The Organization of Innovation in the Presence of Networks and Bandwagons in the New Economy

Many contemporary markets, particularly markets of information technology products and information services, are characterized by increasing returns, including those resultingfrom bandwagon and network effects. At the same time, in larger firms innovation often takes place in distinct units that are semiau-tonomous and that have the responsibility for more than one phase in the product development process. In the most extreme case, a separate profit center is created within which R&D, production, and related activities are fully integrated and which has its own responsibility for external relations: an internal innovative venture.The central issue in this paper is the way firms—in the organization of their innovative activities—deal with the dynamics caused by bandwagon and network effects. We focus on the interrelation between decision-making actors and propose a categorization of causes of increasing returns and definitions of bandwagon and network effects that are consistent with this aim. We investigate the extent of internal autonomy of the unit; of the integration of R&D, production, and other activities in the product development process; and of external autonomy. Cases of two firms, one in packaged software development, the other in public services, demonstrate that higher autonomy of teams, particularly in managing external relations, is important to cope with bandwagon and network effects.