OPEN INNOVATION

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OPEN INNOVATION
The Strategic Management of Technological
Innovation Commercialization
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21st Century Organizational Forms
Knowledge Economy
Strategic Alliances
CONVERGENCE
Virtual Organizations
Globalization
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The Need for Innovation

• Commodity businesses compete on price
• Advantage goes to the low cost producer
• Perhaps due to lower labor costs, materials
  costs, or a superior process
• The only way to avoid commoditization is
  innovation
• Products
• Processes
• Value-added via integration or services

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What is an Innovation?
Process of developing and implementing new ideas
or inventions Process of recombining existing
ideas, inventions or artifacts in novel ways by
applying them to a new context Creativity is not
Enough
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Open vs. Closed Innovation
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Limits of Closed Innovation

• Knowledge has become widely diffused
• Even largest firms have difficulty monopolizing
  innovation
• Good ideas exist outside the firm (patent growth
  and diffusion across firms and countries overall
  share of RD has shifted towards smaller firms)
• Internal innovations go underutilized
• Research produces technologies not aligned to the
  business model
• Internal markets for innovation are smaller,
  often less efficient than external ones

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Chesbrough, Sloan Management Review (2003)
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What Open Innovation is Not

• Giving away innovations
• If no one pays for them, the supply dries up
• Sharing them with free riders
• If you cant protect them, you cant get paid
• BUT
• Firms can pool resources to share costs
  expertise
• Benefactors can fund research

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Open Innovation Assumptions

• Innovation essential social and dynamic
• Authorship joint, cumulative and evolutionary
• Knowledge created by interaction
• Innovation as a mass activity
• Complex products should be modular
• Innovation comes from creative conversation
• Structured communities of co-creation

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Challenges of Open Innovation

• Incorporating external innovation in the firm
• Motivating a supply of external innovations
• Maximizing returns to internal innovation

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1. Incorporating External Innovations

• Firms need to
• Identify external sources of innovations
• Evaluate and select most appropriate ones
• Incorporate them in firms products/services
• External ideas should be on par with internal
  ones
• Firms must add value to create differentiation
• Need to manage internal politics and massage egos

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2. Motivating External Innovations

• In most cases, you pay for them
• Temptation is to cut input price
• If your supplier doesnt get paid enough to
  survive, you wont have a supply
• Sometimes a benefactor will pay for them
• Typically government funded research
• In some cases, users will donate them (need to be
  in close touch with lead users!)

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3. Exploiting Internal Innovations

• Firms should seek to sell and utilize their
  innovations through any profitable channels
• Even if it means selling to competitors
• All firms utilize external markets
• Some sell their own innovations
• Others out-license exclusively
• Intellectual property is the key to success
• Typically protected by patents
• e.g., Shift in Xerox PARC innovations from
  shelving to outlicensing (license royalties or
  equity stake in spinoffs)

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A Network View of Innovation

• Depending on a firms strengths, different firms
  play different roles in open innovation value
  chain
• Some firms generate innovations
• Some integrate the innovations of others
• Some have a fully integrated model
• An open innovation system is a networked system

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Changing Connectivity Groups to Networks

• From Densely Knit to Sparsely-Knit
• From Impermeable (Bounded) to Permeable
• From Broadly-Based Solidarity to Specialized
  Multiple Foci
• Networks provide social capital that has
  individual, organizational and societal benefits
• Upside and downside to networks

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From a network IN an organization . To the
network IS the organization
Hierarchy
Matrix
Network
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TYPES OF NETWORKS

• Task Networks involve the exchange of specific
  job-related resources including information,
  expertise, professional advice, political access,
  and material resources.
• Social Networks involve relationships
  characterized by higher levels of closeness and
  trust than those that are exclusively
  task-related. They usually consist of people who
  share a common background or interest. Since
  people have more leeway in choosing their friends
  than their co-workers, these networks tend to be
  less closely determined by formal organizational
  arrangements and work assignments. Social
  networks, however, often play a critical role in
  mobilizing resources, transmitting information,
  and providing peer coaching.
• Innovation Networks must combine both!

Thanks to H. Ibarra
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TYPES OF RELATIONSHIPS

• It is important to cultivate a broad range of
  network relationships!
• Long-term, high reciprocity (Strong) ties Close
  bonds and reciprocal relationships ensure
  reliability under conditions of uncertainty.
  These include peer alliances that function by
  exchange of favors, ties of trust and loyalty
  between superiors and subordinates, and career
  development ties between mentors and proteges.
• Short-term, instrumental ties Many important
  ties such as highly circumscribed job-related
  connections, are often dissolved when the
  relationship has served its purpose. Some are
  with individuals the manager may not even like,
  but must interact with to get things done.
• Distant Acquaintances (Weak ties) These types of
  relationships are important because they function
  as bridges between the manager and distant social
  or organizational groups. As a result, they are
  often sources of unique or novel pieces of
  information. A networking strategy that does not
  take these into account leaves a manager open to
  the risk of developing an inbred network that
  will not provide information on external
  opportunities or threats.

Thanks to H. Ibarra
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NETWORK SIZE AND REDUNDANCY

• All things being equal, the information benefits
  of a large, diverse network are more than the
  information benefits of a small, homogeneous
  network.
• Size, however, is a mixed blessinggreat
  opportunity costs.
• What matters is the number of nonredundant
  contacts (a dense network is inefficient because
  it returns less diverse information).
• Attentiveness to power relations

Redundant Network (Clique)
Brokerage Network
YOU
YOU
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IDEO Product Development

• Decision Point
• Should IDEO accept the Visor project as is?
• Should they try to persuade Handsprings
  management to change its aggressive launch
  schedule?
• Or should they simply decline the project?

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IDEO Innovation Design ProcessOrganized
Creativity

• Phase 0 Understand/Observe
• Phase I Visualize/Realize
• Phase II Evaluating/Refining
• Phase III Implement/Detailed Engineering
• Phase IV Implement/Manufacturing Liaison
• Staged process (need to somehow discipline
  creativity)
• NOT the linear process of planning preceding
  development, but iterative

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Change of the design paradigm

• Uncertainty/Ambiguity is an inevitable aspect of
  all design and development projects
• Increases in product complexity has made it
  exponentially more difficult to forecast product
  requirements
• Need to redefine problem from effort to improve
  forecasting to eliminating the need for accurate
  forecasts Need to retain flexibility of product
  characteristics as the development proceeds
  constant interaction with customers
• Shift towards modularity of design where changing
  one component in a system has little influence on
  the performance of other components in the
  system also facilitates networked collaboration
  when designed for plug and play.

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Innovation Paradoxes

• Innovation How to maintain order and
  predictability, but also flexibility
• Organizational Balancing Exploration vs.
  Exploitation
• Entrepreneurial Balancing Novelty and
  Familiarity (Optimal distinctiveness?)

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Change of the design paradigm

• Design process must combine managers and
  technologists and focus on ways to enhance
• innovation management
• team work
• creativity
• knowledge management
• This necessitates a shift in overall
  organizational culture and the strategic
  orientation of management the innovation
  process cannot be effectively organized as a silo!

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How to Create an Open Innovation Network

• Firms need to build an OI culture and focus on
  value creation and capture
• Industries need to create OI infrastructures,
  facilitating cooperation and assuring the funding
  of innovation
• Government needs to fund basic research and help
  facilitate coordination among disparate actors in
  industry, institutes, universities, etc.

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RD Time Horizons
time horizon lt3 months 3 months-24 months 2-5
years 5-10 years gt10 years
Business
Industrial RD
University
Innovation Process
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Need Knowledge/Innovation Brokers

• Build mechanisms to access increasingly diffuse
  knowledge
• Capture good ideas, Keep ideas alive, Imagine new
  uses for old ideas (see analogies), Put promising
  concepts to the test
• Bridge networks between firms, between firms and
  universities, and between customers (especially
  lead users) and firms/universities (e.g., Mercks
  virtual lab)
• Need to collaborate as well as compete
• Innovation is a Strategic Management Issue!!