm to encompass this compelling new approach for creating value. Key concepts include:

In the future, the key problem for organization design will be the management of distributed innovation in dynamic systems. Specifically, how should diverse entities be integrated into a coherent network that generates goods in the present and new designs for the future?
Organization designers must think about how to distribute property rights, people, and activities across numerous self-governing enterprises in ways that are advantageous for the group as well as for the designer's own firm or community.
Many creative problem-solvers will not (or simply cannot) work effectively under standard employment or supply contracts. That is why distributed innovation in a business ecosystem is such a desirable organizational form.
The rise of modular systems occurred hand-in-hand with the upsurge of ever-cheaper information technology in the second half of the 20th century. Distributed innovation was an unintended consequence of modularity.

Author Abstract

Systems of distributed innovation - so-called business ecosystems - have become increasingly prevalent in many industries. These entities generally encompass numerous corporations, individuals, and communities that might be individually autonomous but related through their connection with an underlying, evolving technical system. In the future, I believe the key problem for organization design will be the management of distributed innovation in such dynamic systems. Organization designers must think about how to distribute property rights, people, and activities across numerous self-governing enterprises in ways that are advantageous for the group as well as for the designer's own firm or community.