Profiting from External Innovation: A Review of the Research

Joel West
Joel WestProfessor at Keck Graduate Institute
Profiting from External
Innovation: A Review of the
          Research
                 Joel West
       KGI - The Keck Graduate Institute
                www.oiblog.net


              Marcel Bogers
      SDU - Southern Denmark University


                MCPC 2011
                San Francisco
              18 November 2011
Where is KGI?
What is KGI?
• Keck Graduate Institute of Applied Life
  Sciences
    - Mission: “dedicated to education and research
      aimed at translating into practice, for the benefit of
      society, the power and potential of the life
      sciences.”
•   Founded in 1997
•   Funded by grant from Keck Foundation
•   About 150 graduate students
•   Youngest of 7 Claremont Colleges
•   Mixture of science and business faculty
Profiting from External Innovation
• 1986: Teece created a model of small
  firms profiting from their own innovation
  - “Profiting from Innovation” model
  - Partner if they can’t commercialize on own
     vRely on established firms for manufacturing,
       distribution, support
• Today: firms commercialize external
  sources
  - Inbound perspective of open innovation
What we did

For research on inbound OI:
• Developed a 4-phase process model
• Reviewed OI research (2003-2010)
• Looked for gaps and opportunities

Recent draft is on SSRN
Open Innovation
Open Innovation: then and now




4,561    960      664     published
cites    cites    cites     2011
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, Open Innovation:
                     Researching a New Paradigm, p. 1
Chesbrough funnel
                                                   Other Firm’s
                                                      Market
              Licensing
                                      Technology     New
 Internal                              Spin-offs     Market
Technology
   Base                                             Current
                                                    Market
 External
Technology
   Base
                       Technology Insourcing

       “Open” innovation strategies      Source: Chesbrough (2006)
Research Design
Our process model

We developed a model of profiting from
  external sources of innovation:
• Based on current innovation process
  models (e.g. Freeman, 1982)
• 3-step linear model of innovation
  creation and commercialization
  - Add reverse paths (upstream)
Our process model
       Innova&on
                              Focal	
  Firm
         Source
                      1      2                   Sales	
  /   3
                                       R&D                        Customers
                                                Marke.ng
       Innova&on
         Source

Profiting from external sources of
    innovation
1. Obtaining                        Innova&on                     Innova&on
2. Integrating                        Source                        Source
3. Commercializing

    Reverse paths

        Suppliers                     Rivals                       Customers
Research Design
• SSCI
  - Selected 18 “A” & “B” bus, tech journals
  - Published 2003-2010
  - Mentioned OI or cite Chesbrough
• Add Google scholar 100+ cites
  - Yielded 15 pubs: 11 are duplicates
  - 3 Chesbrough books, plus 1 chapter
• 280 papers/chapters
• Manually reviewed the 280
Articles by Journal
Journal                            Papers   Journal                         Papers
Academy of Management Journal        4      Management Science               18
Academy of Management Review         1      MIT Sloan Management Review       6
Administrative Science Quarterly     1      Organization Science              6
California Management Review        11      R&D Management                   52
Harvard Business Review              1      Research Policy                  52
IEEE Transactions on                 3      Research-Technology              39
Engineering Management                      Management
Industrial and Corporate Change      3      Strategic Management Journal      4
International Journal of            34      Technological Forecasting and     4
Technology Management                       Social Change
Journal of Product Innovation       21      Technovation                     30
Management                                  Total                            276
Related Research
In addition to Open Innovation:
• Exploration/acquisition strategies
  - R&D joint ventures, alliances & outsourcing
• External sources of innovation
  - User innovation & co-creation
Analysis
Categories of Papers (1)
       Phase      Category    Open Innovation Topic
                              • Sourcing
                  Searching   • Brokerage
                              • Limits
                              • Contests
                              • Intermediaries
                  Enabling
                              • Toolkits
   1. Obtaining
                              • Platforms
                              • Gatekeepers
                  Filtering
                              • Technology scouts
                              • Incentives to share
                  Acquiring   • Contracting
                              • Nature of the innovation
Categories of Papers (2)
       Phase        Category     Open Innovation Topic
                                 • Absorptive capacity
                                 • Culture and “Not Invented
   2. Integrating                  Here”
                                 • Incentives to cooperate
                                 • Competencies
                                 • Commercialization process
   3. Commercializing            • Value creation
                                 • Value capture
                                 • R&D feedback
                    Feedback     • Customer/market feedback
   Nonrecursive
   paths                         • Co-creation
                    Reciprocal   • Communities
                                 • Value networks
1. Obtaining Innovations
• Best covered of the phases
  - Searching, enabling, filtering
  - Sourcing particularly well covered
• Most popular area: sources of innovation
• Often about external knowledge and not
  external innovations
• Not much about asset specificity of potential
  innovations
2. Integrating Innovations
• Considers org capabilities and culture
  - Absorptive capacity over-researched
        is mentioned, not well measured
  - Implicit assumptions
• Integration seems to be a black box
  - Are new competencies needed?
3. Commercializing Innovations
• Lots of value creation
  - Sometimes measured using NPD metrics
  - Less research on value capture
• Assumes external innovations
  commercialized same as internal ones
  - How do firms differ in external innovation
    commercialization capabilities?
4. Reverse Paths
Beyond the linear model, this includes
• Feedback mechanisms
  - Information flow upstream
• Reciprocal measures
  - Ongoing interactions
  - Includes co-creation, communities
Research here is scarce
Discussion
Unanswered questions (1)

• Search: Largest body of research
  - Is this what’s new?
  - Or is it the most fun to study?
• Integration:
  - What competencies are necessary?
  - When do external sources substitute for (or
    complement) internal innovation?
Unanswered questions (2)
• Commercialization
  - Is commercialization path the same?
  - Where are success metrics?
     vDecades of NPD research offer examples
• Non-linear approaches
  - Open innovation tends to have linear focus
     vOpen Services Innovation is notable exception
  - How is this changed by feedback, co-creation,
    other cooperative mechanisms?
Unanswered questions (3)
• Where is the business model?
  - Includes value capture
• Is everything an “innovation”?
  - Patent, copyright, knowledge
Invention vs. innovation

  We owe to Schumpeter the extremely
important distinction between inventions
and innovations … An invention is an
idea, a sketch or model for a new or
improved device or system. … An
innovation in the economic sense is
accomplished only with the first
commercial transaction (Freeman, 1982)
Contribution
Profiting from External Sources of Innovation:
• Process model
  -   Obtaining
  -   Integrating
  -   Commercializing
  -   Reverse (nonrecursive) paths
• Summary of 200+ articles:
  - Existing conclusions
  - Blind spots and research opportunities
For more information

• http://ssrn.com/abstract=1949520
• blog.OpenInnovation.net
• Twitter: @openITstrat
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Profiting from External Innovation: A Review of the Research

  • 1. Profiting from External Innovation: A Review of the Research Joel West KGI - The Keck Graduate Institute www.oiblog.net Marcel Bogers SDU - Southern Denmark University MCPC 2011 San Francisco 18 November 2011
  • 3. What is KGI? • Keck Graduate Institute of Applied Life Sciences - Mission: “dedicated to education and research aimed at translating into practice, for the benefit of society, the power and potential of the life sciences.” • Founded in 1997 • Funded by grant from Keck Foundation • About 150 graduate students • Youngest of 7 Claremont Colleges • Mixture of science and business faculty
  • 4. Profiting from External Innovation • 1986: Teece created a model of small firms profiting from their own innovation - “Profiting from Innovation” model - Partner if they can’t commercialize on own vRely on established firms for manufacturing, distribution, support • Today: firms commercialize external sources - Inbound perspective of open innovation
  • 5. What we did For research on inbound OI: • Developed a 4-phase process model • Reviewed OI research (2003-2010) • Looked for gaps and opportunities Recent draft is on SSRN
  • 7. Open Innovation: then and now 4,561 960 664 published cites cites cites 2011
  • 8. 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, Open Innovation: Researching a New Paradigm, p. 1
  • 9. Chesbrough funnel Other Firm’s Market Licensing Technology New Internal Spin-offs Market Technology Base Current Market External Technology Base Technology Insourcing “Open” innovation strategies Source: Chesbrough (2006)
  • 11. Our process model We developed a model of profiting from external sources of innovation: • Based on current innovation process models (e.g. Freeman, 1982) • 3-step linear model of innovation creation and commercialization - Add reverse paths (upstream)
  • 12. Our process model Innova&on Focal  Firm Source 1 2 Sales  / 3 R&D Customers Marke.ng Innova&on Source Profiting from external sources of innovation 1. Obtaining Innova&on Innova&on 2. Integrating Source Source 3. Commercializing Reverse paths Suppliers Rivals Customers
  • 13. Research Design • SSCI - Selected 18 “A” & “B” bus, tech journals - Published 2003-2010 - Mentioned OI or cite Chesbrough • Add Google scholar 100+ cites - Yielded 15 pubs: 11 are duplicates - 3 Chesbrough books, plus 1 chapter • 280 papers/chapters • Manually reviewed the 280
  • 14. Articles by Journal Journal Papers Journal Papers Academy of Management Journal 4 Management Science 18 Academy of Management Review 1 MIT Sloan Management Review 6 Administrative Science Quarterly 1 Organization Science 6 California Management Review 11 R&D Management 52 Harvard Business Review 1 Research Policy 52 IEEE Transactions on 3 Research-Technology 39 Engineering Management Management Industrial and Corporate Change 3 Strategic Management Journal 4 International Journal of 34 Technological Forecasting and 4 Technology Management Social Change Journal of Product Innovation 21 Technovation 30 Management Total 276
  • 15. Related Research In addition to Open Innovation: • Exploration/acquisition strategies - R&D joint ventures, alliances & outsourcing • External sources of innovation - User innovation & co-creation
  • 17. Categories of Papers (1) Phase Category Open Innovation Topic • Sourcing Searching • Brokerage • Limits • Contests • Intermediaries Enabling • Toolkits 1. Obtaining • Platforms • Gatekeepers Filtering • Technology scouts • Incentives to share Acquiring • Contracting • Nature of the innovation
  • 18. Categories of Papers (2) Phase Category Open Innovation Topic • Absorptive capacity • Culture and “Not Invented 2. Integrating Here” • Incentives to cooperate • Competencies • Commercialization process 3. Commercializing • Value creation • Value capture • R&D feedback Feedback • Customer/market feedback Nonrecursive paths • Co-creation Reciprocal • Communities • Value networks
  • 19. 1. Obtaining Innovations • Best covered of the phases - Searching, enabling, filtering - Sourcing particularly well covered • Most popular area: sources of innovation • Often about external knowledge and not external innovations • Not much about asset specificity of potential innovations
  • 20. 2. Integrating Innovations • Considers org capabilities and culture - Absorptive capacity over-researched is mentioned, not well measured - Implicit assumptions • Integration seems to be a black box - Are new competencies needed?
  • 21. 3. Commercializing Innovations • Lots of value creation - Sometimes measured using NPD metrics - Less research on value capture • Assumes external innovations commercialized same as internal ones - How do firms differ in external innovation commercialization capabilities?
  • 22. 4. Reverse Paths Beyond the linear model, this includes • Feedback mechanisms - Information flow upstream • Reciprocal measures - Ongoing interactions - Includes co-creation, communities Research here is scarce
  • 24. Unanswered questions (1) • Search: Largest body of research - Is this what’s new? - Or is it the most fun to study? • Integration: - What competencies are necessary? - When do external sources substitute for (or complement) internal innovation?
  • 25. Unanswered questions (2) • Commercialization - Is commercialization path the same? - Where are success metrics? vDecades of NPD research offer examples • Non-linear approaches - Open innovation tends to have linear focus vOpen Services Innovation is notable exception - How is this changed by feedback, co-creation, other cooperative mechanisms?
  • 26. Unanswered questions (3) • Where is the business model? - Includes value capture • Is everything an “innovation”? - Patent, copyright, knowledge
  • 27. Invention vs. innovation We owe to Schumpeter the extremely important distinction between inventions and innovations … An invention is an idea, a sketch or model for a new or improved device or system. … An innovation in the economic sense is accomplished only with the first commercial transaction (Freeman, 1982)
  • 28. Contribution Profiting from External Sources of Innovation: • Process model - Obtaining - Integrating - Commercializing - Reverse (nonrecursive) paths • Summary of 200+ articles: - Existing conclusions - Blind spots and research opportunities
  • 29. For more information • http://ssrn.com/abstract=1949520 • blog.OpenInnovation.net • Twitter: @openITstrat

Editor's Notes

  1. The open innovation model emphasizes flexibility in a firm’s innovation strategy: The best source of innovation may be outside the firm (arrows going in) The best market for an innovation may be outside the firm (arrows going out) The importance of flexibility. Span firm boundaries. Can bring in technology at any point in the product development process. Major goal: if firm is fighting false positives (extra cautious), you will get lots of false negatives (Chesbrough 2006). Make sure you find a way to monetize or otherwise find a path to market for these false negatives.
  2. 2/13/2011
  3. 1. Searching (where): Sourcing, Brokerage , Limits, University research, User innovation 2. Enabling process/mechanisms (how): Contests, Intermediaries , Toolkits, PlatformsCrowdsourcing 3. Filtering (which): Gatekeepers , Technology scouts, Technology brokering 4. Acquiring: Incentives to share, Contracting, Nature of the innovation
  4. Absorptive capacity: 80/280 articles
  5. This is all the stuff that’s of interest to the MCPC community, but it’s not often found in OI. Some say it’s a level of analysis thing: that consumers or individuals are not part of OI. I don’t agree — I just think they haven’t been studied much
  6. The inherent value of a technology remains latent until it is commercialized in some way. (Chesbrough & Rosenbloom, 2002: 529-530).