Designing Effective Organizations for Product Innovation
By Mike Hyzy
kHUB Post Date:November 17, 2023
Read Time10 Minutes
Amidst a whirlwind of global competition and ever-shifting consumer demands, the race to innovate and launch groundbreaking products has become the lifeblood of any forward-thinking company hungry for growth and determined to outpace the rest. Many established organizations struggle to foster innovation because their structures and processes do not align with the behaviors required for ongoing product development. Designing an organization that enables product innovation is, therefore, a key challenge faced by many executives and managers.
This article synthesizes fundamental academic theories and industry case studies to outline best practices for structuring product-focused organizations. It examines principles from organization design, strategy, innovation management, and product development that can guide managers in building organizations optimized for product innovation. The analysis also highlights common barriers and pitfalls to avoid. While organizational contexts vary, the evidence-based guidelines presented here provide a strategic framework for designing structures, systems, culture, and leadership approaches to unlock innovation.
Fostering Innovation with Organic Structures
A fundamental tension in organizing for innovation is balancing efficiency, control, and exploitation of current capabilities with flexibility, autonomy, and exploration of new opportunities (March, 1991). Whereas established organizations tend to emphasize the former through bureaucratic structures that reinforce reliability and optimization, innovation thrives in more agile, decentralized, and participative environments (Burns & Stalker, 1961).
The differences suggest that more organic organizational designs characterized by loose departmental coupling, cross-functional collaboration, decentralization of authority, and loose oversight tend to be better suited for innovation (Tushman & O’Reilly, 1996). Features such as flat hierarchies, empowered teams, informal communication, and open innovative cultures allow ideas to emerge through bottom-up participation rather than top-down control. Employees closest to emerging technologies and customer needs can drive the innovation process.
For example, Amazon has institutionalized an approach to organizational design that emphasizes decentralization, known as the ‘two-pizza team’ model. This concept posits that teams should be small enough to be fed with two pizzas, aligning with the principle that smaller groups can enhance operational flexibility and autonomy. Such teams are cross-functional, possessing the capabilities necessary to complete tasks independently of other groups within the organization. By design, these teams can exercise decision-making with minimal bureaucratic oversight, enabling a more organic and responsive approach to product development. This methodology rests on the theory that smaller, self-sufficient teams actively foster more innovative environments, thereby sustaining Amazon’s competitive advantage in the swiftly evolving digital marketplace. Similarly, companies like 3M and Google enable innovation by allowing employees to allocate a portion of their time to personal projects outside formal responsibilities (Garvin & Levesque, 2006). Rather than isolating R&D, organic structures make innovation a companywide priority.
While organic structures promote exploratory innovation, they can reduce efficiency and control compared to bureaucratic designs. The contrast highlights the need to balance structure based on the external environment and strategic priorities. Stable or mature industries may do better with more limited organic features explicitly focused on R&D and new product groups, while rapidly changing industries require enterprise-wide agility.
In a more agile organization structure, leadership and culture must also reinforce autonomy and experimentation. Without a supportive context, organic structures alone will not sustain innovation.
Adapting Structure to the Product Innovation Process
Beyond broad designs, organizational structures can be tailored to the different phases of the product innovation process, which include ideation, research and development, product design, engineering, manufacturing, and commercialization. Different stages require cross-functional collaboration while also needing distinct capabilities. The broad mix of players suggests that product innovation benefits from ambidextrous and hybrid structures that blend characteristics of functional, divisional, and matrix designs. (O’Reilly & Tushman, 2004).
For example, early ideation and R&D phases may flourish in decentralized units with wide latitude over projects and personnel. However, product development and launch activities depend on tighter cross-functional coordination across design, engineering, manufacturing, marketing, and sales to ensure seamless execution. Some firms address this through internal incubation labs to spur radical innovation and more integrated product groups for incremental advances. Similar to a company lifecycle, products evolve from loose entrepreneurial teams to centralized units as they mature. Structures must adapt accordingly.
The ambidexterity required for product innovation has led many organizations to adopt matrix structures, which provide dual reporting relationships along product and functional lines. The matrix allows alignment within product divisions for quick decision-making while enabling coordination across functions (Larson & Gobeli, 1988). However, matrix structures violate unity of control. So, keep that in mind. For instance, Toyota employs matrix structures to combine the strength of decentralized teams with integration through oversight roles. However, matrix structures also pose management challenges of ambiguity and conflict that require active integration (Galbraith, 2009).
While consistently managing the ambidexterity dilemma is complex, adapting organizational structure and autonomy to the innovation process improves results. Firms must balance flexibility for early creativity with coordination for orderly execution.
Cross-Functional Collaboration and T-Shaped Skills
Given the multidisciplinary nature of product innovation spanning design, engineering, manufacturing, marketing, and other functions, cross-functional integration is widely recognized as critical for successful development (Griffin & Hauser, 1996). Silos stifle communication and cause delays in solving technical challenges, understanding customer needs, and delivering integrated products.
Structural integration mechanisms like teams, informal networks, and matrix designs can break down barriers, but developing a collaborative culture is equally important. Shared goals, incentive systems, and social relationships that cut across functions are necessary enablers of cooperation and knowledge sharing (Hansen, 2009). For example, cross-functional job rotation programs at Procter & Gamble build bonds and empathy between departments. A sense of collective mission and camaraderie is essential.
Enhancing collaboration also requires employees to have T-shaped skills - deep functional expertise combined with a broad understanding across disciplines (Ostroff, 1999). For instance, an engineer with marketing knowledge can better communicate with business teams, and marketers who grasp technical constraints can set more realistic goals. Developing T-shaped skills through training and job experiences improves shared understanding and the ability to integrate diverse perspectives critical for product innovation.
While structures and systems shape behavior, cross-functional collaboration ultimately depends on the soft skills of team dynamics, relationship building, communication, and creative problem-solving. Organizations must actively cultivate these to unlock innovation.
Ambidextrous Leadership & Culture
The paradox of product innovation requiring both tight and loose management, structure, and culture has led to extensive research on ambidextrous leadership (Rosing et al., 2011). Rather than making tradeoffs, tactical innovation leaders adapt their approach to align with specific activities and stages of development. They provide vision and inspiration balanced with participative decision-making. They shift between coaching that supports autonomy and high-performance demands that drive accountability.
Productive paradoxes play a crucial role in sustaining a dynamic organizational environment. Social cohesion, paired with internal competition, fosters a collaborative yet driven workforce. Balancing patience with urgency ensures thoughtful decision-making that remains responsive. Combining openness with focus allows for innovative exploration while maintaining core objectives. Together, these paradoxical strategies help maintain a state of engagement, continual exploration, and effective control. (Schuler et al., 2011). For instance, 3 M’s culture values entrepreneurial risk-taking but requires meeting demanding objectives.
Leaders play a crucial role in shaping this cultural duality. They must be comfortable with ambiguity and contradictions. By role modeling versatility and integrating opposing demands, leaders create the trust, aligned vision, and context needed for product innovation to move from imagination to implementation continuously.
While formal structures and processes are foundational, it is ultimately leadership and culture that animates an organization’s ability to develop cutting-edge new products consistently. Savvy integration of contradictions unleashes innovation.
Portfolio Management & Pipeline Visibility
To maximize return on innovation investments, many leading organizations adopt portfolio management approaches to oversee technology initiatives and product pipelines (Cooper et al., 2001). Using design principles from financial investing, managers create portfolios that balance risk across incremental improvements, major advances, and transformational offerings. They use analytical techniques and stage gates to decide which projects to fund, how to allocate resources, and when to terminate initiatives based on strategic alignment and expected value.
At P&G, for instance, divisional product portfolios are governed by executive councils representing different functions to ensure diverse input on evaluating opportunities and managing the pipeline. Portfolio transparency helps assess gaps and identify areas for external partnerships. By making calculated bets based on risk-return tradeoffs, portfolio management injects rigor into what would otherwise be an opaque process vulnerable to pet projects and institutional politics interfering with innovation investment priorities.
Extensive evidence indicates that actively governing innovation pipelines and portfolios as strategic assets lead to better commercial results (Booz & Company, 2008). It translates raw creativity into launched products with strategic discipline and financial accountability.
Open Innovation Ecosystems
Given rapid technological change, individual companies cannot rely solely on internal capabilities to sustain innovation. The situation has led to the widespread adoption of open innovation ecosystems, tapping networks of external partners, including suppliers, academic institutions, startups, independent inventors, and competitors (Chesbrough, 2003). Engaging outsiders brings fresh perspectives, specialized expertise, and insights on emergent technologies valuable for informing product strategy.
An open approach requires permeable organizational boundaries and collaboration skills to build trusting relationships with external contributors. For example, P&G’s Connect + Develop program scans for solutions across its global network of innovators. Lego leverages an open platform where over 100,000 adult fans contribute product ideas. Openness further enables test marketing of early prototypes to capture external input for designing market-ready products.
While open innovation expands possibilities, it also poses management challenges of co-creating with outsiders. Transparent governance systems, IP protection protocols, and incentives that reward external engagement while preventing leakage of sensitive data are required operational capabilities (Dodgson et al., 2006). When leaders create environments of open innovation effectively, it dramatically scales an organization’s creation potential.
Agile Product Development Methods
Many organizations have adopted agile product development approaches emphasizing iterative learning and customer collaboration rather than rigid linear execution. Agile provides flexibility to incorporate feedback and change priorities as circumstances evolve continuously (Rigby et al., 2016). Short sprints rapidly translate concepts into prototypes for validation and refinement. Visual dashboards foster transparency on progress.
This empirical, user-centric methodology thrives in empowered teams with clear goals but high autonomy over how they work. Leadership provides inspiration and air cover more than command and control. The agile mindset shifts from getting everything right upfront to failing fast and learning through rapid cycles. It harnesses uncertainty through experiential problem-solving.
For software, agile methods like Scrum and Kanban are standard. Industrial firms like Caterpillar and Siemens apply agility to accelerate mechanical product development. While agile originated in technical domains, its core principles around iteration, customer focus, autonomy, and embracing change have growing relevance for organizations of all types. The future favors learning and adaptability over static optimization.
Digital Platforms & Ecosystems
Digital connectivity has transformed the interaction between organizations and their audiences, allowing dynamic collaboration through online platforms and advanced toolkits. The integration of generative AI across various software sectors is becoming a prime example of this transformation. These AI systems, capable of producing original content and providing intelligent insights, are changing the game for businesses by enabling them to automate creative tasks, accelerate development cycles, and offer highly personalized experiences. In software development, generative AI tools assist programmers by writing code, testing applications, and even suggesting new features, thereby streamlining the innovation pipeline. This shift empowers companies to leverage the power of crowdsourced creativity while significantly enhancing their ability to innovate and maintain a competitive edge in the digital age.
Effectively leveraging digital ecosystems requires carefully designed interfaces, governance mechanisms, revenue-sharing models, and tools to facilitate matching problems and solutions (Nambisan & Sawhney, 2011). Organizations still need to curate value creation by providers and manage intellectual property. If executed well, platforms unlock nearly unlimited scalability by coordinating innovation on a global digital grid.
The plug-and-play nature of platforms represents the ultimate in open, agile product systems. Digitalization and AI provide the infrastructure for organizations to harness massive external creativity for continuous incremental improvement and radical innovation.
Avoiding Structural Traps
While the design principles outlined so far enable innovation, established organizations remain prone to structural traps that stifle creativity over time:
Complacency: Past successes breed assumptions and routines that blind organizations to disruptive threats (Christensen, 1997). Continually challenging orthodoxies is critical.
Competency: Core capabilities transform from strengths to liabilities when the basis of competition shifts—willingness to abandon the old and adopt the new counters this trap.
Bureaucracy: As organizations grow, a tendency toward formalization and standardized efficiency creates inertia. Maintaining agile structures alongside formal ones prevents ossification.
Insularity: Internal focus and resistance to external input leads to outdated paradigms. Staying connected to the outside world counters insularity.
Traditional: Settled hierarchies cause power dynamics that suppress new thinking. Fluid structures that allow new leaders to emerge keep creativity flowing.
The traps highlight how structure intrinsically evolves toward exploitation rather than exploration. Renewing design flexibility, embracing external ideas, and dispersing influence are required to sustain innovation over time.
Key takeaways for designing innovation-enabling organizations include:
- Adopt organic, decentralized structures that empower creativity.
- Tailor design to the divergent phases of the innovation process.
- Foster cross-functional collaboration through integration roles, networks, and T-shaped skills.
- Develop ambidextrous leadership and a culture that embraces contradictions.
- Implement portfolio management and pipeline transparency.
- Leverage open innovation networks to scale ideas.
- Incorporate agile, iterative, prototype-driven processes.
- Harness digital platforms and ecosystems for co-creation.
- Continuously renew structures and mindsets to avoid inertia.
While still challenging, implementing these organization design principles allows executives to nurture the innovation capabilities critical for competing in volatile, uncertain markets. The guidelines provide a strategic blueprint for structuring creative organizations that can translate imagination into game-changing products.
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About the author
Mike Hyzy, Inspire 11
Mike Hyzy is a highly experienced product strategist and management consultant with a proven track record of delivering results. Throughout his career, he has demonstrated exceptional leadership skills, guiding cross-functional teams to successful product launches and driving growth for his clients. With a deep understanding of the product development landscape, Mike is known for his ability to develop and execute effective product strategies, bringing innovative products to market. Mike holds many key certifications, including a NPDP certification from the Product Development and Management Association, a CSPO certification from the Scrum Alliance, and a Foresight Practitioner certification from the Institute for the Future. He is currently writing a book on gamification for product teams to be published in the fall of 2023.