Project-based Organizations 01

Ž .Research Policy 29 2000 871–893www.elsevier.nlrlocatereconbase

The project-based organisation: an ideal form for managingcomplex products and systems?

Mike Hobday )

( ) ( )Science and Technology Policy Research SPRU , Complex Prod. Sys. CoPS InnoÕ. Cen., Mantell Building, UniÕersity of Sussex, Falmer,Brighton, East Sussex BN1 9RF, UK

Abstract

ŽThis paper examines the effectiveness of producing so-called CoPS i.e., complex high value products, systems,. Ž .networks, capital goods, and constructs in a project-based organisation PBO , as compared with a more traditional

functional matrix organisation. A simple model is developed to show how the PBO relates to identified forms of matrix andfunctional organisation and a case study is used to identify some of the strengths and weaknesses of the two organisationalforms for CoPS production. On the positive side, the PBO is an intrinsically innovative form as it creates and recreates neworganisational structures around the demands of each CoPS project and each major customer. The PBO is able to cope withemerging properties in production and respond flexibly to changing client needs. It is also effective at integrating differenttypes of knowledge and skill and coping with the project risks and uncertainties common in CoPS projects. However, thePBO is inherently weak where the matrix organisation is strong: in performing routine tasks, achieving economies of scale,coordinating cross-project resources, facilitating company wide technical development, and promoting organisation-widelearning. The PBO can also work against the wider interests of corporate strategy and business coordination. Strategies tostimulate organisational learning and technical leadership include the deployment of coordinators along functional lines tocut across project interests and incentives. Project tracking and guidance at the corporate level is also important for achievingbroader business goals. The paper illustrates the wide variety of organisational choices involved in producing CoPS andargues that the nature, composition, and scale of the product in question have an important bearing on appropriateorganisational form. q 2000 Elsevier Science B.V. All rights reserved.

Ž .Keywords: Project-based organisation; Complex products and systems CoPS ; Functional organisation; Matrix organisation

1. Introduction

In contrast to the functional and matrix organisa-Ž .tion, the project-based organisation PBO has been

put forward as a form ideally suited for managingincreasing product complexity, fast changing mar-

) Tel.: q44-1273-686758; fax: q44-1273-685865.Ž .E-mail address: [email protected] M. Hobday .

kets, cross-functional business expertise, customer-focused innovation and market, and technologicaluncertainty. This applies particularly to high value,

Ž .complex industrial products and systems or ‘CoPS’ ,the sophisticated high technology capital goods,which underpin the production of goods and ser-vices. Some studies suggests that the PBO is anatural organisational form for CoPS producers, es-pecially when several partner suppliers are engagedwith the user through the various stages of innova-

0048-7333r00r$ - see front matter q 2000 Elsevier Science B.V. All rights reserved.Ž .PII: S0048-7333 00 00110-4

( )M. HobdayrResearch Policy 29 2000 871–893872

Žtion and production Hobday, 1998; Gann and Salter,.1998 .

Existing firm-level research explores the potentialadvantages of PBOs, tensions between project- andcorporate-level processes, PBO suitability for pro-ducing service-enhanced products, and the nature of

ŽPBO behaviours and structures Brusoni et al., 1998;.Gann and Salter, 1998 . Focusing on the project

rather than the firm, the new product develop-Ž .ment NPD field points to the benefits of strong

projects in NPD, the leadership requirements forŽ‘heavyweight’ project teams Clark and Wheel-

.wright, 1992 , and the need for the greater profes-sionalisation of project management as projects as-sume increasing importance across various high

Ž .technology industries Pinto and Kharbandha, 1995 .So far, however, there has been little research on

the scale or pace of diffusion of the PBO form, orhow the PBO actually operates in practice in themanagement of CoPS. We know very little about thePBO or how its processes differ from those ofvarious matrixrfunctional forms of organisation orhow disadvantages of the PBO can be overcome inpractice. Nor has there been much discussion of the

Žvarious different types of PBO e.g., large vs. small.PBOs, single project vs. multiple project PBOs .

The aim of this paper is to identify some of thefeatures of the PBO by looking in depth at howCoPS projects are managed in one large PBO, com-paring this with CoPS produced in a functionaldivision of the same company. The purpose of takinga ‘bottom up’ project perspective is to explore thedynamics of project structures, processes, and perfor-mance in the PBO vs. a functional organisation.Although it is outside the scope of the paper toexamine corporate-level structures and processes, thecase illustrates some of the key advantages anddisadvantages of the PBO in the execution of majorCoPS projects and draws attention to tensions be-tween project and company-wide processes in PBOs.The paper also suggests how some of the problemsintrinsic to the PBO form can be overcome in prac-tice.

One of the problems of case study research of thiskind is the counterfactual difficulty of knowing what

Ž .would have happened e.g., in terms of performanceif another organisational structure had been applied.It is also difficult to attribute particular behavioural

Žand performance attributes e.g., flexibility, effec-.tiveness, efficiency, and return on investment to

particular factors such as organisational form, ratherŽthan other factors e.g., project leadership, company

culture, product market differences, and senior man-.agement support . The method adopted to overcome

some of these difficulties is to take the case of asingle large CoPS supplier which, for particular his-torical reasons, operates a mix of both project-basedand functionalrmatrix forms, addressing similarproduct markets and clients with the same seniormanagement team.1 The paper analyses and com-pares two CoPS projects of similar value, duration,technology, and customer, in the two distinct strate-gic business units, one PBO and one functionalrma-trix. By identifying process differences, as well asthe advantages and disadvantages of both forms, thepaper points to some important limits of the PBO inthe management of CoPS projects. It also identifies amodified form of the PBO, termed here the ‘project-led organisation’, which has been used to overcomesome of the limits of the pure PBO.

The paper is structured as follows. Section 2examines the nature of the project management chal-lenge in CoPS. Section 3 then provides a workingdefinition of the PBO and develops a simple modelto show how the PBO differs from and relates toother forms of organisation identified in the litera-ture. Section 4 then presents the case of a producerof highly complex, particle accelerator systemsŽ .Complex Equipment Inc. to illustrate the advan-tages and disadvantages of the PBO structure, focus-ing on project processes, problems, and performance.Section 5 interprets the evidence arguing that thePBO provides a concurrent and outward-looking ap-proach to project management, while thefunctionalrmatrix form embodies a more linear, in-ward-looking and less flexible approach. Section 5also comments on the underlying economic motiva-tions for adopting a project-based form for CoPS and

1 Although the case study design allows an in-depth compari-son of the different structures and projects within the same firm,the method cannot fully overcome the problem of project unique-

Žness and history see Section 4.1 for a discussion of the limitationsof the method and possible ways of overcoming these in future

.research .

Owner

Highlight

( )M. HobdayrResearch Policy 29 2000 871–893 873

Žindicates strategies which can be used e.g., thedeployment of a milder form of PBO, the ‘project-led

.organisation’ to resolve corporate strategy and com-pany-wide learning problems inherent in the PBO.

2. Innovation in CoPS

2.1. What are CoPS?

CoPS are the high-technology, business-to-busi-ness capital goods used to produce goods and ser-vices for consumers and producers. Unlike high vol-ume consumption goods, each individual CoPS ishigh cost and made up of many interconnected, often

Žcustomised parts including control units, sub-sys-.tems, and components , designed in a hierarchical

Žmanner and tailor-made for specific customers Hob-.day, 1998; Walker et al., 1988 . Often their sub-sys-

Ž .tems e.g., the avionics systems for aircraft arethemselves complex, customised, and high costŽ .Mowery and Rosenberg, 1982 . As a result of theircost, physical scale, and composition, CoPS tend tobe produced in projects or small batches, which

Žallow for a high degree of direct user sometimes.owner–operator involvement in the innovation pro-

cess, rather than through arms-length market transac-tions as is normally the case in commodity goods.

During design and production, small designchanges in one part of a system can lead to largealterations in other parts, calling for more sophisti-cated control systems, new materials, and novel de-

Žsign approaches. Once installed, some CoPS e.g.,intelligent buildings and computer integrated manu-

.facturing systems further evolve as users expand,Žoptimise, adopt, and operate the system Gann, 1993;

.Fleck, 1988 .Product complexity, of course, is a matter of

Ž .degree. Hobday 1998 puts forward various dimen-sions of product complexity, including numbers ofcomponents, the degree of customisation of bothsystem and components, the number of designchoices, elaborateness of system architectures, therange, and depth of knowledge and skill inputs re-quired, and the variety of materials and informationinputs. According to an amalgam of these dimen-sions, some products can be categorised as ‘ex-

tremely complex’, embodying many highly elabo-rate, customised sub-systems and components, newknowledge and multiple feedback loops in both de-

Žsign, and production e.g., a new generation military.aircraft . At the other end of the spectrum, there are

less complex products where the boundaries of un-certainty are better understood, architectures andcomponents are relatively well-established, reducing

Žthe risk inherent in the production of each good e.g.,.a new model flight simulator . In between there are

‘highly complex’ and ‘moderately complex’ goods.In all cases though, ‘complex products’ can be dis-tinguished from simpler or even complicated prod-ucts, where architectures are relatively simple, com-

Žponents are relatively few in number and usually.standardised , the degree of new knowledge required

for each product is fairly constrained and productiontasks can be codified, routinised, and automated toproduce process efficiency and cost reduction based

Žon volume e.g., a bicycle or toaster could be de-scribed as ‘simple’ products, whereas a passengervehicle could be described as ‘complicated’ but notcomplex, as defined here.

Technical progress, combined with new industrialdemands have greatly enhanced the functional scope,complexity, pervasiveness, and performance of CoPSŽe.g., business information networks, tailored soft-

.ware packages, and internet super-servers . The na-ture of CoPS can lead to extreme task complexity,which, in turn, demands particular forms of manage-ment and industrial organisation.

2.2. Industrial innoÕation in CoPS

CoPS are often produced within projects whichincorporate prime contractors, systems integrators,users, buyers, other suppliers, small- and medium-

Ž .sized enterprises SMEs and sometimes governmentagencies and regulators. Often, these ‘innovation

Žactors’ collaborate together, taking innovation e.g.,.new design decisions in advance of and during

production. Sometimes users and suppliers engage inco-engineering throughout the production process.Prime contractors and systems integrators are re-sponsible for managing CoPS projects, which amountto temporary multi-firmruser alliances. Given thenature of CoPS, systems integration, and projectmanagement competencies are critical to production


effectiveness and efficiency.The project is a widelyused form of coordination in CoPS. The project is afocusing device which enables different types ofinnovation actors to agree the fine detail of CoPSdevelopment and production. The project is responsi-ble for realising the market, for coordinating deci-sions across firms, for enabling buyer involvement,and for matching technical and financial resourcesthrough time. The project exists to communicatedesign and architectural knowledge and to combinethe distinctive resources, know-how, and skills of thecollaborators.

Because production is oriented to meet the needsof large business users, the project management taskis fundamentally different from the mass production

Ž .task. As Joan Woodward 1958, p. 23 put it in herresearch into UK project-based companies in the1950s: Athose responsible for marketing had to sell,not a product, but the idea that their firm was able toproduce what the customer required. The productwas developed after the order had been secured, thedesign being, in many cases, modified to suit therequirements of the customer. In mass productionfirms, the sequence is quite different: product devel-opment came first, then production, and finally mar-keting.B

The specific CoPS in question will shape the formand nature of the project. In the case of very largeengineering constructs, entire project-based industrialstructures can be called into being by various stake-holders for the purpose of creating a single product.The Channel Tunnel, for example, entailed a massivetask of financial, managerial, and technological coor-dination involving hundreds of contractors, at least208 lending banks and around 14,500 employees at

Ž .its peak Lemley, 1992, p. 14, 23 . By contrast, withŽsmaller CoPS e.g., flight simulators and telecommu-

.nications exchanges much of the project task iscarried out within the managerial span of control of asingle firm.

In CoPS, design-intensity and product complexitylead to many extremely complicated, non-routine

Ž .tasks Hobday and Rush, 1999 . Users frequentlychange their requirements during production, leadingto unclear goals, uncertainty in production, and un-predictable, unquantifiable risks. Success and failureare multifaceted and hard to measure. Managers haveto proceed from production stage-to-stage with in-

complete information, relying on inputs from othersuppliers who may be competitors in other projects.In some cases these challenges have led firms tore-organise their entire business activities along pro-ject-based lines, leading to project-based organisa-tional structures.

3. The nature of the PBO

3.1. Definition and key propositions

In contrast to the matrix, functional, and otherforms, the PBO is one in which the project is theprimary unit for production organisation, innovation,and competition.2 Although the PBO is commonlyused in private manufacturing enterprise, it is also

Ž .deployed in other organisations public and private ,including the legal profession, consultancy firms,marketing, the film industry, and advertising. Whilea project can be defined as any activity with a

Ždefined set of resources, goals, and time limit e.g.,.for information technology or new materials , within

a PBO the project is the primary business mecha-nism for coordinating and integrating all the main

Žbusiness functions of the firm e.g., production, R&D, engineering, NPD, marketing, personnel, and fi-

.nance .ŽWithin a pure PBO i.e., an organisation in which

.no other form is present , major projects will em-body most, if not all, of the business functionsnormally carried out with departments of functionaland matrix organisations. In some cases, the project

Žinvolves a consortium of companies e.g., Sematech,Airbus, the Channel Tunnel, and the Millennium

.Dome . In other PBOs, much or all of the projectmay be carried out within the boundaries of a singlecompany. Because core business processes are or-ganised within projects rather than functional depart-ments, the PBO is an alternative to the matrix, wherebusiness functions are carried out both within pro-jects and along functional lines. In the PBO, the

2 This paper uses the term PBO rather than project-based firmas a single firm may deploy both project-based divisions as well

Ž .as functional divisions as in the case example in Section 4 .


knowledge, capabilities, and resources of the firmare built up through the execution of major projects.

Ž .Project managers PMs within the PBO typicallyhave very high status and direct control over busi-ness functions, personnel, and other resources. PMs

Žand directors are senior to resource coordinators thenearest equivalent to the functional manager in the

.PBO , whose role is to support the needs of projectsand PMs and, sometimes, to coordinate business

Žfunctions across various projects e.g., technical, hu-man, and financial resources for project bidding,

.management, systems engineering, and so on .Because the project is a temporary organisational

form, the PBO is inherently flexible and reconfig-urable in contrast with the anti-innovation bias oflarge integrated, hierarchical organisations described

Ž . Ž .by Williamson 1975 and Teece 1996 and the coreŽ .rigidities identified by Leonard-Barton 1992 .

Within the PBO a project is often a major busi-ness endeavour and the normal mechanism for crea-ting, responding to, and executing new businessopportunities. Each project is likely to involve aspecific well-defined product and one or a few iden-

Žtified customers. In many cases, the customer often.a user or owner–operator will be closely and di-

rectly engaged in primary innovation and productionprocesses, as each project will tend to be critical tothe business functioning, performance, and prof-itability of the user. The PBO is widespread in

Žtraditional industries e.g., construction, shipbuild-.ing, and major capital projects , industries that have

Žbeen regenerated through new technologies e.g.,.aerospace and telecommunications , newly emerging

Žindustries e.g., information and communication.technologies and many other examples of business-

to-business, high-technology, high value capitalgoods.

In principle, the PBO is not suited to the massproduction of consumer goods, where specialisationalong functional lines confers learning, scale, andmarketing advantages. However, within large manu-facturing firms the project form is used to organisespecific non-routine activities and complex tasks suchas R&D, NPD, and advertising campaigns. Also,some large multiproduct firms embody both PBO

Ž .and functional divisions or strategic business unitsto deal with different types of products, technologies,

Žand markets e.g., producers of both telecommunica-

.tions handsets and exchanges . Thus, particular pro-jects may be ‘large’ for a small or medium-sizedfirm or ‘small’ for a large or very large firm, imply-ing that the manner in which project organisationsare established, perceived, and deployed varies withfirm characteristics.

PBOs organise their structures, strategies, andcapabilities around the needs of projects, which oftencut across conventional industrial and firm bound-aries. In CoPS industries, there are many differentcategories of PBO, ranging from large prime contrac-tors, which specialise in project management andsystems integration, to tiny specialised sub-contrac-tors, which supply tailored components, software orservices. Any one project may combine these groupsin a variety of roles, with the same firm acting asprime contractor in some projects and sub-contractorin others. Not all firms within a project are necessar-ily PBOs. Also, PBOs can range from firms servic-ing one single project to firms which execute many

Žhundreds of projects at any one time e.g., in con-.struction .

The structures and business processes of PBOsare likely to be shaped by the changing profile ofprojects, especially their size, complexity, and dura-

Ž .tion. Some PBOs e.g., in construction are likely toderive most of their income from large projects overwhich they exercise little direct span of controlŽ .Gann, 1993 . In other cases, firms may direct andcontrol particular projects, largely from within thefirm, as noted earlier. Major new projects becomecentral innovation events in some CoPS industries,giving rise to new business opportunities and noveltechnological trajectories.

3.2. Research perspectiÕes on the PBO

Various bodies of research help inform our under-standing of the position, nature, and advantages ofthe PBO. At the project level, research on NPD haslong recognised the importance of the project forintegrating business functions and responding tocomplex technical challenges for the purpose of de-veloping new products. Clark and WheelwrightŽ .1992 , for example, describe four basic types of

Ž . Ž .organisational structure for NPD: 1 functional; 2


Ž .lightweight project structure; 3 heavyweight projectŽ .structure; and 4 project-based. In conventional

functionalrlightweight project structures, PMs tendto be junior to functional managers and have nodirect control over resources. In the heavyweightproject approach, functions such as marketing, fi-nance, and production tend to be coordinated bymanagers across project lines, but PMs have highstatus and direct control over financial resources andpeople.

In their analysis of the influence of managementstructure on project success, Larson and GobeliŽ .1989 show how both project management structureand other variables such as new technology, projectcomplexity, managerial competence, top manage-ment support, project size, and well-defined objec-tives impact on project success. Pinto and PrescottŽ .1988 , analyse how critical success factors varyover the life cycle of projects, while Pinto and CovinŽ .1989 show how such factors depend on the type of

Ž .product and activity in question. Shenhar 1993provides insights into the importance of new knowl-edge in project risk and uncertainty, comparing low-with high-technology projects.

Focusing on the benefits of the project form,some innovation scholars have argued that projectsand project management are the ‘wave of the futurein global business’ due to increasing technical andproduct complexity, shortening time to market win-dows, and the need for cross-functional integration

Žand fast response to changing client needs Pinto and.Kharbanda, 1995 . It is certainly reasonable to as-

sume that as market change, risk, and uncertaintyincrease, the project form will grows in importancein a wide range of industries and tasks.

At the firm level, traditional innovation writershave long recognised the advantages of flexible pro-ject-based organisational forms. Burns and StalkerŽ .1961 made the classic distinction between organicand mechanistic organisational forms, arguing that ifa stable routine environment prevailed and the mar-ket was fairly predictable, then firms can reap advan-tage from mechanistic, functional organisationalforms with clearly defined job descriptions, stableoperational boundaries, and Taylorist methods ofworking. However, in the case of rapidly changingtechnological and market conditions, then open and

Ž .flexible ‘organic’ styles of organisation and man-

agement are required which are able to link functionssuch as R&D and marketing.3

3.3. A simple positioning framework for the PBO

In order to understand the relationship betweenthe PBO and other types of organisation, GalbraithŽ .1971, 1973 describes a range of alternatives frompure functional form through to pure product form,where management structures are centred upon each

Ž .product equivalent to the PBO . Building on Gal-Ž .braith’s work, Larson and Gobeli 1987, 1989 de-

scribe three distinct types of matrix. First, is thefunctional matrix, where the PM is confined to coor-dinating resources, monitoring progress, and report-ing into one or more functional managers. Second, isthe balanced matrix, where responsibilities and au-thority for each project are shared between func-

Ž .tional and PMs. The third is the product or projectmatrix, where the PM has authority over personnel,

3 Ž .Building on the work of Burns and Stalker, Mintzberg 1979points out that appropriate organisational forms are contingent onfactors such as market, task, and technology. He describes five

Ž .basic organisational forms: a the machine bureaucracy withhighly centralised control systems, suited to a stable environment;Ž . Ž .b the divisional form suited to mass production efficiency; cthe professional bureaucracy made up of flat organisational struc-

Žtures, useful for delegating complex, professional tasks e.g., in. Ž .universities ; d the simple or entrepreneurial structure, valuable

Ž .for its informality and flexibility; and e the adhocracy, which isa temporary project team design, suited to complex tasks and

Ž .turbulent and uncertain markets. Similarly, Teece 1996 proposesŽ . Ž .six categories of firm: 1 stand-alone entrepreneur inventor; 2

Ž .multiproduct integrated hierarchy; 3 high flex, Silicon ValleyŽ . Ž . Ž .type; 4 virtual corporation; 5 conglomerate; and 6 alliance

enterprise. Taking an historical perspective, Miles and SnowŽ .1986 argue the organisations have evolved from the owner–manager of the 18th century, to the vertical organisation of themid-19th century, through to the divisionalised and matrix organi-sational structures suited to the mass production of industrial

Žgoods in the mid-20th century. They argue that a new form the.dynamic network has recently emerged in high technology pro-

duction. In the network, large and small firms collaborate to-gether, responding to fast changing market needs. Key businessfunctions such as product design, R&D, manufacturing, and distri-bution are performed by independent firms cooperating togetherand linked by ‘brokers’ who provide information to networkmembers and coordinating overall operations. In Miles and Snow’sformulation, brokers and partners are similar to Teece’s virtualfirm and alliance enterprise, respectively.


finance, and other resources. Finally, the pure prod-uctrproject-based form is an extreme form wherethe business is organised solely around productrpro-ject lines.

Interpreting the above literature, Fig. 1 provides adescription of six ideal-type organisational forms

Ž .ranging from the pure functional form Type A toŽ .pure project form Type F . The various functional

Ždepartments of the organisation e.g., marketing, fi-nance, human resources, engineering, R&D, and

.manufacturing are represented by F1 to F5, whilenotional CoPS projects are represented by P1 to P5.Type B is a functionally-oriented matrix, with weak

Žproject coordination as described in the case study.‘FMD’ below . Type C is a balanced matrix with

stronger project management authority. Type D is a

Ž . Ž . Ž . Ž . Ž .Fig. 1. Positioning the project-based organization. A Functional, B functional matrix, C balanced matrix. D Project matrix. EŽ .Project-led organization. F Project-based organization.


project matrix, where PMs are of equal status tofunctional managers.

Beyond the project matrix, lies a form not identi-Ž .fied in the literature Type E , called here a ‘project-

led organisation’, in which the needs of projectsoutweigh the functional influence on decision-mak-ing and representation to senior management, butsome coordination across project lines occurs. Fi-nally, Type F is the pure PBO as defined in Sec. 3.1,and illustrated below in the case study ‘PBD below’.Here, there is no formal functional coordinationacross project lines; the entire organisation is dedi-cated to one or more CoPS projects and businessprocesses are coordinated within the projects.

The positioning diagram helps to contrast thevarious forms of organisation available and to high-light those most suited for different types of CoPS,accepting that a mixed organisational structure ispossible even within a single business unit. Forms Ato C are unsuitable to managing the CoPS, becausethey are not appropriate for performing non-routine,complex project tasks in an uncertain, risky, andchanging environment. CoPS projects require ‘super-

Ž .heavyweight’ professional PMs or directors , capa-ble of integrating both commercial and technicalbusiness functions within the project and buildingstrong lines of external communication both with the

Ž .client often the source of the innovation idea andother collaborating companies. These external inno-vation actors typically have different goals, struc-tures and cultures, and the task of the CoPS projectdirector is to skilfully negotiate a path towards suc-cessful completion.

The pure PBO is probably best suited for largeinnovative projects and single project firms, whereresources have to be combined and shared with other

Ž .firms in the project the multi-firm CoPS project .The PBO is a form suitable for meeting innovativeneeds, responding to uncertainty, coping with emerg-ing properties, responding to changing client require-ments and learning in real time. By contrast, thePBO is weak where the functional matrix is strong:in coordinating resources and capabilities across pro-jects, in executing routine production and engineer-ing tasks, achieving economies of scale and meetingthe needs of mass markets.

More broadly the framework implies that inchoosing an appropriate organisational form the na-

ture, scale, and complexity of the product must beconsidered. With a balance of small batch, CoPS,and mass produced goods, organisational choicesbecome messy, complex, and dynamic. Mistakes canbe very costly. As the product mix evolves, organisa-tions need to change in order to respond to productmarket needs.

3.4. Gaps in the literatures

Ž .While Galbraith 1971 and others provide usefultools for positioning the PBO in relation to otherorganisational forms, they fall short of examining thePBO itself and do not analyse its advantages anddisadvantages. Surveys of project successrfailurefactors are generally unable to explore intra-project

Ždynamics and tend to ignore the informal, human or.‘soft’ side of project progress which are so impor-

Ž .tant to performance Katz, 1997 . Much of the litera-ture tends to assume products are being developed‘for the market place’ whereas CoPS are usually

Ž .transacted with the user and other suppliers inunique combinations and rarely, if ever, transacted inan arms length market setting.

Similarly, while studies of NPD and project per-formance help disentangle the many facets of projectsuccess and failure, they do not explore PBO pro-cesses nor do they tend to distinguish between com-plex capital goods and mass-produced products. Nordoes the project success literature tend to examinethe changing nature of projects through time. Thisissue is especially important for CoPS projects, whichinvolve several outside innovation partners in differ-ent ways through the various stages of the projectcycle.

To contribute to an understanding of innovationmanagement in CoPS, Section 4 illustrates how onePBO deploys its resources to create and deliversingle complex products. By comparing the progressof CoPS projects in the PBO and functional matrixforms, the case shows how well suited the PBO isfor creating and executing large and risky CoPSprojects. However, the case also highlights the diffi-culties PBOs face in capturing and transferring pro-ject knowledge with pressures, structures, and rou-tines crowding out learning from one project toanother.


4. The case of complex equipment inc

4.1. Case objectiÕes, method, and limitations

The purpose of the case study is to assess CoPSproject performance and processes and to look at thenature, strengths, and weaknesses of the PBO incomparison with the functional form through the lensof two major projects, one in a PBO division and onein a functional division. The case also examines howPBO disadvantages can be overcome in practice.

The case study is a large German-owned pan-Ž .European firm Complex Equipment Inc , which em-

ploys around 4000 people and produces a wide rangeof advanced, high-cost scientific, industrial, andmedical equipment.4 For some years, the company

Žhad experienced serious problems delays, cost.over-runs, and customer dissatisfaction in producing

ŽCoPS within its functional matrix division called.FMD here in one of its strategic business units,

which produced both CoPS and small batch, simplerproducts. In another strategic business unit, whichreports to the same senior management, a pure pro-

Ž .ject-based division called PBD had been convertedfrom a matrix organisation to deal solely with largeCoPS projects.5

The senior management wished to learn from theoperating experiences of PBD, which had been inpure PBO form for around 2 years. PBD had provedhighly successful in meeting customer needs andproject performance targets. A key strategic decisionwas whether or not to implement a pure PBO inFMD, a larger division. The management felt thatthere were lessons to learn from the good and badexperiences of both organisations. Although bothPBD and FMD produced similar CoPS equipment,for geographical reasons the physical merging of thetwo sites was not an option in the foreseeable future.

The research method involved examining the ex-Žperience of two similar, complex projects termed

4 The name of the company, as well as project names, havebeen changed to protect confidentiality.

5 PBD corresponds to type F in Fig. 1, while FMD correspondsto type B. The firm provides an unusual opportunity to compare aPBO with an FMO in a single company, with the same companyculture and senior management.

.project P in PBD and F in FMD in order to reviewand compare project processes, problems and perfor-mance and to draw lessons for both organisations.6

The CoPS in question was an experimental form ofsynchrotron particle accelerator which is used insub-micron semiconductor R&D and other scientificapplications. The price of each unit was in the orderof $10 million each and the duration of the projectswas around 18 months in each case.

The research involved three stages: first, a struc-tured questionnaire was used to gather the views of asample of practitioners in each project, includingscientists, engineers, draftsmen, technicians, andPMs. Views were sought on the detailed, actualexperiences of PBD project P and FMD project Fand on perceptions of the wider strengths and weak-ness of both organisations. Second, interviews werecarried out with senior managers and directors ontheir perceptions of the projects and each organisa-tions strengths and weaknesses. Third, a workshopwas arranged with both groups to feedback resultsand check the findings were consistent with theexperiences of the staff, many of whom had workedfor both parts of the organisation and other strategicbusiness units within Complex Equipment Inc.

Twenty interviews were conducted for each pro-ject. Information was gathered on origin, history,structure, management, client relations, supplierlinks, project processes, and performance. The sam-

Žple consisted of a ‘slice group’ i.e., representativesof most main functions and seniority levels of the

.two projects . Within the case, the research focusedon:

Ø Organisational structure,Ø Project management and leadership,Ø Team identity and coherence,Ø Client and client management,Ø Risk management,

6 Project processes refer to patterns of managerial, technologi-cal, and operational practice: the ‘way things are done’, within theproject, including both formal and informal routines. At thebroader firm level, processes occur within and across the various

Žfunctions of the firm e.g., marketing, production, finance, engi-.neering, R&D, and personnel and occur both formally and infor-

mally, shaping the efficiency and effectiveness of a firm.


Ø Formal and informal tools and procedures,Ø Organisation-wide learning and coordination,Ø Project performance,Ø Organisational strategies and solutions.

Each of these issues is reported upon below inturn, contrasting the functional matrix with the PBOdivision.

Regarding scope and limitations, the research tooka ‘bottom up’ look at two real projects, but did notsystematically research the broader company pro-

Žcesses or functions e.g., corporate strategy, qualitysystems, bid processes, production, purchasing and

.cross-departmental communications . Nor could thestudy look systematically at the relations betweenproject and wider company business processes. Bothprojects were carried out largely under the control of

Ž .the firm e.g., the degree of co-engineering was low ,so although other partners and users were activelyinvolved, the case is not an example of an extensivemulti-firm project where developments are sharedmore equally between partners. In addition, the caserefers to the type of PBO conducting a small numberof major CoPS projects, rather than the case of aPBO carrying out large numbers of smaller projectssimultaneously. Even within this category, the caseissues cannot claim to be generally applicable toother large firms producing small numbers of elabo-rate, high value CoPS.

In addition, while the case study design enablesan in-depth comparison of different projects withindivisions of the same firm, the approach cannot fullyovercome the problem of project uniqueness andhistory, as noted in the introduction. Even within thesame firm with the same company culture and seniormanagement, each project is still subject to specificfactors, which shape overall performance, successand failure, and it is very difficult to normalise forthese factors. However, alternative methods of as-

Žsessing project success factors e.g., cross-sectional.surveys are also limited as they cannot look in-de-

pth at the evolution of projects through time, infor-mal practices, and ‘soft’ issues, which are critical toproject success. One way of overcoming these diffi-culties in future research may be to expand thenumber and type of intra-project studies of PBOs inorder to identify more CoPS project success factors,

links between project performance, and wider busi-ness processes and comparisons between differenttypes of PBOs, including single project and multi-project firms.

Accepting these limitations, the case design wasable to illustrate some of the features of the PBO forCoPS compared with the functional matrix and ma-jor differences in project processes, advantages, anddisadvantages of the two organisational forms. Thecase also yielded insights into some of the widerorganisational issues, especially organisational learn-ing, which featured as a major problem in the case ofPBD. Some of these key issues are illustrated belowusing quotations from PMs, engineers, and otherpractitioners.

4.2. Organisation structure

FMD was run as a functional matrix withlightweight PMs. Projects were resourced by theheads of the functional departments. While PMswere nominally in charge of projects they had nodirect staff or control over resources, nor a regularreporting mechanism into senior management. Withinthe matrix, PMs for CoPS reported in to one of the

Ž .functional managers usually engineering . Tradition-ally, FMD was heavily biased towards the needs ofthe functional departments and standard product linesproduced in small batches. However, increasinglyCoPS were being processed in FMD leading toproblems, as noted earlier.

In contrast to FMD, PBD had been organisedalong project-based lines for about 2 years, with PMsin direct control of project resources, team-building,and project outcomes. The PBO had been an experi-mental move and was widely viewed as a success.As noted earlier, the directors of Complex Equip-ment Inc wished to learn the lessons for the rest ofcompany and in particular wanted to assess whetheror not to implement a PBO to resolve CoPS prob-lems at FMD.

4.3. Project management and leadership

Because of its functional orientation, the PM ofŽ .project F as with other PMs in FMD had little

direct control over project resources, nor a heavy-


weight representation into senior management. Thislightweight PM structure had been introduced someyears earlier to run alongside the functional organisa-tion to deal with CoPS projects. This led to prob-lems, as described by the PM for project F: AI had no

wpeople working directly for me. They the heads ofxthe functional departments took people off the pro-

ject without telling me. The bosses didn’t come toproject meetings and didn’t really know what wasgoing on in the project.B Similarly, the senior manu-facturing engineer noted: AIn project F I was notinvolved or consulted about the original budget esti-

wmates. There was no time to do this job the estima-x wtion properly. This happens far too often. It the

xproject should have been resourced properly at thew xoutset but there were conflicts between Jim the PM

w xand the resource i.e., functional managers.BŽGiven the number of functional departments and

.bosses in FMD, each with standard reporting sys-tems and procedures, a wide range of reportingrequirements and sometimes conflicting demandswere placed on the PM for project F. There were fivemain functional departments: engineering, manufac-turing, marketing, finance, and human resources.Reporting into the five departments absorbed a greatdeal of time and energy, leading to a reactive, ratherthan a proactive stance towards risk, client manage-ment, product design, manufacture, and so on.

As discussed below, customer relations were alsodifficult, with the PM looking to functional managersfor answers to technical and schedule questions raisedby the client, but with little direct contact betweenthe functional managers and the client. This led todelays in dealing with client problems and also tosome confusion. In some instances, the two main

Ž .sets of client demands commercial and technicalŽwere in conflict e.g., new technical specifications

were called for alongside demands to maintain costs.and keep to schedules . These demands led to diffi-

cult negotiations with the functional managers andfrequently placed the PM for FMD in a difficultposition with the client.

By contrast in PBD the heavyweight PM haddirect control over resources and team personnel, aswell as a strong and direct representation into senior

Ž .management the company directors . The PBD PMfor project P was more senior to other staff in PBDand on equal terms with functional managers in

FMD. The PM for project P dealt directly with theclient, having both control over, and responsibilityfor, all technical and commercial issues.

PBDrProject P was particularly strong on theintangible, informal activities essential to project

Žsuccess in uncertain environments e.g., project man-agement, close customer relations, good communica-tions, open honest meetings, and mutual respect

.among team members . In PBDrP a good level ofcommunication and trust was built up with sub-con-tractors, both large and small. The PBDrP team wasas flexible and responsive to changes in specifica-tion, risks, and so on, as one would hope from awell-managed PBO.

As the PM for Project P put it: AIn PBD we set upa new team for every project and we tend to work onone or two builds at a time. As the PM I do theoverall plan and delegate tasks to team members. Italk to the engineers and technicians every day be-cause working relations are vital. Its a matter ofmutual trust and respect.B A manufacturing techni-cian for Project P further explained: AIt was a good

w xmanagement set up. She the PM knew exactly whatto do even though it was a very difficult project. One

w xof the suppliers let us down, so Jane the PM wentdown and ordered a new one from another supplier.She had to bypass the finance department and tellthem afterwards. That’s not following the rules, butshe judged it necessary to get the job done on time.B

However, there were difficulties not only withinthe project but also in the wider organisation. Thesewere proving difficult to address within the PBO

Ž .structure see Section 4.8 below .

4.4. Team identity

The FMDrProject F team felt that the project wasunder-resourced, given its size, complexity and de-velopment nature, and that insufficient numbers offull-time technical staff worked on the project at anygiven time. Most individuals worked on more than

Ž .one project some as many as six and few, apartfrom the PM, felt any identity with Project F. Someteam members were under great pressure and tworesigned from the company, partly due to the de-mands of Project F.


As one Senior Engineer on Project F stated:AThere was not enough team spirit partly because ofall the politics between different people in the vari-ous departments. Most of the team worked on sev-eral other projects. They were in and out.B And froma different perspective: AI had no feeling of owner-

wship, neither did the other team members. Jim thexPM was running the project using resources pro-

vided from the departments as and when. It shouldŽhave been handled differently from the outsetB Elec-

.tronics Engineer, Project F . The PM concurred withthese views adding: AThe engineer responsible fortesting, where we had major difficulties, becameoverstressed and left the company. We managed toget a replacement from another division, who thendiscovered serious technical problems with the sys-tem, which had further knock-on affects.B

Overall, the project suffered from weak teamcoherence, poor team spirit, and fragmented commu-nications. This was due in part to initial projectunder-resourcing, itself a reflection of the weak bar-gaining position of the PM who was unable to insistupon a dedicated team within the functionally-ori-ented organisational structure. These problems wereseen as resulting from the functional structure andhad occurred before in CoPS projects in FMD, lead-ing to the decision to consider introducing a PBOstructure similar to PBD.

By contrast, in PBDrProject P the team felt theyhad achieved a highly effective and professionalapproach to project management and implementa-tion, with strong team coherence and close identitywith Project P. Most of the team were dedicated toProject P and all felt allegiance to it. Project leader-ship and management were viewed as strong by teammembers and internal communications proceededwell.

4.5. Client and client management

The FMDrProject F team had developed poorand confused relations with their client and felt‘unlucky to have a bad client’. Early on in theproject’s development, the PM had reacted to newclient demands for changes in specification by at-tempting to please the customer. However, the PMdid not have the time nor authority to carefully

negotiate full costings or rescheduling, or to carryout the detailed internal planning needed. This hadresulted in unclear business relations. Conflicts de-veloped as team members felt their customer wasunwilling or unable to divulge essential informationon detailed requirements or to sign off pieces of

w xwork when requested to: AThey the customer inter-fered far too much with the design. They arguedabout every single nut and bolt. They set the patternof being able to dominate the design and make ustake the risk. This eventually led to the point where

w x Žthe customer didn’t trust Jim the PM .B Senior.Mechanical Engineer . Similarly, Awe tried to get

feedback from the client but we got no help. Wedecided it was better to be late on delivery than have

Ž .a system fail in the fieldB PM, Project F .Team members also felt let down by their own

PM and senior management who did not seem ableto sort out the difficulties. To them, seemingly arbi-trary changes in specification were called for causingdelays in delivery and severe technical difficulties:AThe specification was not properly dealt with. Thecompany was afraid to talk to the customer. Youneed a high level PM from a business point of view

w xon this type of project. Jim the PM was down onŽthe shop floor fire fighting too muchB Manufactur-

.ing Technician, Project F .However, official client procedures and be-

haviours on FMDrProject F were not dissimilar tothose of PBDrProject P, coming from a differentdivision of the same buyer organisation. FMDrPro-ject F team members reacted defensively to clientdemands, putting problems down to internal cus-tomer politics and commercial inexperience on theclient’s part. Project F members perceived requestsfor changes as the placing of unreasonable demandson the project team who were already stretched andunder-resourced.

In the absence of clear ‘rules of engagement’,expectations on both sides of FMDrProject F weredifficult to manage and potential risks materialised tothe detriment of the project. Team members felt thatthe responsibility for dealing with these issues rested

Žwith the various functional managers e.g., manufac-turing for delivery, finance for costs, and engineering

.for specification changes , while some senior func-tional managers felt that the PM should have dealtwith these problems or highlighted them earlier. All


agreed that client relations were difficult and unclear.A draftsman on Project F summed this up: AWe needbetter contracts and better specification procedures.We have them internally but we don’t have themwith the customer. We’re too soft on the customer— we accept costs to us too easily and lose money.Being a big project, it exposed weaknesses in ourapproach.B

By contrast, PBDrProject P members felt thatthey were fortunate to have a ‘good client’, who waswilling to entrust design and development decisionsto them. This was partly due to the involvement ofPBD engineers in an early design study for theclient, which specified some of the system. How-ever, the team had also developed a shared business‘negotiation’ mentality, now common in PBD. Thisassumed, for example, that any requests for changesto specification had to be negotiated between the PMand the client, fully costed and, if necessary, re-flected in extended delivery schedules: AWe havevery good client relations but if they want to make

w xchanges to the specification we stop the clock, andŽ .price it.B Engineer, Project P .

Although this approach had developed informallyŽin PBD no explicit systems or detailed contractual

.arrangements existed over and above those in FMD ,the negotiated approach had become standard prac-tice because it helped meet the needs of engineers,especially when confronted with large complex pro-jects where frequent iterations with the client were

Ž .needed. The rules e.g., on specification changesŽwere alluded to in the contract as in the case of

.FMDrProject F but also, and more importantly,communicated through the ‘tone’ of day-to-daychannels of communication at all levels of the pro-ject. This, in turn, required team ownership of theproject and good internal communications. By estab-lishing project ground rules at the initial bid stage,changes to design, day-to-day misunderstandings andother uncertainties could be dealt with in a system-atic professional fashion.

In PBDrProject P, most of the liaison with theclient was carried out or co-ordinated by the PMwho was able to build a good working partnership.As the project progressed, more team members be-came involved directly with the client as the PMentrusted particular team members, at various stages,to take actions with members of the customer’s team.

As a result, Project P team members felt that rela-tions with the client were orderly and understood.

4.6. Risk management

Regarding risk, three types of risk were identifiedŽ .in both divisions: a those wholly outside the con-Ž . Ž .trol of the project external ; b those wholly within

Ž . Ž .the ambit of the project internal ; and c risksŽsubject to negotiationrinternalisation negotiated

.risks .In FMDrProject F, the PM was unable to estab-

lish a pro-active approach to risk, particularly inrelation to risks inherent in customer–supply rela-

Ž .tions e.g., major changes to specification , commonin CoPS. Organisationally, the PM felt he Awasbeing torn limb from limbB by the various demandsof the functional bosses, unhappy team members andthe client. As a result, the PM was unable to estab-lish an orderly business framework for managingclient relations from the outset. Failing to meetchanging needs, the project team had developeddefensive relations with the client. The team mem-bers were unable to manage internal and externalrisks well, and allowed negotiated risks to emerge.Because of the lack of team coherence and resources,the PM and senior engineers were unable to regu-larly visit the customer or key suppliers to avoid

Ž .risks e.g., delays in the delivery of sub-systems .ŽBecause management systems e.g., internal design

.reviews were not carried out regularly, as theyshould have been, problems of risk were intensifiedby the failure to share information either in formal orinformal meetings.

By contrast, partly due to its tightly integratedproject structure, PBDrProject P members managedinternal and external risks well, and increased theircontrol over negotiated risks. The PM and seniorengineers paid regular visits to key suppliers andhelped to resolve delays in the delivery of compo-nents and sub-systems. Referring to sub-contractorrelations, as one senior engineer on Project P said:AYou have to spend a lot of time on this. I wentthrough 19 different suppliers to find two or threereally good ones. You pay them a visit and askquestions. It usually takes one min to tell whetherthey are good or not. And it’s nothing to do withfirm size — some of our best suppliers are small


companies.B The team avoided risks by sharing in-formation in their formal two-weekly review meet-ings, informal meetings and conversations, and regu-lar client and customer visits.

The business approach made possible by the ‘su-per heavyweight’ project structure, allowedPBDrProject P to deal with two major sources of

Ž .external risk supplier and client relations , allowingspace for dealing with unexpected events and scopefor internalising negotiated risks. The Project P teamfelt pleased with the informal way most problemswere handled, the only formal risk management toolsbeing a two-page weekly reporting form and thetwo-weekly project meetings. In the event, despitesome problems, Project P progressed well and was

Ždelivered on schedule, but slightly over budget see.Section 4.9 .

On the negative side, senior management at Com-plex Equipment Inc felt that they Adid not reallyknow enough about PBDrProject PB, given its im-portance as a new product line for the company as awhole. This had also been the case for other projectscarried out in PBD. The lack of regular reportinginto senior management created some tensions be-tween project progress and corporate-wide strategiesand goals. Company directors felt a degree of projectisolation in PBD had created risks in terms of overallmarketing strategy and business coordination. Their

Ž .solution see below Section 4.10 was to set up moreregular reporting with PMs along the lines of FMD.

4.7. Formal and informal tools and procedures

Both FMD and PBD had fairly typical tools andsystems mandated by the company for bid review,cost, and risk management, internal design, and spec-ification change management. In both organisations,there were formal systems for project recording,controlling, and reporting. In FMD, detailed proce-dures were laid down by the functional departments,each with their different goals and needs, leading toa heavy administrative load for FMD projects.

In FMDrProject F, actual procedures followedŽ .‘what happened in practice’ diverged considerablyfrom formal tools and company best management

Ž .practices ‘what should have happened’ , as reflectedin senior management views and contained in acompany toolbook and quality manual. Procedures

for the early bid stage, internal design reviews, re-porting to senior management, cost tracking andcontrol, progress monitoring, and risk managementwere officially in place but were not applied. Thiswas put down to the absence of a coherent team,under-resourcing, time pressures, weak incentives for

Ž .team members who reported to functional bosses ,and the ‘firefighting’ mode of the PM and teammembers: Athere were no internal design reviewsheld to ask ‘are we doing the right thing’. This was a

w xvery large complex project. Jim the PM was droppedŽright in it with no commercial backupB Mechanical

.Engineer, project F .While Project F was a fairly extreme case, the

divergences between formal and actual proceduresoccurred in other CoPS projects in FMD. Tools andreporting were seen as an added bureaucratic burden,unhelpful in the managing of the project.

By contrast, in PBDrProject P the PM was incharge of implementing company tools and proce-dures. The ‘leanness’ and flexibility of formal toolsand systems within PBD, which involved no func-tional reporting or negotiating with departmentalbosses, meant that tools and procedures were seen ashelpful in getting tasks completed, although againthere were some differences between official proce-

Ž .dures what should have been and real practicesŽ .what actually went on , particularly in terms of theinformality in the use of tools. Some tools weredeployed very sparingly indeed and there were dif-ferences in the ways PMs within PBD used companytools and followed procedures.

Informal methods, experience, and trust wereviewed as more important than tools and formalprocedures on Project P: AThe fancy 3D CAD tools

ware really ‘boss dazzlers’. The main thing in projectxsuccess is delegating the right tasks to the right

people and keeping in close touch. I use my imagina-tion. I sketch things out in order to work out the bestway of doing the job before doing the detaileddesign. We have a process manual but it doesn’t helpwith detailed design problems. Its experience that

Ž .mattersB Senior Engineer — Project P . Similarly, aveteran engineer working on the detailed design ofProject P explained: AYou go down some routes,abandon others, create new ones and so on. Youhave to proceed even though the next steps are oftenuncertain.B


PBD managers, over the past 2 years, had modi-fied and simplified company tools and systems tosuit their project needs and successfully resisted theintroduction of more elaborate formal managementtools and systems.

4.8. Organisation-wide learning and coordination

ŽIn FMD, organisational learning involving infor-mal knowledge sharing, training, reviews, personnel

.development, and technical leadership was centredon the functional departments. In this area FMD as awhole performed well. Younger engineers felt thatthey had good overall technical leadership from thesenior engineers and functional managers. They couldsee a career ladder within the organisation. Seniorengineers had incentives and resources to recruit,train, and retain new younger engineers and techni-cians for their departments. Much of the knowledgesharing and communications occurred in informalsettings although there were also training pro-grammes and official seminars and meetings. Infor-mally, groups of engineers exchanged tacit knowl-edge and problem-solving tips through narratives, inwhat is sometimes called communities of practiceŽ .Seeley Brown and Duguid, 1996 . In this importantarea, FMD out performed PBD.

In PBD, despite very good individual project per-formance, in the previous two years the high pres-sured work environment had left little space forformal training or staff development, either in techni-cal or commercial areas. It was apparent that manyof the formal and informal activities associated with

Žorganisational learning, and improvement e.g.,Ž .post-project reviews PPR , technical mentoring, and

.informal communications were not being per-formed: ASince we became project-based, I’ve hadno incentive or time to train anyone up. Previously Ialways looked after two or three younger engineers.

w xIn the old functional organisation we had space forŽtraining and staff development.B Veteran design

.engineer, Project P .Lessons learned from particular projects were not

shared formally because there were no structures orincentives for cross-project learning or communica-tions. It had become hard to learn from project-to-project, leading to worries within PBD over its long-

Žterm effectiveness. The learning ‘silos’ represented

.in FMD by functional departments were absent inPBD’s pure PBO.

The PPR was viewed by the company as animportant mechanism for learning from project-to-project. The official procedure called for a PPRinvolving all major project contributors, from the bidstage onwards. The PPR should have operated in

ŽPBD as a mechanism for capturing lessons good. Žand bad , sorting out problems e.g., closing the loop

.between bid stage decisions and project outcomes ,Žand building up wider company communications in-.volving project outsiders and senior managers .

However, few PPRs had occurred in the past 2 yearsdue to work pressures and the lack of structure andincentives within PBD. Internal markets had devel-oped for good people and the most persuasive andsenior PMs often get them, sometimes leading to askewed performance among projects.

At least three other problems of learning andcoordination were evident in PBD. The first con-cerned technical leadership. In FMD, this role wasplayed by senior engineers and department man-agers. Younger and newer recruits in PBD wereconcerned over career development and professionalprogress because of the dispersion of technical lead-ership across projects. Insecurity was highest to-wards the end of a project when staff were not sure‘where they would go to next’. Related to this wasthe lack of incentives for human resource develop-ment. The PBD structure had reduced the incentivefor senior engineers to bring on younger engineers asthey had previously done under the functional matrixas a fairly natural thing to do. In FMD there wereconcrete incentives to groom young staff to improvethe performance of various departments, but theseincentives did not exist in PBD and no senior indi-viduals had responsibility for this task. The func-tional departments served this role in PBD allowing

Ž .space and time for the sharing of knowledge andexperience.

A second problem was revealed in some of thesmall projects undertaken in PBD. While the organi-sation was suited to large complex projects, it wasoverly elaborate for dealing with small routine pro-jects: ‘using a sledgehammer to crack a nut’ as oneengineer put it. In particular, there was no real needfor a senior PM and a dedicated team to controlsmaller, especially more routine projects. Treating


smaller projects ‘as if’ they were major projects hadled to heavy overheads and too much bureaucracy insome cases.

A third problem concerned cross-project integra-tion and senior management coordination and con-trol. Some major projects had ‘gone their own way’in PBD and it had become difficult for senior com-pany managers at HQ to keep properly informed andmaintain some degree of control and consistencyacross the activities of PBD. Systems had come tovary somewhat from project-to-project, as PMs exer-cised their discretion over which tools to apply andhow to apply them. The basic minimum of formal

Žcontrols e.g., for risk management, cost, and design.review were not always adequately applied, as hap-

pened in the case of PBDrProject P at the bid stage.Overall, senior management felt that control of PBDhad become difficult, especially as the organisationhad grown.

4.9. Project performance

In FMDrProject F, the initial underestimation ofcosts produced a knock on effect throughout theproject, leading to under-resourcing and, in particu-lar, insufficient full-time staff. As a result, therewere major technical problems, the project came insubstantially over cost and delivery was late. Boththe client and FMD’s senior management consideredProject F a failure.

There were various causes of the poor perfor-mance. In FMD, PMs did not report directly andregularly to the senior management team to shareproblems, responsibilities and so on. In Project F,this led to the initial under-resourcing, which pre-vented both team-building and the development of agood team spirit. It was also difficult to rectify theproblem later, given the PM’s relatively low status inthe organisation. FMD lacked the clear processes andprocedures needed for controlling large complex pro-jects. The way the project was managed exacerbatedproblems with the customer and placed unreasonabledemands on team members. Because team coherenceand commitment were low, risks materialised, andproblems were difficult to address. All in all, thefunctionally-oriented structure of FMD was not suitedeither for the setting up or execution of CoPS pro-jects. The heavy functional bias was appropriate for

small projects and more standard product lines. Inscaling up from simpler to more complex products,the organisation needed a heavier PM structure withdirect representation into senior management.

By contrast Project PrPBD was considered to bea major technical success and delivered ahead ofschedule. However, as noted earlier, the project wascompleted slightly over budgeted costs, and with alower level of profit than expected. The costs of twosub-systems had been under-estimated. Neither sub-systems posed special technical or supply challenges,but one probable cause was the informality of PBD’sbid stagercosting process. Team members felt that aslightly more systematic bid process involving morespecialists from other projects would have helpedavoid bidrcosting problems. Also, despite good rela-tions with suppliers, the delivery of some items waslate. These problems were dealt with by visits tosupplier sites by the PM and senior engineers andrisks to the project schedule were averted. Again, theteam felt that a little more formality in dealing withsuppliers could have avoided some of these prob-lems.

Overall, problems on Project P were fairly minorand both the senior management and the customerwere pleased with end results. However, there werewider concerns about long-term learning and techni-cal developments as discussed earlier.

4.10. Organisational strategies and solutions

In order to overcome the ‘mismatch’ betweenorganisational structure and the needs of large pro-jects, FMD’s management decided to move to aheavyweight project matrix structure, maintaining a

Žfunctional matrix for standard lines a move from.‘B’ to ‘D’ in Fig. 1 above . The difficult task of

allocating resources between functions and CoPSprojects was to be undertaken at senior managementlevel, with project directors responsible for negotiat-ing for and controlling resources. Deploying aheavyweight project structure for CoPS was viewedas more suitable than either the existing functionalmatrix or the pure PBO, given the need to cope withlarge numbers of standard items. For major projects,heavyweight PMs would report directly into seniormanagement on a regular basis at the same level asthe functional managers.


Recognising the burden placed on PMs in CoPS,FMD also decided for very large projects to split thePM function into two with a commercial PM and a

Ž .technical project engineer PE , a practice followedin some projects in PBD. The rationale was toincrease the scope for negotiating with the clientŽ .Agood guyrbad guyB androther routines and to tryto overcome the need for PMs ‘with a super-humanrange of talents’ as one director put it. The PMwould have overall business control of the project,including client relations, progress schedules, toolsand procedures, team meetings, and so on. The PE,of equal status to the PM, would be responsible forall technical issues, including specifications, detaileddesign, construction, sub-system interfacing, and soon. The PE would deal with the client on mosttechnical issues, but would avoid commercial deci-sions, leaving these to the PM.

Ž .Reflecting on Project F, the then PM said: ATo-day a project like that would have a dedicated teamof full-time engineers and a full-time PM. We learned

w xa lot from that project F . Big projects with adevelopment side must be handled differently, withdifferent professionals in charge of technical workand commercial issues. We now have a project-basedstructure for all big projects where people can movein and out of teams.B

The dual PMrPE system has both advantages anddisadvantages. For the system to work effectively,the PM and PE have to be willing and capablepartners, able to share in strategy, decision-making,and team-building. In some organisations, the systembecomes accepted as the natural way of doing busi-ness. Sometimes, but not always, the PM is also an

Ž .engineer either practising or by background . Re-gardless of background, the PM is responsible formastering all the skills of managing projects effec-tively and efficiently. In some companies, the PMorganises commercial training for other team mem-

Žbers e.g., on negotiation skills, new tools, and risk.and time management .

In addition, the PM function was to become moreprofessionalised in FMD, not only through trainingbut through the fostering of a commercial PM ethos,which values and rewards PMs. Courses on team-building and project management were being ar-ranged, while individuals were being encouraged toengage in various PM associations and introduce

Žstandard PM tools and procedures e.g., for schedul-ing, team-building, bidding, cost control, risk man-

.agement, and negotiation methods , along the linesalso being followed by PBD. Regarding tools andprocedures, it was decided not to introduce highly

Želaborate PM tools e.g., for risk management, de-.sign walkthroughs, and cost control , following the

lessons of PBD. However, as with PBD, minimumformal processes were mandated. For example, riskmanagement was being built into the design reviewprocess so that problems could be communicated,discussed and shared among project staff.

Given the composition of FMD, most PMs wouldbe engineers or scientists who had demonstrated theaptitude, skills, and desire to be PMs. People withflair in this direction were to be encouraged andrewarded to undertake commercial PM responsibili-ties, sometimes alongside their technical careers.Alongside the new structure, much more attentionwould be given to developing a systematic, profes-sional approach to managing client relations andneeds, including training in how to establish a busi-ness framework, manage expectations, and negotiate,again along the lines of PBD. Complex and changingclients needs are not unusual in CoPS; therefore, apre-emptive, pro-active approach is essential to min-imising risks.

Turing to the case of PBD, to address the organi-sational learning problem, PBD’s management de-cided to establish a programme to build space forlearning, training, staff development and PPRs, andto make time to reflect on important technical and

Žbusiness issues e.g., new technical developments,project lessons learned, time management and cross-

.project design reviews . To promote the long-termproductivity and effectiveness of PBD, younger teammembers would be encouraged to learn from moreexperienced staff and to share in some of the ‘tacit’knowledge, locked up in the heads of otherwisebusy, more experienced people.

Although learning went on informally at the sin-gle project level, PBD decided to structure and en-able learning to occur in more formal, cross-project

Žsettings e.g., regular cross-project meetings, projectmanagement workshops, off-site training and special

.technical seminars with outside speakers . To ensurethis occurred, PBD put specific people in charge ofcoordinating particular themes and programmes


across projects, forming a weak functional line acrossthe major projects of the unit. Other functional taskswere being considered to help coordinate sub-con-tractor relations and risk management procedures.The aim was to ensure consistency in project ap-proaches, to share best practices more widely and tokeep senior management at HQ better informedthrough improved reporting procedures. Thisamounted to a step ‘back’ to a project-led organisa-

Žtion, but fell short of a project matrix a shift from.‘F’ to ‘E’ in Fig. 1 .

To provide incentives for senior people to give upŽ .project time e.g., to bring on new recruits a formal

mentoring programme was set up with incentives forgood performance. PBD also restructured desk lay-outs and coffee spaces to enable more informalcommunications to occur. Senior management recog-nised that moves in this direction depended on moreresources being made available and some degree oforganisational slack in the system. However, thehigh good performance and profitability of PBDjustified this long-term investment in learning.

Whether or not these formal organisational solu-tions to the problems of organisational learning andcareer development work effectively remains to beseen. It is possible that moving a step back to aproject-led organisation and establishing resource andtask coordination may not solve the problem. Ulti-mately, the success of the approach adopted depends

Ž .on taking senior and other staff away from projectwork, which could, of course, be resisted by the PMswho are in a powerful position and could potentiallyprevent ‘interference’ with project operations. In-evitably, this kind of solution introduces its owntensions into the organisation, in this case pittingshorter-term project needs against wider organisa-tional needs. A key factor in whether or not the newprogrammes and structures work effectively is thehealth and dynamics of informal organisational struc-tures and practices which, in turn, reflect the particu-lar culture of a company. As shown by Pisano and

Ž .Wheelwright 1995 , informal, personal, and cross-departmentrdivisional relationships play a vital rolein ensuring any official form of organisational struc-ture works effectively. Nevertheless, although therecan be no ‘mechanistic’ structural solution to prob-lems of organisational learning, it is wise to adoptstructures and formal practices that promote learning

and match the needs of large projects with organisa-tional structure, which the project-led organisation isformally designed to do.7

5. Managing CoPS in PBOs — interpretation

This section draws analytical lessons from thecase study, interpreting the evidence in relation toproject coordination for CoPS. The aim is to providea framework for interpreting the various organisa-tional choices and strategies available to foster inno-vation in high technology capital goods, networks,constructs, and systems.

5.1. Interpreting the organisational strategies of PBDand FMD

As noted above, FMD was initially a Type BŽ .organisation see Fig. 1 , but this led to extreme

problems in project management and coordinationboth internally, and externally with the client andsuppliers. In response to the problems, FMD decided

Ž .to convert to a project matrix Type D with aheavyweight PM structure in order to allow CoPS tobe managed more effectively within the organisation.

However, it did decided not move to a PBOŽ .Type F , in order to retain the functional depart-ments needed for standard product lines and batchproduction. The difficult task of allocating resourcesbetween functions and CoPS projects could then beresolved by functional and PMs of equal status, with

Žtheir senior management in this case company direc-.tors . The directors favoured this arrangement be-

cause the emerging CoPS were important new busi-ness opportunities and needed to be understood andsupported at the highest level. Regular, direct feed-back on the progress of these projects was vital tothe company.

By contrast PBD, organised as a Type F purePBO, had achieved a very good record at the individ-ual project level, but the overall organisation wasconcerned for its long-run performance in areas suchas technical leadership, organisation-wide learningand communications. PBD’s response was to moveback from a pure PBO to a project-led organisation

7 The effectiveness of the formal solution adopted at ComplexEquipment Inc is an interesting subject for further research.


Ž .Type E in which PMs retain the most senior posi-tions but appoint new resource coordinators alongfunctional or generic task lines which cut acrossproject interests and incentives. This strategy wasadopted in PBD to stimulate organisational learningand to provide incentives and resources for greatertechnical leadership. In PBD task force managerscould resolve specific problems and help coordinate,

monitor, and improve performance across the wholeorganisation.

5.2. From linear to concurrent models of projectmanagement

To illustrate the management advantages of thePBO for CoPS, Fig. 2 contrasts the PM task within a

Ž . Ž .Fig. 2. Comparing project management in functional and project-based organizations. A Functional matrix. B Project-based organizationŽ . Ž . Ž .internal coordination . C Project-based organization external coordination .


Žfunctional matrix with the weak PM structure Type. ŽB deployed in FMD, with that of a pure PBO Type.F deployed in PBD. Fig. 2A shows the position of

the weak PM within the functional matrix, involvingmultiple lines of communication, control and com-mand, and various department managers.

The PM function embodies a linear or sequentialmodel of project management, in which the projectpasses through various stages and departments inturn. The model also treats the client and suppliers asexternal to the project. The PM has to perform ahighly complex internal task of balancing the variousinternal interests and meeting the different demandsŽ .e.g., in terms of reporting and quality control of thedepartments. Similarly, there are many lines of com-munication with team members on the project who

Ž .also report primarily to departmental managers towhom they owe their career allegiance, and to other

Ž .PMs some in FMD worked on four or five projects .PMs face similar complexities and difficulties in

external coordination. To reply to customer requeststhey often have gain information and commitmentsfrom engineering, purchasing, and planning depart-ments. The larger and more complex the project, themore difficult the task of keeping the client informedand responding to requests for changes from thecustomer.

By contrast, Fig. 2B shows the position of the PMin a PBO in relation to the specialist functions withinthe project. The PM is the main line of communica-tion and can exercise control to coordinate and inte-grate specialists and functions in creative new ways,focusing on the needs of the project. Because thereare few internal lines of command and communica-tion to interfere with project objectives, the internalcoordination task becomes simpler and clearer.

Similarly on the external front, clear strong linesof command and communications can be built up

Ž .with the client Fig. 2C . In principle, the PM is ableto quickly assess and react to change in client needsand learn from feedback from the client and majorcomponent suppliers. The PM has both the responsi-bility and power to react to unexpected events, nego-tiate changes with the client and, if necessary, putsuppliers of major components together with thecustomer to resolve difficult problems.

In effect, the PBO embodies a concurrent modelof project management. The move to a PBO repre-

sents a shift from the linear model of project man-agement, which treats the user and other innovationactors as ‘outside bodies’, to a concurrent model ofproject management which is able to integrate all thebusiness functions within the project and includesusers and suppliers in the core project processes. ForCoPS projects, the concurrent model is potentiallyvery helpful in dealing with uncertainty, risk andemerging properties common in CoPS.

5.3. Economic motiÕations and determinants

Underlying the advantages and disadvantages ofthe two organisational form are economic motiva-tions and determinants.8 In theory it would be possi-ble to mass produce consumer goods such as cam-corders or hi-fi equipment in a PBO, rather than afunctional organisation. Similarly, it would also be

Žpossible to produce a large CoPS e.g., a power.station or a flight simulator in a functional organisa-

tion. However, in both cases, the costs of productionwould be far higher than if the more appropriateorganisational form had been adopted.

In economic terms, the large functional Chandle-rian firm is most effective at achieving productionscale advantages and exploiting economies of scope,systematically converting lower value inputs intohigher value outputs. However, these economicdrivers are largely irrelevant in CoPS production,because the latter are produced either as one-offs orsmall-batch items. Therefore, efficiency gains mustcome from other sources, centred on other forms oforganisation. The PBO, with its focus and flexibility,in theory and in contrast with the functional form,

Ž .can achieve economies of: a resource allocation —allocating and re-allocating physical and human re-sources when and where they are needed to each

Ž .project; b knowledge management — applying theknow-how needed to deal with the technology, as

Ž .well as regulator and client needs; c design optimi-sation — enabling design cycles to be carried outeffectively and efficiently by reducing the number of

Ž .designrredesign cycles and costs associated with

8 This section draws heavily on ideas and comments providedŽ .by Paul Nightingale SPRU .


additional cycles, caused in CoPS by backward feed-Ž .back loops from later to early design stages; and d

quality — enabling the organisation to produce acomplex good to the exact specification and needs ofthe buyer. Its inability to achieve such economies,indicates that the functional form is economicallywasteful as a form of production for one-off projects.

As shown above, the PBO can also assist inmanaging risk and uncertainty, especially importantin the many CoPS which exhibit emerging propertiesŽunforeseen and unforeseeable features which occur

.during design, systems integration and productionŽ .Hobday, 1998 . Given that formal planning is lim-ited in its ability to deal with design and productionunknowns, then the devolved decision-making al-lowed by the PBO enables a flexible allocation ofresources to alleviate these problems when theyemerge. Furthermore, the nature of the CoPS projecttask often changes as clients realise new needs dur-ing the design and production phases, especially invery high value CoPS where production may taketwo years or more. The PBO, in theory, allows theswift transfer of information to relevant teams andteam members who are then in a position to adapttheir activities and respond to new contingencies.

In short, the functional Chandlerian organisationis appropriate for the mass production of knownproducts with known processes, where the key taskis to optimise the production system in order totransform large quantities of lower value inputs intolarge quantities of higher value outputs, by reducingunit costs. These economies are essentially scale-based. By contrast, each CoPS product and processinvolves uncertainty. Economies in production comefrom reduced design cycles and efficient systemsintegration, made possible by the flexible and effi-cient allocation of knowledge and resources to eachgood being produced. Therefore, in CoPS, as inmass-produced goods, economic advantages arerooted in appropriate organisational form. The PBO,in principle, is an appropriate organisational form forthe technological and market environment of CoPS,allowing for efficient project control and resourcecoordination.

5.4. InnoÕation adÕantages of the PBO

Beyond the economic advantages of the PBO,there are dynamic innovation advantages over the

functional form. Realising a CoPS is often a creativeand difficult task, involving feedback and learning asthe project develops. CoPS not only require innova-tion at the product level but also at the process andorganisational levels. Design and production involvemany knowledge-intensive, non-routine tasks, anddecision-taking under conditions of uncertainty andrisk. These intelligent processes cannot be reduced toroutine project management procedures and plan-ning. Learning during production is required to as-similate the knowledge required to complete the taskof production.

Because each CoPS is different, the innovationneeds of the product frequently demand experimenta-tion in forms of project management. In short, pro-ject-level innovation is required to produce innova-tive products. Because the PBO creates and recreatesorganisational structures and processes around theneeds of each product and customer it is, in princi-ple, a highly innovative form. Again, in theory atleast, the PBO defies the anti-innovation bias oflarge functional organisations with their semi-perma-nent departments and consequent core rigidities.9

The challenge of managing innovative CoPS projectsis one of integrating business functions, ensuringflexibility and responsiveness to the needs of cus-tomers, and dealing with the emerging propertieswhich inevitably arise in complex products whichembody new knowledge. It is also a challenge ofthinking beyond current market and product needs toanticipate future needs and especially to convincebuyers of the firm’s competence to deliver furthernew CoPS.

6. Conclusion

Using a case study approach, this paper has com-pared the efficiency and effectiveness of the func-tionally-oriented, matrix organisation with the PBO,pointing to both the strengths and weaknesses of thePBO in the management of CoPS. On the positive

9 In practice, of course, the PBO form may not live up to itsinnovative potential. Indeed, some project-based sectors are noto-

Ž .rious for failing to learn and innovate e.g., construction . Realis-ing the innovative potential of the project-based organisation is akey challenge for management.


side, the PBO has the potential to foster innovationand promote effective project leadership across thebusiness functions. As resources, technical and other,are formally dedicated to the project, both power andresponsibility for project success lie with PMs. Thelatter, who tend to be ‘super heavyweight’, can focuson team-building, meeting the clients needs, dealingwith technological uncertainties and making a suc-cess out of the project. By contrast, the functionalmatrix is poorly equipped to coping with the needsof CoPS projects.

Along the spectrum of six functional-to-project-based forms, the paper showed that the PBO is anextreme form, having no functional division of labouror task coordination across project lines. All majorbusiness functions, including marketing and finance,are coordinated within the project. The PBO is prob-ably best suited for large, risk-intensive projects,where resources have to be combined and sharedwith other firms in the project. Because of its flexi-bility and focus the PBO form is able to cope wellwith the emerging properties of CoPS by respondingto client needs in real time. The case example showedwhy the PBO form was more effective than thefunctional form in integrating different types ofknowledge and skill, learning within the projectboundary and coping with project risks and uncer-tainties. While the functional matrix embodies aninward-looking, linear form of project management,the PBO embodies a concurrent model of projectmanagement which is able to realise innovation incollaboration with clients and suppliers.

Because CoPS tend to be major new businessendeavours, simultaneous product, process and or-ganisational innovation is required. The PBO is po-tentially an effective form because it creates andrecreates new organisational structures around theneeds of each product and each major customer.Unlike functional departments, the PBO is temporaryand is, therefore, not subject to the anti-innovationbias of functional organisations with their rigid de-marcations and core rigidities. As Section 5 shows,potentially, the PBO boasts significant economic ad-vantages over the functional form in the productionof CoPS.

On the negative side, the PBO is inherently weakin coordinating processes, resources and capabilitiesacross the organisation as a whole. Individual project

success and efficiency, although important, does notnecessarily enable a firm to continue to executeprojects successfully. Indeed, the case study revealeda problem of ‘learning closure’ around major pro-jects, as there were no structures or incentives in thePBO for cross-project learning or communications.The learning silos, represented by functional depart-ments, are absent in the pure PBO. As a conse-quence, PBOs can suffer from a lack of technicalleadership and direction, roles typically played byengineering and R&D managers in functional andmatrix organisations. PBOs can also breed insecurityover career development, especially among new re-cruits because of the dispersion of technical leader-ship across projects. By contrast, functional depart-

Ž .ments provide space and often time for the sharingof knowledge and experience. In short, the PBO isinherently weak where functional forms are strong:in executing routine production and engineeringtasks, achieving economies of scale and meeting theneeds of volume production.

Cross-project integration and management controlcan also become a problem in PBOs if projects ‘gotheir own way’. Systems may come to vary fromproject-to-project, as PMs exercise a high degree ofdiscretion over which tools to apply and how toapply them. It may become difficult for senior man-agers to track, control, and respond to the activitiesof project teams and directors, limiting the firmsoverall capacity for effective corporate strategy andbusiness coordination. To be most effective the PBOrequires that projects are coherently directed towardscompany-wide market and technology targets.

The case example identified various strategies fordealing with PBO weaknesses, particularly the prob-lem of project isolation. To improve coordination inareas such as overall company strategy, regular re-porting channels into company directors were set up.To enable and encourage organisational learning,cross-project communication and technical leader-ship the company moved one stage back from a purePBO to a project-led organisation. In this arrange-ment PMs retain their senior positions but new re-source and task coordinators along functional linesare appointed, cutting across project interests andincentives, in order to resolve specific problems andhelp coordinate, monitor, and improve performanceacross the organisation and a whole.


This move back from a pure PBO to a project-ledorganisation shows the variety of choices involvedand the need to match organisational form with theproduct mix in question. More generally, the paperindicates that the changing nature, composition, andscale of productrs have an important bearing onappropriate organisational forms. The managementchallenge facing CoPS producers is both to realisethe potential of project-based forms for current mar-kets, and to develop the firm’s overall capabilities toexploit and create future market opportunities.

Acknowledgements

This paper was prepared within the ComplexProduct Systems Innovation Centre, supported by theUK Economic and Social Research Council. Theauthor would like to thank Paul Nightingale, StefanoBrusoni, Ammon Salter, Andrea Prencipe, HowardRush, Tim Brady, and two anonymous referees forcomments on earlier drafts. The normal disclaimersapply.

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