Innovation Beyond Firm Boundaries
Georg von Krogh
Professor of Strategic Management and Innovation
Summer Term 2007

Contents
 Innovation beyond firm boundaries:
The challenge
 Innovation Incentives
 Innovation Efficiency
 Innovation Excellence
 Takeaways for Managers and Researchers
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Summer Term 2007 Georg von Krogh | Strategic Management & Innovation | gvkrogh@ethz.ch

Innovation beyond firm boundaries: The challenge
In closed innovation the firm generates, develops, and commercializes its own ideas
Boundaries
of the firm
Research
projects The market
Source: Chesbrough (2003)
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Summer Term 2007 Georg von Krogh | Strategic Management & Innovation | gvkrogh@ethz.ch

Innovation beyond firm boundaries: The challenge
In open innovation the firm commercializes both its own ideas and innovations from other
firms and buyers. The boundary between the firm and its environment is porous, enabling
innovations to flow more easily between the two
Boundaries
of the firm
New market
Research
projects Current market
Source: Chesbrough (2003)
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Summer Term 2007 Georg von Krogh | Strategic Management & Innovation | gvkrogh@ethz.ch

Innovation beyond firm boundaries: The challenge
Examples of firms that “innovate beyond boundaries”
Lego Hewlett-Packard IBM Merck
BMW Philips Cadence Mozilla/Firefox
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Summer Term 2007 Georg von Krogh | Strategic Management & Innovation | gvkrogh@ethz.ch

Innovation beyond firm boundaries: The challenge
Some real-life experiences
In the UK Still 68% of manufacturing firms source ideas internally
Car Manufacturer “Those users just come with silly ideas we have to evaluate”
Software Firm “Open source project did not attract interest from customers”
Hardware firm “Customers fled our technology enabled community programs”
Novell/Microsoft deal “The developer community is sensitive to our business deals”.
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Summer Term 2007 Georg von Krogh | Strategic Management & Innovation | gvkrogh@ethz.ch

Innovation beyond firm boundaries: The challenge
Innovation beyond firm boundaries:
 Can we get communities to make products?
 Can communities make products cheaper?
 Can communities make good or better products?
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Summer Term 2007 Georg von Krogh | Strategic Management & Innovation | gvkrogh@ethz.ch

Contents
 Innovation beyond firm boundaries:
The challenge
 Innovation Incentives
 Innovation Efficiency
 Innovation Excellence
 Takeaways for Managers and Researchers
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Summer Term 2007 Georg von Krogh | Strategic Management & Innovation | gvkrogh@ethz.ch

Innovation Incentives
Innovation beyond firm boundaries, hinges on
mobilizing outside talent needed to experiment
with markets and technologies, without using
hierarchy and/or firm-internal incentive systems
to shape their free engagement (e.g. users)
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Summer Term 2007 Georg von Krogh | Strategic Management & Innovation | gvkrogh@ethz.ch

Innovation Incentives
 Private funding of public goods innovation
 OS software development is a collaborative effort where
thousands of developers follow strong social norms for sharing
their innovations
 Engagement with the OS community is a dynamic and
cumulative process of exchanging ideas and knowledge
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Summer Term 2007 Georg von Krogh | Strategic Management & Innovation | gvkrogh@ethz.ch

Innovation Incentives
Incentive structure in open source innovation
Leader
co
e
ar
nc
sh
ea
l
Follower Follower
co
co
e
e
ar
ar
nc
nc
sh
sh
ea
ea
l
l
p1 p2 p3 p4
Economic payoff from sharing
Gaechter, von Krogh, Haefliger (2006)
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Summer Term 2007 Georg von Krogh | Strategic Management & Innovation | gvkrogh@ethz.ch

Innovation Incentives
Experimental results on knowledge sharing in open source innovation
Mutual 70%
sharing
60%
50% Mutual knowledge
sharing is
40%
substantially more
30% fragile in the
followers‘ than in
20%
the leaders‘ payoff
10%
0%
0
0 10
10
20
appropriation appropriation
20
30 30
payoff follower payoff leader
Gaechter, von Krogh, Haefliger (2006)
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Summer Term 2007 Georg von Krogh | Strategic Management & Innovation | gvkrogh@ethz.ch

Innovation Incentives
Strategies to motivate customers in
innovation
‣ Show preemptive generosity
‣ Create customer communities
‣ Leverage your brand
‣ Encourage customers to set up shop
‣ Pay them
von Krogh (2006)
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Summer Term 2007 Georg von Krogh | Strategic Management & Innovation | gvkrogh@ethz.ch

Contents
 Innovation beyond firm boundaries:
The challenge
 Innovation Incentives
 Innovation Efficiency
 Innovation Excellence
 Takeaways for Managers and Researchers
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Summer Term 2007 Georg von Krogh | Strategic Management & Innovation | gvkrogh@ethz.ch

Innovation Efficiency
Incentive structure in open source innovation
Unit of analysis Software code reuse
Setting 6 Open Source Software Projects
Research design Longitudinal research design
Data Source code data,
mailing lists,
interviews (74% of all reuse incidents)
Haefliger, von Krogh, Spaeth (2006)
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Summer Term 2007 Georg von Krogh | Strategic Management & Innovation | gvkrogh@ethz.ch

Innovation Efficiency
 Total lines of software code in the project: Open innovation is more
6 million efficient than firms in
 2.975 unique reuse incidents mitigating cost through
knowledge and technology
 Reuse of 55 components representing 16,9
reuse!
million lines of software code
Project Abiword GNUnet iRATE OpenSSL TikiWiki xfce4
Component
libxml
mysql
zlib
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Summer Term 2007 Georg von Krogh | Strategic Management & Innovation | gvkrogh@ethz.ch

Contents
 Innovation beyond firm boundaries:
The challenge
 Innovation Incentives
 Innovation Efficiency
 Innovation Excellence
 Takeaways for Managers and Researchers
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Summer Term 2007 Georg von Krogh | Strategic Management & Innovation | gvkrogh@ethz.ch

Innovation Excellence
Can we make „good“ or „better“ products?
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Summer Term 2007 Georg von Krogh | Strategic Management & Innovation | gvkrogh@ethz.ch

Innovation Excellence
Nokia Internet Tablet N800
 Innovative hardware and interface
 Infrastructure and Applications: Open
source and proprietary software
Spaeth, Stuermer, von Krogh, Jaaksi (2007)
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Summer Term 2007 Georg von Krogh | Strategic Management & Innovation | gvkrogh@ethz.ch

Innovation Excellence
Nokia and developer community jointly create the software products
Lines of 8.000.000
code
6.000.000
4.000.000
2.000.000
0
July ‘05 February ‘07
Spaeth, Stuermer, von Krogh, Jaaksi (2007)
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Summer Term 2007 Georg von Krogh | Strategic Management & Innovation | gvkrogh@ethz.ch

Innovation Excellence
“But we believe the world is changing and the competitive
advantage comes from how many others can you get from
participating in this network. This network becomes more
important than trade secrets.
So it’s really a fundamental strategy change we are
executing. We believe that this will result in better products
by revealing the code and letting others participate.”
Nokia Senior Executive
Spaeth, Stuermer, von Krogh, Jaaksi (2007)
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Summer Term 2007 Georg von Krogh | Strategic Management & Innovation | gvkrogh@ethz.ch

Innovation Excellence
 Communities of talented developers often withdraw their love
for the product
 Nokia developed a new product category through open
innovation, by:
behaving humbly

collaborating with existing projects

following the community norms and rules (e.g intellectual property)

Spaeth, Stuermer, von Krogh, Jaaksi (2007)
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Summer Term 2007 Georg von Krogh | Strategic Management & Innovation | gvkrogh@ethz.ch

Contents
 Innovation beyond firm boundaries:
The challenge
 Innovation Incentives
 Innovation Efficiency
 Innovation Excellence
 Takeaways for Managers and Researchers
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Summer Term 2007 Georg von Krogh | Strategic Management & Innovation | gvkrogh@ethz.ch

Takeaways
 Can we get communities to develop products?
Yes, if you balance the rewards to the firms and the community
‣
 Can communities develop products cheaper?
Yes, if you design technology for reuse
‣
 Can communities develop good or better products?
Yes, if you recruit and reward talented developers, and behave according to the
‣
rules of their community
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Summer Term 2007 Georg von Krogh | Strategic Management & Innovation | gvkrogh@ethz.ch

References
S. Haefliger, G. von Krogh, and S.Spaeth (2007) “Code reuse in Open Source Software”,
Management Science, Forthcoming
G. von Krogh and E. von Hippel (2006) “The promise of research on open source software”,
Management Science, 52(7), pp. 975-983
E. Von Hippel and G. von Krogh (2006) \" Free revealing and the Private-Collective Model of
Innovation Incentives\", R&D Management, 36(3), pp. 295-306
G. von Krogh (2006) “Customers demand their share of IP”, Harvard Business Review, February, pp.
45-46
E. Von Hippel and G. von Krogh (2003) \" Open Source Software and the \"Private-Collective\"
Innovation Model: Issues for Organization Science\", Organization Science, 14(2), pp. 208-223
YOU ARE WELCOME TO VISIT US AT
www.ethz.ch
www.smi.ethz.ch
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Summer Term 2007 Georg von Krogh | Strategic Management & Innovation | gvkrogh@ethz.ch