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Strategic Openness


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Talk presented at UC Berkeley, Haas School of Business, October 11, 2011

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Strategic Openness

  1. 1. 1 Strategic Openness Joel West Keck Graduate Institute, Claremont Colleges Program on Open Innovation UC Berkeley, Haas School of Business 10 Oct 2011 Take-Home Message 1. Many choices of closed vs. open v Most are continuous, not bifurcated v Partly open is most common condition 2. Two sources of openness v Exogenous (involuntary) v Endogenous (voluntary): strategic openness Implications for competitive advantage
  2. 2. 2 Traditional Competitive Advantage Competitive advantage=control Traditional sources of advantage: • Monopoly/oligopoly (Tirole 1988) • Vertical integration to control inputs and outputs (Chandler 1977) • Inimitable resources (Barney 1991) Manifest by economic rents
  3. 3. 3 Lack of control is bad Teece (1986): 1. First mover firms often unable to control the returns from their inventions • Typically due to lack of appropriability • Particularly true for small companies 2. Partner (e.g. with big companies) to overcome this lack of control And yet… • Firms build on open technologies v Apache, Linux open source software v Open standards v University science • Firms open their own technologies v Eclipse development tools platform v WebKit open source mobile browser
  4. 4. 4 IBM’s forays into openness • Greatest success came from proprietary vertical integration (Fisher et al 1983) • But today… v An exemplar of inbound and outbound open innovation (Chesbrough 2003) v Leading champion of OSS (West 2003) v Gave away IP to gain advantage (Alexy & Reitzig, 2010) Prior Research on Openness
  5. 5. 5 Ways of being open • In-licensing external technology (Bresnahan & Greenstein, 1999; Chesbrough, 2003) • Enabling 3rd party complements (Langlois & Robertson, 1995; Bresnahan & Greenstein, 1999) • Shared architectural control (West & Dedrick, 2000; West & O’Mahony, 2008) • Information transparency (Lerner & Tirole, 2000; West & O’Mahony, 2008) • Out-licensing internal technology (Chesbrough 2003, 2006) Domains of Openness • Open science (Merton, 1973; David, 1998) • Open standards (Simcoe, 2006; Krechmer, 2006; West, 2007) • Open platforms (Garud & Kumaraswamy, 1995; West & Dedrick, 2000) • Open source software (West, 2003; Henkel, 2006; West & Gallagher, 2006) • Open innovation (Chesbrough, 2003, 2006) • Community innovation (von Hippel & von Krogh, 2003; Jeppesen & Frederiksen, 2006)
  6. 6. 6 What’s so open about… Domain of openness • Open science • Open standards • Open source • Open innovation Effect • Open information • Easy market entry • Shared IP, control • Open boundaries Degrees of (platform) openness Platform strategy Sponsor Multiple hardware vendors Multiple OS vendors Source Licensing Products closed Vertically integrated proprietary Hardware vendors no no no IBM S/360, DEC VAX, Macintosh Horizontal proprietary Microsoft yes no no Windows Unix AT&T yes no yes System V Open Systems Consortia yes yes yes OSF, X/Open open Open Source none/many yes yes yes Linux Source: adapted from West (2003)
  7. 7. 7 Limits to openness • Open standards v Need some closedness for value capture (Simcoe 2006; West, 2007) • Open source v Choice of open parts vs. partly open (West 2003) • Open innovation v Too much inbound OI is suboptimal (Laursen & Salter 2006) v Costs of inbound OI can exceed revenues (Faems et al, 2010) Involuntary Openness
  8. 8. 8 Origins of involuntary openness • Low appropriability (Teece 1986) • Value chain specialization (Grove, 1996; Langlois 2003) • Open standards v Formal de jure standardization (e.g. GSM) v Open de facto platforms (iPhone apps) v Most “open” are partly open (West 2007) • Open source (can be involuntary) Open standards not equally open Openness has multiple dimensions • For different stakeholders • For different rights (e.g. complement or implement) v And cost of these rights (e.g. royalties) • Range of openness on each dimension Thus “many shades of gray” (West 2007)
  9. 9. 9 Open source not equally open • Involuntary openness v Community owned source (e.g. Linux, Android) • More open than open standards (West, 2003) • Strategic openness v Firm sponsors open source community, releases own code (West & Gallagher, 2006; West & O’Mahony, 2008) • Hybrid: v Strategic/proprietary: gated source (Shah, 2006) Strategies under these conditions • Compete on execution v Dynamic capabilities, arbitrage of information asymmetries, economies of scale, … v Hope for first-mover advantage v Often transient competitive advantage • Partner/license for scarce resources • Niche-ification (i.e. focus differentiation)
  10. 10. 10 Results of involuntary openness • Leads to excess entry v Little or no differentiation v Price-based competition, commoditization • Reward low-cost producers • Typically few winners, many losers ∴When openness is exogenous, v producer firm doesn’t make the rules v odds of success are not very good Strategic Openness
  11. 11. 11 Strategic openness • I define strategic openness as “the selective opening of a firm’s control of its technology, innovations and other outputs in order to gain competitive advantage” • Builds on prior research on open standards, open source software, open innovation Growing the pie vs. slicing the pie • Value creation vs. value capture (Simcoe 2006) • Proprietary control vs. attracting adoption (West 2003) • Control vs. attracting collaboration (West & O’Mahony 2008)
  12. 12. 12 Who benefits from value creation? Specific firm(s) benefit from growing pie: • General growth benefits firm with most market share (e.g. Intel, Qualcomm) • When value creation is aligned to business model (Chesbrough & Rosenbloom, 2002) • Growing a sponsored ecosystem (West & Mace 2010) Growing an open ecosystem If firm controls an ecosystem, opening the ecosystem accrues to sponsoring firm • Modular economies of substitution (Garud & Kumaraswamy 1993) • Faster time to market, technological progress (Bresnahan & Greenstein, 1999) • Upstream scale economies (West & Dedrick, 2000) • Downstream variety (Boudreau 2010)
  13. 13. 13 Other reasons for openness • Undercut competitor profits • Create reputation(Henkel 2004) • Facilitate search for external technology or knowledge transfer (Cohen & Levinthal, 1990) • Sell internal technology(Arrow 1962) Different dimensions of openness Many openness levers to experiment with • Access, participation & cost(West 2007) • Transparency & accessibility (West & O’Mahony 2008) • Need to study combining multiple forms of openness (Dahlander & Gann, 2010)
  14. 14. 14 Examples: Apple Inc. Apple [Computer] Inc. • Apple’s image: exemplar of proprietary • Actually used all 3 strategies v Closed v Involuntary openness v Strategic openness
  15. 15. 15 Closed Apple: Cloning • Prosecuted Apple II clones (Apple v. Franklin) • Mac cloning debate (West, 2005) v Blocked Mac clones (1985, 1992) v Allowed, then cancelled clones (1994-7) Exogenous openness: components • Early pioneer of component-based business models (cf. West 2006) v Integrated standardized components v Sourced CPUs from MOS Technologies, Motorola, Intel v Also other key components • Increasingly, standardized peripherals
  16. 16. 16 Strategic openness: outsourcing • Once traditional approach to manufacturing v Automated Fremont Mac factory (1983-1991) v Ireland (1980), Singapore (1981) factories • Outsource all manufacturing to suppliers v 1996-7: sold factories to SCI (later Sanmina SCI), National Steel v 1998-2000: outsource assembly to Quanta, LG, Hon Hai • Anticipates PC industry shift to contract mfr. Source: West (2002) Strategic openness: apps • Provided standardized platform, APIs • Enabled 3rd party complements v Apple II: VisiCalc v Macintosh: software “evangelists” v iPhone/iPad • App store: enables market entry
  17. 17. 17 Strategic openness: open source Multiple experiments: • FreeBSD/Darwin: operating system • CUPS: printing • WebKit: v Safari (Mac/iPhone/iPad) browser v Android/Chrome browser v Also Nokia, Research in Motion Conclusions
  18. 18. 18 Closed vs. open strategies • Firms prefer closed strategies v More predictable v More control, appropriation • However v “pie” may be too small, e.g. mainframe computers, minicomputers, PCs (Langlois, 1992; Bresnahan & Greenstein, 1999) v “not all the smart people work for us” (Chesbrough 2003) Inherent risks of openness • High entry, competition • Commoditization • Difficulties differentiating, charging a price premium • Leakage of knowledge to current and potential rivals
  19. 19. 19 Strategic vs. involuntary openness • Involuntary openness impacts all firms • In strategic openness v Firms control the nature of openness v Align to firm strengths, competitor weaknesses v Possibly forestall disadvantageous openness v Usually requires some sort of initial advantage Unresolved questions • How do we measure costs, benefits? • What/where are the moderators? • Which firms will choose openness? v Do some have more choice than others? v Are some more capable than others? v Constrained by business models?