An Overview of Distributed Perspectives on Innovation

An Overview of DistributedPerspectives on Innovation Joel West blog.OpenInnovation.net San José State University Center for Open Innovation UC Berkeley, Haas School of Business January 24, 2011Today’s Story• Traditional and distributed innovation• Similarities and differences• Emerging areas of research and practice• Conclusions

What is “Innovation”? Defining “Innovation” Some disagreement over “innovation”: • Technical vs. economic (or both) • Radical vs. incremental  Is cost reduction radical? (Leifer et al) • Adopter vs. producer perspective • New to the firm vs. new to the worldSource: Bogers & West (2010)

Latent value of an innovation “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) Invention vs. Innovation “Inventions … do not necessarily leadto technical innovations. In fact themajority do not. An innovation in theeconomic sense is accomplished onlywith the first commercial transaction.” —Freeman (1982: 7)

Vertically Integrated R&D Source: Chesbrough (2006) Science & TheTechnology Market Base Research Development New Products Investigations & Services Vertical Integration Research of Alfred D Chandler (1918-2007) • Studied large US firms 1840-1940 • Firms vertically integrate to supply own inputs and control their outputs  R&D is an essential part of integration  Technology industries require large R&D labs  Markets don’t exists to buy/sell innovation • Integration widely adopted in practice  Pattern of large 20th C US and MNC firms

Distributed* Perspectives on Innovation* i.e. open, user, cumulative innovation Value Network Rivals Suppliers Users Focal Firm Comple- mentors

Sources of Innovation Focal Firm Suppliers Customers Rivals Vertical integration X User innovation X † X Cumulative innovation X X Open innovation X X X XSource: West (2009) X = Sources of Innovation; † limited emphasis User Innovation • From von Hippel (1988, 2005) • Users know their needs best • Goal: engage users in innovation  Use empowerment, other motivations  Direct (toolkits) & indirect (feedback)  Requires processes, tools, design • Found in ever-wider domains

Free vs. Paid RevealingWhat do users do with their innovations?• Use them and keep quiet• Free revealing (Harhoff et al 2003)  Share them with other users  Give them back to companies• Make money  Sell them back to companies  User-entrepreneur (Shah & Tripsas 2007)Cumulative Innovation• Promoted by Scotchmer (1991, 2004)• Focus: developing radical innovations  Initial innovation is rarely complete  Subsequent shared technological progress• Competitors build on each other  Need rights to each others’ work  Some IP regimes hinder C.I.• Jungle vs. commune view of rivalry

Three Cumulative Patterns 1. Core technology, many derivatives  E.g., Cohen-Boyer patent 2. Derivative of many building blocks • E.g., GSM/W-CDMA MP3 cameraphone 3. Incremental quality improvements • E.g., higher resolution inkjet print headsSource: Scotchmer (2004) Open Innovation • Chesbrough (2003,2006,2007,2011) • Key points:  Find alternate sources of innovation  Either markets or spillovers  Find alternate markets for innovation  Central role of the business model • Cognitive managerial paradigm • Framework consonant with UI, CI

R&D under Open InnovationSource: Chesbrough (2006) Other Firm’s Market Licensing Technology New Internal Spin-offs Market Technology Base Current Market External Technology Base Technology Insourcing “Open” innovation strategies ICT: Systems Integration Model Innovator Integrator Users Technology Component Systems Adoption Component Complements Component Rival Complement Provider Source: West (2006)

Key Issues for Open Innovation 1. Maximizing returns to internal innovation 2. Identifying/incorporating external innovations 3. Motivating an ongoing stream of external innovations (with or without money) Licensors Licensees Motivating 3 Incorporating Maximizing Firm 2 1 Ideas R&D ProductsSource: West & Gallagher (2006) Increasing OI Research

Related Innovation Models Collaborative, peer-to-peer innovation without monetization: • Open Science • Free Software • Shared ProductionSimilarities Across O/U/CI

Dispersal of Knowledge • “In Open Innovation, useful knowledge is generally believed to be widely distributed, and of generally high quality.” (Chesbrough, 2006: 9) • “Different users and manufacturers will have different stocks of information … each innovator will tend to develop innovations that draw on the sticky information it already has” (von Hippel 2005: 70) Other Similarities • Orientation outside the firm • Innovation activities take place across organizational boundaries† • Overall, rejecting Vertical Integration † Some UI ignores firms and is entirely outside any firmSource: Bogers & West (2010)

Contrasting Modes of CommercializationSource: Bogers & West (2010) Innovation Flows in Value Chain Rivals Suppliers Users Focal Firm Comple- Open Innovation mentors User Innovation Cumulative Innovation all forms

Sample Modes (1)Cell Creation Diffusion ModeIntegrated Inside Inside Vertical integrationOutbound Inside Outside Outbound OI User sharing Employee entrepreneurs Sample Modes (2)Cell Creation Diffusion ModeOrphan Inside N/A Left on the shelfInbound Outside Inside Inbound OI Lead users User entrepreneurship

Sample Modes (3)Cell Creation Diffusion ModeCollabo- Outside Outside User sharingrative Open science Shared productionEgocentric Outside N/A User’s own need Sample Modes (4)Cell Creation Diffusion ModeCoupled Inside & Inside Co-creation Outside Inside & Rivalrous Outside spillovers Cooperative spillovers

Distinct Commercialization Paths † Includes non-commercial diffusion of innovations Commercialization inside outside not focal firm focal firm commercialized inside Integrated Outbound Orphan focal firmCreation Coupled co-creation frontier outside Inbound Collaborative† Egocentric focal firm Antecedents for Selecting Modes • Supply conditions  Scale economies  Cost of production and distribution • Demand conditions  Heterogeneity of demand • Institutional conditions  Strength of IP regime  Markets for innovation

Selecting Inside/Outside Paths Inside OutsideCreation • Strong R&D • Because not all knowledge is in capabilities one firm (Chesbrough 2003) • Unable to source firm- • To exploit sticky user specific R&D (Dierickx information (von Hippel 1994) & Cool, 1989) • Share scale economies of R&D (West & Gallagher, 2006)Commer- • Strong distribution, • Lack complementary assetscialization other complementary (Teece 1986) assets; or • Doesn’t fit business model • Weak appropriability (Chesbrough & Rosenbloom (Teece 1986) 2002) Communities

Importance of Communities • Best known from open source software • Implicit in CI research  E.g. Meyer (2006) on 19th century airplane • Increasingly important in UI  E.g. Franke & Shah (2003), von Hippel (2005), Jeppesen & Frederiksen (2006) • Finally being recognized in OI Communities in OI • Two pre-requisites:  Voluntary association of independent actors  Enabling innovation commercialization • Open questions  Who are the members? Individuals (cf. UI communities) or firms (cf. ecosystem, networks …)  What are the boundaries?  Upstream vs. downstream communities  Interactions within vs. with communitiesSource: West & Lakhani (2008)

Communities as Third Mode Open innovation has three modes 1. Outside-in: using external innovations 2. Inside-out: commercializing internal innovations 3. Coupled: communities, ecosystems, alliances, consortia etc.Source: Enkel, Gassmann, Chesbrough (2009) Findings about OI Communities Study of three innovation communities: • Participants from multiple organizations • Anchored to specific innovation • Shared goals, objectives, identity • Leverage distributed competenciesSource: Fichter (2009)

Are ms Only “Open Enough”? • Firms, OI communities share interests • Firms chronically unwilling to give up control  E.g. OSS communities: Apple, Google, Nokia, … • Is it possible for firms to be open?  Optimistic view: firms gain more by openness  Pessimistic view: Firms are only as open as they need to be (West, 2003; West & O’Mahony, 2008)Emerging Patterns ofPractice

Learning from Observation ”The field of innovation studiesarguably operates in Pasteur’sQuadrant, in that the processesand practices of industry actorsoften extend beyond the boundspredicted by academic theory.” – Chesbrough (2006) Are Acquisitions OI or VI?• Firms buying innovation by buying firms  Cisco growth strategy (Mayer & Kenney 2004)  Now Google, Intel, Qualcomm• Is this inbound open innovation?  Externally developed, internally commercialized?• Is it vertical integration?  Ongoing innovation, commercialization controlled by one firm

Is ICT Vertical Integration Dead?• Silicon Valley: distributed innovation  Ecosystems  Component-based business models  User innovation via beta sites, toolkits  1990s, even IBM became distributed  Grove (1996) pronounced VI dead• Today: more vertical integration  Apple, Google, HP, Microsoft, NokiaIs Crowdsourcing UI or OI?• A user innovation model?  Users have sticky knowledge  Apply knowledge to solve own problems  Make it easy to obtain free revealing• An open innovation model?  Users/non-users have knowledge  Maximize return from that knowledge  Use markets to identify, source ideas

OI: Substitute or Complement?• Open innovation offered as a complement to traditional corporate innovation  Increasingly, OI used as a substitute• OI-Inbound: OI vs. internal R&D  Instead of correcting atrophied internal R&D  Firing internal R&D workers (e.g. HP)  What about absorptive capacity?• OI-Outbound: OI vs. actual business model  IP licensing -> Patent trolls  Where is the value creation?Monetizing Knowledge Flows• Contrasting views of charging for knowledge  UI, CI celebrate free spillovers  Open source software  Other collaborative communities  OI emphasizes monetization  Universities chasing patent royalties  Impact on open science?  Which is socially optimal?• Tied to IPR policy  Ongoing debates over patent trolls, patent reform

Conclusions Summary • Rapidly growing research on distributed innovation  Distinct but overlapping O/U/CI streams • Distributed innovation is here to stay  Requires different conceptual approaches  Requires different processes  Requires different metrics

An Overview of Distributed Perspectives on Innovation

by Joel West on Jan 27, 2011

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