How do firms manage research and development units to optimize their innovation capabilities? First, the most innovative R&D units function more like a goal-directed community than as a typical bureaucratic department. One of the major benefits of a goal-directed community is that it preserves individual creativity within the context of collective action. Second, there are several management practices that facilitate the creation of a goal-directed community. These are: creating balanced autonomy between the management and the researchers; relying much more heavily on intrinsic rewards than extrinsic rewards; building cohesive teams that preserve individuality; and assuring a continuous supply of slack resources.