Improving performace in innovative environments

project management as an enabler of dynamic capabilities

This article is copyrighted material and has been reproduced with the permission of Project Management Institute, Inc. Unauthorized reproduction of this material is strictly prohibited.

Introduction

A link between improving project management maturity (PMM) and better project performance has been demonstrated. However, many companies in evolving and dynamic markets have resisted programs aimed at improving PMM because such efforts may lead to practices that are rendered obsolete in rapidly changing environments. In order to accommodate rapidly changing project conditions, dynamic project management (DPM) is more appropriate. DPM works to integrate knowledge and helps organizations anticipate and seize market opportunities.

Project Management Maturity

With projects becoming more prevalent in the world economy and project management proliferating, many firms have been trying to evaluate the benefits of investments in project management. This has become increasingly true in the current economy as corporations have stanched business spending and focused on reducing overhead costs. Arguably, the most popular method for evaluating project management is PMM.

PMM models are relative measures of the level of sophistication of an organization's current project management practices and processes. Data for the models are obtained via internal firm assessment and the benchmarking of peer organizations. Once a benchmark is set, specific improvement goals can be determined. After a period of time, the company re-assesses its capabilities, via benchmarking, to monitor improvement.

The benefits of improving PMM have been documented by past PMI-sponsored research (Ibbs & Reginato, 2002). Highly mature project management practices provide value in that they improve the overall cost and schedule performance of projects. Additionally, highly mature organizations tend to deliver projects more reliably in terms of cost and time (i.e., the variability of project costs and durations is decreased). A third benefit for mature organizations is that they tend to have lower overall costs for managing projects. Lastly, improving PMM has been linked to higher levels of returns on investments made in project management (Ibbs & Kwak, 2000). Taken in aggregate, the more mature a firm's project management practices, the more value that firm derives from project management and the more project throughput the organization realizes.

Developing high levels of PMM can take many years of incremental improvements and substantial organizational processes are prerequisite. Furthermore, because organizations with high levels of PMM are able to improve their project management processes for relatively lower cost than their less mature peers, high levels of PMM are a seemingly sustainable advantage in relatively static environments. Because of these factors, high PMM practices are not easily traded or imitated beyond the firm in which they reside.

PMM can be further thought of as continuously improving business processes to create a stable project environment. Organizations are evaluated on how well processes are performed, controlled, and managed. The de facto industry standard for determining PMM is predicated on the Project Management Institute's Guide to the Project Management Body of Knowledge, or PMBOK® (PMI, 2000). The PMBOK® assesses project management issues such as cost, schedule, scope, risk, and human resources management, among others.

Improving project management is often about improving project efficiency. As such, PMM is best suited for established, predictable industries. Companies that score well and benefit the most from PMM improvements are typically in markets where uncertainty minimization and loss aversion are at the forefront of business operations. These companies tend to focus on cost reduction and efficiency of large-scale production.

Maturity and the Perils of Dynamic Markets

The strategic implications of PMM-based improvements are consistent with the resource-based-view (RBV) of strategic management. The underlying foundation of the RBV is that sustained competitive advantage is a function of resource heterogeneity and immobility (Rumelt, 1984, Wernerfelt, 1984, Barney, 1991, Peteraf, 1993). In a resource-based view, strategic advantage is endowed upon firms that can increase their competitive position through the use of valuable firm-specific resources that are rare and difficult to imitate or replicate. In such a scenario, resources lend themselves to the accumulation of extraordinary profits (extraordinary profits, or profits in excess of industry norms, are referred to as Ricardian rents after the 19th century economist David Ricardo). Highly mature project management acts as such a resource in that it creates value (through lower costs and better project performance) and is difficult to imitate or replicate (due to the organizational effort and time necessary for development).

Such efficiency-based views are appropriate when projects have relatively clear definitions and finite variation. PMM and other resource-based management perspectives are better adept at improving the efficiency of project management practices by improving the learning rate of project managers and standardization of management procedures. However, Abernathy (1978) warned of a productivity dilemma where innovation distracts from learning, thereby decelerating the learning rate. This conundrum highlights the need for a new paradigm for determining project management sophistication in innovative markets.

Many high profile firms experienced this phenomenon first hand during the 1970s and 1980s. Firms such as Xerox, IBM, and Texas Instruments accumulated large stocks of assets via the resource-based approach (Hamel & Prahald, 1994, Teece, Pisano, & Shuen, 1997). While these companies were able to generate vast Ricardian rents during a period when they faced little competition, they found that such an advantage is temporary in rapidly changing and more competitive markets. Each of these firms had strategic advantages, as defined by the resource-based view. They also became ossified around their resources and capabilities, becoming unable to act upon the changing competitive landscape. Companies that compete in dynamic markets and concentrate their project management improvement efforts on improving PMM may also find their project management advantage to be temporary.

There are other potential issues associated with PMM in highly dynamic industries. Project managers in established, routine businesses typically find that they are rewarded for not failing. Reward structures reinforce this mentality by focusing on maintaining current assets and strict adherence to cost and schedule performance. Also, PMM has a propensity to increase with incremental asset utilization. Existing assets tend to limit the search for new applications, creating a focusing bias that leads to incremental improvements. In asset-heavy industries, where PMM is traditionally higher than less asset-intensive industries, already thin profit margins are determined by asset utilization rates. Therefore, project management solutions are focused on solving problems on the basis of time and cost.

Lastly, PMM tends to steeply discount the value of project management innovative organizations. Using R&D expenditures as a simple proxy for innovation, companies that spend less than 5 percent of revenues on R&D (low R&D companies) consistently score better on the components of PMM measurement than firms that spend greater than 5 percent on R&D (high R&D companies), particularly in the areas of project close-out and risk management, as depicted in Exhibit 1.

Exhibit 1

Exhibit 1

Project Management in Dynamic Markets

The dynamic nature of innovative environments places a premium on the ability to respond to technological change and appropriate opportunities, as opposed to the mere improvement of efficiency. In innovative industries, where uncertainty underpins the very nature of the work being performed, such decision-making processes exhibited in high PMM organizations can lead to bureaucracy and unnecessary organizational hierarchy. Technology-intense companies are often more interested in early-to-market strategies for their innovations than cost or schedule performance. To get to market faster than the competition, risk is often encouraged.

Firms participating in chaotic high technology markets typically have an entrepreneurial bent (Quinn, 1985). Project management can be of greater value if it is used to promote the success of uncertain technologies. Innovative firms are often forced to stimulate primary demand for their products because there is typically no established market. As such, the scope of their projects must be flexible to accommodate unknown and rapidly evolving customer needs and demands. Therefore, they often organize around flexibility, as opposed to efficiency. Flexibility allows them to answer the needs of a wide variety of end users, as well as suppliers and other members of the value chain (Maidique & Patch, 1988).

In innovative environments, uncertainty is commonplace, resources are scarcer, and projects are not easily defined. Projects face higher development costs and shrinking development cycle times, as well as greater chance of failure. Joseph Schumpeter (1942, 1951) argued that the emergence of new products and processes result from new combinations of knowledge and competences. Dynamic markets demand new and rapidly evolving processes; established processes, by way of creative destruction, are often rendered obsolete.

Dynamic Project Management

The value derived from project management is increasingly a function of a firm's ability to manage the strategic factors that drive its competitive position, as well as its ability to steer project resources through irregular channels in order to enhance or create new profit opportunities. Project management that incorporates such strategic factors, in addition to traditional operational factors, in evolving market environments is dynamic project management (DPM). With such a high degree of uncertainty, a dynamic approach to project management, as opposed to an efficiency-based approach, is appropriate for innovative product development projects.

DPM adopts a stance similar to that of dynamic capabilities (Teece, Pisano & Shuen, 1997). Dynamic capabilities encompass a firm's ability to combine and reconfigure assets, competences, and complementary assets in such a way that the firm is able to sense and seize new opportunities. By flexibly enabling the reconfiguration of assets and competences, project management lends itself to successful innovative product development projects, and hence, a firm's ability to capture extraordinary profits in rapidly evolving, highly dynamic, and volatile markets.

Ongoing research in life science industries has determined four types of resources and competences that enable project management competences in dynamic markets. It is these factors that project managers must take into effect in dynamic and innovative markets: internal factors, external factors, firm factors, and market factors. Internal factors involve those aspects of project management that are controlled from within the organization. Issues that entail management of organizational and resource issues outside of the firm are external factors. Firm factors are those that are directly related to organizational hierarchy and how human resources are organized and utilized within the boundaries of the firm, including organizational design, administration systems, and corporate policies. Market factors entail issues related to how products are received by customers and users. They include the choice of goals, designs and features to offer for a particular product, as well as how project definition will affect how the firm positions itself to compete in a given product market. A schematic representation of DPM is provided below as Exhibit 2.

Exhibit 2

Exhibit 2

Management Flexibility

At the center of management flexibility is the shift from controlling project resources to coordinating project resources. Management flexibility, in terms of project management, involves two aspects: resources slack and coordination flexibility. Resource slack is the cushion of actual or potential resources that allows an organization to successfully adapt to the internal pressure for changes, as well as to initiate changes in strategy with respect to the external environment (Bourgeois, 1981). Complementary to resource slack is coordination flexibility. Resource slack ensures the presence of necessary resources and that they will be optimally deployed. Coordination flexibility allows for the increased ability to reconfigure project formation resource chains and to redefine project strategies (Sanchez, 1995). This, in turn, leads to the reduction in perceived risk and decreased difficulty in making technological shifts (Davidson, Clamen & Karol, 2000, MacCormack, Verganti & Iansiti, 2001, Sanchez, 1995).

Basic Operational Competences

Basic operational competences involve the organization's ability to manage the day-to-day aspects of projects. In many companies, PMM can be used to measure the relative ability of project management to control project parameters. Basic project operational competences include the ability to maintain schedules and budgets, manage risk, or establish lines of communication throughout the project team. It should be noted that at many companies project managers do not have control over all of the PMBOK functions. For example, in many life science companies, project managers have little control over human resources or procurement policies. At most of the companies surveyed, a few key operational functions (typically schedule and scope) are intensely monitored by project managers.

Project Collaboration

An oft-discussed strategic factor associated with innovative projects is collaboration. Collaboration is where two or more partners contribute differential resources and technological know-how to agreed complementary aims (Dodgson, 1993, Tyler & Steensma, 1995). This represents a range of alliances (e.g. joint ventures, partnerships, licensing agreements, etc.) between organizations (Hagendoorn, 1993). Collaborative arrangements create economies of scale by allowing for the combination of resources, as well as access to larger pools of knowledge and learning networks (DeFillippi & Arthur, 1998, Powell, 1998). Collaboration also increases the number and flexibility of communications networks (Tushman & Nadler, 1986).

Regulatory Management

The life science industry is highly regulated, particularly the pharmaceutical and medical device markets. As such, projects are rarely, if ever, considered a success until regulatory approval is granted. Project managers must often manage projects as if a regulatory body (e.g. the Food and Drug Administration in the United States) is the client. In many companies, the project manager often reports to a company officer that is in charge of quality assurance or regulatory affairs.

While regulatory management is a much larger issue in life sciences than in other industries (say electronics), most industries have de facto regulatory agencies or industry standards that must be accommodated. The project functions associated with managing these issues are a part of regulatory management.

Firm Organization

How firms are organized is a major strategic factor affecting innovative projects. A consistent point in life sciences management is that bureaucracy severely hinders the ability of organizations to fulfill innovative projects. Bureaucracy is troublesome in that it leads to top management isolation and top-down decision-making, excessive rationalism, inappropriate incentives, and standardization (Bahrami & Evans, 1987, Teece, 2000).

Therefore, in order to best organize around the innovation process, firms can establish 1) flat hierarchies, 2) decentralized decision making, 3) group autonomy, 4) clear procedures for expedient conflict resolution, and 5) informal boundaries and control systems. Each of these characteristics builds upon one another and they are all interrelated.

Human Capital Management

In order to adequately address many of the aforementioned strategic project issues, human resource policies for innovative projects must be assessed. Because of the uncertain nature of innovative projects and the diversity of their potential solutions, project team members must be multi-skilled and capable of performing a wide variety of development and management tasks (Bahrami & Evans, 1987, Tushman & Nadler, 1986, Bacon, et al, 1994) determined that multi-skilled project personnel are an important factor in high tech project success.

Secondly, project personnel must have the proper incentives in place to be motivated to truly seek innovative project solutions. With traditional projects, research has shown that managers are risk phobic and are less likely to accept variable compensation as the amount of project risk increases (Davila, 2000). With innovative projects, particularly where there is a large R&D component, project personnel often choose recognition of their accomplishments in lieu of financial compensation (Bahrami & Evans, 1987, Gold, 1987, Tushman & Nadler, 1986). Additionally, in many organizations, equity compensation (in the form of stock options) further aligns project personnel with project and corporate goals and provides incentives for discovering and implementing novel project solutions (Teece, 2000). While the PMBOK addresses human resources management, it is lacking in the detailed description of the requisite need for multi-skilled and financially-aligned knowledge workers and how to manage them.

Project Definition

From a strategic point of view, project definition is more important determinant of successful innovation projects than cost and schedule performance. From a project management point of view, customer and user needs assessment and understanding, strategic alignment, and priority criteria lists are of extreme importance. Bacon et al (1994) states that the most critical information to successful projects is based on customer and user preferences and requirements, while those developed without such a list rarely succeeded. Other literature arrives at a similar conclusion (Gupta & Wilemon, 1990, Quinn, 1985).

Market Timing and Risk

Market timing consists of how and when a product is introduced to testing or to the targeted market. Many companies in the life sciences often aim for a first to market strategy to ensure the securitization of intellectual property rights and to grab market share. Particularly in drug development, the financial rewards for introducing a therapy first to market are substantially greater than those of “me-too” products. The difficulty in market timing is that it is a moving target. Often companies are forced to shrink product development schedules in order to beat a competing company to a product launch. Therefore, market timing is not the same as schedule or time management.

Life science product development projects are inherently risky. A small percentage of projects initiated actually make it to the regulatory review phase, where upon there is an additional round of high project attrition. However, once a project does clear the regulatory hurdle and is introduced to the market, there are usually bountiful financial rewards. The key in life science projects, as well as other highly innovative industries, is not to build a set of robust management processes that eliminate risk, but rather to embrace the risky nature of the industry and develop processes to halt projects once it is recognized that the project will not meet its initial goals. This will save the company from the high opportunity costs associated with product development and allow critical resources to be reallocated to more viable projects.

Conclusion

PMM has been strongly correlated to better project performance, decreased cost and schedule variability, and lower project management costs. However, these benefits are more apt in stable and less novel industries. For innovative and dynamic markets, project management that resembles a dynamic capability is more appropriate. This paper presents the model for DPM, which incorporates basic PMM-like operational competences with management practices that enable an organization to better sense and seize opportunities in shifting market environments.

This paper represents the midway point of ongoing doctoral research at the University of California, Berkeley. While many of the conclusions drawn and examples presented in the paper have been distilled from extensive surveying of new product managers at life science companies, further work is being conducted to examine the difference between successful and failed projects. The next step in the research will involve detailed case studies and development of a statistical regression model to determine the value of each component of the DPM model to successful delivery of innovative products.

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This material has been reproduced with the permission of the copyright owner. Unauthorized reproduction of this material is strictly prohibited. For permission to reproduce this material, please contact PMI or any listed author.

Proceedings of PMI® Global Congress 2003 – North America
Baltimore, Maryland, USA ● 20-23 September 2003

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