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But where are the boundaries? The challenge of leading in the modern age

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Life is full of boundaries. The walls of a house tell us where we live, the lines on the ground tell us where we should play our sport, the borders of a country tell us where we are and at times where we shouldn’t be. But does the same apply when we talk about innovation?

On a certain level boundaries are necessary. They give us the scope of our authority and influence, they guide us on where and how we can and should act and are a necessary element of providing a framework for our activities and also those of organisations.

In his seminal 1937 paper, The Nature of the Firm, the economist Ronald Coase argued that the boundaries of the firm can be established by looking at the cost of transactions. He asserts that:

At the margin, the costs of organizing within the firm will be equal either to the costs of organizing in another firm or to the costs involved in leaving the transaction to be "organized" by the price mechanism. Business men [sic] will be constantly experimenting, controlling more or less, and in this way, equilibrium will be maintained.

Coase, 1937, p.40

In other words, an organisation’s boundaries will be found at that point where a decision either to do it in-house or purchase from elsewhere is required.  The transactional nature of this conceptualisation is arguably reflected in the real-world language of international trade, where terms such as CIF (Cost Insurance Freight), FOB (Free on Board) and EXW (Ex-Works) describe in a legally-defined manner when a transaction is deemed to take place, the responsibility of each party to that transaction and what liabilities apply. 

Decades later, Jay Barney (1999) built on this argument to provide a rational logic and decision-making framework for the outsourcing of certain tasks and processes. Barney also analysed the role an organisation’s capabilities play, but both Coase and Barney assume that people are rational and behave within boundaries that can be determined and fixed, no matter how fleetingly.

When it comes to people and organisations in the early 21st century, however, the boundaries are not always so clear or indeed so well-defined.  

For what might be termed a traditional business such as local retailer or a manufacturer, the broader network might include people such as customers, suppliers and stakeholders amongst others, and we can almost always draw a clear line between those who are part of the organisation and those who are not.

In these organisations account managers, sales representatives and vendor managers have traditionally been the boundary spanners – they engage with outside world and play an important role in feeding information back and forth between the organisation and its customers. They almost inevitably work for the organisation and represent its interests and through their actions or by virtue of the transactions over which they preside, demonstrate a clear demarcation and boundary line between the organisation and the outside world.

Yet think for a moment about Facebook, Twitter, LinkedIn or any other online social media platform. On the one hand, the business itself might be considered to have boundaries as we can say who is an employee and where their office might, nominally, be located. On the other hand, however, consider the millions of people who use these services on a daily basis. For Facebook alone there are apparently almost 1.3 billion daily users of the platform.

The situation gets even messier if we consider AirBnB – not only is there a core business organisation with rather cool and funky “bricks and mortar offices” (the one in Dublin, for example, contains a “hill” covered in artificial turf and a life-size Giraffe statue) but there are also the people who own the estimated 3,000,000+ properties which are listed on the site and, of course, those who rent them. 

Even in businesses undertaking more traditional tasks – FMCG, for example – it is not uncommon for providers of 3rd Party Logistics and Supply Chain services to have people based permanently in their client’s office in order to provide a more responsive service and deal with issues as they arrive. Equally, large retailers these days will often allow suppliers to manage their own product range and assortment in-store and direct feeds of sales data from the retailer to the supplier in order to manage this are often required.

So in the modern world where are the boundaries?  In fact, are there really even any boundaries to speak of?  And, returning to our theme of innovation, is all innovation now “Open Innovation”?

The idea of open innovation is not new.  The notion of collaborative research & development efforts emerged in the 1960s, though in reality has probably existed for millennia.  Yet it was not until 2003 that Chesbrough popularised the concept of Open Innovation, defined as:

A distributed innovation process based on purposively managed knowledge flows across organizational boundaries, using pecuniary and non-pecuniary mechanisms in line with the organization's business model.

Chesbrough and Bogers, 2014, p. 17

Closely linked to the concept of Open Innovation is the idea of Clusters. The European Commission asserts that…

Clusters are groups of specialised enterprises – often SMEs – and other related supporting actors that cooperate closely together in a particular location.  In working together SMEs can be more innovative, create more jobs and register more international trademarks and patents than they would alone (European Commission, 2017). [emphasis added]

The emphasis here is clearly on cooperation within a geographically contiguous area, though in the virtual world this notion is almost impossibly quaint!

Ultimately, however, the challenge with the strict definitions of both Open Innovation and Clusters is that they imply a purposeful and planned approach, whereas in reality this is not always the case.  Just as innovation within organisations can emerge from the bottom-up, so too can clusters emerge organically facilitating and indeed allowing Schumpeter’s much vaunted winds of creative destruction to come frolicking through the organisation – whether we like it or not!

In this regard, AnnaLee Saxenian’s concept of Brain Circulation to describe the way in which people move back and forth between countries and organisations is particularly powerful.  Citing the example of Silicon Valley, she argues that:

Silicon Valley has a regional network-based industrial system that promotes collective learning and flexible adjustment among specialist producers of a complex of related technologies. The region’s dense social networks and open labor markets encourage experimentation and entrepreneurship. Companies compete intensely while at the same time learning from one another about changing markets and technologies through informal communication and collaborative practices; and loosely linked team structures encourage horizontal communication among firm divisions and with outside suppliers and customers. The functional boundaries within firms are porous in a network system, as are the boundaries between firms themselves and between firms and local institutions such as trade associations and universities.
Saxenian, 1996, pp. 2–3

Needless to say, one key consequence of this phenomenon can be the cross-fertilisation of ideas and approaches which might not otherwise have occurred.  Realistically, developers moving from one software company to another cannot help but bring the ideas and techniques which they have learned with them – for better and worse!

For leaders this situation can pose real challenges, in particular being able to sense where boundaries are, if indeed they exist at all, and being able to define their scope of authority and action.  In both regards, leaders require an incredibly high tolerance of ambiguity, an internal locus of control and strong influencing and team-building skills – some of the key characteristics of what has been called the “Entrepreneurial Mindset” (Frederick et al., 2007).

Yet it also relies on the development of what Khanna has termed contextual intelligence: geographical-, domain- and organisationally-specific knowledge which informs sense-making and consequently actions and approaches.

If we assume then that boundaries are breaking down, is this good or bad for innovation?  Well that is the odd thing… boundaries and limits are actually beneficial for creativity and innovation.  While it may superficially appear as though the free flow of ideas might sound great, often it is external imposed boundaries and limits which really force people to think and act differently.  But that is a discussion for another day… 

Laurie Knell is an Associate Lecturer at The Open University Business School and speaker at the MBA Refresher Residential 2017 event.

References

  • Barney, J.B., 1999. How a firm's capabilities affect boundary decisions. Sloan Management Review, 40(3), pp.137-145.
  • Chesbrough, H., & Bogers, M. 2014. Explicating open innovation: Clarifying an emerging paradigm for understanding innovation. In H. Chesbrough, W. Vanhaverbeke, & J. West (Eds.), New Frontiers in Open Innovation: 3-28. Oxford: Oxford University Press.
  • Coase, R.H., 1937. The nature of the firm. economica, 4(16), pp.386-405.
  • European Commission. (2017). EU Cluster Portal. Available at: https://ec.europa.eu/growth/smes/cluster_en. Accessed 2nd June, 2017.
  • Frederick, H.H., Kuratko, D.F. and Hodgetts, R.M., (2007). Entrepreneurship: Theory, process, practice. Nelson Australia.
  • Khanna, T. (2014) ‘Contextual intelligence’, Harvard Business Review, vol. 92, no. 9, pp. 58–68.
  • Saxenian, A. (1996) Regional Advantage: Culture and Competition in Silicon Valley and Route 128, Cambridge, MA, Harvard University Press.

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