Why the Most Innovative Companies Have Holes in Them

CORPORATIONS WITH DENSE AND HOMOGENOUS INTERNAL NETWORKS ARE UNLIKELY TO MAKE GOOD USE OF EXTERNAL KNOWLEDGE. WHEN NETWORKS ARE MORE OPEN AND WORKERS FILL THE GAPS OF THEIR NETWORKS BY TALKING TO PEOPLE WITH DIFFERENT SKILLS, PATENTS PRODUCTION INCREASES

Organizations with an open social network of knowledge-sharing relationships are more likely to use external knowledge to generate innovations. This is the result of a study by Marco Tortoriello, Professor of Strategy and Organizations at Bocconi University and Director of SDA Bocconi School of Managemet's Doctorate in Business Administration (DBA). The paper, which was published by the Strategic Management Journal, focuses on a multinational semi-conductors company, but its findings are applicable to any knowledge-based organization: research and development departments, law firms, advertising and consulting agencies.
 
Claiming that higher R&D spending increases the organization’s ability to acquire external knowledge is not enough. In The Social Underpinnings of Absorptive Capacity: The Moderating Effects of Structural Holes on Innovation Generation Based on External Knowledge (in Strategic Management Journal, Volume 36, Issue 4, Pages 586-597, doi: 10.1002/smj.2228), Tortoriello focused on the internal mechanisms through which organizations assimilate external knowledge and foster innovation. He used a questionnaire to collect data from 276 senior employees working in 16 R&D laboratories of a large multinational company. “Their productivity” Tortoriello says “is measured by the number of new patents: the innovation generation is therefore a a key job activity”.
 
The survey measured both the external sources of knowledge and the internal social network relationships of each senior manager, researcher or engineer: is it an open or closed network? Are the knowledge-sharing relationships weak or strong? How common is the exchange of information? The dependent variable was represented by the number of patents generated by the researchers and granted by the United States Patent and Trademark Office in a two year span after the survey.
 
The results say that the individual’s position in the internal knowledge-sharing network is crucial to determine his ability to generate innovations. “A structural hole is a gap between two individuals who have knowledge in different areas. A position rich in structural holes – that workers can fill talking to people with different skills - is significantly associated with a higher likelihood of generating innovations based on external knowledge”. Conversely, the knowledge of individuals at the center of a dense and homogenous network makes it more unlikely to absorb, decode and share external knowledge. “The problem of any large organization is to break the structural homogeneity that causes the compartmentalization of knowledge. The challenge is to build relationships that bridge across gaps in the organizational social structure”.
 
The paper brings together two traditionally separate research streams, one that deals with external knowledge, the other with absorptive capacity. Focusing on individuals is thus crucial. “When people were asking him the best way to understand how an organization works, the economist and Nobel laureate Herbert Simon answered: go talk to managers. Organizational studies can not overlook the role of individuals. Big data are important, but there is still a lot to learn from small data”.

by Claudio Todesco