Architectural Innovation - Beyond the Innovator’s Dilemma

Nov 22

There are two types of innovation that industries and companies can experience - architectural and technological innovation. In this article, we'll discuss the difference between these innovation patterns and why communication channels within a company play have hindered architectural innovation for established firms. In the digital age, companies have new ways of communicating and exchanging information, which lies at architectural knowledge's core. Only companies that embark on the idea of digital-first can position themselves well for the future.

At the core of product innovation are two concepts: architectural innovation, which changes how a company interacts with the components that create the product, and component innovation, where pieces of a product experience novelty while the architecture and basic functionality of the component in the product remain the same.

Incremental improvements or products are at the core of established firms. They innovate on components and implement those into the existing architectural knowledge of the product. Processes are improved, and the design potential is exploited to the absolute maximum.

Radical innovation builds on new scientific and procedural principles, different sets of engineering principles, and new architectural designs that are engrained into new firms. This completely new framework opens up new markets and applications for new firms and allows them to enter and often redefine existing industries.

Product Architecture and Components

A product can be separated into two parts.

The components of which the product consists. Imagine the individual parts of a fan - the motor, blades, the case.
The overall component architecture, how they interact, and how teams interact and communicate to assemble the components to create the fan. The process in which everything is assembled and brought together.

Innovation and improvements occur in four different categories: incremental innovation, modular innovation, architectural innovation, and radical innovation. The framework in which we can set these categories is a two-dimensional graph.

Incremental innovation occurs when core concepts like the components or processes within the company are improved. Imagine a stronger motor for a fan with equal power consumption or smaller size.

Modular innovation is when components are changed or new processing techniques are developed, yet the architecture remains the same. Imagine the telephone dial and how it switched from an analog dial to a digital dial.

Radical innovation is clear as it contains a radical change in a product's components and conceptual architecture. An example would be the change from ceiling fans to central air conditioning.

Architectural innovation is more difficult to distinguish and identify as it entails a big change in the procedural, conceptual, and communicative architecture of a firm while the basic components of a product remain the same. An example is the change from proximity-aligned lithography to scanning projection lithography. Both techniques used the same components and technology yet, required different sets of processes and architecture to enable engineers to use the new type of lithography process.

Incremental improvements and radical/architectural innovations have dramatically different outcomes for the firms as they require different organizational, architectural, and procedural capabilities. Incremental improvements build on already and deeply engrained capabilities of a firm, and these are intrinsically difficult to readjust. Radical and architectural innovation forces a company to establish new technical and commercial skills, ask different questions from its predecessors, and apply new problem-solving skills.

The Evolution of Component and Architectural Knowledge

A company or industry doesn't start with a finished product but first establishes a dominant design through experimentation, and feedback, which is a naturally iterative process. The company then develops knowledge, capabilities, and processes around the recurring tasks of the emerging dominant design.

Without understanding a company's experience with evolving technology, one can't understand a firm's development and innovative capabilities.

That's why many combustion engine (CE) car manufacturers have had difficulty adjusting to the capabilities and architectural changes required to design and build electric vehicles.

At the beginning of the car industry, firms developed capabilities built around the dominant design of the CE - like using a transmission, heat control of the engine, catalysts to filter the exhaust air, and more.

The software was often outsourced as it was not the primary focus of the dominant design of a CE.

An electric vehicle has a different set of components that require a new dominant design. For EVs the electric engine that drives the car is a basic technology, the battery technology is evolving but also widely available. The electrical engine is much simpler constructed than its combustion counterpart. It requires only little hardware assistant systems to work well.

What is new in electric vehicles is that it revolves around software. Tesla understood it developed Danke software development. Tesla also realized that all New car manufacturers understand the novel architecture and integrate software and hardware skills into their architectural knowledge.

Because the dominant design and architectural knowledge are stable, they are ingrained by the companies and rooted deep into the practices and procedures of the company. Many company-specific routines, recurring tasks, and even communication patterns emerge for the dominant design to work as efficiently as possible.

Channels, Filters, and Strategies

As the dominant design establishes itself, certain specific interactions between departments and people emerge that efficiently solve the problem is building the product. For example, department A reports to B to provide the necessary information for their work. Or Fred (material engineer) goes and talks with George (engine engineer) because he is the person that knows how to solve Fred's problem. These interactions that any established firm has are critical for effective design. A company's communication channels embody the architectural knowledge of the linkages between the components.

This might remind you of Conway’s law, which states: “Any organization that designs a system (defined broadly) will produce a design whose structure is a copy of the organization's communication structure.”

The architectural knowledge and the communication channels create the logical sub-structures for the final product. To create the fan, one group focuses on the motor, another on the fan, and another on the case. For example, the groups that focus on the motor and the blade will report to the same supervisor to align their processes with each other technical and design specifications, but they have little to do with the design department.

As the organization's tasks stabilize around the dominant design and architecture, procedural knowledge is engrained throughout the company, and information is efficiently filtered to let only work-relevant (each department has its own filter) information through. Important information streams between the department emerge like the technical specification of a fan's engine and the fan's material and design properties. The case design information is irrelevant to the motor department and thus filtered.

As the product evolves, the engineers face recurring problems that they solve similarly. The problem emerges that engineers don't look beyond the engrained channels and solving mechanisms. Also, not all possible alternatives for a problem or new design are examined as the guiding architectural knowledge drives the engineers in the engrained directions. Even the established communication channels don't allow the exchange of new possibly relevant information as the engineers focus on existing problem solving and reporting designs. The architectural knowledge is thus encoded through the forms described before and becomes implicit.

Architectural Innovation and its difficulty for Established Firms

Architectural innovation is often difficult to spot as it transgresses through a firm's informal information and communication channels. New interactions between teams and new frameworks and reporting structures. These intrinsic changes and innovations make it difficult for other firms to view those internal changes of new challengers in an industry.

For architectural innovation to be spotted, it must first pass through the communication channels, filters, and strategies of the established firms, and the established company's framework often filters it out. Even though the company might understand the technology and components of a new product, they do not necessarily understand the new interactions, communication channels, and strategies engrained in the new company.

Researchers discussed the tendency of individuals to continue their beliefs in old established frameworks even though new information would justify discarding those old beliefs (Kahneman, Tversky, Slovic). Organizations are no different. Even in sight of industry disruption, organizations may continue to operate within their old frameworks and thus misunderstand the nature of the threat. They interpret the disruption and innovation within the guidelines of their architectural knowledge and analyze it in ways with which they and their people are familiar.

It's often even the case that established firms build the innovative components and processes themselves but can't fully exploit them within their architectural framework. So, new smaller, and much more agile companies emerge and build on top of the established firm's innovation and processes, establish new dominant designs and disrupt the old incumbents.

Assuming that the established company understands the nature of the architectural innovation, it needs to invest, build, and apply the new architectural innovation effectively. Within established large companies switching from one type of operation to another (new communication channels, learning methods, reporting structures, and strategies) is a difficult and limiting task.

Think Digital, Lean, and Agile

For an established company, the stable mode of operating and framework must be put down in exchange for actively finding new solutions along a constantly changing framework.

Architectural innovation places a premium on exploring new interoperability methodologies between components, their design, and the assimilation of new knowledge.

It's often easier for smaller companies to make these changes within a loser framework and processes than for a large and established firm.

To reorient itself towards the change, it takes time, resources, and effort of all parties involved to initiate the change. For new incumbents, there are few existing capital assets. Large established firms have already invested heavily in assets which incentivizes them to operate along their old framework to make use of prior investments.

Because the architectural knowledge is deeply ingrained in a company's channels, filters, and strategies, the reorientation creates considerable friction among the departments, people, and organizational structure. In 2002, Jeff Bezos of Amazon initiated a radical architectural change toward a digital and AI-first architecture, creating high friction among its already established logistics and online retail business by enforcing new communication and storage systems throughout the entire company. Radical in the sense that anyone not adapting to that change would be fired immediately.

Other established companies and leaders would have considerable challenges working along similar lines. The benefit of Tesla against other car manufacturers is that its design and architectural knowledge of the electric vehicle is new and merged software and hardware from the beginning. Older companies have outsourced important software development work, having a large disadvantage against Tesla's architectural innovative approach to combining those two.

Established firms invest heavily in innovation and interpret it as incremental innovation and align it within their existing architectural knowledge, thus, underestimating its potential and impact on the embedded knowledge of the innovation. New entrants, free from old frameworks, can exploit this potential.

Conclusion

Architectural innovation destroys and enhances existing competence in established firms in often subtle ways. Architectural innovation and embarking on it often depends on the organization's nature of learning, improvement, and coping with change.

New modes of learning and communication channels can be created in the digital age by going data and AI first and removing bottlenecks in communication between teams. That's why digital transformation doesn't just mean uploading data to the cloud and attaching sensors to machines and equipment.

Keyanoush Razavidinani