4th Annual World Open Innovation Conference Burlingame, San Francisco, CA

1. OPEN INNOVATION:
WHAT ARE THE
CHALLENGES, WHERE DO
WE GO?
Professor David J.Teece
Tusher Center for Intellectual Capital Management
Haas School of Business, University of California, Berkeley
4th Annual World Open Innovation Conference
December 14, 2017
1

2. Table of Contents
I. General:Theory & Lineage
II. Elements of innovation model
III. Digital convergence and platforms: Implications for OI theory &
practice
IV. Elements of the open innovation model
V. Appendix
2

3. I. GENERAL THEORY
AND LINEAGE
3

4. “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 et al,
Open Innovation: Researching a New Paradigm, Oxford University Press, 2006
4
HenryChesbrough
Open Innovation (OI)

5. 5
• Recognizes that not all ideas/new products can be developed internally.
• Relentlessly focused on how to augment internal efforts through accessing
external ideas and resources and combining them with critical ideas and resources
• Is two sided: outsourcing and insourcing of ideas/technologies/ IP is core
Features of Open Innovation

6. • Companies have always relied (to some degree) on external
sourcing of ideas and innovations
• 100 years ago in the US, open innovation wasn’t an imperative
because there were few R&D labs. Contract research was the
norm.
• However, during the heyday of (i) large corporate R&D labs
(1920’s-80’s) and (ii) US technological dominance (1940-90) habits
of thinking became quite parochial
• Many companies remain caught in the “not invented here” trap
• In almost every firm, the best ideas and people lie elsewhere
Exceptions:
• But by the 40’s, 50’s, & 60’s, many firms like GE,Westinghouse,
Esso and Dupont could effectively compete globally with their
tremendous in-house R&D capability
6
Lineage

7. 7
“Capturing value through corporate technology strategies”, D.Teece, in Science Technology and Free Trade, (ed: John de la Mothe & Louis
Ducharme, (Pinter Publishers, 1990).
Late 1980’s
open/closed
innovation model
“network firms” are
today’s
“open innovation
firms”*

8. 8
An early view of the
open innovation
imperative provided a
contingent framework*
that recognized:
i. Diversity in the
services of know-
how
ii. Appropriability
regimes and
iii. Transactions and
transfer costs
*See G. Pisano & D.Teece, “Collaboration Arrangements & Global Technology Strategy”, in R. Rosenbloom & R. Burgelman, Research on
technology Innovation, Management Policy & JAI Press, vol 4, 1989).

9. Why the enhanced imperative for OI?
• Post 1960 global dispersion in the sources of knowledge
• Greater global competition… need for speed
• Stronger IP rights in the 1980’s strengthened the market for know-how
• Decline in in-house R&D spending because of shareholder activism and
short-term focus (traders and raiders play too big a role in US Capital
markets)
• Digital Convergence… which is requiring greater connectedness and
platform engagement
9

10. a) Timely access to domain and technology expertise is critical to firm level
competitiveness
b) Active engagement by practically all firms in sensing/outsourcing of technology is
now required
c) Scouting/sensing tools need to be developed
d) Seizing/orchestration/integrating skills are now paramount
10
So fundamental are these developments
that today’s open innovation is qualitatively
and quantitatively different from pre-
1980’s
Open innovation… requires new management
approaches & deep (systems) capabilities in technology
“integration”

11. 11
II. ELEMENTS OF OPEN
INNOVATION MODEL

12. There are 2 fundamental choice variables
with open innovation
1. Technology development business model: proportion of in-house vs. contract
R&D
2. IP strategy… non-proprietary (open) vs. proprietary
• The two are somewhat interdependent, as a robust market for know-how
depends on the existence of (intellectual) property rights and the
opportunity for unstructured technical dialogue*
12
*On the latter point, see Kirk Monteverde,, “Management Science”, Oct. 1995.
These choices exist both for value creation and (separately) for value
capture/commercializtion

13. Technology developer perspective: Two
choice variables
13
e.g.
Qualcomm
e.g.
Tesla
e.g.
Cisco
e.g.
Linux
Foundation
Proprietary strategy
Non-Proprietary Strategy
ExternalTechnology
Sources
In-house
R&D

14. New managerial challenges/associated with
each modality
14
Open Closed
Systems integration a major
challenge
System integration is critical
and is easier if done in-house
End-to-end integration
harder… requires
collaboration
End-to-end integration easier
and, if necessary, can be done
by fiat

15. Open innovation also implicates business
model choice & technology strategy issues
• In reality, “open” vs. “closed” distinction is just be a matter of definition and
degree
• Open vs. closed innovation thus contain both business model design and IP
strategy issues
• The choice depends on both market, strategy, and capability issues
• Without strong IP, markets for know-how don’t work
• Absent external capabilities, there is no point in outsourcing innovation (and
vice-versa) because there is little to be had by searching externally
15

16. • Technology: Liquid fuel reusable rockets
• Strategy: 10x cheaper than those currently in use
• Adopt a “lean startup” approach and “test and fly repeatedly”
• Space X innovation strategy:
– Do as much as possible in-house (closed) because the existing supply chain is wedded to
defense contractors who are too cost-insensitive (cost plus contracting mobility)
– Reject outsourcing (i.e. Made hatch fitting out of off-the-shelf- bathroom fittings)
16
Value creation at Space X: Sometimes open
innovation is not the way forward

17. 17
Value Capture: The profiting from innovation
(PFI) framework
PFI shows that contracting
out (open innovation) is the
preferred commercialization
strategy/model unless a
number of criterion are met
Open Solution
Closed (internal) Solution
D. Teece. “Profiting from Innovation”, Research Policy,
Dec. 1986
Start Here
Innovation
Requires Access to
Complementary
Assets for
Commenrical
Success
Commercialize
Immediately
Complementary
Assets
Specialized
Appropriability
Regime Weak
Specialized
Asset Critical
Cash Position
OK
Imitations/Com
petitors Better
Positioned
Integrated
Contract for
Access
Contract for
Access
Contract for
Access
Contract for
Access
Contract for
Access
No No
No
No
No
No
Yes
Yes
Yes
Yes
Yes
No

18. 18
Strong
Legal/Technical
Appropriability
Innovator Excellently
Positioned vs.
Imitators w/Respect
toCommissioning
Complementary
Assets
Innovator Excellently
Positioned vs.
Imitators w/Respect
toCommissioning
Complementary
Assets
Weak Legal/TechnicalAppropriability
(1)
Contract
Innovator
will win
(2)
Contract
Innovator
should win
Innovators &
Imitators
advantageously
positioned vis a
vis independent
owners of
complementary
assets
(3)
Contract
Innovator
or imitator
will win: owner’s
won’t benefit
Strategy
Outcomes
(6)
Contract
(to limit
exposure)
(5)
Integrate
(4)
Contract if can do
so on competitive
terms; integrate if
necessary
Innovators &
imitators
disadvantageou
sly positioned
vis a vis
independent
owners of
complementary
assets
Innovator should
win; may have to
share profits w/
asset holders
Innovator
should win
Innovator
will probably lose
to imitators &/or
asset holders
PFI offers a predictive theory of how open innovation
(“contrast) impacts value capture outcomes for Innovators:
Specialized asset case
“Reflections on ‘Profiting from Innovation,’” Research Policy 35:8 (December 2006), 1131–1146.

19. Open innovation in mobile telephony
• Perhaps the greatest cooperative/open innovation experiment in history is
in mobile telecommunications, where 3GPP has helped orchestrate the
world’s greatest collaborative “open innovation” research enterprise…
which has spawned 3G and 4G and (in 2020) 5G wireless technology
• This cooperative enterprise has led to the “licensing out” of standard
essentials patents (SEPs) by scores of technology contributors, and the
licensing in of SEPs by hundreds of implementers
• These technologies are enabling smart phones, tablets, the internet of
things, and in the future mobility as a system (MaaS)
19

20. Open innovation through ETSI/3GPP has
allowed modularity & stimulated new entry
• With ETSi/3GPP, implementers have had ready access to mobile
technology on FRAND terms.This has spawned a multi-billion dollar
industry in mobile devices, tablets & other devices
• This dramatically lowered entry barriers and spawned scores of new-
entrants, particularly in China & India
• There are national competitiveness implications (free riding) because of
licensing holdouts
20

21. Smartphon
e 3G/4G
Unit Sales
(million) -
WW
21
Growth in mobile phone has been remarkable

22. Open innovation is a handmaiden of
dynamic capabilities
…and dynamic capabilities is a handmaiden of open innovation!
22
Dynamic Capabilities
Sensing Seizing Transforming
Open
Innovation
PFI/Open
Innovation

23. • Mobile roadmap relevant (over 8.5 billion smartphones shipment
between 2017-2021)
• Mobile is the underpinning platform for everything. Qualcomm:
“Qualcomm’s business model is one of the greatest successes of open innovation in
the world.
Our business model has democratized access to mobile technology. We created
mobile broadband… open innovation is the spirit of our licensing and chipset
business.
Our inventions span new market places and vibrant ecosystems. More & more
companies are mobile first. Look at Uber, Snapchat, Waze, mobile banking… they sit
on top of and are enabled by over 30 years of R&D in wireless…
…every time you touch your phone, you touch a QC invention. You may not realize it
because it is being presented to you by our partners in open innovation” 23
Open innovation allows fast paced
“democratic” co-innovation: e.g. mobile
telephony
Paul Jacobs, chairman (ch) Qualcomm at the World Open Innovation forum, 2017

24. III. DIGITAL
CONVERGENCE AND
PLATFORMS:
IMPLICATIONS FOR
OI THEORY &
PRACTICE
24

25. Today’s business context: digital convergence,
perhaps a“Grand Convergence”?
25
The techno-business environment has changed since 1980-’s & digital convergence is in
progress
• Digital platforms ubiquitous
• Digital data and signals, provide a common (0,1) base for handling diverse types of
information, including words, sounds, and images
• Widespread use of common standards allows connectivity between diverse
information devices
• Internet increasingly pervasive…
• “Multi-invention” & “co-innovation” context more common (100,000+ patents
implicated in the iPhone)
– Ecosystems are now more central

26. The “Grand Convergence” has powerful
implications for open innovation/PFI
Systems integration is both easier and more necessary with open innovation
– Understanding co-invention/Co-innovation opportunities & challenges
• Requires integration of PFI and OI into the Dynamic Capabilities Framework
Implication: Management of ecosystems and access and control of complementary
assets may now be more important to competitive advantage than installed
base/switching cost considerations
26

27. Digital convergence has rendered open
innovation an imperative
• In almost every technology development context there are now many key
issues:
• Do I source the technology internally or externally?
• What (complementary) technologies does one need to bring together
to produce desirable products/services
• What other (complementary) assets does one need
• Do I build a platform?
• What IP strategy/posture will I take?
27

28. Platforms can be defined as:
28
“Evolving ... meta-organizations that: (1) federate and coordinate constitutive agents who
can innovate and compete; (2) create value by generating and harnessing economies of
scope in supply or/and in demand; and (3) entail a modular technological architecture
composed of a core and a periphery.”
• Digital Standards enable the value of complements to be easily tapped through
connectivity
• Platforms and standards enable distributed innovation and open innovation
Gawer,A. Bridging differing perspectives on technological platforms: toward an integrative framework”.
Research Policy, 43(7), p.1240, (2014).

29. Platforms & standards enable open
innovation
29
• Complementary assets and complementary technologies and standards are
more significant than ever in a world of common standards and competing
and intersecting platforms (Evans and Gawer, 2016)
• Business ecosystems are increasingly the relevant competitive units and drive
firm-level profits
• FRAND (Fair, Reasonable, & Non-Discriminatory) royalty requirements are
mandated by many standards development organizations.This raises
important measurement & public policy issues

30. Business model options are more rich and
varied with digitalization
• With digital convergence, a plethora of complements must often be deployed to
assure commercial success
• In multi-invention contexts, which individual products draw on multiple internal
and external sources of technology (patented and unpatented)
• Business model choices for a new innovation, even with reference just to
appropriability, are more complex than the original open versus closed
appropriability model (Teece, 2010; Zott et al., 2011)
30

31. IV. ELEMENTS OF THE
OPEN INNOVATION
MODEL
31

32. • Adner’s “Wider Lens”* is most insightful &
outlines the importance of “lining up all the
ducks” to achieve commercial success
• Understanding Adner’s “Wider Lens”
requiresOI, PFI, and Dynamic Capabilities.
32
Bringing the plethora of complements into
focus is an open innovation challenge
Ron Adner, Dartmouth
Ron Adner, “Wider Lens”, Penguin Books, (2012).

33. Adner correctly points out that the
innovator’s success likely depend on the
combined efforts of multiple partners
Adner’s Examples:
• Better place LLC which is working on batteries for hybrids
• Apple’s iPod & iPhone*
• Self-healing tires
Other Examples:
• Lockheed L1011 & Rolls Royce delay in developing the RB211 engine
• Boeing Dreamliner
Chesbrough &Teece Example:
• Cell phone handset and battery producers need some in-house R&D in order to pace
technology development (HBR, 1996)
*See: Teece, “Dynamic Capabilities: A Guide for Managers,” Ivey Business Journal (March/April 2011).
33

34. Adner’s Value Blueprint methodology
34
Stresses:
• the importance not only of alignment with customers but also with investment
partners to minimize co-innovation risk
• The role of ecosystem leader (the ecosystem “captain”)
• Helps one identify gaps in complementary assets/capabilities
• Could benefit from application of OI, PFI, and Dynamic Capabilities
A useful methodology to help clarify the structure of
required collaboration, i.e. who hands off what to who &
when?

35. The PFI/open innovation (Teece) proposition:
The major prize might also go to the party that puts down the first piece. It
depends on whether or not the “piece” is the bottleneck.The scarcity of the
underlying resource has much to do with the answer. (e.g. is it is protected
by intellectual property?)
*Adner interview in Brian Leavy’s, “Ron Adner: managing the interdependencies and risks of an innovation ecosystem”, Strategy
and Leadership, (2012).
35
Adner proposition:
“The major prize was destined to go, not to the party that puts down the
first piece of the puzzle, but the one that puts down the final piece.”*
Contrasting perspectives?

36. Sensing and Seizing are critical activities
for successful OI
• For those companies that embrace open innovation either partially or fully, the
greatest challenge is being able to identify what is available in the market for sale or
licensing and then evaluating it in terms of its fit to their product strategy
• Where it is needed, intermediaries are becoming established to join the two
together and provide a set of services around channeling innovations towards
companies whose business structure is based on open innovation. Markets are
rapidly changing
• It can be a long process from ideas to profit and doing all of the innovation in-house
is limiting
36
The overriding aim will be to get a progressively better return from
R&D/technology spend. It will not matter whether the approach taken
is closed, open or some combination of both

37. Cultural issues need to be addressed
• Open state of mind required
• It takes organization and effort to run an OI program
• The leadership team must: vanquish NIH complex
• Become smarter at using licensing as a value capture business model
(when considering selling/licensing its own inventions/technologies)
• Prioritize the development of technology integration skills and capabilities
37

38. Are there technology transfer “best practices”
that assist open innovation?
• Best practices are a function of the technology and the context
• However, empirical studies of technology transfer costs show experience curve
effects and time cost trade-offs*
• Knowledge interpretation processes are generally (but not always) easier inside
firms than between firms because:
a. The movement of people is easier
b. Intellectual property issues are simplified
38
*D. Teece, “Technology Transfer by Multinational Firms: The Resource cost of Transferring Technological Know-how”, The Economic Journal 87,
1977(a), p.242-261; and D. Teece, “Time Cost Trade-offs and Elasticity Elements for International Tech Transfer”, Projects Management Science,
1977(b), p.830-837.

39. Some Miscellaneous Managerial Implications
• Making IO work is often a challenge… despite its conceptual ease
• Partnerships can often lead to leakage of trade secrets
• Smart “asset” orchestration… involving the combination of internal and external
technologies is what makes OI work
• A strong commitment to OI will usually dramatically expand the number of
technology partners one has
• With OI, IP management becomes especially critical
• Open innovation requires sensing, sense-making, and the filtering of externally
developed technologies
• Open innovation often requires assembling a portfolio of IP rights
39

40. Effective management practices are key to the
(functional) integration of knowledge across
boundaries
• Functional integration requires:
• Technology transfer (across functional firms and geographies) skills
• Knowledge recombination (asset orchestration) skills
• Intellectual property protection and licensing capabilities
• Good governance with respect to alliance and partnerships
• Easier to assert the need for “new combinations” (a la Schumpeter); harder to
effectuate them
• Open innovation increases the number of combinational opportunities; but
addressing them is not without cost
• Technology transfer costs are higher for tacit than for codified knowledge… the
latter requires the movement of people
40

41. Towards a knowledge based general systems
(and dynamic capabilities?) based approach
• Deeper analysis of open innovation requires a knowledge based approach
• Economic theory and organizational economics has emphasized cooperation and
ignored coordination problems… assuming they can be readily accomplished by
management fiat
• Organizational economics, blindsided by agency issues, and assuming well-
functioning markets, has in effect belittled coordination issues (Grant, 2017).
Exceptions include Malegnsen (1961)
41
*Grant, Robert, Foreword to Tell et al, “Managing Knowledge Integration Across Boundaries”, OUP, (2017).

42. The way ahead
• Rather than adding to the archipelago of separate theories, we need to link new
theories to existing bodies of organization theory
• Open innovation shares much in common with:
• Knowledge based theory of the firm
• Profiting fro innovation model
• Dynamic capabilities framework
• Open innovation like PFI and knowledge based theories of the firm, is part of a
meta theory of (technology) management
• We all need to do a better job of making these connections and nesting our
frameworks inside other, more general approaches
42

43. Observations on sensing
Strong dynamic capabilities requires top management to know what data to
observe, and how and when to be decisive
As Jeff Bezos says:
“There are decisions that can be made by analysis… these are the best kinds of
decisions!They are fact based decisions! Unfortunately, there is this whole set of
decisions that cannot ultimately be bailed down to a math problem”.*
Amazon big bets include:
• Kindle
• Amazon web services
• Purchase ofWhole Foods
43
Deutshmann, “Inside the Mind”

44. Classical approach to strategy (e.g.
Porter) are the enemy of dynamic
capabilities
• These approaches designed for stable markets without uncertainty
• They ask, “Where do we play?”; Porter’s answer: Pick an attractive industry then
erect barriers to entry
• Decisions cascade down
• With dynamic capabilities they go both up and down:
• Insight based innovators interactions with customers observations of emerging
technologies.This process drives sense making, and this in turn informs
strategy
44
Deutshmann, “Inside the Mind”

45. Things to watch out for
• Failure to act on the sensing signals received
• Sensing done well: Birkinshaw and Ridderstrale use Netflix to illustrate:
• CEO Hastings saw the future of the movie industry before the technology
existed
• Started with DVDs but saw that as merely a stepping stone to streaming over
the internet… not yet possible in early 2000’s when Netflix got going with
DVDs
• Choice of name signaled long-run commitment to streaming*
45
Se W. Shih et al, HBS teaching case, 9-607-138, April 2009

46. Seizing
• IBM- 360 story
• Blockbuster: tried several ventures, including mail order & streaming, but never
made the required big commitment
• By 2007 technology was there for video on demand to work for Netflix: Have to
get timing right (PFI). Need to be a player
46
Deutshmann, “Inside the Mind”

47. V. APPENDIX 47

48. Final Observation:
Enabling & general purpose technologies
have garnered scholarly attention recently
48
• These technologies have three characteristics
o Pervasive
o High potential
o Enhance research productivity
• GPT’s often start out as something less, (e.g. user invented with no initial obvious
application)
• GPT’s allow development of derivative technologies in diverse fields (e.g. printing press,
transistor, microprocessor) and thus fuel open innovation
• PFI and OI can help us understand the appropriability challenges presented by such
“generic” technologies
Enabling and GPT technology goes under-rewarded because of
inherent limitations in licensing as a business model

49. Hypothetical transfer/integration cost
relationship
49
Time Cost Total Cost
Costs Per Projects