Innovation in project-based, service-enhanced firms: the construction of complex products and systems

Research Policy 29 Ž2000. 955–972 www.elsevier.nlrlocatereconbase

Innovation in project-based, service-enhanced firms: the construction of complex products and systems David M. Gann ) , Ammon J. Salter SPRU-Science and Technology Policy Research, UniÕersity of Sussex, Mantell Building, Brighton BN1 9RF, UK

Abstract This paper explores the management of innovation within firms producing complex products and systems. It is based on a study of how design, engineering and construction firms develop and produce buildings and structures. We contend that these project-based, service-enhanced forms of enterprise are not adequately addressed in the innovation literature. Project-based firms rely upon combining technical expertise from other organisations in order to deliver their own technical capabilities, usually in one-off processes. The paper argues that these firms are only able to effectively harness and reproduce their technological capabilities by integrating project and business processes within the firm. Our results show the need for a better conceptual understanding and new management practices to link project and business processes. The paper offers a framework for achieving this, explaining the dynamics of project-based firms and how they can improve performance across portfolios of projects. q 2000 Elsevier Science B.V. All rights reserved. Keywords: Construction firms; Design and engineering firms; Complex product systems; Management of technology; Project-based firms; Innovation; Systems integration

1. Introduction Constructing complex products and systems requires the mobilisation and management of a wide range of capabilities. Rarely are these to be found within the sphere of control or ownership of a single enterprise. This paper explores innovation processes in firms operating in design, engineering and construction, who produce and service buildings, structures and infrastructures. It focuses on the nature of activities that link core technical capabilities and

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Corresponding author. Tel.: q44-1273-678167; fax: q441273-685865. E-mail addresses: [email protected] ŽD.M. Gann., [email protected] ŽA.J. Salter..

business processes within the sphere of control of what we call project-based, service-enhanced firms. Business processes are the intra-organisational activities, forming the ‘glue’, which binds the different parts of a project-based firm. The issue here is not immediately about project performance, rather, it is about the performance of firms whose business is to engage with others in delivering projects. Capabilities are explored in terms of delivery and feedback mechanisms linking one firm’s technical capabilities with those of other enterprises, with whom the firm collaborates, in order to produce one-off projects. A resource-based approach to the firm is taken, following Penrose’s earlier work ŽPenrose, 1995.. The management of innovation is analysed in the context of the organisation of firms’ technical capabilities associated with their business

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processes. This is linked to project processes where firms’ technical competencies are practiced in association with technical capabilities from other firms. We contend that these types of activities require particular skills and resources that differ from those found in more stable production networks in which standard mass-produced products and services are delivered. Recent studies of innovation have pointed to the use of new forms of organisation to cope with increasing complexity of production, communications and technology ŽHedlund, 1994; Miles et al., 1997: Hughes, 1998; Rycroft and Kash, 1999.. These suggest that firms have become increasingly reliant upon projects to organise the production of complex products and systems. There are coherent bodies of knowledge about innovation in projects, project management and the management of projects within firms ŽDeFillipi and Arthur, 1998; Morris, 1994. and an emerging literature on the virtual enterprise ŽNagel and Dove, 1991.. We argue that project-based, service-enhanced forms of enterprise are not adequately addressed in the innovation literature. In this paper, we explore the way that these firms manage innovation in construction projects. Our aim is to develop a framework for understanding the dynamics of project-based firms, offering an approach to explaining how they might grow, improve performance and develop reputation for technical excellence. Our focus is on the relationship between firms’ core technical capabilities and the projects in which they work. Key issues for makers of complex products and systems in the built environment are not solely the management of projects or the management of business processes per se, but rather the integration of project and business processes within the firm. The rise in project-based organisational forms in other industries indicates that the problems faced by construction firms in their management of technologies may not be exceptional. The relentless projectbased nature of construction serves to heighten the problems faced by firms in this sector. We suggest that our findings could also have implications for producers of a wide range of other types of complex products and systems. As Galbraith suggested in 1977, there is a continuum of organisational forms ranging from M-form through the matrix to the project-based ŽGalbraith, 1977.. Companies struggle

to find the right balance between these various structures. However, there is an increasing trend in many industries toward a project-based approach to organisational design ŽMiles et al., 1997; Hughes, 1998.. For example, although the automotive sector has been used as the model of the M-form, there is evidence of increasing use of projects, especially in product development ŽWomack et al., 1991.. These issues have important consequences for general economic growth. In most OECD countries, the production and renewal of buildings and structures contributes around 7% of the total value of goods and services Žgross domestic product, GDP.: the figure is higher if the value of construction-related materials and components is included. In some fast growing, newly industrialising regions, for example, until recently, in Japan and Korea, construction accounted for around 12% to 14% of GDP. These are large industries, often employing millions of people, accounting for around 8% or 9% of economy-wide employment in 1994 ŽOECD, 1997.. The role and significance of project-based firms in the production of the built environment extends far beyond their direct economic contribution to wealth creation. The products and services provided create and maintain the physical environment that supports existing and emerging social and economic activities. The provision of a high-quality built environment helps to facilitate wealth creation and improve living standards. If inadequate or inappropriate buildings are produced, or they are poorly maintained and adapted, then social and economic life is compromised. The ability to meet new demands and improve performance through the management of innovation is closely related to the development of technical capabilities within project-based design, engineering and construction firms. These firms operate within a dynamic environment in which rapid changes in the economy and society are creating demands for new types of buildings and structures. Processes of production, distribution and consumption are changing such that new facilities are needed for extraction of raw materials, processing, manufacture, retail and service sector activities. New infrastructures are required for transmitting information, transporting people, goods and services and providing basic utilities such as water, sanitation and power. Demand for new types of buildings to support infor-

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mation intensive activities and businesses in the emergent bio-technology and life-science industries poses particular technological and organisational challenges for construction ŽGann, 2000.. This paper is organised in six parts. The following section describes our research method and the literature relevant to our approach. Section 3 presents an analysis of the general contextual issues within which project-based, service-enhanced firms operate in construction. In Section 4, we discuss some of the results from our case studies, followed by the development of a conceptual framework for understanding innovation in project-based firms in Section 5. Our conclusions are presented in Section 6. 2. Literature and method The paper is based on research with leading UKbased design, engineering and construction firms, their clients and suppliers. Over 30 organisations have participated in the research, including design, engineering and construction firms. Research included semi-structured interviews and the development of in-depth case studies with two organisations, for which up to 40 interviews were carried out in each case. The research method is based on a threestep, iterative process. The first step involved interviews with project team members and the second step focused on the views and activities of central groups within the firm. The third step involved workshops with the research team, central actors and project groups, focusing on different ways in which firms manage technology. Several workshops were designed to challenge ideas and share knowledge between participants from a number of different organisations. 2.1. Organisation of the firm The research method was designed to examine particular features of the ways in which project-based firms are organised. There has been a tendency in studies of innovation to see the firm as a single definable entity. For example, in Chandler’s work, firms are coherent entities, based on divisions, and tend to have strong leadership from a central strategy team ŽChandler, 1990.. Penrose’s work also presents the firm as a bounded entity, in which different

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divisions or units are operationally identifiable with coherent boundaries between the firm’s sphere of operation and control and its interfaces with external activities ŽPenrose, 1995.. Yet, this notion of the firm as a bounded entity does not appear to fit with reality when applied to organisations involved in the production of complex products and systems. For example, in firms operating in design, engineering and construction, internal divisions within the firm are often greater than those conventionally assumed in innovation studies. In many project-based firms, project teams have limited contact with senior management, are based off-site and work in teams with many other firms. Value is created and profits generated by project groups that tend to operate at the boundaries of the firm. Their tenuous links to the central core of the firm require a research method that captures information about experiences of these largely independent project groups, as well as central actors of the firm. In order to analyse the firm in its totality, it was therefore found to be necessary to compare and contrast the views of personnel from projects and central groups within the firm. 2.2. Project and business leÕels of analysis The division of the firm into project and business groups requires that firms constructing complex products and systems manage both project and business processes. In general, business processes are ongoing and repetitive, whereas project processes have a tendency to be temporary and unique ŽGann, 1998; Brusoni et al., 1998.. Firms usually develop routines in their business activities. These routines are made possible by the recurrence and frequency of their business activities. Routines can stimulate innovation, providing opportunities for standardisation and sustained process improvements. By contrast, project processes usually present non-routine features that do not lend themselves easily to systematic repetition. This can limit opportunities for process improvement, standardisation and economies of scale. Despite a large body of literature on project management and organisational design, little research has been completed on how firms build links between operations at the project level, portfolios of projects, and central routine activities. Traditionally, project management research has focused on the

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critical success factors in project design, management and execution ŽMorris, 1994; Kerzner, 1995.. It relates to projects, not firms. By contrast, the organisational design literature mainly focuses on business processes ŽLeonard-Barton, 1995; Nonaka, 1994; Clark and Fujimoto, 1991; Womack et al., 1991.. It does not take adequate account of the role of project processes. No clear link has been drawn in either literature between business and project processes ŽGann, 1998; Brusoni et al., 1998.. This is often a point of confusion in the literature as researchers use project-based studies to describe the competitiveness of firms, equating projects with firm performance. For example, Pisano’s study of project development in the pharmaceuticals sector shows how learning-before-doing in the experimentation and development of procedures for manufacturing drugs can accelerate and enhance the introduction of successful innovations in pharmaceutical firms ŽPisano, 1997.. Pisano’s research focuses on 23 development projects in 11 organisations. The unit of analysis is the project leading to the development of new drugs. Pisano uses his study of projects to comment on the competitive advantage of different firms. Although measures of the project-based firm may relate to the sum of all its projects, particular projects may not always provide an accurate measure of overall firm performance. Projects may be exceptional, one-off. Firm-level processes depend upon a variety of organisational factors outside the project itself, such as the firm’s financial position, ownership, structure, etc. The unit of analysis in Pisano’s study, the project, may not therefore by itself be capable of explaining the characteristics of firm performance. In order to help fill the gap in the literature between work focusing on projects and that on firms, our research set out to explore the mechanisms by which technical support was mobilised from central resources within firms, to projects. It also sought to develop a framework for understanding feedback to the core of the firm from lessons learnt on projects. 2.3. Studying project and business processes The first step of the research involved the nomination of projects for analysis by participating firms. The projects were selected on the basis that they

represent good examples of current practices within the firm. Detailed interviews with project-based staff were conducted to elicit their current ways of working and their relationships with central business functions. For each project, six interviews were carried out. Project actors were asked about the nature of the project and the technical support they required to achieve the project’s goals. Project-based actors were asked to assess the quantity and quality of service they received from central technical support groups. The way project-based actors stored, accessed and developed information was also analysed to investigate the degree to which knowledge management practices extended from the central parts of the firm to individual projects. The second step of our research involved interviews with staff from central departments, including R & D, engineering support, IT support, finance, contracts, sales and marketing and senior management. These interviews explored the structures and business processes operating within the firm. Individuals located in central departments were asked to describe the types of support they offered to projects, the mechanisms used by the firm to capture learning from projects, and how lessons were embedded to support future activities of the firm. 2.4. Integrating the results The two perspectives of firm practices were integrated and each firm was assessed on the basis of its ability to manage projects and manage the business processes associated with delivering a portfolio of projects. As Winch has suggested, the management of business processes associated with projects is a generic business process in construction ŽWinch, 1998.. It provides a source of key competitive advantage for firms in the sector who rely not only on their project management abilities, i.e. the ability to manage a given project, but also their ability to manage a portfolio of projects. This research method elicited information about firms’ practices and the findings were communicated to the firms involved via interactive workshops. These workshops were designed to provide feedback to participating firms. They provided a mechanism for developing a dialogue among all the divisions of the firm involved in the development and management of technology. Generic

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lessons from these workshops have been included in the conclusions drawn in this paper.

3. Innovation in design, engineering and construction firms The particular characteristics of markets, industrial organisation, governance structures, technologies and competencies in design, engineering and construction provide the context for our analysis of forms of organising innovation in project-based firms. Fig. 1 illustrates the types of actors, activities and knowledge flows found in construction activities. This model has six main analytical dimensions: Ži. Project-based firms. Žii. Project supply networks. Žiii. Projects Žclients, owners, users.. Živ. Technology support infrastructure. Žv. Regulatory and institutional frameworks. Žvi. Knowledge flows. In project-based productive networks, linkages between firms and other institutions differ from those found in traditional manufacturing approaches, which focus on individual firms with clear boundaries and transactions between them and their operations, working in a purely buy–sell relationship with one another. For example, attention may be focused on coordination mechanisms between firms, including non-market mechanisms such as indirect ownership, coengineering practices and partnering arrangements. We view construction as a process rather than an industry. In our definition, it includes designing, maintaining and adapting the built environment, involving many organisations from a range of industrial sectors, temporarily working together on project-specific tasks. Functions involve planning and design, engineering, supply and integration, erection and installation of a diverse array of materials, components and increasingly complex technical systems. The project-based nature of work implies that firms have to manage networks with complex interfaces. Delivery of products and services requires collaboration between firms. Performance and competitiveness depends not solely on the single firm, but on the efficient functioning of the entire network. A techni-

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cal support infrastructure, including professional institutions, industry organisations and associations, together with mobility of personnel, aids learning between firms and projects. Firms’ technology strategies, therefore, need to extend beyond their immediate boundaries if technologies are to be managed effectively. Many of these issues are similar to those encountered in other project-based sectors, producing complex products and systems, such as aircraft, ships, oil-platforms and high-speed trains ŽHobday, 1998.. The main characteristics that describe project-based firms in construction are: Ži. their design and production processes are organised around projects; Žii. they usually produce one-off, or at least highly customised, products and services; and Žiii. they operate in diffuse coalitions of companies along the supplier–customer chain. Production of the built environment involves making many types of technically and organisationally complex products such as, hospitals, concert halls, research laboratories or silicon chip fabrication plants. It also involves producing structures and infrastructures such as bridges, power plants or airports. These complex products often need to be integrated with new and existing systems in order to operate, as is the case with hospitals, so-called ‘intelligent buildings’ — including large research facilities — and buildings housing control systems for air-traffic, land transportation, telecommunication and utilities operations. Operation usually involves the management of facilities as part of larger technical systems and infrastructures. Thus, individual projects often have to be designed within constraints defined by existing systems and the legacies of the technologies they embody ŽDavid, 1985.. The level of technical complexity appears to be increasing as new vintages of technology are overlaid onto older vintages. New technical specialisations are emerging, increasing the need for capabilities in systems integration ŽGann and Salter, 1999.. The extent to which technical competencies are specialised and located in different places within and between organisations affects how they can be deployed, ultimately affecting project performance, the ability to deliver value to clients, and firms’ prof-

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Fig. 1. Knowledge, information flows and actors in project-based processes.1

itability. At the level of the firm, technology policy and the strategic management of resources involves issues of how firms develop their core technical competencies within project-based environments. In the production and use of complex products and systems this relates directly to issues of integration in planning, design, systems integration, assembly and construction. In general, construction markets are segmented according to different product types: housing, commercial and industrial buildings, civil engineering structures and infrastructures, public works, and repair, maintenance and improvement to existing facilities. Demand for buildings and infrastructures fluctuates with business and investment cycles. In several market segments, activities are demand-led, particularly where large complex facilities and infrastructures are required. Production and operation often involves long-term business to business interactions between customers and suppliers and within the sup-

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ply chain. Production is often triggered in response to user needs and in this sense, projects are demandderived rather than the result of arm’s-length market transactions, which typify consumer-goods industries. Government regulatory and procurement policies have a strong influence on demand and play an important part in shaping the direction of technological change. Governments and international agencies, financial institutions and insurance organisations are creating a new framework for the governance of technology in construction ŽGann, 1997; Gann et al., 1998.. 3.1. InnoÕation driÕers A number of general inter-related forces drive the innovation process Žsee Gann, 2000.. The most significant is the demand for radically new types of buildings and structures. During the 1980s and 1990s, demand for new types of buildings was generated by

This approach was partially developed in our previous study of the construction R & D system, which encompassed design, engineering, component manufacture, supply, assembly, construction operation and use ŽGann et al., 1992..

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the diffusion of information and communication technology, new methods of manufacturing, and growth of the service sector. Globalisation of markets and production, and new regions of economic growth around the Pacific Rim and in China have also created pressures to innovate. Owner–operators of large facilities are exerting pressures to improve the ways in which complex engineering and construction projects can be delivered on time, within budget and to specified quality. They also wish to improve lifecycle performance characteristics and enhance flexibility to meet unforeseen changes in demand. Forces of change also emanate from within construction itself, as firms compete in their quest to secure orders and deliver new products and services. Management of innovation is complicated by the discontinuous nature of project-based production in which, often, there are broken learning and feedback loops. The choice of technology in construction takes place under conditions where it is not usually feasible to test full-scale prototypes. Simulation and modelling is therefore of great importance in front-end decision-making, planning and execution. Product definition, development, simulation, testing and production usually involve the transfer of knowledge within complex networks of suppliers and include a large number of interactions between many different specialists. This includes the need to deal with technical decisions in which the interdependency between components and subsystems creates the need for an exchange of technical know-how across a range of professional and engineering disciplines. Design and engineering processes often occur concurrently, and these are increasingly affected by events that were once considered to be exogenous to engineering decision-making processes. For example, the form of project finance and role of new financial institutions are becoming important stimulants of change. The structure and timing of project finance introduces new institutional decision makers in project planning, and this may have implications for the procurement of technologies. Similarly, demands concerning environmental protection, made by what were once considered to be ‘external’ pressure groups, are also shaping the conditions within which technical decisions are made. Project-based firms need to manage technological innovation and uncertainty across organisational

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boundaries, within networks of interdependent suppliers, customers and regulatory bodies. Knowledge is differentiated and distributed throughout these networks. Under these conditions, the management of technical know-how has become a significant strategic consideration for suppliers and operators. There is a need for integrity of information between suppliers, designers, systems integrators, engineers, constructors, clients and end-users. Yet, firms tend to manage risk by retaining information crucial to systems integration within their own sphere of control, rather than by transferring know-how between the temporary coalitions of firms with whom they collaborate. Design, engineering and construction firms therefore have to manage innovation in multi-technology environments,2 responding to changes in software, engineering, information and materials technologies, rising costs, and the need to deal with increasing complexity due to social and political circumstances. In response to this rise in complexity, leading firms in the construction sector have developed scientific and technological capabilities across a large range of technical fields. Data from corporate publication in academic journals indicates that not only do construction firms publish in traditional fields such as civil engineering, they also publish extensively in chemistry, materials science, mathematics and mechanics ŽSalter et al., 2000..3 3.2. Reputation and branding Construction firms trade on their reputations, based on past performance. Some project-based firms dominate specialist niche markets and have become recognised for their technical capabilities in the public realm, in a similar way to major product brands in some consumer markets. For example, in structural engineering, Ove Arup and Partners is a world leader, a brand reputation consolidated with completion of the Sydney Opera House. Their ability to utilise 2

In some ways, the types of competences required by projectbased organisations may be similar to those needed by large multi-technology firms — see Grandstrand et al. Ž1997.. 3 It is also possible to find academic publications from construction firms in infectious diseases, optics, zoology and palaeontology.

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reputation to win new orders, and thus gain further experience in the deployment of technical expertise is of crucial importance to their long-term competitiveness. This also has a direct impact on profitability and therefore on the ability to invest in new generations of technology and business process changes. A reputation of technical expertise is often a key component in the formation of project teams. Large clients often conduct expertise audits of project members to determine whether they have the required technical skills to complete the tasks. Maintaining a reputation for technical expertise can be expensive, but it is often essential to demonstrate to clients and other project team members that the firm has the resources available to handle complex problems that might emerge during design and construction. Firms in construction often use professional journals and other forms of publications associated with the engineering professions to signal their competencies to others in the sector ŽSalter and Gann, 2000.. Reputation in the production and delivery of complex products and services in construction can be lost through high-profile, public failures. In some respects, construction, like movie picture production or sports management, is a public business. Construction projects often draw high levels of media attention since they may involve public funding or impact directly on a large number of people. Failures, difficulties and conflicts often play themselves out in the media. Reputations can be lost as easily as they are gained. There are many examples of how failure can damage reputations, including the Jubilee Line in London or the new Safco field in Seattle — which sullied the reputation of NBBT, a world leader in the design and production of sports stadia ŽEngineering News Record, 1999.. In more conventional manufactured products, reputation is gained or lost in the quality and durability of products over time. In construction, questions of quality, technical expertise and management may remain in the public gaze for many years such as in the construction of the Channel Tunnel or the British Library. 3.3. From products to serÕice solutions The cocktail of drivers for innovation in construction is leading to the emergence of new forms of

production, which centre on the delivery of products and services. There appears to be a growing need for suppliers to provide more than basic physical products. Value-added services to support components and systems are needed to assist owners and users in operating, maintaining and adapting buildings and structures. Services include financial deal structuring, planning and design, specialist consultancy, customer support and training, supply-chain coordination, production and risk management, together with the management of coalitions of interests concerned with project operation, use and facilities management — including legal, environmental and regulatory governance authorities. Growing demand for packaged product and service delivery is blurring the traditional boundaries between manufacturing, design, construction and service sectors ŽLester, 1998a,b; Gann and Salter, 1998; Marceau et al., 1998.. Some project-based firms are positioning themselves to provide systems integration services, which they view as a key source of competitive advantage. Some firms have adopted an approach to sharing project information aimed specifically at extending the market for their services. For example, in the US, the engineering firm RM Parsons created opportunities to provide clients with new value-added services, extending their market for engineering, procurement and construction, into early project decision-making and downstream facilities management ŽGann et al., 1996.. To achieve this, they developed their existing Computer-Integrated Engineering systems to form new Computer-Integrated Project systems. These are supported by a variety of technologies such as Geographical Information Systems used in early development and planning processes. The adoption of this approach resulted in the need for internal business process changes and new relationships with clients, design organisations, contractors and suppliers, government agencies, financiers and political groups. This has been important in enabling them to sell new services earlier in the project lifecycle. The recognition that the ‘bundling’ of products and systems with services has the potential to offer customers enhanced performance and increased value lies at the heart of these new approaches. The growth in number and workload of systems integrators supplying turnkey solutions is an indicator of the growth

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in provision of bundled services. For example, Davies Ž1997, p. 252. argues that Ericsson and Nokia are market leaders in the provision of telecommunications systems in part because they offer financial assistance, technical support and consultancy services to help their clients open new markets. Moreover, Tidd et al. Ž1997, p. 178. argue that value added at the systems level is greater than the sum of the value — added by the components — except where a component or subsystem is significantly superior to competing offerings. In the aero-engine industry, the prime engine manufacturers earn profits largely in the maintenance and service contracts associated with purchases. For some engine makers, it takes up to 7 years after the original sale for the firm to begin to turn a profit ŽPrencipe, 1997.. In all of these industries, firms’ competencies in adding services to the original, physical project are becoming the major enticement for the production of the artefact itself. This new approach to production is in part driven by the changing nature of demand. In the UK, the privatisation of utilities and infrastructures has brought with it changes in the structure of markets for project-based, service-enhanced firms. The Private Finance Initiative has changed the role of many traditional project suppliers, involving them in work earlier in project lifecycles, requiring new knowledge about financing and regulatory issues. Customers such as electricity generators, which once may have engineered and commissioned new facilities, now outsource far more work, including services to project-based firms. Evidence of these shifts can be found in the public statements of supplier firms — the section on ‘Intelligent Building Systems’ in ABB’s Ž1997. Annual Report states that: Our building systems customers are increasingly asking for total solutions that cover all of their needs, from lighting and ventilation systems to monitoring and control systems that ensure the most efficient use of electricity through an entire building. ABB has the product and system knowhow and design and project management capabilities to meet this growing demand. Žp. 23. Adtranz, an ABBrDaimler Benz joint venture, the world’s largest producer of trains, places particular emphasis on what it sees as the trend towards total

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system supply with operators letting maintenance and service contracts.4

4. Research results In this part of the Paper we present tentative findings and general results gleaned from work in progress with a range of design, engineering and construction firms. We also present more substantial material from one of our completed case studies. 4.1. Case study results Our first detailed case study was carried out with a specialist design, engineering and manufacturing company making ventilation equipment, roof vents and smoke exhaust systems for buildings. These have evolved to include sophisticated components, which form sub-systems in complex products — including embedded software for digital control. The business is family-owned and although it is a national leader, with international capabilities, it is a small player in a large and diverse sector. The company has grown from its manufacturing base in the 1950s to become a specialist in schematic design in the 1990s, offering a range of technical consultancy services, including integrated systems solutions ŽFig. 2.. The firm operates on the basis of projects, which vary in size, characteristics and complexity. Interviewees suggested that the business operates through a pyramid of projects, with a small number of large projects, a group of medium-sized projects and many small projects ŽFig. 3.. Size, however, has little relationship with the company’s overall profitability or the importance attached to an individual project. Large projects often involve large numbers of standardised components and their integration and installation as more complex sub-systems within buildings, whereas many small projects involve bespoke and time-consuming design processes. The business expends much effort on large projects and often finds it difficult to compete on small projects. A

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We are grateful to Andrew Davies for references to ABB and Adtranz.

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Fig. 2. Evolution from manufacturing to integrated systems solutions.

network of smaller suppliers is often used to assist in the delivery of smaller projects. Large projects can be very profitable, but the overhead costs incurred in developing small projects can cause these to be loss-making. Small projects fill the factory and help to build contacts and reputation to win larger projects, particularly when they are carried out for large customers. But what is often unknown, is which small projects might lead to future, profitable largeprojects. Sales staff bid for new projects and are rewarded on an incentive basis — a system, which may account for the large number of small projects won each year. In contrast, technical engineering staff have weaker incentives in their work and often feel themselves to be over-stretched in terms of delivering on projects. Project slippage is ‘enemy number one’ creating a cycle of delay, catch-up and blame within the business. There were contrasting views in the business about the ways in which detailed specification and technical design work were managed. The ability to integrate tendering packages was seen by some to offer new opportunities for exploiting technical competencies. However, tendering for new projects was a cost-driven exercise and this, together with lack of incentives, tended to limit the ability to integrate capabilities across the business. New methods of winning work were being explored, including partnering with other design and construction firms and with clients, but the firm had limited experience of this and how it might help them to exploit their technical expertise. Although the firm has a wide range of technical capabilities, we found that there were limited links between these across different business units and between business units and individual projects. There were few indicators of technical performance. There were many sources of technological innovation,

stimulated by new requirements by clients, the need to develop standards and to comply with new regulations, and from ideas generated by staff in R & D and technical support units, as well as from personnel working on projects. Major external sources of innovation were standards and legislation. The firm plays a leading role in regulating fire and smoke systems, helping to write the standard performance criteria for these systems. Involvement in regulation therefore provides competitive advantage to the firm. Writing standards at a high level, to match firm competencies, spurs innovation and advantage. The company also receives a substantial number of unsolicited calls from architects and building consultants about designs and systems, although servicing these calls was often time consuming, they could lead to new business opportunities. There were equally many barriers to innovation, including lack of resources — there was a reduction in the number of technical staff following the recession in construction markets in the early 1990s. Traditional approaches and limitations in technical knowledge in some specialist areas also constrained the business’s ability to innovate. Responsibilities for the management of technology were divided between Technical Support and the R & D units. Knowledge in the Technical Support group is based on mechanical engineering, fluid dynamics and thermodynamics and a detailed understanding of the regulations concerning fire and smoke systems. However, this type of knowledge is not necessarily useful in relaying information about new business opportunities. We found that technical support was one of the weaker links in the flow of technical information within the business. It was driven by an external orientation, focusing on meet-

Fig. 3. The pyramid of projects.

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ing requirements from projects, and it was often used to fulfill training functions. However, there were no obvious links with marketing and selling the business’s reputation for technical excellence. The R & D unit focused on product innovation and there were only limited communications between ideas generated here and the needs of other divisions. Few technical performance indicators existed. Our review of the firm indicated two contrasting sets of issues relating to business and project processes. From the point of view of internal business processes, the relatively flat structure of the firm with semi-autonomous operating units resulted in ineffective use of technical knowledge. A range of issues surfaced during a workshop with senior managers, including: Ø The variable quality of technical documents. Ø Unmet need for shared directories and use of central library resources. Ø The potential to use the Intranet and Internet for transferring technical data. Ø The need to speed up information flows and update current practices. Issues concerning project processes included: Ø The need for greater technical support at the front-end of projects. Ø The need to provide better integration between different technical specialist skills and create more flexibility between technical experts and general systems integrators. Ø Mechanisms by which additional technical specialist skills were bought in. Ø Mechanisms for allocating technical support and prioritisation of resources. Ø New business opportunities in providing design solutions to projects on-line, and the possible difficulties of charging for these. Our case study with this company provided opportunities for internal debate about business and project processes that had hitherto not existed. It helped to raise awareness of potential problem areas and opportunities with senior management. The firm appears to be well positioned to respond to new threats and opportunities, based on its technical capa-

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bilities, a strong internal culture based on values derived from the family-owned nature of the business, and a willingness to change among its staff. 4.2. Initial general results In many firms in our study, there appears to be a mismatch between the knowledge acquired and used in inter-organisational project processes, including project-based learning, and the intra-organisational business process knowledge needed to manage and work in project-based firms. Project processes often involve delivering products and services in temporary coalition with other suppliers. Different specialisations are usually brought together from a range of industries including other project-based firms, often in unique combinations. Project processes are established in multifarious ways and when competitive procurement systems are used, a number of different and unique potential processes are invented to deliver the project, only one of which will be chosen.5 The case study outlined above, together with results from interviews and case studies currently being developed with other firms, suggests that the management of technology in construction firms is often conducted informally. Few mechanisms are used to track the development of technology throughout the firm. The management of innovation within these firms tends to be confined to the R & D unit, senior management and engineering staff. Yet, in construction firms, learning, research, and development is not limited simply to the R & D department. Project teams are involved in a considerable amount of ‘practitioner-research’ and they often conduct research and develop expertise in the course of their project activities ŽGroak and Krimgold, 1989.. Central actors within the firm often have a poor understanding of these ‘practitioner-research’ activities within project teams. Some conservative firms in the sector have tried to stamp out unplanned practitioner-research projects seeing these projects as a

5 The bidding process is often an important first stage of engagement for many types of project-based firms. Considerable effort is expended in producing bids, the majority of which usually fail. This is expensive and provides a form of learningby-failure, which is nevertheless difficult to capture.

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burden on firm resources. Other firms, such as Ove Arup and Partners, have an explicit strategy to encourage project-team members to develop and integrate research projects into their mainstream design activities. Our interviews indicate that Ove Arup and Partners views practitioner-research as a way of building technical capabilities within the firm — the business often attempts to ‘tag on’ a research project into major consultancy projects. In general, projects of different size — relative to the size and capability of the project-based firm — present their own particular problems. Size of project is rarely proportional to the size of the design costs. Small projects can be bespoke, requiring a large number of engineering-intensive calculations. They can also be design- and service-intensive. Large projects involve large teams made up from a wide range and variety of firms. This variety can create uncertainty and cause problems for even the most seasoned construction firm. For example, in the construction of the Jubilee subway line extension in London, a large number of social and technical issues were involved that demanded much more resources than the project team had anticipated. The project entailed the construction of a new subway station close to the Westminster Parliament and underneath Big Ben, one of the most famous landmarks in London. The constructors were responsible for ensuring that Westminster station would remain operational during the course of the project. The project team needed to meet on a weekly basis with over 55 different local agencies to ensure that the project did not impact negatively on the local community. In the course of construction of the station, the contractors had to rebuild the Westminster station four times. As part of the project, they had to drill underneath the Houses of Parliament and insert probes that released material into the ground to ensure that tunneling did not lead to shifts in the ground level. In order to ensure that Big Ben did not move, a pendulum was fixed to the top of the tower, hung to the base, and shifts in the structure were monitored on a computer scanner every ten min. Any shifts in the structure were immediately corrected. In the face of these technical and social issues, the project slipped well beyond budget and caused major embarrassment to the firms involved and the client, London Transport, as well as to the UK government. The project

demonstrates that social, economic and political issues can easily compound technical complexity. Results from our interviews suggest that few of the firms involved in the project were prepared to withstand the social, economic and political complexity of the job. Given this complexity, frustration among the project team grew. Large projects often involve the integration of a large number of different teams of specialists. During the life of the project these teams can act as a single organisation through colocation, secondments, and close trust-based working relationships. In the case of the construction of the Millennium Dome, the project team became a single unit at a common site. Company-specific name tags were removed and visitors could not tell from which firm the project members came. This level of integration among different firms and specialisations is not always achieved, but when it does take place, projects become organisations with bounds of trust and authority similar to, or even stronger than, a firm. For example, we found that in the Dome project, a policy of ‘no letters’ communication was introduced whereby communication by formal contractual methods was harshly frowned upon. The barrier of contracts created by transaction costs was overcome by a sense of common purpose and trust. However, this form of trust and project management can be rare in the highly competitive and contract-based world of construction. Moreover, our interviews suggest that it is difficult to transfer this culture back into the centre of individual businesses involved in large one-off projects. We observed that services are increasingly supplied along with products across two industrial linkages: between supply-networks and project-based firms; and between project-based firms and their customers. These services are increasingly necessary to ensure that sophisticated component systems can be designed, integrated and operated as final complex products. In many cases, detailed design activities are migrating upstream into the supply network. However, knowledge about operational characteristics is required to perform such design services and this knowledge must flow up, as well as down, the supply network. Attempts to standardise procedures and to use modular approaches to design and component development are important methods for ensur-

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ing interchangeability of parts so that systems can eventually be integrated. Such an approach offers the possibility of meeting differentiated, customised requirements while benefiting from economies of scale derived from using standardised, pre-assembled components ŽCIRIA, 1998.. When working in large teams, it is often difficult to define the intellectual property from the wide range of discrete inputs on large projects. Projectbased firms appear to struggle with definitions of intellectual capital and many of the activities that take place are difficult to price. For example, design activities are often poorly measured and priced within projects. Design is rarely routine and therefore measures based on person-hours can be partly misleading. Engineering and design organisations in the construction sector often find that elegance, complexity and detail are often considered superior to simple and standardised designs. Expectations by clients put pressure on designers to prepare long, detailed designs in order to justify expensive design consultancy fees. Design complexity can become a substitute for value when few measures of the intellectual capital of design are available. Often, project-based firms’ inputs into a project may be tied to a particular stage of the project’s development. For example, schematic designs of fire and smoke systems are prepared in the initial stages of building design. Only after some months of construction are such designs applied. In the meantime, changes in design resulting from the pressures of the construction process may alter the original schematic design for the fire and smoke system. The makers of these systems may be far removed from the construction process, but they are expected to alter their designs to account for the new circumstances. Our interviews show that this places extra pressures on the firm to shift design capabilities rapidly. Knowledge flows, therefore, need to be managed in the context of short-term, discrete networks of firms. Knowledge and skills associated with dealstructuring and partnering are important in many project-based activities. This often requires detailed knowledge about customer organisations and understanding of the business dynamics of other firms in the supply chain. Clients often need to be managed. Long-term projects force firms to appoint a client liaison officer. This officer stays with the client over

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the life of the project, acting as a conduit to capture the clients’ perceptions. Over the life of some longterm projects Že.g. over 5 years., companies launch promotional campaigns to manage client expectations. Concurrent engineering is practised in many projects and this requires capabilities in coordination across organisations — sometimes involving colocation of staff. The consequences of failing to manage coengineering between independent organisations may result in problems that are difficult to rectify because of the interdependent, systemic nature of technologies in complex products and systems. Success often depends upon the knowledge that people at every level of the organisation bring to bear in new, semi-autonomous and often temporary, crossfunctional teams. The knowledge base usually includes competence in specialised technical areas, particularly where component or systems technologies are developing rapidly. At the same time, interdisciplinary design and integration knowledge is required to enable the coordination of the many specialists and skills from different industrial activities. ‘Integrative competencies’ are becoming increasingly important. The ability to assemble project teams rapidly is described by firms as core capabilities for personnel at all levels of the project-based enterprise. People need to be able to form teams quickly to tackle new projects or respond to events in existing projects. Professionals, managers and shop-floor operatives need to be able to respond to unforeseen events and deploy a high level of problem-solving expertise. Project-based firms in construction increasingly need new skills to deliver services, as well as products. Management, marketing customerruser support skills, financial management skills, risk assessment and coordination skills are all needed. Services provided include: Ži. planning; Žii. technical support and transfer; Žiii. environmental analysis; Živ. design and engineering; Žv. systems integration consultancy; Žvi. economic assessments; Žvii. procurement advice; Žviii. legal advice;

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Žix. teaching and training; and Žx. facilities management and operations support. Delivering such services increases the need to harness and manage knowledge from both engineering and social sciences within the firm. We found that project-based firms often rely on informal channels of communication among project groups to develop an understanding of the firm’s project-based activities. Job rotation, monthly and informal meetings are often used to facilitate communication. In order to improve communication, many firms set aside central funding for project support groups. These support groups act as repositories of knowledge and information about firm-wide processes. They are responsible for knowledge management within the firm, to ensure that a flow of information and knowledge about current and past projects is maintained by the organisation. But because project-teams are often self-contained, they may draw little from central services such as technical and R & D support. When they do use central in-house expertise, they often have to pay on a fee-for-service basis and this may form a constraint to integration of internal business processes. Firms are increasingly seeking to use IT-based project management tools, such as Baan’s Dynamic Quantitative Modeler. These tools allow firms to track the financial position of projects. But rarely do they assist in measuring or understanding the development of technology in the firm. Technical services within the firms are often charged to a single project. Yet, the benefits of such investments may be received by all projects within the firm. Moreover, technological developments are notoriously difficult to cost— benefits to investments in technology are often subtle, indirect and varied ŽTidd et al. 1997.. Few project-based firms appear to have developed sophisticated techniques for understanding and managing their total portfolios of projects. Often, the financial manager of the firm monitors cost and time estimates across the business. Monthly or quarterly meetings of project managers may act as a device for ensuring that the status of different projects is understood, but they rarely provide a strategic direction for the firm. In project-based environments, the articulation of an innovation strategy often depends on limited knowledge of the current state of the firm’s

portfolio of projects. In part, this situation is created by the organisational structure of project-based firms. With limited central functions, project-based firms need to find mechanisms to interpret project-based activities. With IT project management systems focusing on single projects, firms often rely upon paper-based maps of project developments. Results from our interviews suggest that this method can be ad hoc and difficult to embed into the firm’s competitive strategy.

5. Towards an understanding of project-based firms in construction In our attempt to understand the management of technology and innovation in construction firms, it has been necessary to understand the theories of the firm. Of the various theories, the resource-based approach seems the most promising because it focuses on systematic differences across firms in their ability to mobilise resources for implementing competitive strategies. In the theory, resources refer to assets within the firm that enable it to muster its collective capabilities, including tangible things, such as plant and equipment and human resources, to sustain competitive advantage ŽFoss, 1996.. But, as Penrose stresses, Ait is never resources themselves that are the ‘inputs’ in the production process, but only the serÕices that the resources can renderB ŽPenrose, 1995, p. 25.. The rendering of resources differs from firm to firm, ensuring heterogeneity in firm capabilities. Resources are bound to firm-level routines. They are the firm-specific assets of the organisation. Resources are often considered as the same as competencies or capabilities. A firm’s development of resources is an ‘unfolding process’, sequenced in time and path dependent ŽFoss, 1996, p. 14.. Foss has argued that advocates of the resourcebased theory of the firm have struggled to define a unit of analysis, shifting from routines to processes, and that treatments of firm’s resources have tended to be static ŽFoss, 1996.. In our view, resources are embedded in the dynamic activities of firms and the changing external environment in which the firm operates. The use of resources for competitive advantage lies in their timeliness, valuability, rareness and costs of imitation ŽTeece and Pisano, 1994..

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In spite of the rich stream of theorising on the nature of the firm, little effort has been made to account for the particular project-based nature of construction firms, or to apply resource-based theories to these types of firm. Increased attention is necessary regarding the question of how firms develop and resource their core technical competencies relating to issues of integration in design and construction. An initial model indicating the interactions within which technical support and service activities can be explored is shown in Fig. 4. This is based on our case study work. It illustrates in-house support and external research and technical support services bought-in by firms. Some of the firms in our study are managing portfolios of hundreds of projects each year. Companies like Ove Arup and Partners may be engaged in several thousand projects at any one point in time. In general, knowledge associated with ‘knowwhat’ and ‘know-why’ tends to be codified, while knowledge associated with ‘know-who’ and to some extent ‘know-how’ tends to be uncodified, or tacit. We think that tacit knowledge may be extremely important in this environment, particularly in the provision of design and other services. The model shows that project-based firms need to manage both project and business processes. The resources of the firm are embedded at both the project and the firm level. It is the integration of these two sets of resources that enables the firm to be competitive. In our study, we found that business processes are ongoing and repetitive, whereas project processes have a tendency to be temporary and unique ŽGann, 1998; Brusoni et al., 1998.. To be successful, firms need to integrate the experiences of projects into their continuous business processes in order to ensure the coherence of the organisation.

Fig. 4. The project-based firm and technical resource flows.

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Resources at the core of the firm need to be mobilised to support projects and feedback from projects is needed to replenish central resources. Firms, such as Ove Arup and Partners, have adopted a number of knowledge management tools to capture knowledge from previous projects. These measures include skills networks, project databases and informal culture-generating activities, such as design workshops. Nevertheless, these techniques for capturing project-based learning appear to have been only of limited success. Members of construction firms bemoan the cycle of ‘re-inventing the wheel’ that characterise project-based production. The limits of knowledge management techniques are not only driven by the project-based nature of activities, they also arise from high turnover, a reluctance on the part of engineers to recycle designs and an incentive system within the profession, which rewards novelty rather than standardisation. Some of the features are not particular to the construction sector, but within construction, they exist in extreme forms. Project-based firms in construction compete on their ability to bid, manage and complete projects in a timely and cost efficient manner. Yet, in construction, they have to live with a high rate of failure. For example, leading designers and contractors often have 20% or lower bid success rates. The preparation of bids can involve the development of bespoke designs andror processes. Failures act as a drag on the firm’s activities. It is common for firms to operate programmes to save information and experiences from failed bids. For other project-based firms, bids are often too bespoke to be recycled. For example, the firm in our first case study, presented above, had little opportunity to recycle work in preparing bids. Schematic designs for fire and smoke systems were bespoke, linked to the design of an individual building design. If the building design failed the tendering process, then all of the firm’s efforts were lost. Project-based firms, such as this currently face a continuous cycle of failure and wasted effort. The problem of failed bids in construction is compounded by the financial structure of many project-based firms, where a small number of projects often account for the profits and losses of the business. In a typical portfolio of projects, a design or construction firm may have one or two that are spectacularly successful, many, which break even

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and a number that fail. Firms often depend upon a few spectacular successes to ensure profitability. Predicting which will be successful is often difficult. When taken together with the high rate of failure for bids, this shows that almost all of the efforts of a project-based firm are tied to failed or losing projects. Only a small proportion of effort Žsometimes as little as 5% of the total. is responsible for successful projects upon which the firm ultimately relies for its survival. Through our initial research and feedback sessions with project-based firms, we have begun to develop a number of generic tests for our model. These include: Ø the extent to which business and project processes are integrated; Ø the degree to which value-added services Žand other new business opportunities. have been developed on the back of core project-based activities; Ø the extent to which mechanisms are in place for capturing learning from past projects; Ø the extent to which general technical performance metrics have been developed and implemented at project and business-wide levels; Ø the extent to which a coherent system of technical support and development has been developed at the core of the firm, providing technical resources to projects; and Ø the extent to which mechanisms are in place to capture ideas from outside the firm.

6. Conclusions In this paper, we have argued that project-based firms in design, engineering and construction represent a challenge to research on management and innovation. As regards the delivery of traditional physical products, they are developing new serviceenhanced capabilities. Traditional treatments of behaviour, from project management to resource-based theories, do not have the methodological equipment to explore the particular dynamics of innovation in project-based firms, because they fail to draw a link between project and business processes. The

project-based firms described in this study are not virtual enterprises. They are sustainable businesses that draw strength from their histories based portfolios of projects and maintaining services based on their technical expertise. We suggest that the relationship between business and project processes is paramount for the understanding of project-based firms and how they sustain competitive advantage over time as they operate in multi-actor environments and on the basis of one-off projects. In response to this need, we have developed a research method that combines project and firmbased studies, articulating the linkages between technical resources at the core of these businesses and their deployment and feedback in projects. A number of issues relating to knowledge management and learning still need to be addressed, in particular, the relationship between learning by individuals, project teams and that across project-based firms. Moreover, project-based learning and firmlevel business process requirements need to be matched to facilitate the integration and management of knowledge across project groups and business units. Learning also needs to take place between physical production processes and provision of related services. Our on-going research aims to develop metrics for assessing these issues. Project-based methods of production create a need to understand knowledge flows in client and supplier relationships that extend beyond the traditional economic notion of ‘an industry’. This has implications for the form of cross-sectoral learning, development and knowledge flows including feedback, learningby-doing and learning-by-using. While such learning is generally cumulative, the discontinuous and temporary nature of project-based modes of production creates problems for rapid assimilation of new knowledge throughout project-based organisations. Modern forms of apprenticeship and peer group and team-based learning appear to offer important mechanisms for overcoming such discontinuities. Moreover, simulation of practice and observation, and a recognition that professional practitioners also have to perform the role of problem-solving researchers, is also useful ŽGroak, ´ 1992.. The capability to develop and use advanced forms of Information Technology for simulation and modelling is also likely to be of increasing importance in helping to visualise and

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represent products and processes before they are made. Engineering and IT research in IT, together with work in cognitive and media studies is likely to be of increasing importance here. Information systems are likely to change the notion of decision-making and the nature of decisions themselves with the implementation of new project and business management tools. For example, successful implementation of IT-based decision support systems in leading construction organisations demonstrates that emerging processes are quite different in character from conventional approaches. The use of IT systems is resulting in fundamental changes to the timing, sequencing and hierarchy of decision-making. The most important aspects of change are: Ži. the speed and concurrence of decision-making; Žii. the ability to make information readily available when and where it is required; and Žiii. increased visibility of decision-making processes, including access to other people’s decisions. Design, engineering and construction firms will not be able to achieve all of these changes alone. Emerging forms of service-enhanced, project-based production are likely to require new and different systems of innovation support at national and international levels. The cross-sectoral issues concerning the management of knowledge raised in this paper suggest that the separation of analysis into different categories — manufacturing and services — creates rigidities which stifle effective policy making. R & D policies need to change from not only the production of physical technologies, but also to encompass organisational issues and the need to take account of, and deal with knowledge about service operations required to support those products. Governments need to be involved in setting governance and regulatory structures to enable firms to develop better practices and services. Governments also need to become more sophisticated clients in procurement of their own complex products and systems and they need to target research expenditures in interdisciplinary areas. We believe that the future for the organisational processes described in this paper is far from stable. Construction firms will need to perform in an in-

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creasingly dynamic environment. Deregulation and internationalisation are expanding and changing business opportunities. Rapid innovation in components, sub-assemblies and systems underpins competitiveness in the development and use of complex products and systems. Winning firms will be those which are capable of making deep-rooted cultural changes while maintaining engineering and technical strengths. Acknowledgements This paper is based on research in progress, supported by the Engineering and Physical Sciences Research Council ŽEPSRC. under the Innovative Manufacturing Initiative ŽIMI.. We are grateful for their support and to all those in industry who are participating in the project. We are also grateful to two anonymous referees for their helpful comments and insights. References ABB, 1997. ABB — Annual Report 1997. ABB, www.abb.com. Brusoni, S., Precipe, A., Salter, A., 1998. Mapping and Measuring Innovation in Project-Based Firms. CoPS Working Paper, CENTRIMrSPRU, Brighton. Chandler, A.D., 1990. Scale and Scope: The Dynamics of Industrial Capitalism. The Belknap Press of Harvard University Press, Cambridge, MA. CIRIA, Construction Industry Research and Information Association, 1998. Adding Value to Construction Projects through Standardisation and Pre-assembly. Report 176, CIRIA, London. Clark, K.B., Fujimoto, T., 1991. Product Development Performance — Strategy, Organization and Management in the World Auto Industry. Harvard Business School Press, Boston. David, P.A., 1985. Clio and economics of QWERTY. American Economic Review 75 Ž2., 332–337. Davies, A.C., 1997. Lifecycle of a complex product system. International Journal of Innovation Management 1 Ž3., 229– 256. DeFillipi, R.J., Arthur, M.B., 1998. Paradox in project-based enterprise: the case of film making. California Management Review 40 Ž2., 125–139. Engineering News Record ŽENR., 1999. Let the Sun Shine In. pp. 36–40, March 8. Foss, N., 1996. The Resource-based Perspective: An Assessment and Diagnosis of Problems. Working Paper 4, Copenhagen Business School, Copenhagen. Galbraith, J., 1977. Organizational Design. Addison-Wesley, Reading, MA.

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