CIFECENTER FOR INTEGRATED FACILITY ENGINEERING A New Model for Systemic Innovation Diffusion in Project-based Industries

Traditional industries (e.g., aerospace and pharmaceuticals) that once organized their activities into functional hierarchies are evolving toward project-based forms of organization in which teams of specialists from both inside and outside the firm report to project managers. Emerging industries (e.g., biotechnology and information technology) are also adopting project-based forms of organization. Researchers term this proliferation of organizational forms emerging between market-based organizational interactions and hierarchical organizations as the “swollen middle” (Hennart 1993). Though much is known about innovation in traditional, hierarchical organization structures, little research to date explores the issues associated with innovation in the project-based organizations that populate the “swollen middle.” As outsourcing of specialized skills increases, product and process innovations with potential to improve overall productivity significantly (e.g., supply chain management, enterprise resource planning, or component prefabrication) often require multiple interdependent firms to change their processes. Although they may hold the promise of significant increases in productivity and profitability, data shows that these “systemic” innovations diffuse slowly in project-based industries. This research explores the structural mechanisms inherent in project-based forms of organization that impact the diffusion of systemic innovations. Expanding our understanding of this phenomenon is critical as firms and industries continue to evolve toward project-based forms of organization. We explore these structural mechanisms in order to develop a proof of concept explanatory model for understanding why systemic innovations diffuse more slowly than incremental innovations in project-based industries. Our research design focuses narrowly on innovations in residential building; though we seek to generalize our model to apply to any project-based firm or industry. In this paper we: (1) delineate the concepts of “incremental” and “systemic” innovations in the project-based industry context, (2) review the building industry literature on innovation, (3) present outcome and process evidence from our case-based research on “systemic” vs. “incremental” innovations in the U.S. residential homebuilding industry, and (4) introduce a proof of concept model for systemic innovation in project-based industries. This paper concludes with a research agenda to improve our ability to understand, predict and influence rates of diffusion for systemic innovations in project-based industries. 1 In press, Project Management Institute, International Research Conference, London, England, July 2004.