www.druid.dk DRUID Working Paper No. 07-23 Innovation in Private ...

DRUID Working Paper No. 07-23 Innovation in Private Infrastructure Development: Effects of the Selection Environment and Modularity

By Nuno Gil and Marcela Miozzo

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Innovation in Private Infrastructure Development: Effects of the Selection Environment and Modularity Nuno Gil and Marcela Miozzo Manchester Business School The University of Manchester Booth Street West Manchester M15 6PB Tel.: +44 (0) 161 306 3486/3423 E-mail: [email protected] and [email protected]

Abstract: This study investigates how the selection environment and modularity affect innovation in private infrastructure development. Our findings stem from an in-depth empirical study of the extent ten process innovations were implemented in an airport expansion programme. Our findings suggest that developer and customers can each occasionally champion or resist innovations. An innovation succeeds contingent upon the capability of the stakeholder groups to develop collectively a plan to finance and implement the innovation, which reconciles subjective individual assessments. Innovations can be particularly hard to adopt when they require financing from different budgets, or when the developer’s investment pays off only if customers behave in a specified way in the future. We also find that the degrees of novelty and modularity neither represent sufficient or necessary conditions enabling or hindering innovation. Novelty, however, makes the innovation champion’s job harder because it leads to perceptions of downside risk and regulatory changes, whereas modularity helps the champion operationalise ways that moderate resistance to innovate.

Key words: Innovation; financing; implementation Jel codes: O31; R42 ISBN 978- 87-7873-252-1

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1. INTRODUCTION This study investigates the determinants of process innovation in the development of new physical infrastructure. Process innovations introduce new technological elements (e.g., machinery, IT systems, new product configurations) for achieving lower production costs and/or higher quality of service (Reschstein and Salter 2006). Infrastructure, such as power stations, airports, and railways, are a subset of CoPS, the capital, engineering- and ITintensive components of large technical systems (e.g., air travel, utilities) (e.g., Miller et al. 1995, Hobday 1998). Like most CoPS, infrastructure is delivered through projects, the temporary multi-firm alliances that coordinate design and production decisions, enable user involvement in development, and match financial and technical resources (Hobday 2000a). CoPS projects matter for innovation to eliminate reverse salients, i.e., the components of the large technical systems that have fallen behind with the others (Hughes 1987). We combine two theoretical lenses for carrying out our study ─ the evolutionary economic theory of innovation (Nelson and Winter 1977, 82) and the modularity construct (Ulrich 1995, Baldwin and Clark 2000). The evolutionary view postulates that the processes that generate technological mutations operate stochastically and locally, involve uncertainty, and are affected by the selection environment, i.e., the socio-political, economical, regulatory, and technical forces that the innovation needs to overcome to succeed and be selected by the decision-makers (Nelson and Winter 1977, 82). Large technical systems can be regarded as non-market selection environments, where the relationships between firms and customers do not have an arm’s length quality; costs and benefits are difficult to quantify; and regulation cannot provide a pervasive set of incentives (Nelson and Winter 1977). The design view of technological evolution postulates that modularity is the force that allows the creation of value, the dispersion of value across firms, and the generation of new concentrations of value (Baldwin and Clark 2004, Fixson and Park 2006). Modularization involves splitting up the functional elements of a product/process/system and assigning them to decoupled components according to a formal, specified architecture (Ulrich 1995). It also involves specifying the interface rules which govern how the components interact, and the standardized tests which verify that the components work well together (Baldwin and Clark 2004). Modular designs can adapt economically to changes in functional needs because improvements can be made without undercutting the functionality of the system as a whole. Few studies have combined these two lenses to investigate how market liberalization, the customers’ operating environment, and the features of new designs influence process

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innovation in CoPS projects, and particularly in infrastructure projects. This is the motivation for this study. Specifically, we investigate whether the assessments of the innovations by the developer and customers are homogenous, or heterogeneous and conflicting, and how these actors align innovations with their business needs. We also investigate what makes the project coalition (Winch 2003) invest in building new technology into a CoPS definition, while rejecting other innovations that presumably could also bring collective value. The understanding of process innovation matters to help firms increase productivity and gain competitive advantage, or enact government policy (Reichstein and Salter 2006). The understanding of how this happens in infrastructure development has especial significance in light of its socio-economic importance. The UK, for example, spent an estimated £26bn on infrastructure in 2006 (Brown 2006), whereas investment just for realizing the trans-European transport network comes to more than €600 billion up to 2020 (Van Miert Group 2003). Our research method involves an in-depth multiple case study of the extent ten innovations were adopted in a capital programme (encompassing a set of interrelated projects) to expand one of the world’s busiest international airports, owned by a private firm. This is an important setting given the role of airports in economic development and the growing demand for air travel. 1 Further, it illustrates the recent trend of using private equity (through privatization, private-finance, and public-private partnerships) to promote new infrastructure, influenced by the neo-liberal discourse linking market pricing, deregulation, and private ownership (Henisz et al. 2005). The UK has long taken the lead in this approach, having issued almost £3.5bn in bonds to fund private-financed infrastructure in 2006 (Tett 2006). Private equity firms (e.g., pension funds, banks, insurance companies) are also venturing into infrastructure to respond to pressure to achieve maximum diversification and hedge longevity risk. From 2004 to 2006, infrastructure deals rose from £33.8bn to about £75bn (Hughes 2007). All our cases relate to innovations aiming at reducing the airport construction costs or improving service quality. The role of the project developer is akin to that of systems integrators in other CoPS environments (Prencipe 1997, Hobday 1998, Davies 2004, Davies et al. 2006). The developer must integrate the needs of customers and end-users in the design briefs in light of a regulatory framework, the project constraints set by business strategy (e.g., budget, schedule, quality), and the production capabilities of suppliers (Figure 1).

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The number of passengers is expected to soar to an annual rate of over 7bn worldwide by 2020 (ACI 2005).

2

Corporate bylaws, design standards

Regulatory Framework

Codes of Practice, Laws, Statutes, HSSE Regulations, (…)

Regulators (internal/ external)

Figure 1 – Stakeholder Groups Influencing New Infrastructure Development: Conceptually (Left) and for the Research Setting (Right) The system solutions specified in the design briefs provide the basis from which the developer commissions design, manufacturing, and construction works to suppliers, and manages the projects and their interfaces. We research the selection environment in terms of: (1) innovation costs and benefits as perceived by the developer and customers, (2) novelty of the technological elements relative to the stakeholders’ know-how, and (3) the regulatory framework. Flexible innovations involve modular technologies in which the functional elements exhibit decoupled, standard, and testable interfaces to the other airport subsystems. Our findings suggest that both project developer and customers can each occasionally champion or resist process innovations. Innovations succeed contingent upon these stakeholders, together with suppliers, agreeing collectively a financing and implementation plan reconciling their individual subjective assessments of the costs, benefits, as well as financial and technical risks. This reconciliation is easier to achieve when the stakeholder financing the innovation has control over the operations that make the investment pay off. Conversely, it is harder to achieve when the investment is financed from a number of project budgets, or when the degree to which it pays off depends from another stakeholder behaving in a specified way during the infrastructure lifetime. Stakeholders can agree collectively that the benefits of an innovation outweigh (or not) its costs and risks, even when novelty and lack of regulation induces different assessments of the particular costs, benefits, and risks. We also find that modularity does not suffice to ensure an innovation is adopted, and it is also not a necessary condition. The flexibility of modular architectures to respond to heterogeneity in

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stakeholder needs, however, can help the innovation champion develop a plan to finance and implement the innovation that moderates other stakeholders’ resistance. We structure the remaining of this paper as follows. First, we review related literature on innovation in CoPS and modularity. We then discuss our methods for data collection and analysis. The next section examines the empirical evidence of the process innovations and the stakeholder assessments. After summarizing our findings, we discuss the limitations of the research and implications for practice, theory, and policy. 2. INNOVATION IN COPS AND MODULARITY We position this study against work on technological change in large technical systems (Mowery and Rosenberg 1982, Hughes 1983, 1987, Markard and Truffer 2006), and in particular, on innovation in CoPS (Hobday 2000a and b, Gann and Salter 2000, Geyer and Davis 2000, Davies et al. 2006). At the core of understanding technological change in complex systems is the selection environment (Nelson and Winter 1977). This notion suggests that the innovation process is steeped with uncertainty, where innovations compete with one another and with prevailing practice, succeeding by ex-post selection (Nelson and Winter 1977). It builds on the concepts of technological regime, the boundaries of achievable capabilities limited by the economical, physical, and other constraints (Hayami and Ruttan 1971), and of natural trajectories, the heuristics and payoffs that exist when a technology is advanced in a certain direction (Rosenberg 1972, Dosi 1982). Firms innovate to fit better internal routines and perceived performance with the environment (Nelson and Winter 1982). Innovating firms have greater propensity to incur the risks of innovation (Schumpeter 1942) because they compare with the best, whereas risk-adverse imitators compare to a broader population (Massini et al. 2005). The main elements of the selection environment include (Nelson and Winter 1977): (1) the benefits and costs expected by the organizations that will decide to adopt or not the innovation; (2) how consumer preferences, government legislation, and regulation influence the value of the innovation; and (3) the Schumpeterian processes of investment (expansion of the innovator) and imitation (by competitor) that are involved. In non-market selection environments, decisions to adopt an innovation are motivated by subjective assessments of profits, tastes and efficacy since producers’- and customers’ interests mix (Nelson and Winter 1982). Successful innovations can be said to receive a ‘professional stamp of approval,’ moderated by constraints on spending limits and regulation (ibid.)

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Various scholars have used this construct to explain the trajectories of new technologies in complex systems (e.g., Davies 1996, Islas 1997, Glynn 2002, Markard and Truffer 2006). Successful technologies must simultaneously realize cost-savings economies of scale (improve efficiency in production and services) and scope (provide a broader range of services), as well as overcome the power of institutional interests and the commitments to particular technologies in sunk costs (Davies 1996). Resistance to innovation stemming from lock-in effects, or path dependencies (David 1985), can be particular high in attempts to innovate infrastructures due to the constraints defined by existing systems, and the legacies of the technologies they embody (Gann and Salter 2000, Walker 2000, Magnussion et al. 2005, Marckard and Truffer 2006, Bergh et al. 2007). The market liberalization of large technical systems and enduring support by government policies, however, can moderate strong path dependencies and barriers to innovation (Marckard and Truffer 2006). The flexibility stemming from modular design architectures also affects technological change (Baldwin and Clark 2004). Modularity can be a driving force behind the success of some major innovative firms, whereas the lack of modularity may help explain the fall of other players (Baldwin and Clark 2000). In market environments, consumers can ask to substitute or remove existing modules, or add new ones, to come up with a product that suits their taste and needs (Baldwin and Clark 2000). In CoPS environments, modularity helps to address the heterogeneity of interests and needs across project stakeholders (Baldwin and Clark 2004). Further, modularity helps these actors build options into the design definition, which they can exercise over time if uncertainties resolve favourably (Baldwin and Clark 2004). Stated differently, modularity enacts the managerial value of designing complex systems as neardecomposable systems (Simon 1962). Of course, modularity does not come for free since the search for solutions decomposing an integral system into a modular system of equivalent performance can be difficult (Baldwin and Clark 2004). Further, an overly high investment on modularization involves costly cycling behaviour that may not pay itself off through corresponding gains in performance improvement (Ethiraj and Levinthal 2004). Recently, scholars have combined the two approaches to study innovation in large technical systems. Watson (2004), for example, employs the two lenses to investigate the commercial success of the combined cycle gas turbine. The study uncovers how the low capital cost was essential to enter in the deregulated energy market, whereas technological flexibility was essential to penetrate in markets as diverse as power, plant equipment, and aircraft engines. Our study also combines the two lenses, but uses a CoPS programme as the research setting. We next discuss how we set off to investigate these issues. 5

3. METHODS Our research method involves building theory from multiple case studies (Eisenhardt 1989, Yin 1994, Eisenhardt and Graebner 2007). We examine the processes to adopt potentially ten innovations across four projects. Our theoretical sample includes innovations that were adopted, as well as others that were rejected or abandoned mid-course in a project. In particular, we searched for “polar types” (Eisenhardt 1989), extreme cases illustrating upfront rejections and acceptances of the innovations. The complexity of the selection environment and the modularity of the innovations both vary from low to high. Incremental innovations were not new in airport systems (i.e., the project coalition was imitating), whereas radical innovations were new in airport systems. We developed our analysis by playing iteratively data against the constructs. We used tabular cross-comparisons to test the plausibility of our insights (Miles and Huberman 1994), searching for new data to rule out alternative explanations, replicate findings, and elaborate our insights (Eisenhardt and Graebner 2007). We also made a number of presentations to specialised audiences, and gradually refined the research scope, identified the limitations, and clarified our contributions. RESEARCH SETTING AND SUMMARY OF CASES Our research setting was a €6.1bn (2006 prices) airport expansion programme encompassing a number of projects, including terminal buildings, aircraft stands and taxiways, a baggage handling system, and an intra-terminal train. The airport was operated by a subsidiary (Airport Ltd.) of a public limited company (Airport plc.) which owned over six airports. Airport plc. set up a business unit to develop and manage the whole programme. This unit, in turn, encompassed more than ten project development units (project developers). Some of the project customers were business units of Airport plc. (e.g., retail unit) and of Airport Ltd. (e.g., airport operations, security) (Figure 1). Other customers were external to Airport plc., such as the main airline occupying the new terminal campus, and the customs & immigration department occupying the new immigration hall. These customers represented the market of the airport (Hughes 1987). The supplier base was a fragmented myriad of firms, as typical of the construction industry (Cacciatori and Jacobides 2005). Table 1 summarizes the ten cases and the chronologies of the processes of adoption or rejection.

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Table 1 - Summary of the Process Innovations for the Ten Cases

Terminal buildings

Train

Airfield

Baggage handling system

Project

Case

Description

Innovation adopted

Baggage Develop a reconciliation system, and integrate it with the baggage reconciliati handling system, to enable baggage handlers scan bags at the collection on system point before loading them into the aircrafts

Yes

Baggage identificati on system

Use radio frequency identification (RFID) technology to identify and trace bags. RFID relies on chip tags attached to products for storing and retrieving data remotely

No

Baggage check-in at car park Highperforming pavements MARS aircraft stands

Offer premium passengers possibility to check-in baggage at the car park. This involves building a bridge to extend the baggage handling system from the terminal building into the multi-storey car park. Augment the strength of airfield pavements to cope with larger planes, while decreasing their thickness to reduce the amount of bulk materials. This involves developing new, high-performance concrete mixes Provide Multi Access Ramp Stands (MARS) that can park one large aircraft or two small aircrafts. This triplicates the number of services to provide at the aircraft stand , including power, fuel pods, boarding bridges

Reconfigur ed aircraft stands Vehicle occupancy security Wireless way finding system IRIS for immigratio n control 80% selfservice check-in

Provide economical aircraft pavement stands, where thickness is greater in areas subjected to high loads (where the wheels park) and lower in areas subject to moderate loads (under the wings and head of stand) Use closed circuit television (CCTV), a network of video cameras transmitting a signal to a set of monitors, as the basis of the vehicle occupancy security system (VOSS) of the train carriages Use wireless signs to display way-finding information (necessary to ensure passengers can find their way effortlessly) inside the terminal buildings Use Iris Recognition Immigration System (IRIS) to identify registered travellers when they present themselves at an automated barrier. This biometric offers high accuracy and speed of recognition Provide self-service check-in kiosks and bag drop facilities, assuming that 80% of the passengers will either arrive with their boarding pass printed online, or will check-in at self-service kiosks at the terminal

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No Yes Yes

Yes (partly) No

No Yes Yes

Chronology of the process of adopting/rejecting the innovation 2002, Need identified (current system will be ‘old’ by opening date) 2004, Launch of negotiations with baggage handlers and loaders 2005, Airline authorizes development and approves funding 2007, Airline completes negotiations with unions 2002, Use of RFID ruled out in the new baggage handling system 2003, Las Vegas Int. Airport announces $125m investment into RFID 2004, Airline asks developer to leave open option to use RFID 2005, Hong Kong Int. Airport announces $50m investment into RFID 2002, Airline requests provision to offer baggage check-in at kerbside on the forecourt on top of the multi-storey car park 2004, Plan to adopt the innovation is abandoned 2000-02, Slipforming trials confirming viability of F7 concrete mix; develop specifications for batching plant and slipform paver 2003-06, Application of the F7 mix in the new airfield pavements 2000, Airbus unveils A380 to enter service in 2005 2003, Five airport airlines order A380, but not the occupier airline 2004, Project developer agrees to provide four MARS stands 2007, Airline publicly announces intention to order over ten A380s 2002, Launch of discussions to change the structural configuration of the pavement of the aircraft stands 2005, Innovation accepted for the second batch of aircraft stands 2001, Intelligent CCTV solution documented as the preferred solution 2003, Wiring looms to connect CCTV cameras installed in the trains 2004, CCTV solution abandoned in production design 2002, Need for an integrated passenger information system, making extensive use of wireless technologies, is documented 2005-06, Wireless technology is ruled out in the way finding signs 2002, First trial to test technology with 200 passengers 2003, Home office issues notice to supply and maintain technology 2004, Pilot scheme; 5-year contract signed with supplier 2002, terminal building layout and equipment designed, assuming 50% self-service check-in (mostly regular business travellers) 2006, assume 80% self-service check-in (for business travellers and non-IT conversant people like ‘once-a-year’ family)

DATA COLLECTION The field work took place between May 2004 and July 2007 as part of a broader research programme. When we set off to collect data, the conceptual designs were substantially developed, and physical execution was progressing concurrently with design detailing. Data collection involved: (i) face-to-face interviews, lasting from one to two-and-a-half hours with representatives of the project developers, customers, and suppliers (Table 2); (ii) thorough analysis of over one hundred documents, including drawings, specifications, design standards and briefs, and clips from the trade and business press; and (iii) on-site observations, including attendance to supplier presentations, site tours, and visits to supplier shops. All interviews were tape recorded, transcribed, and organised into a digital database. We also had numerous informal conversations with our hosts. We subsequently summarised our findings in write-ups about each project, which we shared and discussed with our interviewees. Table 2 Interviews per Case Case

Job roles of Interviewees (number of interviews) Developer Suppliers Customers Baggage Production leader (2); project leader Director (1); Airline, airport Ltd.: Project reconciliation (2); design manager (1); senior systems director (2); chief architect (1); development manager (1); assistant architect (1); site head of development (2); Baggage project leader (1); operations manager (1) seconded designer (1) ; quality identification manager (1) Baggage check-in manager (2); systems integrator (1) designer (1) at car park High-performing Project leader (1); design manager Senior designer Airline, airport Ltd.: Project pavements (1); development manager (1); head (1); design director (2); chief architect (1); of development (2) engineer (1); head of development (2); MARS stands designer (1) seconded designer (1) Reconfigured aircraft stands Train Project leader (1); design manager Designer (1) Airport Ltd.: operations manager Security system (1); head of design (1); development (2) manager (2) Wireless way design managers (2); head of Designers (2) Airport Ltd.: way finding expert finding system development (2); project leader (2); (1); Retail director (2) buildings director (2) IRIS for Project leader (2); design manager Unavailable Strategy and technology immigration (2); development manager (2); head manager (1) (via e-mail) control of development (2); head of engineering (1); buildings director (2) 80% self-service Project leader (1); design manager Designers (2) Airline, airport Ltd.: Project check-in (2); development manager (2); head director (2); chief architect (1); of development (2); head of head of development (2); engineering (1) seconded designer (1)

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4. ANALYSIS THE EFFECTS OF THE SELECTION ENVIRONMENT Extant theory characterizes the selection environment that innovators face in a CoPS project as highly bureaucratised and political, where the innovation can only succeed after extensive negotiations between a single (or a small number of) customers under a contract with the developer (Hobday 1998). Our findings reveal a more nuanced view where the complexity of the selection environment varies in different attempts to introduce process innovations. We first examine this complexity in terms of the perceived costs and benefits associated to each innovation, and the number of project budgets contributing to finance the innovation. Assessments of Costs, Benefits, and Funding Sources We did not uncover evidence of rigorous quantitative cost-benefits analyses underpinning the decisions to adopt or reject an innovation. Rather, we found systematic evidence of the use of ballpark figures and subjective risk assessments in the decision-making process as typical in large-scale infrastructure projects (Flyvbjerg et al. 2003) (Table 3). Two factors increased the complexity of the selection environment. First, the greater the number of project developers and customers affected by an innovation, the more difficult its adoption, because of the proportional complexity of the funding negotiations. Second, it was harder to adopt innovations if one or more project developers were expected to fund the innovation, but the investment would only pay off if a customer would commit to operate in a specified way after opening the terminal, i.e., the developer was incurring most of the financial risk.

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Table 3 Summary of the Analysis of the Innovation Costs, Benefits, and Relevant Regulation Case

Complexity

Baggage Moderate reconciliatio Airline expected to n system fund, but based upon cost estimate provided by project developer Baggage Very High identificatio Multiple sources of funding; n system multiple beneficiaries

Baggage High check-in at Multiple sources of car park funding; funders lack control over potential benefits HighVery Low performing One source of funding; pavements direct alignment between funding source and main beneficiary MARS Moderate aircraft One source of funding; stands multiple beneficiaries

Reconfigur Low ed aircraft One source of funding; stands direct alignment between funding source and main beneficiary Vehicle Moderate sources of occupancy Three funding security system

Wireless way finding system

Innovation champions

Project developer and airline

Budget

Funding Perceived Cost

Moderate ~ €3m (2005 prices) + staff training

Airline

Benefits Direct Perceived beneficiary savings, functionalities Better traceability, visibility; Airline enhanced security; benefits difficult to quantify Airport Ltd, Better traceability, airline visibility; enhanced security: “It could slash the annual €1bn bill for lost baggage” (airline industry IT body) Service attractive to premium Airline passengers; benefits difficult to quantify Project Greater strength, developer positive impacts to (airfield) sustainability; “phenomenal savings” (project leader) Airport Ltd, Improved Airline efficiency from flexibility to park one large or two small aircraft, assuming high use Project No added developer functionality; (airfield) savings ∼ €30 m in €670m of airfield work

Airline (only at early stages), baggage system supplier

Project developer (baggage team), airline

Very High “Each tag needs to cost less than 10 cents, it’s no way near that” (Airport spokesman)

Airline

Project developers (car park, buildings, baggage) Project developer (airfield)

High Complex engineering work due to physical interfaces Not an issue Airfield pavements need to be done

Project developer (airfield), airline

Project developer (airfield)

Moderate ∼€1.8-3m of additional cost for four MARS stands



Not an issue. Innovation aims to cut construction cost

Project developer (train, IT), Airport Ltd

Project developers (train, IT systems)

Airport Ltd Very High Develop new algorithms, very costly service agreements

Project developer (buildings, IT systems)

Airport Ltd


Airport Ltd Low Two sources of funding

Moderate “It’s tough call to manage compromise between costs and aesthetics” (project leader) IRIS for Home office Project Very high Very high immigration Multiple sources of developers ~€22.5m just for control funding; multiple pilot scheme (building, beneficiaries IT), airline, (2004 prices) home office 80% self- Moderate Airline Airline expected to service fund, but based upon check-in cost estimate provided by developer

Airline

Moderate €1.5m prices)

∼

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Enhanced security; unclear savings: no need to employ operatives, but high maintenance Aesthetic value; flexibility to make changes; benefits difficult to quantify

Home Security benefits; allow frequent office, airport Ltd., travelers by-pass queues; airline operational savings Airline, Improved (2006 Airport Ltd. processing times, increased capacity, lower staffing levels

Regulatory Framework Internal business operation

No international standards agreed

Internal business operation

Tests must satisfy international design standards Design must meet international standards

Design must meet international standards

Security statutes constantly evolving

Internal business operation

Innovation promoted by statutory authority (home office) International standard available

The high complexity of the selection environment in terms of costs and benefits, for example, impacted negatively the airline request for the project developers to build provisions allowing for baggage check-in at the forecourt on top of the multi-storey car park. This new service involved the construction of a bridge extending the baggage handling system from inside the terminal building into the car park, thereby affecting at least three projects. The airline was originally keen to offer the service to its premium clients, and this aim was spelled out in the first design brief. However, the airline and the developers did not agree a plan to fund the work. This, together with perceptions that the benefits from selling this premium service would not offset the cost of constructing the bridge, led to the abandonment of this innovation. It remains unclear, however, the extent to which the demand for this service would not offset the investment since 40 percent of the passengers using the new terminal fly in the premium categories. In contrast, some innovations were more likely to go ahead because they faced a relatively simple selection environment. The change in the structural configuration of the aircraft stands was championed by the airfield project developer interested in reducing the construction costs. The airfield project developer was also benefiting directly from the adoption of this innovation. This was equally the case with the adoption of new concrete mixes to develop high-performing airfield pavements: “The airfield pavements will lay on an area of clay fill several metres thick. Incentives to re-use the soft clays excavated during the massive earthworks were irresistible, even if this meant a complete rethink of the concrete mix and base layer design. The advantages were obvious: cement production rates were higher and the depth of the pavements was significantly reduced. An added bonus was reducing truck movements by 13,000 overall” (Design engineer 2005)

In between the extremes, there were innovations facing moderately complex cost-benefit trade-offs. The adoption of the MARS stands, for example, meant that the project developer would incur an additional cost of €0.45-0.75m per stand, but the main airline adamantly refused to signal whether it planed to purchase A380s in the future. As stated by the airline CEO in 2005: “A380 may well have a role in our long-term fleet development programme, but I’ve never subscribed to the concept of ‘buy now while stocks last.’” The developer decided to incur the financial risk and make the investment, cognizant that five other airport carriers planned to purchase super jumbos. Thus, the stands could be used by those carriers if the main airline ended up not purchasing the A380s. As put by the project leader (2005): “When we started designing the terminal, we had to bear in mind that there was no absolute certainty in the business. The main occupier airline can go bust, and major international carriers

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will have A380s. I believe the main occupier will be forced to fly A380s for competitive reasons. I think (‘MARSing stands’) is the right thing to do.”

We next discuss how the availability, or lack, of regulation affected the innovation process. The Effects of Regulation The complexity of the selection environment could be moderated or aggravated by regulation affecting the innovation. In the case of using CCTV inside the train cars, for instance, the perceived costs that the developer had to incur escalated after the interpretation of the security statutes evolved from a concept of threat detection into one of threat assessment. The latter would demand a new application of CCTV technology, involving the development of new science (algorithms to assess images), and the use of a greater number of cameras to increase coverage. While Airport Ltd. was interested in adopting a CCTV-based solution to eliminate the reliance on operational staff, the new understanding meant that the perceived benefits no longer offset the capital and maintenance costs. Accordingly, the project developer shelved the CCTV plans and settled for a man-based operational solution: “Until we consulted with the Dept. of Transport, we hadn’t appreciated the requirements involved in the threat assessment. All we had in the briefing was that we should maintain segregation between departing and arriving passengers and objects. Now, when you get to the nitty-gritty of what that means, it means a lot of different things to different people” (project leader 2005)

In contrast, the commitment of the home office to help the immigration & customs department implement the IRIS technology was essential to overcome the complexity of the selection environment, albeit the IRIS strategy and technology manager (2006) stating that “the dynamics of introducing IRIS is probably no different from introducing any other major change to an established way of working.” Both the airport and the airline saw major benefits stemming from this innovation, but these were hard to quantify. Nevertheless, the home office was committed to incurring the bulk of the innovation costs within the framework of a Government’s programme to modernise and strengthen border control. This meant that for each stakeholder, the assessment of the benefits outweighed the costs, such as the costs that the developer incurred in postponing the design freeze for the immigration hall, and the costs that the Airport plc. and the airlines incurred in supporting the pilot scheme: “This is an excellent example of the Home Office working in partnership with other stakeholders to make the most of science and explore secure and improved passenger clearance at immigration control” (home office minister 2002)

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We discuss next how the novelty of the technology in relation to the stakeholders’ know-how could generate heterogeneity in their predisposition to incur financial and technological risks, and contribute accordingly to shape their position as an innovator or an imitator. Innovating or Imitating? While radical technologies are more likely to generate heterogeneous assessments from different social actors (Bijker 1995), the assessments may not necessarily be conflicting (see Table 4). The IRIS technology, an untested application of new science, generated different but compatible stakeholder assessments. The airline wanted to be renowned for taking a lead in technological advances, as its manager for government affairs explained (2006): “Iris recognition will complement other initiatives such as check-in online and print your boarding card, which substantially reduce the amount of time our customers need to spend in queues.” Likewise, Airport Ltd was interested in using IRIS to improve efficiency while delivering a ‘greater passenger experience’ (Head of product development 2006). The home office, in turn, was interested in ‘exploring the ability of the latest biometric technologies to simplify existing procedures, and make immigration controls ever more secure.’ (Director of border control 06)

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Table 4 Novelty and Assessment of Risks Associated to each Process Innovation Case

Novelty

Viewpoint of the developer

Viewpoint of the customer

Innovator “To be honest, it is like we [developer] forced the airline to make the right decision, which is a bit bizarre. But this is also political, because we did not want to fund it” (project leader 2005)

Airline: Innovator, but concerned with threat of industrial action “Migrating to a new system is difficult. We have to train 400 baggage handlers, and counteract industrial relation issues” (airline rep 2005)

Baggage Radical Imitator identificatio No proven “Great theory. Let someone else test it [RFID] n system application in first. We want to see it used in other airports, airport so we can understand how it was specified, systems and how it works.” (Baggage production leader 2004)

Airline: Innovator, but business case is not compelling “RFID is relevant since we sell minimum connecting times, but the financial case does not yet stand up due to the cost of tags and lack of scale economies” (Airline CEO 2007)*

Baggage Incremental reconciliatio Applying n system mature programming know-how

Baggage Incremental check-in at Service car park available in other airports

Not interested Airline: Innovator “We were happy to scrap it [the baggage “We originally requested the developer to bridge under the people bridge] 1 ½ years safeguard provision for check-in on car park ago” (System designer 2005) for our premium passengers” (designer 05)

HighIncremental performing New concrete pavements mixes have been used in other settings

Innovator Does not apply since it mainly affects the “If we had stuck with our established mix, the construction process. slab would have had to be 800mm thick, well beyond the capacity of modern slipform pavers” (design engineer 2005)

MARS aircraft stands

Incremental Dual use stands were somewhat familiar

Innovator “Failure to act now could mean the loss of a strategically important element of traffic to competitor airports” (Project leader 2005)

Airline: Innovator without disclosing thinking “What we told them is that we may plan to have big aircrafts, but until they arrive we will put two small aircrafts on a big stand” (project director 2005)

Reconfigur Radical ed aircraft Not done stands before in the airport industry

Innovator “It’s standard practice to build a continuous thick slab across stands, when we just need a thick central lane. I’m challenging this design” (project leader 2005)

Airport Ltd: Imitator “We do it [thick, continuous slab] because this is the way it has always been built, and it is just expected” (project director 2005)

Vehicle occupancy Security system

Imitator “The amount of CCTV coverage and coding to assess a threat remotely was prohibitive” (development manager 2005)

Airport Ltd: Innovator “Initially, our brief said “you must make sure nothing is left in the train,” and we thought it would be nice to have an intelligent system” (operations manager 2005)

Wireless Incremental Imitator way finding Application of “Wireless can be an option, but is the project mature prepared to pay that? If it is going to cost system technology more, we have to have good reasons” (technical leader 2006)

Airport Ltd: Innovator “We want to put it [way finding signs] as posh as we can, and we want to deliver graphics on screen-based technology” (technical leader 2006)

IRIS for Radical immigration New control application of fresh science

Innovator (home office) “It is vital that we harness the technology available today to assist staff in continuing to identify those arriving passengers who pose a risk to the integrity of our border” (IRIS strategy and development manager 06)

Airline, Airport Ltd: Innovators “IRIS will complement other initiatives to reduce amount of time” (airline CEO 2002) “We are always looking at new and innovative ways of improving passenger journeys” (airport managing director 2002)

80% self- Incremental Innovator, as long as they do not have to pay service Trend already “This issue is cost reimbursable; we will tell check-in taking place them [airline] roughly the cost, and they will decide whether they want it” (Head of Engineering 2007)

Airline: Innovator “This is a new concept and design, and is a direct result of the e-revolution. Passengers will be guided through the terminal building by their state of readiness” (airline architect 06)

Radical Threat assessment was new

(*) In 2006, there were 6,000 RFID-enabled airport gates around the world (Passenger Terminal World 2007)

In contrast, the airport developer and the airline agreed in taking the role of imitator in regards to introducing RFID technology. Their subjective concerns regarding the innovation were, however, different. The airline was reluctant to invest in the technology due to the perceived

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high costs of the RFID tags. 2 It was also sceptical about the potential benefits of RFID in reducing lost baggage, as presented by the suppliers (‘I don’t buy it because the reasons for lost baggage are numerous and I don’t think RFID can solve the problem’). In contrast, the developer’s chief concern was the untested nature of the technology. The developer wanted to minimize the likelihood of technical problems impacting baggage handling operations, which would affect airport service provision (‘we tend to follow onto these things rather than lead’). Hence, both stakeholders agreed to act as imitators, despite perhaps a potential collective benefit, and considered the average of the airport and airline industries as their reference groups (Massini et al. 2005): “[In baggage handling] We do not prototype - it is one of the lessons we learned. If we got a problem, we try using existing technology to solve that problem. That is not to say that we are not open to innovation. But, for a new technology in baggage handling, you are incurring risks until you put it in a real life scenario and throw in everything the general passenger is inclined to.” (production leader 2005, emphasis added)

In other situations, a radical innovation could generate conflicting perceptions of technological risks, even when the selection environment from an economic and regulatory perspective was relatively simple. This was the case with the resistance faced by the developer against the reconfiguration of the aircraft stands. The developer was interested in ruling out an investment in safeguarding the option to change the aircraft stand configuration in the future. Investments in project safeguards aim at operationalizing strategic optionlike thinking into integral architectures (Gil 2007). They can be attractive to project managers when they require a limited capital investment, and the assumed likelihood that they will pay off is high (ibid.). Here, the developer believed that this specific safeguarding practice was a waste of money, representing a path dependency (David 1985) from the days when new airport developments were publicly financed. Yet, it took the developer more than two years of debate with Airport Ltd to persuade the latter on the value of the innovation: “Aircraft stands are designed and built for 30 to 50 years. We do it [a thick continuous slab] because of the perception it would take massive construction work in the future to change the stand configuration otherwise. However, the probabilities to move stands are low. In one existing terminal, we are now changing it for the first time after 25 years! And we replaced the pavements anyway because we had to move the fuel connections, change the underground services, and the pavements had deteriorated a bit.” (project leader 2005) 2

In 2001, the cost of RFID technology (read rates in the range of 95-100 percent) was still 4, 5 times higher than that of barcode technology (read rates in the range of 65-85 percent) (Dew 2006).

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Theory also suggests that upfront investments in safeguards are more attractive when they are associated to decoupled elements because modularity can limit the capital investment (Gil 2007). We examine next how the technological features affected the innovation process. THE EFFECTS OF MODULARITY Our findings suggest that the modularity of the functional elements is not a sufficient or necessary condition to ensure that the corresponding innovation succeeds (Table 5). This corroborates recent work suggesting that successful commercial innovations in competitive markets can occasionally be associated with high-performance integral architectures (Fixson and Park 2006). The wireless way-finding signs were readily available in a modular fashion, for example, but the developer could not find a compelling business case justifying the capital investment. Likewise, the RFID technology was largely built upon modular elements, but the stakeholders were unwilling to pioneer its adoption. The lack of modularity, however, is also not a reason strong enough per se to make stakeholders rule out an investment in an innovation. The reconfiguration of the aircraft stands was a move toward integral configurations in the sense that the architecture of the stands would be closely tied up to the assumed aircraft fleet configuration. Yet, this innovation was embraced after the developer persuaded Airport Ltd. that the cost of building a flexible asset did not pay off over time.

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Table 5 Technological Flexibility of the Process Innovations Case

Analysis of the Design Architecture Interfaces

Functional Mapping

Testing

Data Exemplar

Standard software interfaces, modular hardware (PCs, handhelds)

One-to-one Technology needed to identify bags going into containers

Feasible There is time left in the development programme to test & commission

“We spent time talking with the customer, prototyped some screen designs and placed some ‘hooks’ in the system. When we get the OK, we will work with the handlers, and do the coding” (supplier representative 2005)

Baggage Mostly identificatio modular (unresolve n d testing)

Modular elements (tags, handhelds), but few standards

“We did not adopt it [RFID technology], One-to-one or one-to- Difficult Novelty meant need to but the terminal buildings and the many R&D work still pioneer tests baggage handling system are prepared to ongoing adopt the technology” (airline CEO 2007)

Baggage check-in at car park

No

Integral interfaces (car park, baggage, buildings)

“If you look at the drawings, you see it One-to-one Feasible Technology needed Enough time to test & was a very tight area, maintenance would to offer premium commission be difficult, and fire access would be service difficult” (systems designer 2005)

Highperforming pavements

Yes

MARS aircraft stands

No

Reconfigur ed aircraft stands

No

Baggage reconciliatio n

Modular

Yes

Engineering One-to-one Feasible know-how is New mixes needed to Pilot tests could transferable to build new, better performed ex-ante pavements other projects

“We were always confident we could do be it. After all, we regularly slipform motorway barriers up to 2.4m high” (supplier director 2005)

Coupled “To MARS a stand, you have to put in One-to-one Feasible interfaces MARS stands build MARS stands are not underground two more fuel lines, two between utilities operational flexibility technically complex more thick lanes, two more fuel pods, & concrete drive more pits on the floor. It is not layers cheap” (project leader 2005) Coupled interfaces between stands and configuration of aircraft fleet

One-to-one Feasible Reconfiguration aims Available machinery to cut construction enables innovation costs

“In the past, pavements were laid by hand and was inefficient to stop & restart the work to vary the thickness. There are still issues with pavers, but we can have smooth transitions” (project leader 05)

CCTV Hybrid Modular technology (unresolve software, for security d testing) hardware (except cables)

“The wiring looms are safeguarded for One-to-two Difficult Technology detects Unclear how to test cameras to go in. Nothing precludes going into that direction in the future AND assesses threat assessment should IT capabilities enable to carry out threats threat assessment” (project leader 2005)

Wireless way finding technology

Yes

One-to-one Feasible Wireless signs Mature technology convey way-finding information

IRIS for immigration control

Hybrid

80% selfservice check-in

Hybrid

Modular software, components Modular software, coupled automated barriers

One-to-one or one-to- Difficult Novelty requires but many R&D work still significant testing ongoing

Bag-drops are One-to-one integral; check-in Enable self-service kiosks are check-in modular

Wireless signs by definition technologically decoupled elements

are

“The only way we can work out the immigration hall arrangement is doing a trial, but we need to agree some design principles about where the services are going to be” (development manager 2005)

“I don’t have a problem moving the selfFeasible Self-service check-in service check-in desks because we are technology is mature servicing them from below the slab. The bag drops, however, have to stay where and standard they are” (design manager 06)

Our findings suggest nonetheless that modularity may moderate the resistance of stakeholders to adopt new technologies in the sense that it makes it easier to devise and agree collectively an implementation plan reconciling the individual stakeholder assessments. Both the developer and the airline, for example, were interested in adopting a new baggage reconciliation system. The decision to migrate over 400 unionized baggage handlers to a new

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system, however, was a protracted process because the airline administrators wanted to avoid industrial relations issues motivated by union concerns that the innovation could lead to job losses or deteriorate working conditions. The modular interaction between the baggage handling and reconciliation systems made it possible for the developer to progress efficiently with execution of the baggage handling system for three years albeit the lack of a commitment from the airline about the new reconciliation system. Likewise, the cameras of the CCTV solution interacted in a modular fashion with other train subsystems (metal skin of the cars). Developers managed to postpone the procurement of the CCTV technology, albeit agreeing to install the wiring looms when the fabrication of the train cars started in 2003. (The cables were integral to the cars because they ran between the inner and outer skins). As a result, developers incurred limited sunk costs after they abandoned the CCTV solution in 2005, while leaving the option open for the future. As put by the design manager (2005): “Perhaps CCTV technology can evolve in the way baggage screening machines have and then it will allow efficiently detecting and assessing threats. If that happens, the cable looms are already there.” Modular technologies could also be attractive due to their flexibility to accommodate economically foreseeable evolution in design requirements (Balwin and Clark 2000). The supplier of the reconciliation system, for example, structured a database enabling end-users to extract tailored reports. This flexible ‘toolkit’ (von Hippel and Katz 2002) enabled the airline to postpone the development of reports until more information became available. Less spending upfront increased the attractiveness of the innovation. Likewise, the development of new concrete mixes reducing the thickness of the pavements by up to 200mm (leading to a 25 per cent reduction in the bulk materials needed) generated transferable know-how. The developer applied the know-how to build over 675,000 m2 of airfield pavements in the new campus, but the know-how remains available to apply in future airport developments. Modularity also facilitated the aim of the airline to operate assuming that 80% of its customers will check-in online or use self-service kiosks. This innovation came rather late in the programme, but the airline viewed it fundamental to ensure its competitiveness3. The modularity of the check-in kiosks limited the cost of its implementation. However, the cost of moving the bag drop points located next to the ‘old’ assisted check-in desks was too high because they were integral to the baggage handling system and to the floor penetrations. 3

The average cost of checking in a passenger through a human agent is US$3.05, while kiosk check-in is between US$0.14 and $0.32 and online check-in is even less (Forrester Research 2007)

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Accordingly, the two stakeholders agreed a ‘satisficing’ solution (Simon 1962) that reused the original layout of the assisted bag drops into the new layout for the self-service kiosks. We summarize next the analysis of our findings in light of the two theoretical lenses. 5. SUMMARY OF EMPIRICAL FINDINGS Our findings systematically suggest that the champion of a process innovation in new infrastructure development can be the project developer or customer, more often than not teaming up with a supplier. Hence, each stakeholder occasionally needs to persuade, or be persuaded by, another party that an investment to innovate pays off. Figure 2 maps the ten cases according to the perceived novelty of the innovation (X-axis), the number of developer and customer groups relevant to the innovation (Y-axis), and the modularity of the functional elements (size of the bubble marker). As the number of relevant stakeholders goes up, the differences in subjective assessments are likely to increase in number and scope because each actor brings a different view of the world. This makes it harder for the innovation champion to resolve interfaces and agree a satisfactory financing and operational scheme, or paraphrasing Nelson and Nelson (2003), it makes adoption contingent upon the champion’s ability to find answers, acceptable to the other relevant actors, to the questions of how and why the innovation works, and of what the operating characteristics are likely to be.

Figure 2 – Map of Process Innovations as a function of Selection Environment elements 19

(novelty, number of relevant stakeholders) and Modularity Our findings also suggest that novelty is not a determinant factor since we observed both incremental and radical innovations being adopted and rejected. Novelty appears to induce, however, more negative perceptions of technological and financial risks, often aggravated by uncertainty stemming from the lack of established regulations. Hence, the innovation champion needs to put more effort, time, and negotiation skills to persuade other parties to adopt radical innovations. Failure to do so at the project outset can be especially deleterious for moving forward with integral innovations because the adoption costs are likely to go up as the project unfolds to account for the reworking of more interfaces. Finally, our findings also suggest that investments to modularize architectures − which can be particularly costly in the case of physical systems (Baldwin and Clark 2004) − enable to moderate resistance to innovate, but are neither sufficient or necessary per se to ensure the innovation gets adopted. 6. LIMITATIONS We limited our study to the fine-grained analysis of the viewpoints of two stakeholder groups, following recommendations for rigorous qualitative research (Van de Ven 2007). Suppliers however, bring valuable know-how to the infrastructure development process which they gain from working for multiple clients (Geyer and Davies 2000, Reichstein and Salter 2006). The immigration authority, for example, teamed up with suppliers of IRIS technology to trial a pilot scheme, whereas the development of the new concrete mixes resulted from close collaboration between the developer and suppliers. It merits further research when and how to involve effectively suppliers in new infrastructure development. The difficulties to generalize insights from a single research setting are another key limitation of this study (Yin 1984). Unarguably, airports matter to boost the international competitiveness of state economies, and airport projects are far from being unique even if many still remain public assets. 4 Airport developers are, however, the suppliers of the particularly volatile airline industry. Hence, it merits investigating how our insights apply to other privatized infrastructure sectors serving less volatile consumer environments. Finally, our work has parallels with the socio-constructivist view of innovation, which suggests that at the outset there is not such thing as a new technology, but as many new 4

In 2006, there were over 87 airport projects worldwide representing an investment around $100bn (Passenger Terminal World 2007)

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technologies as there are relevant social groups (Bijker 1987). The emergence of a dominant meaning amalgamating the vested interests of the different actors (Pinch and Bijker 1987, Bijker 1995) co-evolves with the stabilization of the technology characteristics. This process is subjected to pragmatic choices, analytic analyses, value judgments, and the power and capability of individual actors to secure collective outcomes, or as Bijker’s (1995) summarizes, ‘to politics.’ Indeed, we observed stakeholders playing games when trying to sell or kill an innovation. This calls for more research on politics in the CoPS innovation process. 7. IMPLICATIONS Our findings have important implications for practice. Infrastructure businesses are at risk if the capital projects they commission fail to limit the sunk costs in the face of long pay back periods and high discount rates. Thus, it is understandable that businesses scrutinize every decision to build a new technology into the design definition. Yet, private infrastructure developers want to be capable of shaping, configuring, and reconfiguring their capital assets so as to respond effectively to changing markets and technological opportunities - what Teece et al. (1997) term a strategic capability. Major international airport hubs, for example, are increasingly competing with one another to offer airlines the lowest minimum times to connect an inbound to an outbound flight without mishandling bags. This enables airlines to schedule more flights and boost passenger loyalty, which in turn boosts airport revenues from fees. ‘Our success means their success,’ observed the airline chief designer about the airport developer. Admittedly, airport developers need to balance the needs of airlines with their in-house interests to grow revenues from retail activities. This is a delicate balance in the face of the complexity of the selection environment and decision-makers’ reliance on ballpark figures and subjective assessments. The ability to interpret rightly the selection environment is, however, a micro-foundation of a firm’s capability at positioning in a favorable ecosystem (Augier and Teece 2006). Thus, infrastructure developers want to set up governance structures at the project/programme levels that can give a share of voice in decision-making to all relevant customers proportional to the functions they represent. This can be enacted, for example, by co-locating developer and customer teams early on so they can share preliminary information, and inviting customers to be part of project boards so they can sign off design briefs. Such arrangements can enable infrastructure owners to create more situations where collective investments in innovations can individually benefit all firms relevant to the innovation, or in other words, to enact successfully distributed innovations (Coombs et al. 2003).

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There is also an important implication for theory. Our work uncovers the dynamics of process innovation affecting a type of system integrator ─ the business unit of an infrastructure owner delivering a capital programme ─ which has perhaps received less attention in scholarly literature. With multi-billion budgets to manage, these units can be as big as many publicly listed companies. While these units may not have manufacturing capabilities unlike other system integrators (Davies 2004), they are still responsible for financing and specifying a new asset that can effectively respond to the needs of customers. They do so by gathering intimate knowledge of those needs, as well as of the production capabilities of the suppliers, some of which are system integrators themselves (e.g., the supplier of the baggage handling system). Stated differently, they are the glue that joins customers and suppliers up to build a solution that works. Like other system integrators, the commercial success of these units is also a function of their capabilities, first, to incur calculated risks (particularly when customers are loath to disclose their strategic thinking); and second, to develop economical solutions that the infrastructure firm can adapt and replicate in subsequent capital programmes at lower cost. Finally, there is also an important implication for policy. We are increasingly witnessing governments using private equity to develop new infrastructure as international pressures of coercion, normative emulation, and competitive mimicry influence the adoption of marketoriented reform (Henisz et al. 2005). These natural monopolies need to be regulated in economic terms to ensure owners do not operate against the public interest. This involves, for instance, capping the maximum allowable utilization charges and rate of return on investment, as well as setting service quality rebates to customers and consumers in case of low performance. Our study elucidates, however, that the commercial interests also impact on design and technological decisions. Given the contribution of CoPS development to technological spillovers (see Mowery and Langlois 1996, for example, on spillovers of defense infrastructure for civilian industry) and to the welfare of citizens, regulators (and commissions responsible for reviewing planning applications) may perhaps also want to look at process innovation.

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