Leveraging Open InnovationJoel West

November 15, 2016

http://slideshare.net/joelwest

Road Map• Today’s question• The value of innovation• What is open innovation?• Different types of open innovation• Examples of how firms leverage

open innovation

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About MeTwo careers (so far):•Software engineer and entrepreneur– Columnist, MacWEEK, Byte, MacTutor– President, Palomar Software (1987-2002)

•Innovation professor and researcher– San José State University– Keck Graduate Institute, Claremont Colleges– Two books, 30 articles on innovation strategy

•Research focus: openness strategies by firms

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Today’s question

How can openness help firm innovation?

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Open Innovation

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What is “innovation”?Something that is•new or novel,•valuable or useful,•that is adopted by others…as chronciled by Everett Rogers

Today I’ll focus on innovations that improve firm success

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Original puzzle: Xerox PARC• PARC invented all these cool

technologies– LANs– Laser printers– Graphical workstations

• It was unable to commercialize them• Why?– It didn’t fit the copier business model

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Xerox Personal Computers

8Xerox Alto (1973)

~$40,000

Xerox Star (1981)$16,500

Xerox 820 (1981)$3,000

Role of the business model“The inherent value of a technology

remains latent until it is commercialized in some way.

“A business model unlocks that latent value, mediating between technical and economic domains.”

– Chesbrough & Rosenbloom (2002)

Origins of open innovation• Term coined by Chesbrough (2003)• Based on actions of IBM, Intel, P&G

etc.• Cognitive paradigm– Combines traditional, open approaches

• Explosion of industry, academic interest

Initial Insights• Firms have technology they can’t

commercialize– Risk of false negative (Type II error)– Others might see value even if we don’t

• Firms need technology beyond what they can develop internally– Other sources of ideas– Other ways to solve a problem

What is “open innovation”?“Open innovation is the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively.”

— Henry Chesbrough, 2006

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What is “openness”?Openness is changing a firm’s mindset:•Porous firm boundaries•Outward orientation•Markets rather than firm control•Cooperation not just competition

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Innovation flowsHow does the knowledge flow?•Inbound: from outside to firm•Outbound: from firm to outside•Coupled: bidirectional flows– Collaboration with specific organization– Collaborations with network of

organizations

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Source: Chesbrough (2006)

CurrentMarket

InternalTechnology

Base

Technology Insourcing

New Market

Technology Spin-offs

ExternalTechnology

Base

Other Firm’s Market

Licensing

“Open” innovation strategies

Knowledge flows inOpen Innovation

Inbound Open innovation

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“Not all the smart people in the world can work in one place.”

Bill Joyco-founder

Sun Microsystems

Why should firms be open?

Model of inbound OI

InnovationSource† Customers

CommercializingObtaining Integrating

Interaction

Focal Firm

R&D OtherFunctions

† Sources may include suppliers, rivals, complementors and customers.

Source: West & Bogers, Journal of Product Innovation, 2014

Inbound challenges1. Obtaining technology– Searching & sourcing– Selecting/evaluating– Acquiring

2. Integrating technology into the firm– Overcoming “not invented here”

3. Bringing products to market

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Example: P&G• Connect + Develop established 1999• Solicits outside technologies to

support product lines• One-third of product have external

technologies– Swiffer duster–Mr Clean eraser– Printing images on Pringles®

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Outbound Open innovation

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Role of the business model• Firms best able to commercialize

technology aligned to business model• A successful business model allows firms

to create and capture value– Can be cognitive trap: excludes other paths– Example: Xerox good at copiers, bad at PCs

• Firms should outlicense or spin-off rather than leave technology on the shelf

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Outbound challenges• Arrow “information paradox”– Buyers want to evaluate a technology– Disclosure obviates need to acquire IP–Works only with effective IPR

• Availability of markets to match buyers and sellers

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Example: Dolby Labs• Founded in 1965 by Ray Dolby• Originally: tape noise reduction• Standard:

• Today: Cinema 7+1 channel sound• $1b/year, 90+% gross margin

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Collaborative openness• Often openness is collaborative– Combines inbound & outbound flows– Quid pro quo– Pooling knowledge– Jointly (co-creating) creating

• Different degrees of openness– Truly open (e.g. open source)– Club (walled garden)

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Examples: leveraging OI

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1. Standards ConsortiaInternet Engineering Task Force•First meeting in 1986•Individuals sponsored by firms•Proposes, votes on new protocols•Defined essential Internet protocols– SMTP, http, https, IP V6

•Made Internet possible

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2. R&D Consortia• More than 200 pharma industry

consortia• Example: Extractables and Leachables

Safety Information Exchange (ELSIE)– Founded 2007–Maintains data on drug/packaging

interaction– Data only available to members– 13/30 top pharma companies are members

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3. Open Source SoftwareWhat is OSS?1.A standard form of open IP license– Sets terms for perpetual sharing

2.Cooperative development process– Specific tools for virtual collaboration

3.Form of shared governance– Independent or firm-dominated

4.A pool of shared technology5.A culture and set of norms

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Open Source Software• Risks: info leakage, license restrictions• Many benefits of coopetition– Pooling R&D costs– Development of shared infrastructure– Standardization in multi-vendor env’ts

• How do you make money?– Tacit knowledge/transient advantage– Commodity technology+proprietary add-

ons

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4. Crowdsourcing• Putting out a problem to large group–Usually an “open call” to any and all– Generally people you don’t know already– Self-selected participants who compete

• Leverage the “wisdom of the crowd”– Benefit from heterogeneous knowledge

• Typically compete for prize• Example: innovation contests

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Crowdsourcing Intermediaries• Consultants run innovation contests• Paid by “seekers”: firms with a problem–Help firms define a problem–Manage disclosure, IP issues

• Attract a large pool of “solvers”– Value added: matching 2-sided market

• Examples: InnoCentive, NineSigma, Yet2.com

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Problem: Alaskan Oil Spills

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5. Internal Crowdsourcing• Goal: seek contributions from internal

crowd• Combines elements of crowdsourcing,

suggestion boxes, internal venturing• Challenges– Limits of internal knowledge pool– Fair evaluation process– Desire for internal anonymity

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Conclusion

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Conclusions• Open innovation changes the role of

the firm– Less about control–More about orchestrating cooperation

• Supplements existing strategies• Most firms begin with experiments–How can OI address unsolved

problems?

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Thank you!

http://slideshare.net/joelwest