TOWARD A NETWORK TOPOLOGY OF ENTERPRISE TRANSFORMATION AND INNOVATION

TOWARD A NETWORK TOPOLOGY OF ENTERPRISE TRANSFORMATION AND INNOVATION (Draft Copy) Takis Damaskopoulos INSEAD Boulevard de Constance 77305 Fontainebleau Cedex France Tel: +33 (0) 60 72 41 39 E-mail: panagiotis.damaskopoulos@insead.edu ABSTRACT This paper develops a framework of research and analysis of the emerging network topology that underpins processes of enterprise transformation and innovation The central argument of the paper is that innovation constitutes the foundation of the competitiveness and value-creation capabilities of economic organizations However, innovation is not something happening “inside” enterprises but rather at the network interfaces of enterprises with the business, regulatory and institutional environment within which they operate The emerging economic system is powered by information and communication technology (ICT), is knowledge-driven, is organized around electronic and organizational networks that generate knowledge and transform industries and markets, and is dependent on dynamic and flexible regulatory public institutions For new ICT to diffuse throughout the whole economy, thus enhancing the competitiveness, knowledge and learning capabilities of organizations, business enterprises, market conditions, the institutions and culture of society need to undergo substantial change It is the dynamic interdependence of this set of conditions that is the source of innovation and value creation in the emerging economic environment The paper is structured around three sections The first explores dynamics of enterprise transformation and innovation as these relate to the adoption and implementation of ICT-enabled change The second discusses key issues of organizational structure as these relate to organizational knowledge and learning capabilities and their application for innovation and value creation The third section explores issues of enterprise transformation in relation to the public institutional, regulatory and cultural environments within which enterprises operate which can be of fundamental importance in encouraging and supporting or inhibiting enterprise transformation The empirical frame of reference of the paper is structured by the findings of four research projects in these domains The first project concentrates on processes of innovation in the financial services industry The remaining three projects are conducted in the context of the European Commission’s Information Society Technologies (IST) program The first of these explores factors critical to the development of sustainable business models in an ICT-enabled business environment, the second examines issues relating to knowledge management and e-learning within enterprise environments, the third concentrates on issues of enterprise transformation and institutional construction with reference to the European Union’s Eastern European Enlargement candidate countries Introduction Information and communication technology (ICT) is today recognized as the epicenter of a profound economic dislocation associated with what has come to be known as the transition from an industrial to a knowledge-driven or learning economy The fundamental feature of this transition is the alteration of the economic parameters of value creation This involves a shift in the valorization process that tends to prioritize the value of the intangible assets of Draft Copy enterprises, particularly their organizational capabilities for knowledge creation, distribution, and application for innovation and value generation The capacity of organizations to engage in learning processes has increasingly come to be viewed as a crucial determinant of innovation, enterprise performance and economic development [Lunvall and Johnson, 1994] In the emerging economic environment, the ability to innovate has emerged as the critical competitive weapon This is the case because of the disarticulation of established economic, social and institutional structures and processes that the new knowledge-driven economy and society bring in their path This disarticulation is the product of the interplay of technological, industrial, economic and social transformations The alignment and re-articulation of technological capabilities, especially information society technologies, through novel knowledge-creating organizational forms geared to constant innovation is the intangible quality that determines the competitiveness not only of individual enterprises but also of the national and regional environments within which they operate This paper develops a framework of research and analysis of the emerging network topology that underpins processes of enterprise transformation and innovation The central argument of the paper is that enterprise transformation geared to innovation constitutes the foundation of the competitiveness of economic organizations However, innovation is not something happening “inside” enterprises but rather at the network interfaces of enterprises with the business, regulatory and institutional environment within which enterprises operate The emerging economic system is powered by ICT, is knowledge-driven, is organized around electronic and organizational networks, and is dependent on dynamic and flexible regulatory public institutions In this context, innovation is a function of complex interdependencies among highly skilled labor operating within and across knowledge-creating organizations that are nurtured and supported by dynamic and flexible institutional structures It is the dynamic interdependence of this set of conditions that is increasingly the source of innovation In other words, for new ICT to be able to spread throughout the whole economy, thus enhancing productivity growth, business enterprises, market conditions, and the institutions and culture of society need to undergo substantial change This is why the agenda of research on the dynamics of enterprise transformation and innovation, business competitiveness and economic growth needs to be expanded beyond the level of the enterprise It needs to be built around the dynamic interrelationships between technological transformations, enterprises’ organizational knowledge-creating capabilities, and public institutions [Boyer et Saillard, 1995, Berger and Dore, 1996, Castells, 2000, Crouch, 2001, OECD, 2001, World Bank, 2002] The paper is structured around three sections The first explores dynamics of enterprise transformation and innovation in reference to ICT-enabled change and the role of organizational knowledge and learning capabilities The second discusses key issues of organizational structure as these relate organizational knowledge and learning capabilities and their application for enterprise transformation and innovation The third section explores issues of enterprise transformation in relation to the public institutional, regulatory and cultural environments within which enterprises operate which can be of fundamental importance in encouraging and supporting or inhibiting enterprise transformation The empirical frame of reference of the paper is structured by the findings of four research projects in these domains The first project concentrates on processes of innovation in the financial services industry The remaining three projects are conducted in the context of the European Commission’s Information Society Technologies (IST) program The first of these explores factors critical to the development of sustainable business models in an ICT-enabled business environment, the second examines issues relating to knowledge management and elearning within enterprise environments, the third concentrates on issues of enterprise transformation and institutional construction with reference to the European Union’s Eastern European Enlargement candidate countries Draft Copy ICT, knowledge and innovation In the aftermath of the dot.com crisis there is an emerging sense that the ‘e’ components of economic and social processes are only one aspect, albeit a central one, of a broader economic transformation Despite the bursting of the dot.com speculative bubble and the continuing crisis in the telecommunications sector, the introduction of ICT into established and novel business processes is transforming the way enterprises, especially “old economy” enterprises, operate It is true that several pure Internet business models have succeeded and continue to thrive However, much of the current transformation is taking place in enterprise processes and in transactions within enterprises and markets of the “old economy” The change is less revolutionary than had been originally anticipated However, it is a ubiquitous and multifaceted process that affects all domains of economic and social activity that underpin innovation; domains such as the structure of enterprises, modes of transaction, business models, modalities of collaboration, markets and value chains, capital markets, community relationships, public institutions, public infrastructure and trust, among others This process of change is driven by certain structural transformations that are likely to shape the conditions of economic and business change in the foreseeable future It is here then – with the durable features of “what is new” – that we must begin our analysis of the sources and challenges of enterprise transformation The emerging economic and business environment involves the formation of an economic system that is knowledge-driven, it is global, and it is networked It is knowledge-driven because the productivity and competitiveness of economic organizations depend upon their ability to generate, process and apply efficiently knowledge geared to innovation It is global because the key processes of production, circulation and consumption are organized on a global scale through functional linkages among technological, organizational and institutional structures And it is networked because productivity is generated through and competition is organized around a global network of interaction between business networks These three central features not mean that the emerging economic environment leads towards convergence of economic systems ICT broadens the scope of economic activity, which means that business systems interact on a global scale In this context organizational forms diffuse across institutional environments, borrow from each other, and create organizational amalgams that correspond to common patterns of business organization and competition, while adapting to the specific social environments within which they operate In other words, forms of economic organization are mediated by antecedent organizational forms, institutional structures and cultures This mediation is of fundamental importance in the acceleration, or deceleration, of learning processes and processes of innovation [Castells, 2000, OECD, 2001] One of the key drivers of change in the emerging economic environment is closely linked to two key industries that not only introduced process and product/service innovations, but also applied such innovations to their own structures and processes, which resulted in higher growth and productivity, and through competition, to the diffusion of new business models throughout the economy These industries are ICT and finance Indeed, it is the global interconnection of the financial markets facilitated by ICT and regulatory reform that makes the new economy global At the core of the new ICT industries are the Internet-centered firms and Internet-related components of “old economy” types of organizations However, the centrality of Internet-related economic activity is not related to the until-recently exponential revenue growth and market capitalization value of Internet-related firms Instead, their economic and business significance lies with the potentially dramatic impact of ICT on the way “old economy” business, is conducted [Castells, 2000, Cairncross, 2002] The financial component of the new economy is related to the successive rounds of innovation during the last quarter of the 20 th century that have resulted in a profound transformation of financial markets both organizationally and technologically Financial markets are increasingly globalized and interdependent while they are one of the leading Draft Copy domains of application of new ICT The global financial market is a central component of the emerging economic system The ability of capital to flow in and out of securities and currencies across markets, and the hybrid nature of financial derivatives, are intertwining through regulatory changes At the same time, ICT-enabled innovation is transforming the nature of financial transactions The widespread use of ICT and the Internet have fundamentally changed financial trade between companies, between companies and the investment community, between sellers and buyers, and not least, the stock exchange markets This change has important implications not only for financial markets but also for the entire economy ICT-enabled transaction mechanisms reduce transaction costs, thus significantly increasing market volume because the globally interconnected financial markets are able to mobilize savings for investment on a planetary basis, while accelerating the turnover of investment [Strange, 1986, Canals, 1997, Orléan, 1999, Castells, 2000] The dialectical interplay between ICT and finance has been in many ways the central axis, the flywheel that accounts for the dynamism, global reach, and innovation potential of the emerging knowledge-driven economy The technological infrastructure of financial markets allows for processes of financial innovation and the development of new financial products that create and allocate value on a planetary basis out of trade in securities On the other hand, ICT-enabled financial innovation encompasses an increasingly larger sphere of economic life where almost any potential source of value can be converted into a security and traded in financial markets globally through ICT-enabled transaction systems This process of conversion of potential sources of value into financial securities, i.e., securitization, is the driving force of the financial industry Indeed, looking at the comparative performance of stocks of financial services firms and ICT firms over the past seven years the financial component of the new economy shows a 17% annual return with financial services firms – the main providers of investment capital – some of the biggest gainers, reflecting the growing centrality of the financial services sector in the economy (See Table 1) Financial markets, in this respect, constitute a strategic network of the new economic environment For it is there that value is assigned to economic activity as represented by its stocks, bonds, derivatives or any kind of security The valuation of companies, and thus their capacity to attract capital, depends in a fundamental sense on the judgment of the financial market [Castells, 2000] Table Percent increase in stock prices, 1/3/95 – 7/2/02 * Financial services, banks, brokerages, insurance companies 224% Health care, drugs, biotech, managed care 202% Consumer staples, food, house wares, personal care 128% Information Technology, hardware, software, services 125% Industrials, machinery, transportation, business services 115% Consumer discretionary, autos, media, retailing, apparel 107% Basic materials, aluminium, chemicals, steel, paper products 39% Utilities, gas and electric companies 17% Telecom Services, telephone and wireless companies 1% * Based on S&P 500 Sector Indexes Data: Bloomberg Financial Markets Source: BusinessWeek, July 15 2002 The question of how this judgment is and should be formed is one of the most complex questions in contemporary economic analysis and is the subject of considerable debate Nevertheless, recent experience and research suggest that expectations (on the part of Draft Copy financial markets) about the future growth projections of enterprises in terms of actual profitability and future financial value and trust in the institutional environment within which financial markets and enterprises operate are central determinants of investment [Castells, 2000, Castells, 2001] However, to reach the financial market, and to compete for higher value in it, firms have to go through innovation in technology, processes, product/service lines, management quality, and branding Indeed, the ability to innovate in these domains becomes the cornerstone of competitiveness in the emerging economic environment [Tuomi 1994, Shapiro 2002] But the key to innovation lies in creative thinking and knowledge applied toward the identification of value-creating opportunities However, knowledge in itself does not contribute to enterprise performance and economic growth Knowledge needs to be incorporated and integrated into organizational structures geared to the production of goods and services The education and skills of individuals not only have to be prepared by the education and training system but also their knowledge and skills have to be effectively applied to the pursuit of particular business and enterprise objectives Educated and skilled individuals, in other words, have to be recruited into employment within enterprises and other organizations and their work needs to be valorized through organizational forms that ensure the real utilization of their competences Where these conditions are not fulfilled, investment in human capital by the state, or even by private firms, does not yield benefits in terms of improved enterprise performance, productivity improvements or economic growth more generally [Crouch et al., 1999] Similarly, advances in technological and organizational knowledge have to be absorbed effectively by enterprises and applied within the production process and the organization of work more widely This is the case irrespective of whether the new knowledge is generated externally (in universities or research institutes) or internally (in the R&D division of a firm); and whether the knowledge advances embody wholly new knowledge or the development of existing knowledge into new combinations It is the innovative capability of organizations that, in turn, to a large extent determines their competitiveness within the emerging knowledge-driven economy This is the case particularly in areas where the cost of the factors of production (especially wage costs) is relatively high In such areas long-term sustainable competitiveness has come to be increasingly related to the capacity of enterprises to improve their performance by means of continuous processes of innovation that utilize the most sophisticated knowledge available [OECD, 2001] The process of innovation itself in its simplest form can be understood as a process of creation of products, services, processes, technological and organizational solutions which have economic significance by virtue of their adoption within organizations In this sense innovation embodies knowledge that is “in demand” Yet this “demand” is not a constant quantity but rather a function of the relationship between enterprises and the market and institutional environment within which they operate For instance, research undertaken in the context of the Transatlantic Roundtable on innovation in financial markets shows that innovation in the financial services industry is undergoing significant change During the 1980s and especially the 1990s ICT, coupled to widespread experimentation on the technological and organizational fronts and entrepreneurial initiatives within large established financial services firms and among new start-up firms, was to a large extent the main driver of innovation However, the turn of the century has introduced a new set of economic and The Transatlantic Roundtable research project that is organized by INSEAD’s Center for Advanced Learning Technologies (CALT) and the Institute for Technology and Enterprise at Polytechnic University in New York City to explore strategic issues of innovation in the financial services industry with particular reference to institutional finance The purpose of the project is to advance the state of knowledge of the dynamics of innovation in the financial services industry through the creation of a transatlantic learning network across leading global financial services firms that will assist high-level executives identify key innovation arenas, analyze the forces that drive the process of innovation and uncover effective ways to manage innovation for sustainable improved business performance Draft Copy geopolitical dynamics that considerably change the nature of the process of innovation as well as the context in which innovation occurs These dynamics are a function of three sources of change The first concerns the NASDAQ crash of March-April 2000 and its implications for economic growth, especially in the ICT field that has hitherto been the epicenter of economic dynamism The second relates to the September 11 2001 events in New York City and its implications for the geopolitical and regulatory structure that underpins the operation of global financial markets The third and more recent source of change has to with the financial, accounting and analyst scandals and their implications for regulatory reform in corporate and market governance which will have a determining impact on trust that underpins financial investment decisions Indeed, the financial services industry seems to have entered a new phase of what might be called the “new innovation” In this phase while enterprise transformation geared to innovation through new technology is important other factors such as changing market and regulatory structures, changing business models, corporate and market governance, regulation and compliance, corporate organization and learning capabilities, customer centricity and being market driven are becoming the critical elements of innovation Moreover, this phase of “new innovation” is marked by significant paradoxes and seeming contradictions (e.g., a tension between share price performance and customer centricity which might require a more total view of the enterprise) Nonetheless, successful enterprise performance may require managers of financial services firms to operate and innovate effectively in the face of, and indeed leveraging, such varied and divergent forces Corporate efforts concerning ICT are also changing in major ways Today there is increasingly less attention and interest in the acquisition of new technologies (the “arms race” as the industry referred to it during the heyday of the dot.com euphoria) and in experimentation and incubation involving new technologies Instead, a higher priority is placed on integration of existing technologies, rationalizing technology and making technology user friendly and cost-effective Greater emphasis is also placed in the global coordination, interoperability and integration of existing systems Technology must now be used to retain existing and attract new customers There are many financial services firms that argue that too much money may have previously been spent on technological innovation with little return in sight On the other hand, innovation may be needed but cost pressures have reduced the pool of capital available for innovation In other words, even on the technological front, financial services firms are under considerable pressure to more with less As a result, on the technology front the key issue for the foreseeable future will be integration of existing technologies, not acquisition of new technologies [Damaskopoulos and Horwitch, 2002] Innovation involves much more than the introduction of new technologies It requires corporate alignment around market tendencies, organizational knowledge and skills, technology, leadership, customers and partners, among other factors within a strategic corporate framework Innovation is a knowledge-intensive process that requires critical and creative thinking within organizational environments that encourage collaboration and cocreation across geographically dispersed organizational and institutional environments Current corporate strategies are geared toward the development of structured relationships between companies operating in different sectors and institutional environments In the emerging context, it is alliances, joint ventures know-how agreements and minority stakes that are becoming the critical components of innovation strategies At the same time, the organizational topology of the operations of financial services firms spans a global institutional and regulatory matrix This means that the critical tasks of managing innovation are becoming balancing acts of conflicting demands between short-term profitability and long-term strategic growth made by the firm’s stakeholding constituencies: shareholders, i.e., financial markets, especially institutional investors and pension funds, customers, knowledge employees and communities [Drucker, 2001, Damaskopoulos and Horwitch, 2002] Draft Copy Despite short-term pressures for profitability improved enterprise performance in the emerging economic environment is becoming a function of alignment of enterprise objectives with the structural changes that shape the dynamics and sources of innovation There are many different kinds of innovation such as process innovation that involves “how” an enterprise produces things This involves both technological and organizational dimensions A second kind of innovation is that of product innovation which concerns “what” an enterprise produces This involves the production of goods and services The relationships among different kinds of innovation are complex, non-causal and non-determinate For instance, there is the relationship between product and process innovation Sometimes the creation of a new product itself requires new process technologies Second, there is a close relationship between technological and organizational process innovation When a new technological process innovation is introduced, it is often also necessary to change the organization of work Organizational innovations are frequently necessary to reap the productivity benefits of technological process innovations (see next section) Finally, there is obviously a close relationship between new goods and new services [OECD, 2001] The complexity of the phenomenon of innovation does not easily lend itself to homogeneous, linear and causal models of analysis The intervening relationships among the central elements, processes, organizational forms and actors involved in the process of innovation demand complex, heterogeneous and non-determinate models of analysis Existing research suggests that linear causal processes of innovation are the exception rather than the rule [Freeman, 1987, Castells, 2000] The processes through which innovations emerge involve complex interrelationships of the diffusion of knowledge, especially knowledge that opens up new horizons of scientific and technological possibilities and their interaction with the development of organizational and institutional mechanisms that enable the conversion of these possibilities into new products, services and processes These conversion processes are marked by complicated and multi-faceted feedback mechanisms and dynamic interrelationships involving scientific advances, technological developments, the development of new production processes, the existence of market demand and supportive and flexible policy frameworks [Edquist, 1997, OECD, 2001] The process of innovation is the product of different balances of organizational forms and capabilities and managerial know-how that enable enterprises to generate value Innovation involves three distinct elements The first element concerns the complexity and differential temporal rhythms of processes of innovation Innovation is set in motion by multiple sources – ranging from organizational culture, knowledge and entrepreneurial attitude – develops through different stages and involves various feedback loops, linkages with both internal networks of managers and other professionals within firms and with external networks of key strategic clients, suppliers, other vendors (including potential outsourcing candidates), other third parties and a range of relevant knowledge-intensive institutions (e.g professional services firms, research organizations and centers and universities) The second element involved in innovation in the new economy concerns networks In many ways the process of innovation is a network process, that is, a process that takes place between and across organizations in multiple and often overlapping organizational and institutional settings within diverse geographical environments These institutional settings include entrepreneurial small and medium-size enterprises, large corporations, providers of technology, and systems integrators The diverse array of geographical and institutional environments includes the global level, national jurisdictions, regions and cities Effective management of innovation in this context requires continuous balancing and leveraging resources among and across various geographical environments and institutional settings The third concerns the variety of the organizational forms that enable innovation Organizational forms are of fundamental importance for innovation and the diverse ways it Draft Copy can manifest itself, e.g., as products, processes and systems/architecture Within each of these forms, some innovations are more or less incremental or evolutionary, while others can be quite radical and disruptive The implication is that different kinds of innovation have different characteristics and require different managerial approaches to be successful [Damaskopoulos and Horwitch, 2002] Organization is in many ways the key mediating structure that articulates the different sources and elements of innovation and enables their conversion into improved enterprise performance Innovations in the organizational structure of an enterprise are frequently necessary to reap the productivity benefits associated with the introduction of ICT One of the well-known examples in this respect is the so-called “Solowparadox”; that is, the fact that the productivity impact of the introduction of ICT was for a long time smaller had originally been anticipated Evidence now suggests that this was related to the relatively slow adaptation of the organizational context effectively to the technological changes It was during the mid-1990s that the organizational context of enterprises began to adapt to the implications of these technological innovations [OECD, 2001] It is to this organizational dimension of innovation that we now turn Organizational dimensions of enterprise transformation: the “network enterprise” The process of innovation, especially as this applies to organizational and market performance, is increasingly becoming a function of open-source networks of cooperation Open-source networks are composed of teams of company employees and entrepreneurs within as well as across the formal boundaries of organizations and other key actors in the value chain such as customers and suppliers Innovation in this context is driven by three main factors The first is the generation of new knowledge in the form of scientific and technological “know-why”, “know-how”, “know-what” and “know-when” and the practice of management This presupposes the existence of well-developed public and private R&D systems able to provide the key ingredients of innovation The second is the availability of highly educated, motivated and autonomous labor, capable of applying new knowledge in innovative ways to increase productivity and improve enterprise performance The third factor is the existence of entrepreneurs Entrepreneurial drive is a key element of innovation since it functions as a catalyst in the transformation of new business ideas and projects into innovation and improved business performance [Castells 2001] Research undertaken in the context of the E-FACTORS project has located factors that are critical to the successful implementation of ICT-enabled business models in five distinct but interrelated levels These are the domains of technology itself, the individual, enterprise organization, industrial structure and societal structure It is specific combinations of the interrelationship of these levels depending up specific geographical contexts that underpins successful business models [E-FACTORS, 2002] As information technology and the Internet become entrenched into corporate life, the spatial organisation of the firm changes Business E-FACTORS IS a project that is part of the European Union’s (EU) Information Societies Technology (IST) Program www.efactors.net The objective of the project is to set up a thematic network dedicated to bringing together universities, research centers and practitioners with a common objective: to determine factors of broad and sustainable adoption of new business models based on e-Business practices and research expertise across Europe The E-FACTORS research consortium is composed of the following institutions: Athens University of Economics and Business (AUEB, Greece), Brunel University (UK), Copenhagen Business School (CBS, Denmark), the Athens Laboratory of Business Administration (ALBA) (Greece), University of Cologne (Germany), Erasmus University (The Netherlands), Norwegian School of Economic and Business – (NHH, Norway), INSEAD (France), University of Manchester Institute of Science and Technology (UMIST) (UK), Jyvaskyla University (Finland), INTRACOM S.A (Greece), Fraunhofer FHGFokus (Germany), IBERINCO (Spain), Virtual Enterprises Architects BV – (VEA, The Netherlands), Waterfall Institute of Technology - (WIT, Ireland), Georgia State University (US) Draft Copy theory on the spatial configuration of the firm has argued that the boundaries of firms are determined by the cost of transactions, and especially the cost of communication [Coase, 1937] The reduction of the information costs attached to transactions, thus, unleashes a process of reconfiguration of the internal and external boundaries of firms The reduction of information costs enhances organisational capacity to link different operations within and between firms and outsource critical business process components An important implication of this is the acceleration of the cycle from conception to rollout At the same time, the Internet is a fertile ground for the development of new ideas and hence competition, which reinforces the need for companies to develop mechanisms for “reading” and adjusting to the shifting conditions of competition Within companies, the implication is a greater need for collaboration in order to maximize synergies and increase efficiencies across all lines of the business process [Cairncross, 2002] In this environment timely access to information related to each market a company is operating in is critical for competitive success However, such access in a constantly changing economic environment marked by highly diverse market dynamics is not feasible on the basis of inflexible and top-down organizational structures ICT allows for the simultaneous decentralization of the information retrieval process from different spaces and for its integration into a flexible system This technological structure spans different institutional and regulatory spaces which present the potential for large multinational firms to link with small and medium enterprises (SMEs) according to contingent project demands forming networks that are able to innovate and adapt continuously Business projects are implemented in diverse domains and can be directed to product and service line development and organizational tasks across different territorial areas Successful business project implementation is a function of information that is generated and processed on the basis of ICT systems between and across companies, on the basis of knowledge acquired from each area In other words, the key passages of information and knowledge that underpin enterprise transformation and innovation run through ICT and organizational networks within, between and across companies [Castells, 2000, Castells, 2001] Efficient enterprise management, in this context, depends in a fundamental sense on the development of organizational forms that generate mutually reinforcing dynamic interrelationships between ICT, organizational flexibility, and highly skilled and motivated labor [Bresnahan, Brynjolfsson and Hitt, 2001, Tidd and Pavitt, 1997] There is a particular organizational form that has emerged as a critical component of competitiveness in the new economy: the “network enterprise” [Applegate et al 1999, Hagel and Seely Brown, 2001, Dutta and Evgeniou, 2002] In contrast to earlier vertically integrated hierarchical organizational structures, this is a flexible organizational form of economic activity, built around specific business projects and strategic objectives The business projects themselves are set in motion through the cooperation of networks of various and flexible duration periods, diverse origins and compositions of skills and competencies Indeed, such is the structural change associated with the transition to the new knowledge-driven economy that the basic unit of economic activity and theoretical analysis is increasingly the network, not the firm The firm continues to be the basic repository of property rights, strategic management and the accumulation of capital However, business practice is increasingly a function of ad hoc networks whose expertise is solicited for the achievement of specific business project goals In terms of its internal organizational structure the “network enterprise” is characterized by several main trends: its organization is structured around process, not task, it has a flat organizational hierarchy, the work process is organized on the basis of teams, customer satisfaction is the primary measure of business performance, the structure of reward is based on team performance, the maximization of contacts with suppliers and customers is an integral part of the business process, and information, continuous training of employees at all levels are considered critical to business success [Castells, 2000, Drucker, 2001] The network organization spans different geographical and institutional settings which alter the meaning of a “global enterprise” The continuing process of globalization goes hand in Draft Copy hand with growing market and institutional differentiation For instance, in the domains of financial markets in light of the changes that are transforming the industry financial services firms are rethinking the notion of being “global” Despite the advantages associated with being global (e.g., scale and scope) today to be a successful global enterprise requires a more granular and sophisticated approach toward market segmentation and attention to comparative market and institutional difference While the operational “back end” of the business may still be more or less global, the “front end” of the enterprise should interact closely with market segments in a more targeted, specialized and aligned fashion Indeed, for many firms, there now seems to be an end to the wholesale closing of bank branches in an effort to retain existing and attract new customers at the local level There is a growing realization that financial services firms cannot be all things to all people, all the time everywhere [Damaskopoulos and Horwitch, 2002] On the other hand, the “network enterprise” is becoming an organizational form that facilitates the customer centricity of an enterprise and its capacity to being market driven With the widespread introduction of ICT in the design, production and delivery of financial services it was assumed that financial services would become increasingly commoditized However, the impact of the changes affecting the financial services industry is more complex Instead of a single trend toward commoditization there is a more complex process at work; one that is akin to the polarization in the value chain of the financial services market On the one hand, there is a clear tendency toward the commoditization of price-driven financial services; hence higher competition and lower margins This has led to both a new emphasis on operations while undergoing shrinkage in operations staffing at the same time Indeed, the overall center of gravity in the price-driven components of the value chain has shifted to the operational part of financial services A higher priority, therefore, is now given to such matters as improving operational efficiency, reducing handling costs, eliminating redundancies and multiple systems and linking of various systems On the other hand, research shows the growing importance of relationship-driven services – the high-value components of the value chain The central issue here concerns how to enable financial services firms to make a better value proposition to their strategic clients Matching content (of products and services) to context (the customers’ needs) is of critical importance The key to this is to enter into a “dialogue” in order to better comprehend the evolution of the needs of strategic clients that needs to be closely aligned with product-line development for the greater co-ordination of product delivery to the client The development of the capability to deliver a seamless product line that corresponds as closely as possible to the needs of the strategic clients is a crucial factor in this respect Higher profit margins for financial services firms lie in the capacity to provide to their clients help in identifying and extracting business meaning and help with their business action plans This can be understood as a flow from fact, to analysis, to extraction of meaning and assistance with business action plans In this respect, client relationship management in financial services is developing into client portfolio management One of the key functions that allow the provision of this service flow is the combination of market intelligence with financial analysis It is this service curve that increasingly defines customer-centricity and being market-driven Instead of technology as the main driver of innovation, there is now renewed emphasis on people and skills development Increasingly, funds will be spent on people and boosting the skills composition of organizations rather than on ICT (hardware and software) Organizations will have to be much more focused on people which means greater emphasis will be given to competency-based management There is a need to have the right people and right partners The workforce in financial services firms generally is becoming more diverse in terms backgrounds, and containing a greater number of women as well Higher-level HR innovation also encompasses such elements as education and training, internal “advocates”, even at a time with staff is being reduced due to cost reduction efforts In fact, financial services firms need to adopt a perspective of the “total organization”: creating “advocates of 10 Draft Copy innovation” within an organization is critical In other words, enterprises face the difficult and indeed paradoxical task of tapping into the key talents of the workforce – talents that are intellectual and emotional – even as organizations are under pressure to reduce the size of their workforces due to financial pressures Capabilities – not formal qualifications – are key to the skills pool of financial institutions The capabilities that need to be cultivated include human and social networking, team building, communication skills, enhancing creativity and imagination, relationship management, ability to learn continuously and communication skills Sophisticated innovation in the domain of human resource management is, therefore, required Also, HR innovation must be carried out both in physical space (in terms of designing appropriate organizations, introducing reform in values, and stimulating attention to customer service) and in virtual space [Damaskopoulos and Horwitch, 2002] Current research undertaken in the context of the ROCKET project shows the growing centrality of networks in organizational learning processes and capabilities Competitiveness in the emerging economic environment depends on the availability of labor able to navigate, both technologically and in terms of content, the emerging information-intensive environment, to organize information, to identify its relevance, and transform it into specific knowledge, appropriate for the purpose of the work process This kind of labor must be highly educated, motivated and autonomous in terms of its capacity to take initiatives The quality of education in the context of the new economy is not a function of the duration of formal education It refers to the “type” and “relevance” of education to specific tasks in the work process Labor in the knowledge-driven economy requires specific types of education that are marked by the continuous modification and expansion of the knowledge embedded in the workers’ minds throughout their working lives The most important features of this learning process are: first, learning “how to learn”, since in the context of accelerated economic and technological change most context-specific information is likely to be obsolete in short periods of time [ROCKET, 2002] Learning “how to learn” involves addressing the kind of learning that goes beyond mere acquisition of facts for the purpose of doing a specific task better It involves developing the ability to forge meaningful connections that gives us an awareness of different perspectives, and teaches one, above all, to ask the right questions It also involves the development of the ability to transform the information obtained from the learning process into knowledge and action geared to improving organizational performance [Freeman, 2002] Organizational learning depends upon individual learning and builds upon it As Nonaka and Takeuchi [1995] have pointed out, organizational learning “amplifies the knowledge created by individuals and crystallizes it as part of the knowledge network of the organization This process takes place within an expanding “community of interaction” which crosses intra- and inter-organizational levels and boundaries” Organizational learning depends not only on generating high rates of “learning-by-interaction” inside an organization, but also between organizations Indeed, today the connection between organizational learning and innovation ROCKET is a project that is part of the European Union’s (EU) Information Societies Technology (IST) Programme http://rocket.vub.ac.be The goal of the project is to prepare a strategic roadmap that indicates the research topics that should be addressed in order to fulfil European industry’s needs in the area of organizational learning related to the continuing life-long education of knowledge workers The ROCKET consortium is composed of the following institutions: University of Florence (UNIFI) (Italy), IKS ISVOR Knowledge System (FIAT group) (Italy), TS Confindustria Toscana Servizi (Italy), FORMUL GRUPPO formula spa (Italy), EDU e-ducation.it (Italy), Institute of Communication and Computer systems of NTUA (Greece), PLANET ERNST & YOUNG (PLEY ) (Greece), INSEAD (France), Sintef group (SINTEF) (Norway), Bremen Institute of Industrial Technology and Applied Work Science (BIBA) (Germany), Universitad Oberta de Catalunya (UOC) (Spain), Vrije Universiteit Brussel (VUB) (Belgium), Computer Integrated Manufacturing Research Unit (CIMRU) (Ireland), Non Standard Logics Limited (NSL) (UK), Forschungszentrum Informatik (FZI) (Germany), Fraunhofer Society - Institute for Industrial Engineering (FHG IAO) (Germany), NOKIA (Finland) 11 Draft Copy has become so critical that many enterprises consider organizational knowledge, coupled to organizational processes geared to continuously improving information and communication channels, as risk management The reason is that sharing and transferring knowledge within and across organizations enables enterprises to increase organizational and operational transparency, which, in turn, helps to reduce risk In other words, organizational knowledge is about access to timely and relevant information and the conversion of information into knowledge through open organizational channels of communication, which combine to improve judgment on the performance of an enterprise [Dore, 2001] This association of organizational knowledge and learning with risk management is likely to grow in light of the scandals that have plagued financial markets in the recent past For issues of corporate governance, especially for publicly traded enterprises, is likely to become a key issue in innovation For instance, research in the domain of financial services markets indicates that the ensuing regulatory changes coupled to changing market perceptions of corporate responsibility are beginning have a profound impact on the management, corporate structure and operations of financial services firms as well as on the overall industrial context in financial services In the emerging business environment trust and a “trusted brand” will hold critical competitive advantages But trust is something that takes time to build and will require changes on several fronts in corporate organization One such front will be the role, tenure and expectations of CEOs The revolving door for CEOs coming and going at increasingly accelerated speeds is creating a potentially problematic atmosphere Short CEO tenures tend to result in negative instabilities and strategic discontinuities Another area that will see change concerns the separation of analysis from sales: regulation will increasingly focus on the relationship of financial services firms with consultancy and accounting firms and will demand clear separation Beyond these domains corporate governance will be a key issue with respect to all stakeholder relationships of organizations: shareholders, customers, analysts, employees and the broader community within which it operates More regulation designed to boost trust in the operation of financial markets and financial services firms will also increase pressure for compliance Corporate attention to external relations is likely to increase Innovation in terms of governance means that firms must acquire a better understanding of the major stakeholders of a firm (e.g shareholders, customers, employees, regulators and the informed public at large) [Damaskopoulos and Horwitch, 2002] Institutional dimensions of enterprise transformation: “clusters of innovation” Enterprise transformation and innovation are not processes that occur at the level of the enterprise Instead, it is synergy among the networked components of enterprise and their interaction with the business, regulatory and institutional environment in which they operates that largely decides the innovative capabilities and competitiveness ICT and the Internet have long been considered as bringing about “the end of geography” since the transparency they introduce into the economic process supposedly makes location less important Yet, recent research demonstrates a remarkable geographical concentration of not only the production process of technologies that presumably annihilate geography (see Appendix 1) but also the continuing concentration of significant ancillary services key to the new knowledge-driven economy, services ranging from finance to legal services and advertising Research shows that spatial concentration and geographical proximity continue to hold a fundamental importance in fostering innovation Innovation, in other words, is not something happening “inside” organizations but rather at the network interface of organizations with the business, regulatory and institutional environment within which they operate [Sassen, 1991, Saxenian, 1994, Porter, 1998, Gambardella and Malerba, 1999, Sassen 2000, OECD 2000, European Commission, 2000b, 2001, OECD, 2001] A key element in this spatial concentration has to with “clusters of innovation” or “learning regions” which denote organizational, social and institutional matrices that 12 Draft Copy underpin accelerated paces of technological uptake, organizational knowledge creation and their deployment for innovation These matrices incorporate specific sets of relationships of production and management, embedded in social and institutional structures that support a culture of entrepreneurship and encourage the development of new business processes geared to innovation The central feature of the institutional infrastructure of these spatial concentrations is the synergistic network relationships they foster among and across firms and institutions of the public sector Typical components of a “cluster” or “region” include companies that are networked within and through the cluster, venture capital firms, public institutions such as boards of trade and dedicated investment-attracting and promotion agencies (necessary for the creation of a business-friendly environment), universities and research centers (necessary for the support of networked R&D activities and the generation of know-why, know-how and know-what) The key in the competitive position of “clusters of innovation” is their ability to generate synergy, that is, the added value that results not from the cumulative economic impact of the critical elements present in the cluster but from their interaction in a way that fosters innovation [Castells and Hall, 1994, Castells, 2000, Morgan et al., 1999, OECD, 2001] Individual and organizational learning processes are critical for clusters’ economic performance Some analysts argue that the processes of learning which are central to continuous innovation themselves display a spatial logic of concentration, which increases new forms of comparative differentiation across regions Geographical proximity between firms and organizations is essential to the exchange of information and knowledge through which this form of learning emerges [Storper, 1995] Accordingly, while there is abundant evidence of structural changes that sustain trends toward globalization of economic processes this does not mean that the comparative difference among localities is disappearing On the contrary, a critical issues in the growing importance of locality has to with the modalities and patterns of learning that are implicated in the complex interactions between global and local processes The distinctive elements that make up the social and economic fabric of regions – their economic structures, patterns of social and political relations, cultural makeup – are themselves critical in shaping emerging patterns of economic development and organizational forms Hence a key determinant of a locality’s economic trajectory is the extent to which its social institutions, themselves largely historical products that reflect the legacy of past patterns of economic and social development, can operate as frameworks enabling responses to the challenges of the new competitive environment [OECD, 2001] Interactive learning processes that take place within networks of organizations are to a significant extent dependent on their spatial proximity Proximity facilitates collaboration between firms and other organizations However, it is important to differentiate between “organizational proximity” and “spatial proximity” The former does not necessarily depend on the latter since the growing sophistication of ICT opens up new possibilities for the growth of effective networks of organizations based upon spatially dispersed interaction [Castells, 2000] However, it remains the case that significant elements of organizational learning continue to take place within networks of organizations that are spatially proximate Spatial proximity may facilitate organizational learning through channels of social interaction; for instance, by increasing the probabilities of personal contacts and encounters between agents within the innovation system More fundamentally, however, at least some of the fundamental elements of knowledge which are generated and disseminated through interaction are tacit, that is they are embedded in particular local systems of interaction Access to such knowledge, as a result, depends participation in the local social system within which such knowledge is generated [OECD, 2001] The importance of localized access to certain forms of knowledge, in turn, lends support to analyses that emphasize the significance of local institutions Of particular importance in this respect is the concept of “social capital” In broad terms “social capital” comprise the social norms, values and beliefs which provide the organizing principles of everyday interaction 13 Draft Copy within social networks and which enable the coordination of action toward the achievement of desired goals [Woolcock, 1998] In other words, the interaction between the organizations comprising a network of innovation reflects not only market relationships, but also the broader social and cultural context in which such relationships are embedded More specifically, the nature and quality of the relations between organizations and the interactive learning that takes place within and across them are mediated by institutions Institutions articulate the social rules, cultural norms, routines and conventions that regulate the interaction between organizations They encompass the socially sanctioned rules of interaction that influence the behavior of organizations by putting into place constraints on or incentives for learning and innovation Research shows that institutions are critical to the development of trust across organizations Where interrelationships across organizations is marked by high levels of trust – that is, expectation of honest, collaborative, nonopportunistic behavior – uncertainty in relation to knowledge exchange is reduced, stable and reciprocal interactions are developed and consequently innovative capability is considerably enhanced [Edquist, 1997, OECD, 2001] Regional clusters of innovation not simply constitute passive entities that “house” dynamic interrelationships among organizations In the EU, for instance, there has been a general shift of certain policies from the national to the sub-national levels of decisionmaking in many countries This reflects partly the efforts of urban and regional authorities to develop initiatives – frequently in conjunction with the private sector – in order to ameliorate the adverse impacts of economic restructuring and to stimulate new forms of economic activity Indeed, there is today increasing interest and debate about how the emergence of new forms of knowledge-based economic activity are impacting on different regions Of central importance in this context has been the idea that “learning regions”, well attuned to the requirements of the knowledge-driven economy, may be fostered through the development of appropriate public intervention strategies This involves considerations which go well beyond narrowly economic issues If “learning regions” are to provide the basis of sustainable development, they need to be viewed in the broadest economic, social and environmental terms in ways that reinforce dynamic interrelationships among all the elements and agents involved [OECD, 2001] In other words, in order to reap the benefits that accrue from the presence in a “cluster”, enterprises, public bodies and all the central elements that compose the cluster need to be “learning organizations” [Morgan, 1997] It is this amalgam of private enterprises and public institutions that is at the center of systems of innovation in the knowledge-driven economy Periods of structural change present great challenges for countries and social systems to redesign many of their organizations and institutions Nowhere is perhaps the strategic importance of clusters of innovation and learning regions attuned to the requirements of the knowledge-driven economy more in evidence than in the transition economies of Eastern European Candidate Enlargement Research undertaken in the context of the ENLARGE project shows that the development of sustainable ICT-enabled business models in transition economies depends on dynamic interrelationships of enterprises, market and industrial ENLARGE is a project that is part of the European Union’s (EU) Information Societies Technology (IST) Program www.enlargenet.org The project aims to support economic integration of the EU Eastern European Enlargement candidate countries by providing an e-strategy framework that will stimulate SMEs participation into global digital economy - through the application of a methodology for devising and putting into action e-Business strategy in SMEs and a series of executive education programs customized for SME managers in Eastern Europe The ENLARGE consortium is composed of the following institutions: Athens Laboratory Of Business Administration (ALBA) (Greece), PLANET Ernst & Young (Greece), INSEAD (France), Central Laboratory For Parallel Processing Academy Of Science (CLPP) (Bulgaria), University of Cyprus - Department Of Computer Science – (UCY) (Cyprus), National Institute For Research And Development (ICI) (Romania), University of Maribor - Center Of Electronic Commerce (Slovenia), and the Academy of Entrepreneurship and Management (LKAEM) (Poland) 14 Draft Copy structures and the regulatory and policy environment in ways that foster enterprise transformation and innovation The learning processes and strategies necessary for the accelerated convergence of Eastern European enlargement countries toward the standards of their EU counterparts are conditioned by history One of the fundamental challenges confronting Eastern European transition economies concerns institutional construction capable of generating the synergies between skilled labor operating within and across knowledge-creating organizations that are nurtured and supported by dynamic and flexible institutional structures in ways that transform enterprises and provide the main ingredients of innovation [ENLARGE 2002, Damaskopoulos and Evgeniou, 2003] The “digital divide” between Eastern European countries and many of their EU Western counterparts is in many ways one of the fundamental features of the uneven development of the new economy and is likely to have important implications for the future economic development of the countries of Eastern Europe However, there is one factor that differentiates the countries under consideration from other areas of the world economy confronting the “digital divide”: generally high levels of education and well-developed educational systems Against this background the slower introduction of ICT, which is the backbone of the new knowledge-driven economy, presents the potential to leapfrog stages of transition and convergence to the new knowledge driven economy [ENLARGE, 2002] Nonetheless, even in this domain, which is of paramount importance for the transition to the new knowledge-driven economy, the challenges confronted by Eastern European countries should not be underestimated A European Commission report on the “wider picture” on European enlargement has put the challenge in terms that deserve to be quoted directly: One of the great hopes for a more rapid transition…and the cohesion of all the preaccession countries (PACs) is that they enjoy a developed educational system and a relatively large science and technology (S&T) base The high education levels, particularly regarding their scientific and technical skills, are a valid source of optimism for future development However, it is important to notice that the science and technology systems of all these countries have suffered major shocks as a consequence of a decline of both government support and industrial investment in research As a result around half of the industrial researchers have been lost to the system Although the situation now appears to be stabilized it is not clear if recovery will be rapid, nor is it clear if the remaining system is well attuned to the needs of the emerging innovative and technologically advanced industries In particular it can be doubted that the university system has the capacity to provide high quality teaching needed to support the transition to a knowledge economy Institutional reforms have to go further to bridge more effectively the gap between industrial requirements, science and technology outputs and an adequate supply of well-trained scientists In particular entrepreneurial and management skills are lacking The key questions are how to achieve these changes, how to achieve them rapidly Moreover, the same research indicates that there is need of better alignment between the education systems of Eastern European countries and the skills required by the knowledgedriven economy Again, in the words of the Commission’s report: If it is true that there are structural mismatches in the labor market…then the on-thejob training and learning by doing are crucial to resolving them As many required skills may become obsolete a considerable amount of retraining will be required This is one of the crucial obstacles to restructuring in the [Eastern European enlargement countries], which is especially worrying in view of signs that the traditional system of enterprise-based training in Central and Eastern Europe is collapsing Again, it seems that the structure and content of education and training is what matters, not just the mere numbers of graduates [European Commission, 1999] 15 Draft Copy Conclusion Despite the passage of the speculative bubble that that fueled the dot.com phenomenon the introduction of ICT into established business processes continues to transform the way enterprises operate In the emerging economic environment enterprise transformation geared to innovation constitutes the foundation of the competitiveness of economic organizations However, innovation is increasingly happening at the network interfaces of enterprises with the business, regulatory and institutional environment within which they operate The emerging economic system is powered by ICT, is knowledge-driven, is organized around electronic and organizational networks, and is dependent on dynamic and flexible regulatory public institutions In this context, innovation is a function of complex interdependencies among highly skilled labor operating within and across knowledge-creating organizations that are nurtured and supported by dynamic and flexible institutional structures It is the dynamic interdependence of this set of conditions that is increasingly the source of innovation In other words, for new ICT that power the new economy to be able to spread throughout the whole economy, thus enhancing productivity growth, business enterprises, market conditions, and the institutions and culture of society need to undergo substantial change This is why the agenda of research on the dynamics of enterprise transformation and innovation, business competitiveness and economic growth needs to be expanded beyond the level of the enterprise It needs to be built around the dynamic interrelationships between technological transformations, enterprises’ organizational and knowledge-creating capabilities, and public institutions The framework of research and analysis presented here has significant implications for policy development In the real economy, markets are always institutionally embedded; rules, norms, laws and regulations are necessary to make possible market exchanges of all kinds between individuals and organizations In other words, “pure markets” not exist Public organizations have a key role to play in ensuring the conditions necessary to effective interaction between organizations Accordingly, the crucial issue is not whether policy makers should intervene or not; but rather, what forms of intervention are likely to be most effective in existing situations Given that interventions cannot and should not be pervasive, on what should policy concentrate? Innovation policy should not only focus on the elements of the system, but also – and perhaps primarily – on the relations among these elements This includes not only the relations amongst different kinds of organization, but also those between organizations and institutions In other words, the key questions confronting enterprise transformation and innovation are not technological; they concern above all questions of institutional construction References: Applegate, M Lynda, F Warren McFarlan, James L McKenney (1999), Corporate Information Systems Management: Text and Cases, McGraw-Hill Archibugi, Daniele et al (ed.), Innovation Policy in a Global Economy Cambridge University Press 1999 Berger, Suzanne and Ronald Dore, (1996), National Diversity and Global Capitalism, Ithaca: N.Y.: Cornell University Press Boyer, Robert and Yves Saillard, (1995) Théorie de la regulation: l’état des savoirs, Paris: La Découverte Bresnahan, Timothy, Erik Brynjolfsson and Lorin Hitt, (2001), “Information technology, workplace organization, and the demand for skilled labor: firm-level evidence” Cambridge, MA: MIT-Sloan School Center for E-business, working paper 16 Draft Copy Brynjolfsson, Erik, Lorin M Hitt and Shinkyu Yang, (2000), “Intangible Assets: How the Interaction of Companies and Organizational Structure affects Stock Market Valuations”, MIT Working Paper, July at http://ebusiness.mitedu/erik/ Cairncross, Frances, (2002), The Company of the Future: Meeting the Management Challenges of the Communications Revolution, London: Profile Books Canals Jordi, (1997), Universal Banking: International Comparisons and Theoretical Perspectives Oxford: Oxford University Press Castells Manuel, (2000), The Information Age: Economy, Society and Culture Volume I: The Rise of the Network Society, Volume II: The Power of Identity, Volume III: End of Millennium, Oxford Castells Manuel, (2001), The Internet Galaxy: Reflections on the Internet, Business and Society Oxford: Oxford University Press Castells, Manuel and Peter Hall, (1994) Technopoles of the World: The Making of Twenty-first Century Industrial Complexes, London 1994 Coase, Ronald, H (1937), “The nature of the firm”, Economica Cooke, Philip, et al (2000), The Governance of Innovation in Europe: Regional Perspectives on Global Competitiveness Pinter Publishers Crouch, Colin (ed.), (2001), Local Production Systems in Europe: Rise or Demise? 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