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An Overview of Distributed Perspectives on Innovation
1. An Overview of Distributed
Perspectives on Innovation
Joel West
blog.OpenInnovation.net
San José State University
Center for Open Innovation
UC Berkeley, Haas School of Business
January 24, 2011
Today’s Story
• Traditional and distributed innovation
• Similarities and differences
• Emerging areas of research and
practice
• Conclusions
2. 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 world
Source: Bogers & West (2010)
3. 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 lead
to technical innovations. In fact the
majority do not. An innovation in the
economic sense is accomplished only
with the first commercial transaction.”
—Freeman (1982: 7)
4. Vertically Integrated R&D
Source: Chesbrough (2006)
Science
& The
Technology 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
5. Distributed* Perspectives
on Innovation
* i.e. open, user, cumulative innovation
Value Network
Rivals
Suppliers Users
Focal Firm
Comple-
mentors
6. Sources of Innovation
Focal Firm Suppliers Customers Rivals
Vertical
integration
X
User
innovation
X † X
Cumulative
innovation
X X
Open
innovation
X X X X
Source: 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
7. Free vs. Paid Revealing
What 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
8. 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 heads
Source: 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
9. R&D under Open Innovation
Source: 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)
10. 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 Products
Source: West & Gallagher (2006)
Increasing OI Research
11. Related Innovation Models
Collaborative, peer-to-peer
innovation without monetization:
• Open Science
• Free Software
• Shared Production
Similarities Across O/U/CI
12. 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 firm
Source: Bogers & West (2010)
13. Contrasting Modes of
Commercialization
Source: Bogers & West (2010)
Innovation Flows in Value Chain
Rivals
Suppliers Users
Focal Firm
Comple-
Open Innovation mentors
User Innovation
Cumulative Innovation
all forms
14. Sample Modes (1)
Cell Creation Diffusion Mode
Integrated Inside Inside Vertical
integration
Outbound Inside Outside Outbound OI
User sharing
Employee
entrepreneurs
Sample Modes (2)
Cell Creation Diffusion Mode
Orphan Inside N/A Left on the shelf
Inbound Outside Inside Inbound OI
Lead users
User
entrepreneurship
15. Sample Modes (3)
Cell Creation Diffusion Mode
Collabo- Outside Outside User sharing
rative
Open science
Shared
production
Egocentric Outside N/A User’s own need
Sample Modes (4)
Cell Creation Diffusion Mode
Coupled Inside & Inside Co-creation
Outside
Inside & Rivalrous
Outside spillovers
Cooperative
spillovers
16. Distinct Commercialization Paths
† Includes non-commercial
diffusion of innovations
Commercialization
inside outside not
focal firm focal firm commercialized
inside Integrated Outbound Orphan
focal firm
Creation
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
17. Selecting Inside/Outside Paths
Inside Outside
Creation • 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 assets
cialization other complementary (Teece 1986)
assets; or • Doesn’t fit business model
• Weak appropriability (Chesbrough & Rosenbloom
(Teece 1986) 2002)
Communities
18. 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 communities
Source: West & Lakhani (2008)
19. 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 competencies
Source: Fichter (2009)
20. 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 of
Practice
21. Learning from Observation
”The field of innovation studies
arguably operates in Pasteur’s
Quadrant, in that the processes
and practices of industry actors
often extend beyond the bounds
predicted 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
22. 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, Nokia
Is 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
23. 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
24. 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