Paper to be presented at the DRUID 2011 on INNOVATION, STRATEGY, and STRUCTURE Organizations, Institutions, Systems and Regions at Copenhagen Business School, Denmark, June 15-17, 2011

Does organizational creativity really lead to innovation?

Mette Praest Knudsen University of Southern Denmark Marketing & Management, DRUID [email protected] Özge Cokpekin

[email protected]

Abstract Current research claims that the presence of organizational motivation, resources and a creative climate in organizations leads to innovation. Just as strong as the relationship is carved out in the literature, just as weak is the empirical evidence reported in the literature. This paper utilizes a survey of 147 firms from a particular region of Denmark to analyze whether organizational creativity does lead to innovation in small firms. We follow the most often referred creativity and innovation model and the pre-existing creative climate assessment tools to assess the stimulants of product and process innovation. The logistic regression analyses demonstrate that organizational motivation, resources and idea time are positively associated with product innovation. However, this result did not hold for process innovation, where strategy and risk are important. We also found that enhanced freedom and autonomy for employees affect probability of product innovation adversely. We conclude that indeed organizational motivation, resources and idea time spawn product innovation, whereas managers are recommended to exercise freedom cautiously. The paper raises three future research directions to further analyze the relationship between organizational creativity and innovation. Jelcodes:O32,O31

Does organizing creativity really lead to innovation?

Özge Cokpekin1 Mette Præst Knudsen Integrative Innovation Management Unit, DRUID Dept. of Marketing & Management University of Southern Denmark

Keywords: creative climate, organizational creativity, product innovation, process innovation

Abstract Current research claims that the presence of organizational motivation, resources and a creative climate in organizations leads to innovation. Just as strong as the relationship is carved out in the literature, just as weak is the empirical evidence reported in the literature. This paper utilizes a survey of 147 firms from a particular region of Denmark to analyze whether organizational creativity does lead to innovation in small firms. We follow the most often referred creativity and innovation model and the pre-existing creative climate assessment tools to assess the stimulants of product and process innovation. The logistic regression analyses demonstrated that organizational motivation, resources and idea time are positively associated with product innovation. However, this result did not hold for process innovation. We also found that enhanced freedom and autonomy for employees affects the probability of product innovation adversely. We conclude that organizational motivation, resources and idea time spawn product innovation, whereas managers are recommended to exercise freedom cautiously. The paper raises three future research directions to further analyze the relationship between organizational creativity and innovation.

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Corresponding author: [email protected].

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1. Introduction and motivation Creativity in an organizational context is the conceptualization and development of novel ideas, products, processes or procedures by individuals or a group of individuals working together (Amabile, 1988, Shalley, 1991, Woodman, Sawyer and Griffin, 1993). Creativity ignites innovation, because innovation is characterized as the successful application of what creativity produces in organizations, (Amabile, Conti, Coon, Lazenby and Herron, 1996, Oldham and Cumming, 1996). In short, all innovation begins with creative ideas (Amabile et al, 1996: 1154). Creativity and innovation are perceived to be so closely linked that these terms are often used interchangeably (Ford, 1996). Indisputable, one is guided to the presumption that creativity leads to innovation, and just as strongly, we expect to find substantial empirical evidence confirming this relationship. Surprisingly, only a few empirical contributions are subsequently identified in a thorough literature review. From a qualitative viewpoint, Mohamed and Rickards (1996) study aspects of the key relationship and Soo, Devinney, Midgley and Deering (2002) briefly discuss the difficulties of turning creativity into innovative products. Bharadwaj and Menon (2000) provide a quantitative analysis on creativity mechanisms in the firm and Sohn and Jung (2010) discuss but only find an indirect relationship between creativity and innovative performance. Somewhat thought-provoking, we realize along with Puccio and Cabra (2010, 147-148) that relevant empirical research remains surprisingly limited. This paper aims to identify the creativity factors that stimulate innovation by analyzing the following research question: Does the organizing of creativity increase the likelihood of product and process innovation? Compared to previous research, this paper extends the work of Bharadwaj and Menon (2000), by focusing not just on organizational structuring mechanisms, but also by adding organizational motivation, specific resources and the characteristics of a creativity stimulating climate. Additionally, we include the availability of time for creativity in our analysis. The elements tested empirically in this paper therefore cover a more complete range of factors for organizational creativity; organizational motivation, resources, dedicated time for creativity and creative climate factors. Founded on the coherent theoretical arguments, this paper delivers some intriguing empirical results. Some aspects of organizational creativity lead to product and/or process innovation, but simultaneously there are hampering aspects that management must consider carefully. We found that encouraging employees toward appropriate risk taking, following a proactive strategy and allocating sufficient resources including time, foster product innovation but do not affect process innovation. Allowing freedom to employees, however, hampers product innovation. To obtain these results, we utilize survey data collected in 2010 on small Danish firms. The first contribution of this paper to the existing literature is the deepened understanding of the main effects of organizational creativity on innovation contributing thereby to the broader innovation management research. The second contribution of this paper is that this is the first empirical study to analyze a coherent set of factors of organizational creativity leading to innovation. In addition to the findings, the paper raises future research questions to explore the relationship between organizational creativity and innovation further.

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The paper proceeds by presenting the main theoretical arguments for organizational creativity and innovation leading to the formulation of main hypotheses (section 2). The details of the study are presented along with the method applied for the test of the hypotheses (section 3). The results section presents the analytical results based on logistic regression models (section 4). Finally, the results are discussed (section 5), and the paper concludes on the findings and discusses the recommendations for managers of innovation processes and future research directions (section 6).

2. Linking organizational creativity and innovation Organizational creativity The two main organizational creativity models in the literature are Amabile`s (1988) componential model and Woodman, Sawyer and Griffin`s (1993) interactionist model (Shalley and Zhou, 2009: 12). The componential model defines the requirements for creativity and innovation and conceptualizes the relationship between these. In this model, creativity is associated with individuals while innovation is described as an organizational phenomenon. According to Amabile (1997), an organization is motivated to innovate if it places explicit value on innovation, is oriented towards risk rather than sticking to status-quo, takes a proactive approach to change rather than following a defensive strategy, expresses pride in employees’ capabilities and efforts, and finally provides supervisory and work team encouragement on employees. Resources needed for innovation are defined as the financial, material and informational resources made available to employees, training provided to improve creative thinking skills, and sufficient time allocated to think creatively and explore new ways of doing tasks (Amabile, 1997). Appropriate managerial practices conducive to innovation are organization of work teams according to the skills of employees, provision of regular and clear feedback, provision of project autonomy and goal setting that is tied to the overall mission, but flexible at procedural progress (Amabile, 1988, 1997). Motivation, resources and skills among employees stimulate creativity and, in turn, creativity feeds innovation if the firm is motivated to innovate, provides resources for doing innovation, and ensures appropriate managerial practices to support the smooth flow of the innovation process (Amabile, 1997). The interactionist model (Woodman, Sawyer and Griffin, 1993) assumes that creativity is a phenomenon that is affected by situational and behavioral factors in particular emphasizing the interactions among individuals, groups and organizations. The model explicitly recognizes intra-organizational influences that either stimulate (“enhancers”) or inhibit (“constrainers”) organizational creativity. As Woodman and his colleagues (1993) draw attention to the importance of these enhancers and constraints, several other researchers such as Amabile and Gryskiewicz (1989), Amabile et al (1996), Oldham and Cummings, (1996), Ekvall et al (1983) and Ekvall (1997), Shalley, Gilson and Blum (2000) also emphasize the importance of work environment characteristics for stimulation of creativity. Although creativity per se cannot be directly “managed” (Amabile, 1995: 78, Woodman, 1995: 60), the work environment characteristics can be. Hence, innovation managers can motivate the employees and the organization to activate the creative potential (Taggar, 2002), and subsequently to foster innovation (Amabile, 1988, 1997, Heinze, Shapira, Rogers, Senker, 2009, Oldham and Cummings, 1996, Shalley, Gilson and Blum, 2000, Woodman, Sawyer and Griffin, 1993). [3]

Empirically, the literature supports the adoption of the “KEYS” construct (Amabile and Gryskiewics, 1989, Amabile et al, 1996) and the “Creative Climate Questionnaire” (CCQ) (Ekvall, 1996). These are developed to quantify the degree of creativity stimulants in the firm`s work environment. “KEYS” measures the level of encouragement of creativity, freedom, resources, pressures and organizational impediments in a firm (Amabile et al, 1996). “CCQ” covers challenge, motivation, freedom, idea-support, trust and openness, dynamism, humor/playfulness, debate, conflict, risk-taking and idea-time measures for assessing the level of support for creativity (Ekvall, 1996). Following the structure of these tools, it can be inferred that an organizational climate conducive to creativity should be characterized as challenging enough to keep the motivation of employees high to accomplish a task, offering a certain degree of freedom to choose ways of accomplishing the task, encouraging a healthy level of risk-taking, supporting generation of ideas, allowing some free time to try new things, and explore unused ways to accomplish task rather than overloading employees with pre-defined work. Determining the optimum amount of time available to balance the tradeoff between time pressure and unconstrained space for innovative activities is important (Amabile, 1988, Hsu and Fan, 2010). A certain amount of urgency stimulates creative thinking, but being overloaded with work within an unrealistic time frame may completely hamper any innovative activity. A simple mechanism may remedy this tradeoff by allocating some free time dedicated to creativity and innovation activities. This managerial initiative sends signal to employees by securing time and space to realize the best potential in them without sacrificing direction and planning in the process. Allocation of dedicated time may therefore release the tension of overloading, and encourage employees to think creatively and work on innovations. The above discussion leads us to formulate an overarching hypothesis on the link between creativity and innovation: A firm is more likely to innovate when the managers unleash the creative potential by motivating the employees to innovate, allocating resources for this purpose, enabling appropriate management practices to establish the organizational climate conducive to creativity, and allocating specific time for idea development and creativity. Conceptualizing innovation The above hypothesis is not directly testable, although measures are available from the literature. Hence, a conceptualization of innovation is called for. Generally, the concept of innovation as the concept of creativity encapsulates too much to be directly measurable. A review reveals that it is relevant to distinguish product from process and organizational innovation (Damanpour and Gopalakrishnan, 2001) focusing on the outcome of the innovative activity. A “product” is a good or service provided to customers, while a “process” is the mode of production and delivery of the good or service (Barras, 1986). Product innovation can accordingly be defined as a “new technology or combination of technologies introduced commercially to meet a user or market need” (Utterback and Abernathy, 1975:642). Process innovation is defined as the “new elements introduced into the firm`s production or service operations to produce product or render a service” (Damanpour and Gopalakrishnan, 2001: 48). These two types of innovations may require similar, but still different organizational skills since product innovations are market-driven, while process innovations concern efficiency within the firm (Ettlie and Reza, 1992).

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A number of studies reveal that product and process innovations2 are closely related and applicable simultaneously (Damanpour and Gopalakrishnan, 2001). For example, Pisano and Wheelwright (1995) argue that simultaneous development of products and process is necessary since the congruent adoption of both types of innovation smoothes the launch of new products and rapid penetration of the market. Following the literature, therefore, it is inferred that firms are not expected to do either product or process innovation, rather they do both types of innovations, regardless of the sequence of innovation. Consequently, we assume that any study of the link between creativity and innovation should involve both types of innovations, rather than one over the other. Our hypothesis developed from the literature merely specifies that creativity is important for innovation, but not whether there are distinct differences between e.g. product and process innovation. Hypotheses Product innovations require continuous intelligence about customers, markets and other uncertainty factors. Accordingly, it is crucial that the firm allocates sufficient informational, material and monetary resources to stay tuned with the external environment. An increase in explicitly placing high value on innovation, expressing pride and high confidence in employees` achievements, taking an attitude towards risk taking and proactive strategy rather than retaining the ongoing activities, and establishing creativity conducive work environment leads to higher product innovation. Hypothesis 1: All creativity components; organizational motivation, allocation of free-time and resources, and establishment of a stimulating work climate are expected to be positively and significantly related to product innovation. As mentioned above the lack of distinction of different innovation types in the creativity literature leads us to the formulation of mirror hypotheses, that: Hypothesis 2: All creativity components; organizational motivation, allocation of free-time and resources, and establishment of a stimulating work climate are expected to be positively and significantly related to process innovation.

3. Data and variables Population and the survey The paper is based on a survey carried out in February and March 2010. Beforehand, five qualitative interviews were conducted to identify the most important topics of creativity and innovation to include in the survey. The interviewees were CEO’s or innovation managers in small and medium-sized companies (from 12-300 employees) from various industries. The selected firms were considered to be at the front end of innovation in the particular region, and therefore would more naturally speak of the topics of

How product and process innovations are related to each other and whether product innovation leads process innovation or vice versa have been widely discussed in the innovation literature. It is not of further relevance for this paper, how the innovative forms are related and evolve, but for key references please consult Abernathy and Utterback (1978), Barras (1986), and Anderson and Tushman (1991). 2

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interest to the survey3. The interviews lasted between 1 and 1½ hours and were carried out in October 2009. The topics included in the survey4 were selected as a combination of existing questions and items from the literature and insights from the interviews. The questions to track innovation activities were based on the CIS format. The questionnaire consists of 20 creativity-related and 21 innovation-related questions that are used in the subsequent test of the hypotheses. The final survey was pre-tested on a company, which first filled out the survey, and then was interviewed about the main subjects of concern. This interview did not highlight any particular problems related to content or formulations. The population consisted of firms with more than 5 employees in a particular geographical area (Funen) in Denmark. The project is concerned with service and manufacturing firms delimiting the population to 1250 companies. A further cleansing of the firms (double-registrations and branches) resulted in 897 eligible companies. These firms received an introductory letter from the mayor and an invitation to participate. An email linking to the electronic survey was subsequently sent, asking for the innovation manager or CEO to respond. Two email reminders were issued resulting in 147 responses at a response rate of 16, 4%. Approximately 64, 6% of the respondents were CEO, administrative director, vice or senior director, research manager and leader, and the rest was marketing or group managers with titles such as sales director, marketing director, production chief. The average tenure of the respondents was 18.4 years. The firms that responded to the survey are primarily smaller firms with less than 10 employees, whereas only two companies have more than 250 employees. The results are therefore relevant predominantly in a SME context. The distribution of responses fits the original distribution of companies in the population. Number

Percentage

Less than 10 employees 79 53,7 10-49 employees 37 25,2 50-249 employees 17 11,6 More than 250 employees 2 1,4 Total 135 91,8 Missing System 12 8,2 Total 147 100,0 Table 1: Distribution of respondents according to the number of employees

Valid percentage 58,5 27,4 12,6 1,5 100,0

In the empirical sections, we have used the following summarized form:   

Manufacturing: Industry, rock extraction and utilities. 26 firms comprising 17.7 % of the sample. Services: Trade, transport, information & communication, and business services. 93 firms comprising 63.3% of the sample. Others: Agriculture, forestry and fishing, building and construction, financing and insurance and culture. 28 firms comprising 19% of the sample.

The semi-structured interviews dealt with the topics of the financial crisis and the firms’ reactions to the crisis, strategies for innovation, creative processes and creative employees, and network relationships for innovation. 4 The survey contains questions relating to the following topics, creativity and innovation in general, innovative activity, the importance of inter-organizational relationships for innovation, creative employees, mechanisms to stimulate creativity and the creative environment. 3

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The data collection took place in a period of the financial crisis and commenced about 1½ after the crisis took off in Denmark. The crisis was strongest in the year 2009; however firms still suffered in 2010. Approximately 53.7% of the firms have reduced the number of employees in 2009. On the positive side, almost a fourth of the companies have increased the number of employees. The same figures for the previous last three years are less negative. It is therefore clear, that the survey has been answered in a period of stress for the companies, where the focus was on rationalizations and employee reductions; however we have been unable to detect any differences within the sample. Data issues Collecting data for both dependent and independent variables from the same respondent at the same time may create common method bias. Among the different sources of bias categorized by Podsakoff, MacKenzie, Lee and Podsakoff (2003), we identify three possible sources of bias: 1) a social desirability bias to present one’s firm as paying closer attention to creativity than it actually does 2) a tendency to keep responses consistent for the creative climate measuring items 3) a tendency to choose answers around neutral rather than choosing extreme responses such as “always/perfectly applicable” and “never/not applicable at all”. To assess the severity of possible biases, we first performed Herman`s single-factor test producing four unrotated factors with approximately 50% of the total variance explained. The test did not suggest the presence of common method bias, but we did not rely on this result due to problems associated with this diagnostic method (Podsakoff et al, 2003). As a next step, the descriptive statistics were analyzed. Most of the variables of interest distribute skewed negatively meaning that most responses fall in the right side of the distribution. Taken together with the associated kurtosis information, the skewness supports that social desirability to present one`s firm positively may have slightly affected the responses, which appear higher than the actual case. However, the relatively low negative skewness in many items clarifies some of this doubt, thus reducing the adverse effect of the social desirability bias. To detect whether responses tend to accumulate around the mean, the kurtosis information is checked and reported. Many items, are distributed with having flatter tops (kurtosis~= or