According to William E. Coyne, Senior Vice President for Research and Development at 3M, "Most modern companies now recognize that the best way to increase corporate earnings is through top-line growth, and the best route to top-line growth is through innovation." The ability to innovate, however, comes from a skill that is underdeveloped in most companies: collaboration. Knowing how to collaborate helps a company to create and transfer knowledge. Knowledge creation and utilization, in turn, lead to innovation. Companies that understand this long-linked process, and make the appropriate investments needed to establish and maintain it, will be the big winners in the twenty-first century global economy. 

For many firms in the twenty-first century, success will come from their ability to continuously create new products and services in an expanding global economy. Unfortunately, however, it is not yet clear how those companies should go about realizing their promising future. On the up side, the combination of explosive knowledge growth and inexpensive information transfer creates a fertile soil for virtually unlimited invention. On the down side, neither the organizational model essential to facilitate continuous innovation, nor the business model necessary to turn its value-adding potential into profits, has been fully articulated.

The absence of well-specified business and organizational models is understandable, for the simple reason that much of the innovation process is organizationally counterintuitive. For example, innovation cannot be managed hierarchically because it depends on knowledge being offered voluntarily rather than on command. Moreover, the unpredictability of innovation makes it difficult to apply traditional rules for strategy formulation, evaluation, and control. Indeed, attempts to channel innovation into pre-specified categories severely constrain innovation-driven company growth. Finally, organizational approaches that facilitate innovation, as we shall see, require investments that often appear to be unjustified in current business thinking.

Nevertheless, while the challenges associated with developing new business and organizational models for the twenty-first century are imposing, they are not in our view insurmountable. One reason is that the process by which knowledge is created, transferred, and utilized to foster innovation is becoming much better understood. It is now apparent that effective knowledge management depends heavily on a company's ability to collaborate, both inside and outside the organization. Another reason is that business models that generate high returns from continuous innovation, while not yet widely familiar and accepted, have numerous real-life examples that can be used to identify their most effective features. When such business models can be clearly and completely specified, their organizational requirements can be easily derived - though, of course, much less easily implemented.

Our overall purpose in this article is threefold. First, we discuss a conceptual framework that shows how firms can prepare for the continuous innovation era, specifically by developing the capability to innovate through collaboration-based knowledge management. Next, by drawing on the experiences of various leading-edge firms, we describe the key features of the business and organizational models required for continuous innovation. Finally, we identify the main types of barriers that today's firms face in attempting to become more innovative as well as some of the ways those barriers can be overcome.

A Conceptual Framework for the Innovation Era

A new economic era begins to emerge when a new meta-capability forms in the minds and behaviors of management pioneers. Firms led by the pioneers reap substantial, often long-lasting returns from their unique approaches to resource packaging and exploitation. The new era achieves fruition when the meta-capability is made explicit, becomes widely understood, and is even taught in various ways across different segments of society. At this stage, most managers can clearly see the value of the meta-capability in creating new business and organizational models. 

In the currently emerging era of continuous innovation, knowledge is the key asset whose exploitation will determine success for many firms. However, knowledge assets cannot be fully exploited until the meta-capability guiding their development and use has been identified and communicated. We believe that describing how it has occurred in earlier economic eras can accelerate this process. 

The next era, that of customization, began to emerge in the first few decades of the twentieth century, overlapping in its earliest stages with the era of standardization. As firms in general began to master the art of mass production and distribution, some firms, such as General Motors, began to seek competitive advantage by differentiating their product lines. In a well-documented process, those firms learned to complement a new business model of diversification with a new organizational model built around semi-autonomous divisions each addressing its own separate but related market. Now the learning achieved in one market could be used not only to further penetrate that market, it could also be transferred laterally within the company in order to produce products and services for a group of related customers. Thus, the entire diversification process was dependent on a new meta-capability, delegation, which allowed firms to construct decentralized decision-making and coordinating centers.

As the customization era progressed, a new key asset - information - was added to that of capital goods, energy, and technical routines. The growing ability of firms to collect and use market information, and to share customer and technical information among their suppliers, was honed by the spreading meta-capability of delegation. In the newer mid-century industries, such as aerospace and electronics, delegation was expressed in the form of temporary project teams housed in matrix organization structures. Later, particularly during the last two decades of the twentieth century, firms learned to use a wide array of information technologies to assemble skills and resources not only within but also across firms. The new organizational model allowed firms to focus on their core competencies and to link themselves with upstream and downstream partners along the industry value chain. Those so-called network organizations were flexible enough to develop, contract, or redirect resources as needed - in effect, to delegate decision making and coordination laterally as well as vertically. As the most exotic network, the virtual organization, became a reality, customization could be achieved with almost the same efficiency as was standardization in the prior era.

Today, leading-edge firms can exploit global asset configurations to customize existing products and services, and they also have the ability to combine their resources with an expanding knowledge base to create a continuous stream of new products and services. The key asset of the innovation era - knowledge - has always been at the root of product/service advances, but the pace with which knowledge is growing and transferring around the world is accelerating. Moreover, we know that knowledge generation and transfer, which are the heart of the innovation process, are the outcomes of social exchange. New ideas and insights do not occur in isolation; they are the result of collaboration. Thus, however the innovation era ultimately unfolds, knowledge is its key asset and collaboration is the meta-capability by which knowledge will be exploited to drive innovation and reap its economic benefits.

A Collaboration-Based Organizational Model for Innovation

A collaborative exchange of information, ideas, experiences, and insights occurs when the exchange is jointly undertaken and purposeful, with the expectation of mutually beneficial outcomes. In true collaborative relationships, the parties each accept responsibility for their own inputs as well as for the equitable sharing of returns on outputs. The ability to develop such relationships, we believe, is essential to the building of organizations capable of continuously producing large amounts of innovation. It is also, as we will argue below, crucial to the design of business models that are designed to capture the commercial benefits of innovation. Hence, an economic era focused on innovation demands the meta-capability to collaborate.

Collaboration, which is so important to the creation and transfer of knowledge and thus to innovation, is fundamentally a voluntary process. It cannot be hierarchically imposed or closely controlled. When competent parties work together in an open and equitable environment, they can share not only explicit knowledge, understandings which can be articulated and exchanged in a variety of formats, but more importantly tacit knowledge, insights and approaches which are more experientially based and may be shared only through joint activity and/or exploration.

Unfortunately, the development of the ability to collaborate is far easier to call for than to accomplish. Organizations can be designed to facilitate the collaborative process, but collaborative relationships can neither be scheduled nor manipulated. What managers can do is invest in the conditions essential to collaboration and nurture the capability with additional investments as it develops. If managers are to make sound investments, they must be aware of the major elements of effective collaboration as well as the role that collaboration plays in the innovation process. 

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Preconditions of Collaboration: The 3 Ts

The essential conditions for the development of an effective process of collaboration can be grouped into three broad, interrelated categories: time, trust, and territory. Obviously, having the time to discuss ideas within and across unit lines is essential to collaborative exchange. Beyond the basic necessity of having time to engage in exchange, however, is the need to create time to search for sources of future conversations, experiment with alternative ways of viewing current problems, listen to the views of experts and other outsiders, and to engage in a host of other activities that might produce fresh ideas.

Time spent in productive exchange is important to the development of trust among the parties involved in collaboration. As interaction opportunities are pursued, relationships may deepen, including the development of strong bonds of trust. With increasing trust comes a growing willingness to expose one's views without the fear of being exploited and to probe more deeply for new insights and perspectives. Knowing that other parties have our interests at heart, as well as their own, serves to further open and accelerate exchanges, as confidence about the equitable sharing of jointly produced outcomes builds.

While time and trust and their interaction are easily described, the concept of "territory" as an essential condition for collaboration is less easily defined. At one level, the requirement for territory is satisfied by the enjoyable psychological space that is created when one voluntarily shares new and interesting ideas with others. Territory is, however, more than a sense of belonging. It implies real evidence, visible to others as well as to oneself, of a "stake" (marking one's place) in the outcomes of the collaborative process and in the present and future processes by which those outcomes are achieved. Visible stakes identifying territory may come in many forms, including stock ownership, stock options, highly visible awards, collegial recognition, and so on. The process of recognizing and assuring individual and joint territory is part of the meta-capability of collaboration.

In sum, managers must invest in the individual and interpersonal conditions - the "3 Ts" of time, trust, and territory - that facilitate collaboration and, in turn, innovation. In addition, they must invest in the design of an organizational setting in which collaboration-driven innovation can be sustained and its outputs recognized and exploited. Again, the meta-capability of collaboration provides the basic criteria for designing the organizational model. If collaboration is based on voluntary sharing with mutually accepted responsibility for both inputs and outputs, so too must be the design of organizational units and their management processes.

Design Principles for Innovative Organizations

The first design principle of an innovative organization is that of self-management. In twenty-first century organizational forms, hierarchical management will be minimized, while relationship management among partners will be widespread. Such organizations will require individuals, groups, and even larger sub-units to assume responsibility for performing most of their own managerial tasks. Take, for example, the growing use of self-managing teams. The capability for self-management towards clear organizational goals has been developed in many companies, including the use of self-directing teams in a wide variety of functional areas such as R&D, manufacturing, and marketing. Not surprisingly, the acknowledged conditions for the development of self-managing capability include time management and trust building, not only within the team where mutual responsibility for team performance must be nurtured, but across teams and between teams and higher management levels.

Self-management for the purpose of innovation, however, is even more demanding because it does not enjoy the guidance provided by pre-set organizational goals achieved through the operation of standard management routines. Instead, innovation-focused self-management includes the higher-order demands of a collaborative search for new ideas as well as the means to pursue them. Those demands cannot be met in a timely fashion by hierarchical coordination; they must be resolved by the parties themselves.

Because innovation-oriented organizational units normally are working towards unspecified outputs, the nature of their interactions with other units, both within and outside the organization, cannot be easily anticipated. Therefore, as a substitute for pre-set goals and methods, innovative organizations use behavioral protocols, a code of organizational "etiquette" that organization members willingly abide by because they believe that doing so enhances the collaborative process. Such operating protocols do not attempt to provide solutions to inter-unit challenges and problems. Rather, they offer guidelines or principles that the units can use to find their own solutions to the problems that inevitably arise in the collaborative process. Well-conceived protocols encourage trust-building behaviors and the acceptance of mutual responsibility for inputs and outcomes. One set of protocols, developed and used by Technical Computing & Graphics (TCG), a group of highly innovative information technology firms in Australia, is shown in Table 2.

Mutual Independence
The TCG group consists of independent firms whose relations are governed by bilateral commercial contracts. It is open to new entrants who are prepared to abide by the operating protocols. There is no internal hierarchy.

Mutual Preference 
Member Firms give preference to each other in the letting of contracts. Contracts may be made outside the group, against a competitive bid from a member firm, when circumstances warrant (e.g., work overload or a signal to the member firm that it has to lift its game). 

Mutual Non-competition 
Member firms do not compete head-to-head with each other. Self-restraint helps to establish trust among member firms. 

Mutual Non-exploitation 
Member firms seek to make profits from customers not from transactions among themselves. Member firms can only charge each other a market- determined price for services provided. 

Business Autonomy 
The flexibility of the group as a whole derives from the ability of each member firm to respond to opportunities as it sees fit. Firms do not need to ask for group approval to enter into any transaction or new line of business provided the initiative does not breach any of the operating protocols.

Democratic Ownership
There is no overall network owner. Nor is there any central committee or other formal governance structure. However, member firms can hold equity in each other as well as in joint- venture partners.

Expulsion 
A firm may be expelled from the group if it willfully violates the protocols. Simply severing all commercial ties with the miscreant member can effect expulsion. 

Subcontracting
There are no "subcontractor-only" firms within the TCG group. Each member firm has access to the open market, and indeed is expected to bring in work from outside the group. 

Entry
New members are welcome to apply to join the group but are not to draw financial resources from existing member firms. New members must obtain capital from banks rather than through equity from other member firms. It is membership in the group that serves as collateral for the bank loan.

Exit
The group places no impediments in the way of a departing firm. However, there is no open market for shares held in TCG member firms. Hence, departure arrangements have to be negotiated on a case-by-case basis. 

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Although competent individuals and teams can assume responsibility for managing themselves, and can use broad behavioral protocols to guide their interactions, there remains the need for integration of the entire organization. This is accomplished through a third design principle of the innovative firm called shared strategic intent, a clear and widespread understanding among managers and employees of the firm's direction and major objectives. The firm creates an appealing concept of product/service invention and distribution, and then it refines and expands that strategic understanding through a process of ongoing "conversations" at all levels. As strategic conversations are imbued with the meta-capability for collaboration, they carry responsibility for reasoned inputs. That is, if it is not top management's role to winnow, select, and pronounce new directions and initiatives, neither is it the membership's role to push for particular directions and approaches without thoughtfully considering their possible outcomes. Thus, fully developed collaborative skills not only broaden the capacity for setting the proper direction for innovation; they make the examination of strategic implications an integral part of the knowledge creation and transfer process.

A fourth principle guiding the design of innovative organizations is the equitable sharing of returns. The meta-capability of collaboration imbues the organization with the intention of equitable distribution of returns and the shared responsibility to see that it occurs. However, the design and implementation of mechanisms to carry out such distribution is not a simple task. Effective sustaining mechanisms cannot be implanted and then forgotten; they, like the process of developing strategic intent, must be constantly discussed and refined. Fortunately, collaborative organizations have high levels of trust, and therefore, members are predisposed to accept longer-run equitable distribution of returns instead of demanding the constant balancing of all inputs and outputs. It is crucial, of course, that innovative organizations remember that their key asset is knowledge voluntarily supplied by those who possess it and participate in its expansion and transfer, so real ownership of knowledge assets must be not only acknowledged but granted.

When stated explicitly, the four key properties of the innovative organization appear to be dramatically at odds with conventional organizational practice. However, they simply extend the trend towards increasingly higher levels of self-management and shared responsibilities and rewards that are visible across the evolution of organizational forms. From centralized functional firms, to those following a decentralized divisional form, to those utilizing temporary project teams in a matrix structure, to those forging reciprocal relationships along the industry value chain in multi-firm network organizations, each new organizational form has expanded the proportion of its members who are expected to exercise self-direction and self-control. Moreover, across this evolution - and particularly apparent in leading-edge firms - is a constantly growing percentage of organization members who are playing an entrepreneurial role in addition to performing their technical tasks.

A Collaboration-Infused Business Model for Innovation

Innovation, as discussed above, cannot be managed directly. Managers can create conditions favorable to innovation, but its occurrence cannot be scheduled. Similarly, many of the outputs of the innovation process are often difficult to predict and control. That is, the innovative ideas, insights, and discoveries that favorable conditions may facilitate frequently do not fit neatly into a firm's current product and service lines. Indeed, many of the best ideas may fall outside not only a firm's product/service base but outside those of the firm's competitors or even its industry. Such unanticipated discoveries have occurred at the level of basic research - when, for example, a chemical firm discovers a new compound or process for which it has no current commercial use. Increasingly today, however, unanticipated innovations are occurring in product or service design such as new computer software applications.

Historically, most unanticipated innovations have gone unexploited even inside the firms where they were discovered. The potential returns from such ideas are difficult to estimate, and their development costs - compared to innovations associated with existing lines - may appear to be enormous. Thus, whether at Xerox Parc in the 1970s (where the personal computer was invented but not developed), or at 3M (where the Post-it adhesive process was invented but almost ignored), ideas that fall outside of the present business domain are, understandably, pushed aside in favor of ideas whose value and costs are more easily estimated and evaluated.

The issue of unintended and often unexploited innovations is most pressing in those firms that produce a large amount of new product and service ideas. Therefore, if a firm adopts a collaboration-based organizational model intended to stimulate rapid, even continuous innovation, it increases its own need to build a compatible business model that can capitalize on the outputs of the innovation process. The issue here is more than simply not wanting innovations to be wasted. In the long run, the lost income is far outweighed by the loss of motivation to innovate among the firm's members.

In order to nourish and sustain the innovative organization financially and motivationally, it is crucial that the firm's business model specifically focus on the utilization of both intended and unintended innovations. By "business model" we mean a clearly stated plan for adding economic value by applying know-how to a set of resources in order to create a marketable product or service. A complete business model includes an understanding of how the firm will grow over time through know-how development and resource acquisition.

As we argued above, many twenty-first century firms will add value by creating the conditions where collaboration-driven innovation will flourish and by designing the mechanisms by which the resulting stream of related and unrelated products will find market acceptance. Pieces of the new business model are visible in present company practices, and myriad experiments are occurring in organizations around the world, but a complete model has not yet been fully articulated and examined. Such a model, however, probably will emerge as an extension of the various approaches shown in Table 3.

Internal Business Models

Continuous innovation can be achieved within the confines of existing product or service lines by using hierarchically coordinated cross-functional teams. Such teams have been charged with breaking down the barriers of functional "silos" in order to develop new products quicker and more effectively. For example, Intel has supported a business model of narrow but continuous innovation by creating start-up, operating, and wrap-up teams that are responsible for having the next product design underway while the current product is moving through to final distribution. Similarly, business teams at Xerox take new product/service ideas and prototypes into the marketplace for discussions with potential customers. Those teams have built collaborative linkages with all of the departments essential to bringing new designs to fruition and distribution.

An even more powerful innovation approach than cross-functional teams is intrapreneurship. Intrapreneurship has been encouraged and facilitated at firms such as 3M, where, for example, employees are given opportunities to "shop" ideas for new products to various divisions serving different markets. At 3M, intrapreneurship is powered by a widely shared strategic intent to compete through both planned and unplanned innovation. Moreover, at 3M and other successful innovators, it appears that encouraging and legitimizing intrapreneurship may be more important than providing funds and other types of "hard" assistance. Indeed, some intrapreneurship advocates argue that too much financial support too early may burden innovative efforts with evaluation and control problems that dampen creativity. They recommend that firms provide only minimal time and financial support based on the belief that "foraging" for internal and external resources stimulates creativity and establishes the collaborative linkages needed for commercialization. 

Although the Intel, Xerox, and 3M examples suggest that a strategic intent to generate innovation and returns through widely distributed entrepreneurship can be profitably incorporated in a business model, nevertheless they anticipate that innovation activities will occur within the organization's ability to coordinate or delegate them. Truly continuous innovation, however, requires efforts that are not only entrepreneurial but extend well beyond the boundaries of the firm.

Inter-firm Business Models

Increasingly, product and service innovation is occurring across companies and industries, often through unplanned interactions. For example, it is instructive to observe how innovation drives economic gain among established and newer firms in Silicon Valley and in the various development centers of the computer software industry. Large firms in these industries pour substantial sums of money into R&D every year. Nevertheless, a good deal of innovation in Silicon Valley occurs not by design in large, established firms but by entrepreneurs who have left or avoided those firms in order to gain the freedom to innovate outside of existing business domains. The new products and services they create in their small start-up firms are often acquired later by the bigger firms, a process in which entrepreneurs essentially serve as an uncontrolled (but highly paid) research and development arm of the Valley giants. Similarly, much innovation in computer software occurs outside the big firms as small R&D groups create new products that are acquired by other firms or even given away on the Internet. Lastly, there is an unorganized but very active process of innovation taking place through merger and acquisition among the growing cadre of e-business start-up firms, where the Internet is the facilitating infrastructure for innovation, both as a repository of explicit knowledge and as a tool that can be used for collaborating to create new knowledge. 

From the Silicon Valley computer software and e-business examples, one can discern two key requirements of the new business model: (1) an ever-widening marketplace as the innovation target (what we call cross-industry or lateral growth) and (2) the unleashing of entrepreneurial initiative (or entrepreneurial empowerment). Both of these ingredients can be found, to varying degrees, in inter-firm business models such as alliances with other firms, spin-offs driven by a company's own venture-capital approach, and self-governing federations. 

The most widely practiced approach to inter-firm innovation is the strategic alliance, a developmental partnership that can take various forms. For example, firms may agree to share the R&D costs of developing new technologies and products and to pool the emerging product and market knowledge. Similarly, firms may create alliances to develop new markets whose costs to open or penetrate exceed the investment risk either party is willing to assume alone. Lastly, firms may form alliances that allow them to utilize a shared upstream or downstream resource essential to creating or deriving returns from innovation. Clearly, there are few conceptual limits to the range of partnering relationships that firms might undertake to broaden their search for new markets and for new products/services either within or outside their existing business lines. The problem is that, historically, most of those alliances fail to a greater or lesser extent. Moreover, they often fail for a very simple reason - they were not created or utilized collaboratively. Instead, the parties focused more on protecting their own returns from the joint activity than on utilizing it for continuous innovation and mutual benefit.

On the other hand, some effective partnering relationships can be identified, and they reflect a much higher level of collaborative ability. One widely recognized example is that of Corning. Corning has developed a large innovative capacity in several of its basic areas of expertise, such as ceramic science. Because it is continually making technical advances, Corning has produced a large number of discoveries that fall outside of its principal product lines. Over the years, the firm has successfully formed and maintained many inter-firm alliances for the purpose of developing product and process innovations that it did not choose to utilize within its own lines of business. Thus, Corning's success is built largely on its ability to exhibit and elicit trustworthy behavior, a key factor in the meta-capability to collaborate.

A second "inter-firm" innovation approach follows a simulated venture-capital model. One firm that uses this approach is Xerox. Our earlier mention of Xerox's failure to exploit unanticipated innovations emerging from its highly creative laboratories at Xerox Parc should not imply that the company was unaware of its shortcomings in taking innovative ideas from concept to commercial application. Its development decisions, in fact, usually followed reasonable business rules. The costs associated with the development of those unplanned products were high, and their predicted returns low, compared to the costs and returns from product developments within their well-respected lines of business.

In recent years, Xerox has developed mechanisms for making development decisions that do not force such immediate comparisons. The company has created a set of internal procedures, and coupled it with a collective mind-set, that more closely resembles the thinking and practice of the venture capital community at large. Within that community, product ideas are examined against a market backdrop that is much wider than the one typically used by a single firm's managers, and financial support often is supplied incrementally to allow time for ideas to develop and potential markets to be more fully explored. Thus, at any given time, a wide range of product ideas can be developed and championed by teams at Xerox Parc and brought to the evaluation process either to be included within existing product lines or to be nurtured to the point where they can be divested as a separate venture free to address new markets outside the company's current domain. 

Similar venture-capital approaches have been undertaken at companies such as Pacific Telesis and Thermo Electron. For these approaches to work effectively, the entire process must be conducted collaboratively rather than competitively. Creating conditions of zero-sum competition among development teams for financial support inhibits the creative process and may drive profitable ideas outside the firm as individuals who want to commercialize their own inventions leave companies that will not empower them to do so. 

A third approach to broad, inter-firm innovation, the "federation" model, is both less well-developed and less well-known. However, there are two examples worth discussing: Technical Computing & Graphics (TCG) and The Acer Group. The structure of each firm is flexible and adaptive rather than hierarchical, and each firm is organized in small entrepreneurial business units that collaborate with each other and with outside partners.

TCG, as mentioned above, is a highly innovative, privately held information technology company in Australia. A federation of 13 small firms, TCG develops a wide variety of products and services, including portable and hand-held data terminals and loggers, computer graphics systems, bar-coding systems, electronic data interchange systems, and other IT products and services. Some TCG member firms specialize in one or more product categories, while others specialize in hardware or software.

At TCG, the various firms have come into the group with existing high levels of technical and business competence. However, the behavioral protocols at TCG assure that system-wide competence will continue to grow (see Table 2 above for a description of TCG's protocols). The company generates continuous product innovation through a process it calls "triangulation." Triangulation is a three-cornered partnership among (a) one or more TCG firms; (b) an external joint-venture partner (e.g., Hitachi) that also provides equity capital to the venture; and (c) a principal customer (e.g., Telstra, an Australian telephone company) whose large advance order wins it contractual rights as well as provides additional cash to the venture.

Each TCG firm is expected to search continually for new product and service opportunities. When a particular venture shows commercial promise, the initiating firm acts as project leader for the remainder of the venture. The first step in the triangulation process is to identify and collaborate with a joint-venture partner, a firm with expertise in the proposed technology. TCG receives partial funding for the project from the joint-venture partner, and it also gains access to technical knowledge and distribution channels. Next, the project leader firm identifies an initial large customer for the new product. TCG also collaborates with the customer in the sense that it agrees to custom-design a product for that client. By working together with the joint-venture partner and the principal customer, TCG is able to efficiently develop a state-of-the-art product that is tailor-made to the principal customer's specifications.

Every innovation project that is undertaken at TCG has its own unique structure that results from the triangulation process. According to TCG's operating protocols, the project leader firm is also expected to search among the other TCG companies for additional partners - not only because they are needed for their technical contribution, but also because the collaboration itself is expected to enhance overall organizational know-how. The process of internal triangulation thus serves a dual purpose: It produces direct input to the project, and it helps to diffuse expertise in areas such as business development, partnering, and project management.

A second example of the federation approach is The Acer Group. Acer's co-founder and CEO, Stan Shih, has created and tirelessly communicated a vision of a global information technology company. Shih's organizational design, like that of TCG, calls for a federation of self-managing firms held together by mutual interest rather than hierarchical control. With over 23,000 people, and operations in 44 countries, Acer is the world's third-largest PC manufacturer and seventh-largest PC brand.

Acer has over 40 separate business units grouped into four global business units. Several business units are R&D and manufacturing oriented, and these are based in Taiwan. Most of the remaining business units are primarily marketing companies - advertising, selling, and servicing computers according to particular national or regional needs - and these units are spread around the world. Although each firm has a core task to perform, new product or service concepts can and do originate anywhere in the federation. Every new product proposal is evaluated as a business venture by the federation's partner firms because none of the firms is in a position to design, produce, and sell the product entirely by itself. Thus, at any given time, a number of collaborative efforts are underway throughout the federation, most of which involve innovation of some sort.

Acer's strategic intent appears to go one step beyond that of TCG in terms of reinforcing both the responsibility of the individual firm for its own destiny and the responsibility of all firms for the long-term success of the total organization. At TCG, the value of each of the member firms is calculated through an internal stock market, and firms are free to leave the group if they so choose. At Acer, the firms are each jointly owned by their own management and home-country investors, with a (usually) minority ownership position held by Acer, Inc., the parent firm. Shih intends that Acer firms around the world will be listed on local stock exchanges and be free to seek capital for their own expansion. He believes that local ownership unleashes the motivation to run each business prudently. On the other hand, Acer's operating protocols are not as explicitly geared to the diffusion of know-how as they are at TCG. Nevertheless, Acer's business model provides the opportunity for each firm to work collaboratively with other federation members as the "preferred providers" of their respective expertise.

In sum, the limits to lateral (cross-industry) growth ultimately are constrained by a firm's ability to continue to build and use a common knowledge base. If an alliance provides mainly financial returns, and little or no developmentally focused learning, then it is no longer "organized." The continuing challenge to companies such as Xerox, TCG, and Acer is to develop the collaborative capability to maintain learning ties without inhibiting the entrepreneurial freedom of organization members.

Barriers to Effective Collaboration and Innovation

Although past experience would indicate that the meta-capability of collaboration will grow and spread across the economy, that same experience also suggests that the growth and diffusion process will have to overcome many barriers - barriers that are in large part the natural outgrowth of managerial values and behaviors learned in earlier eras. Based on our observations, we foresee three broad groups of barriers that will have to be overcome by firms that hope to compete through continuous innovation: institutional, philosophical, and organizational.

Institutional Barriers

In any era, institutions and common practices emerge to guide economic activity. Today, business within and across firms is being particularly shaped by regulations and conventions governing its measurement, valuation, and ownership. Some of these institutional regulations and conventions bear directly on management's ability and/or inclination to create the conditions essential to effective collaboration.

For example, some accounting conventions represent barriers to innovation. As noted earlier, providing organization members with time to interact widely and deeply facilitates collaboration - the time to "purposefully and playfully" consider new ideas and methods. However, the provision of time frequently requires building in slack resources so that required operations can continue while various teams or groups are engaged in collaborative behavior leading to innovation, and time may be required to provide training across groups to facilitate their ability to effectively collaborate. Conceptually, these extra resources, both people and time, represent investments in the meta-capability required for innovation. Conventionally, however, such expenditures are carried on the firm's books as general and administrative expenses, and G&A is subject to tight control and is a continuing target for cuts to increase current profitability.

Moreover, the trust necessary to collaborate is also dependent on time and investments in trust-building activities, including training and the development of knowledge-management systems (internal and external to the organization). Organization members learn to trust those above them, and those in other departments and partner firms, through discussions, the opportunity to ask questions and consider responses, and so forth. Again, the expenditures essential to construct and operate those activities most likely will end up being classified as G&A.

This accounting barrier, however, is not insurmountable. Many firms for years have struggled with the issue of how to account for and evaluate expenditures on R&D. Some firms today consider those expenditures as investments with likely future returns, and they attempt to portray them as such in their financial reports. Conventions have emerged to facilitate this practice, and with sufficient effort firms can develop a clear understanding with investors about the value of such "investments." The difficulty innovative firms have with R&D expenditures highlight a second institutional barrier closely akin to the first: the focus of financial and other business analysts on short-term market performance as the key (or only) measure of company success. Again, firms with a clear long-term vision can make efforts to educate investors (as well as organization members) of the value of those investments. For example, a large measure of the esteem with which General Electric is held is probably attributable directly to the skill with which CEO Jack Welch has explained to the financial community his strategic vision and the investments it requires.

A less easily overcome institutional barrier is the problem of accounting for intellectual capital. In knowledge-intensive firms such as, say, Oracle, only a fraction of the firm's market value is represented by its tangible assets and current patents. The bulk of its market value rests on the belief that Oracle has the know-how to maintain and grow a revenue stream largely dependent on products and services it has not yet created. That know-how is held in the heads of the organization's members and is voluntarily offered. However, because it is voluntary, it can also be withheld, and it can leave the firm usually without recourse. Again, the expenditures essential to holding, growing, and encouraging the sharing of knowledge assets are not viewed as investments but as expenses constantly subject to review and reduction. Years ago, Rensis Likert suggested that firms should develop a means of accounting for their human assets, giving them status equal to that of a capital investment. His suggestion has received lip service and limited research attention over the past thirty years or so, but at most only a handful of firms are pursuing the measurement of intellectual capital vigorously.

Philosophical Barriers

Somewhat less visible than accounting conventions are barriers associated with the values and philosophies underlying modern organizations. For example, as indicated earlier, the very concept of collaboration is organizationally counterintuitive. People in Western societies have been taught that self-reliance is a virtue and that firms should pursue the maximization of their own interests and returns. Therefore, the idea that one might be just as concerned about the returns of a collaborator as about one's own returns does not sound "reasonable." At a deeper level, Western civilizations over the past centuries have evolved two basic philosophies: (1) the libertarian, which emphasizes individual responsibility and freedom and is the underlying logic for neoclassical economics, and (2) the socialistic, which emphasizes collective ownership and returns based at least partially on need. The concept of collaboration, with its demands for both individual and shared responsibility, does not fit squarely into either of these philosophies. A new or hybrid philosophy would be required to fully justify collaborative behavior among individuals and firms. 

Moreover, it would appear that over the last few decades, the United States and some other Western societies (as well as Asian economic leaders such as Japan) have veered sharply towards a libertarian philosophy focused on market mechanisms and financial returns as the main instruments of resource allocation. The result has been an increase in societal attraction to stockholder's rights at the expense of the rights of other stakeholders such as employees and the general public. If this phenomenon is indeed occurring, then the philosophical barrier to collaboration will be raised proportionally.

Of course, values and philosophies do change over time, and individuals and firms have wide latitude to follow well-articulated new pathways. However, the challenge to explain and justify new approaches in the face of opposing convention is sizable, and the diffusion of collaboration as a meta-capability will be restricted accordingly.

Organizational Barriers

A third group of barriers to collaboration is inherent in most of today's organizational designs. Most organization structures create and sustain tight departmentalization of some kind. Whether organizational units are focused on market segments (divisions), specialized capabilities (functions), or even a point along the industry value chain (internal or multi-firm network), boundaries emerge which are often difficult to penetrate and which may make inter-unit collaboration unlikely to occur. How information flows, performance is evaluated, and rewards are allocated are heavily influenced by unit boundaries, and those boundaries reinforce "we versus they" thinking in regard to potential collaboration and knowledge development.

Moreover, the nature of organizational recognition has, in recent years, bifurcated upper and lower member ranks, with rewards flowing disproportionately towards those at or near the top. Conversely, newer firms in knowledge industries are frequently at the forefront in creating much more evenly distributed recognition and ownership through stock options and other equity-based programs. As noted earlier, members of high-trust organizations do not press for immediate payment for ideas and collaborative efforts. Other firms, however, must develop more creative trust-building and sharing mechanisms, and spend much more time and effort on their design and maintenance. If, as expected, leading-edge firms increasingly rely on units and teams to jointly create operating protocols to take the place of hierarchical coordination devices, it may well be that appropriate rewards will naturally be included.

In sum, there is no question that the biggest organizational barrier to operating tomorrow's innovative companies is probably all of those things that we have learned to do to manage today's organizations. Such was also the case in many firms from the 1920s to the 1950s as they sought to move from unitary strategies and structures to diversification strategies and divisional or matrix structures. Leadership approaches, control and reward systems, decision-making processes - all of these had to be rethought to fit the new business and organizational models. Thus, in a business world dominated by hierarchical coordination, the meta-capability of delegation emerged incrementally and spread unevenly across firms and industries. Such will likely be the case with the meta-capability of collaboration during the early years of the twenty-first century.

Conclusions

We have argued that economic eras evolve as managers learn new ways to assemble, exchange, and utilize resources. Each new era demands the development of a new business model that captures the wealth generated by new organizational forms. Business strategies and organizational models must fit each era, and both are informed and facilitated by an emergent meta-capability.

It seems likely that firms, and perhaps even entire economies, might well accelerate the process of evolution by investing money, time, experimentation, and other resources in an effort to develop the new meta-capability ahead of their competitors. Clearly, there is risk involved; pioneers do not always succeed. Our objective has been to offer a framework that could help managers to, first, see the importance of the new meta-capability of collaboration and then to accumulate the experiences that will be valuable in developing it within their own firms.

Presently, such a framework appears to have the greatest value for design-oriented firms and other innovative organizations at the forefront of knowledge industries. Most firms today do not operate alone; they are networked vertically with many value-chain partners. And, increasingly, they will be allied laterally across industries in order to utilize the full range of products and services that emerge from highly energized continuous innovation systems. Firms that choose to grow in this mode should recognize that they will naturally gravitate towards alliances with the most innovative firms in other industries and that the ability to collaborate will be critical to their joint success.

Notes

1 See, for example, Strategic Management Journal, Special Issue on Knowledge and the Firm, 17 (1996) and California Management Review, Special Issue on Knowledge and the Firm, 40/3 (1998).

2 See Adrian J. Slywotzky and David J. Morrison, The Profit Zone: How Strategic Business Design Will Lead You to Tomorrow's Profits (New York, NY: Times Business, 1997), particularly chapters 9, 10, and 11.

3 The most comprehensive, empirically based framework for describing the stages of the innovation process is that developed by researchers in the Minnesota Innovation Research Program. See Andrew H. Van de Ven, Douglas E. Polley, Raghu Garud, and Sankaran Venkatarman, The Innovation Journey (New York, NY: Oxford University Press, 1999).

4 For a discussion of how to map industry evolution, including the development of ideas and information, see Max Boisot, Knowledge Assets (London, England: Oxford University Press, 1998).

5 Briefly categorizing a century of business history requires a significant amount of simplification. The actual development of practices and ideas is subject to debate, and eras will certainly overlap. As such, the categorization presented here should be viewed as illustrative rather than definitive.

6 Alfred D. Chandler, Jr., Strategy and Structure: Chapters in the History of the American Industrial Enterprise (Cambridge, MA: The M.I.T. Press, 1962).

7 The network organization was first described by Raymond E. Miles and Charles C. Snow, "Organizations: New Concepts for New Forms," California Management Review, 28/3 (1986): 62-73. Many networks are multi-firm as companies and their suppliers and partners organize themselves along the
industry value chain, a concept popularized by Michael E. Porter, Competitive Advantage (New York, NY: Free Press, 1985.)
Subsequently, it became clear that the entire value chain had to be managed as an "organization," and the concept of supply-chain management was born. For a discussion of virtual organizations, see William H. Davidow and Michael S. Malone, The Virtual Corporation: Structuring and Revitalizing the Corporation for the 21" --Century (NewYork, NY: HarperBusiness, 1992) and Jessica Lipnack and
Jeffrey Stamps, VirtualTeams: Reaching Across Space, Time, and Organizations with Technology (New York, NY: John Wiley & Sons, 1997).

8 Collaboration, as we use the term here, was first described by Fred E. Emery and Eric L. Trist, "The Causal Texture of Organizational Environments," Human Relations, 18 (1965): 21 -32. Many subsequent
discussions of collaboration focused on it as a tool for conflict resolution. See, for example, Barbara Gray, Collaborating: Finding Common Ground for Multiparty Problems (San Francisco, CA: Jossey-Bass, 1989). We wish to expand that focus to include knowledge generation and transfer.

9 For discussions of the role of explicit and tacit knowledge in organizations, see Ikujiro Nonaka and Hirotaka Takeuchi, The Knowledge-Creating Company: How Japanese Companies Create the
Dynamics of Innovation (New York, NY: Oxford University Press, 1995) and David J. Teece, "Capturing Value from Knowledge Assets: The New Economy, Markets for Know-How, and Intangible Assets," California Management Review 40/3 (1998): 55-79.

10 For a discussion of the concept of territory, which the authors call "ba," see Ikujiro Nonaka, "TITLE?" Long Range Planning, 33/1 (2000) and Ikujiro Nonaka and Noboru Konno, "The Concept of 'Ba': Building a Foundation for Knowledge Creation," California Management Review, 40/3 (1998): 40-54.

11 For real-life examples, see Henry P. Sims, Jr. and Charles C. Manz. Business Without Bosses (New York, NY: John Wiley & Sons, 1993).

12 The concept of "'strategic conversations" is described by Jeanne M. Liedtka and John W. Rosenblum, "Shaping Conversations: Making Strategy, Managing Change," California Management Review, 39/1
(1996): 141-157. Ford Motor Company is presently using a version of the "conversations" process on a worldwide basis so that employees can understand the company in its entirety. See Suzy Wetlaufer, "Driving Change: An Inter-view With Ford Motor Company's Jacques Nasser," Harvard Business Review, 77/2 (1999), 77-88. For an excellent discussion of how shared meaning interacts with other factors to create a powerful strategic intent within the firm, see William F. Joyce, MegaChange: How Today's Leading Companies Have Transformed Their Workforces (New York, NY: Free Press, 1999).

13 The evolution of organizational forms is discussed in detail by Raymond E. Miles, Charles C. Snow, John A. Mathews, Grant Miles, and Henry J. Coleman, Jr., "Organizing in the Knowledge Age: Anticipating the Cellular Form," Academv of Management Executive, 11/4 (1997): 7-20.

14 For recent approaches, see Avan R. Jassawalia and Hemant C. Sashittal, "Building Collaborative Cross-Functional New Product Teams," The Academv of Management Executive, 13/3) (1999): 50-63.

15 For discussions, see Rikard Larsson, Lars Bengtsson, Kristina Henriksson and Judith Sparks, "The Interorcanizational Leaming Dilemma: Collective Knowledge Development in Strategic Alliances," Organization Science, 9/3, (1998): 285-305, andAndrew C. Inkpen and Paul W. Beamish, "Knowledge, Bargaining Power, and the Instability of International Joint Ventures," Academy of Management Review, 22/1 (1997): 177-202.

16 For a discussion of the role of collaboration and other keys to success in innovation oriented partnerships, see Gianni Lorenzoni and Charles Baden-Fuller, "Creating a Strategic Center to Manage a Web of Partners," California Management Review, 37/3 ) (1995): 146-163.

17 Andy Serwer, "Xerox PARC's Wizards Go Back To the Future," Fortune, 140/6 (September 27, 1999): 317. There is a growing body of evidence showing that innovation-focused spin-offs and equity carve-outs perform well in their various marketplaces. See James A. Miles and J. Randall Woolridge, Spin-Offs and Equity Carve-Outs: Achieving Faster Growth and Better Performance (Morristown, NJ: Financial Executives Research Foundation, 1999).

18 John A. Mathews, "TCG R&D Networks: The Triangulation Strategy," Journal of Industrv Studies, 1/1 (1993): 65-74.

19 For additional details on Acer's history, operations, and business philosophy, see John A. Mathews and Charles C. Snow, "A Conversation with The Acer Group's Stan Shih on Global Strategy and Management," Organizational Dynamics, 27/1 (1998): 65-74.

20 The idea of measuring the value of a firm's human assets was introduced by Rensis Likert. The Human Organization: Its Management and Value (New York, NY: McGraw- Hill, 1967). The firm that appears to have the most developed measurement approach is Skandia. See Leif Edvinsson and Michael S. Malone, Intellectual Capital: Realizing Your Company's True Value by Finding Its Hidden Brainpower (New York, NY: HarperCollins, 1997) and Sumantra Ghoshal and Christopher A. Barflett, The Individualized Corporation: A Fundamentally New Approach to Management (New York. NY: HarperBusiness, 1997).

21 Ravmond E. Miles and Grant Miles, "Leadership and Collaboration," in Jay A. Conger, Gretchhen M. Spreitzer, and Edward E. Lawler, III, Eds., The Leader's ChangeHandbook.- An Essential Guide to Setting Direction and Taking Action (San Francisco, CA: Jossey Bass, 1999), pp. 321-343.

20 Daniel Yergin and Joseph Stanislaw, The Commanding Heights: The Battle Between Government and the Marketplace That Is Remaking the Modern World (New York, NY: Simon & Schuster, 1998).