This document discusses open innovation and summarizes a case study on Netflix. It begins by explaining the two core problems in innovation - obtaining solution information and overcoming "sticky" need information. It then discusses how local search bias can reduce problem solving effectiveness. The Netflix case study is presented as an example of open innovation through collaboration from diverse sources. The document concludes by defining open innovation and discussing concepts like crowdsourcing, inbound/outbound open innovation, and broadcast search.

1. From technology market places
to problem places
Frank T. Piller
Chair, RWTH Technology & Innovation Management Group, Aachen
Co-Director, M.I.T. Smart Customization Group, Cambridge, MA
tim.rwth-aachen.de | open-innovation.com
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The problem
of "local search"

2. 4
Every innovation process requires two kinds of information,
influencing the efficiency and effectiveness of the process.
Solution Need
Information Information
market
Ideation
launch
Doing things Doing the right
right things
Realization concept
("R&D", development
product
develop.)
5
Overcoming the two problems of (just) "local search" for solution information
and "stickiness" of need information are crucial for innovation success.
Solution Need
Information Information
sticky
information
market
Ideation
launch
Doing things Doing the right
right things
Realization concept
("R&D", development
product
develop.)
local
search
bias

3. 6
Local search reduces problem solving effectiveness
(Lakhani 2007)
Local Search Problem Evidence
Problem-solvers have different local Experiment (psychology lab): individual
knowledge stocks (Hayek 1945; von problem solvers have difficulty adapting
Hippel 1994) to new problems (Luchins 1942;
Duncker 1945)
Problem solvers use their own local Team-based problem solving negatively
knowledge stocks and solution effected by prior experience and new
algorithms even when not appropriate: problems being different from old (Allen
& Marquis 1964)
Bounded rationality (Simon 1957) Firm & Industry level findings of
negative effects:
- Routines in problem solving
– Photolithography (Henderson & Clark 1990)
(Nelson & Winter 1982)
– Semiconductor Manufacturing (Stuart &
- Competency Traps Podolny 1995)
(Levitt & March 1988) – Medical Imaging (Martin & Mitchell 1998)
– Biotechnology and Semiconductors
(Sorensen & Stuart 2000)
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Open Innovation:
A set of new methods
to manage these two
core problems
==> 20

4. 8
A good illustration
of open innovation:
The Netflix Case
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5. 12
Objective: get root mean
square error (RMSE)
<= 0.8563 (Netflix's own
algorithm Cinematch has
RMSE of 0.9525, this
equals to one point of
error of recommendation
on their 5-point scale of
"hate-love" movie
evaluation)
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A good picture of open innovation: Collaboration and input from diverse
sources ... and fair play in the end
Nice summary from the winners' perspective: http://www.research.att.com/~volinsky/netflix/bpc.html

6. 21
From "The lab is our world"
to "the world is our lab"
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Open Innovation
The formal discipline and practice of
leveraging the discoveries of unobvious
others as input for the innovation
process through formal and informal
relationships*.
*Note: It are the informal relationships that constitute the
"innovativeness" of open innovation!

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Crowdsourcing (Interactive Value Creation)
"Crowdsourcing represents the act of a company or
institution taking a function once performed by its
employees and outsourcing it to an undefined
(and generally large) network of people in the form
of an open call. “ (Howe 2006)
Other terms, same idea: Commons-based Peer-Production (Benkler 2002; Lakhani 2006);
Open Innovation (Chesbrough 2003, Piller 2002); Interactive Value Creation; (Reichwald &
Piller 2006; Piller 2004), Wikinomics (Tapscott 2007)
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Inbound versus Outbound Open Innovation
Inbound open innovation
= "the practice of leveraging the
discoveries of others"
(Chesbrough and Crowther, 2006: 229)
to support sourcing and
acquisition of external ideas
and knowledge to the
innovative process
Outbound open innovation
= "the commercialization of
technological knowledge
exclusively or in addition to its
internal application" (Lichtenthaler,
2009: 318)
© tim.rwth-aachen.de Picture Source: http://www.psicorp.com/open_innovation/index.html 24

8. 26
Broadcast Search
(Karim Lakhani 2008)
InnoCentive is not alone: NineSigma and Yet2 are seen as
core competitors, but have a slightly different business model
Network Size 2m+ 160K+ Solvers, 175 120,000 registered users,
650K+ individuals Countries, 40 Disciplines 70+ brokers, 200+
120+ Affiliates consultants
How they make money Posting Fee Posting Fee Membership fee $4,000 to
$12-19,000 $6,000 to $15,000 posting $30,000
Success fee = % of final fee* Consulting service fee
contract or fixed amount Success fee = 40% of $30,000 to $40,000
(Retainer) contract or award Success fee = % of value
of the deal
Solver/Solution Provider $5,000 to $50,000 plus $5,000 to $1m Contract or licensing value
awards follow-on contract value ($1.5m average)
Growth 500 RFPs to end 2006 2008 postings nearly 25+ deals in 2008
400 RFPs in 2007 double 2007 postings Expansion of broadcasting
large growth in 2008 and Opening of European office services
2009 in 2010
© tim.rwth-aachen.de 27

9. 28
Exploring open innovation
in the German machinery
industry
VDMA-FVA Project to Pilot Open Innovation in the
German Driving Systems Industry
1.
1.
Evaluation and 2.
modification of OI Identification of
methods for industry open innovation platform
domain
3.
Piloting of platform and
4.
Development of evaluation of efficiency and
business model effectiveness of approach as
for future operation compared to conventional
of platform on the means of organizing R&D
FVA level
© tim.rwth-aachen.de 30

10. In the project, we selected five problems from both
companies and the FVA research consortium, be be
"boradcasted" on NineSigma.
© tim.rwth-aachen.de Source: David Feitler 2010 31
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11. 33
© tim.rwth-aachen.de
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© tim.rwth-aachen.de

12. On our call for solutions in five RFPs ("Requests for
Proposals") we got 95 solutions – from very
heterogeneous suppliers.
• 42 Industry
• 32 Universities
• 21 Others (non profits, research centers)
Solution provider Origin of solvers
institution 1% 1%
3%
Industrie 1%
Nordamerika
Universitäten Südamerika
Andere 8% Europa
22%
Osteuropa
45% 41%
Mittlerer Osten
Asien
Ozeanien
33%
44% Südafrika
1%
© tim.rwth‐aachen.de 35
The solutions in general were both from sources new
to the companies and did contain a new technologial
solution
Evaluation of solution proposals by project steering committees
Institution Solution Technology
RFP
new known new known ?
66198 23 3 16 6 4
66204 10 0 3 7 0
66207 7 0 6 0 1
66201 33 2 evaluation ongoing
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© tim.rwth‐aachen.de

13. Comparing „Broadcast Search“ and
Conventional Inhouse Problem Solving
Typical inhouse
problem solving* Broadcast Search
100 extern
25
30 5
8 intern
1
Direct search and self identification of solution providers enables
a much more focused solution space
* typical numbers from the literature
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Increasing the productivity
of problem solving

14. Two statements of project managers
from our company partners
„During the project, our
culture shifted
dramatically. My
colleagues are all bumping
„During the project, we at my door, and want to
have learned a lot about have their own RFP. We are
new players and the changing from a notion of
positions of other privacy and being closed
companies in the (for better) to become
technology space, and this more open. Participating at
in a very short time. The this project was clearly the
real "Aha" however was driver of this change.“
that we did learn so much
about ourselves. We got a
much better understanding
where we are and what we
know.“
© 2010 tim.rwth-aachen.de 39
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Changing the culture
of innovation

15. Success Factors of "Problem Broadcasting"
A Good Open Innovation Environment
Clearly defined problem ownership (expert promoter)
Buy-in for the implementation of returned solutions
Managed by passionate outwardly focused project leaders (process
promoters)
Realistic time planning (RFPs will get to competitors sooner or later)
Realistic budget planning (power promoter)
Focus on Adherence to the Timeline
Rapid high quality RFP crafting/iteration/turnaround (process and
expert promoters)
Rapid, well-defined internal RFP review process (power promoter)
Cooperating with intermediary / broker and alignment of
organizations for processing and scheduling optimization (process
promoter)
© tim.rwth-aachen.de
The client perspective:
Success factors of selecting an OIA (and working with them)
• Determine the objective of your open innovation venture FIRST!
• Decide about the control you want to keep on the open knowledge
transfer process (and the exploitation opportunities of the results)
• Decide about your resource allocation: Do you want to outsource or to
co-create the innovation process with the OIA? Hint: Much "open
innovation" today is inside the firm
• Consider what's next in the short term: Shall the OIA provide support
before and after the open task? (e.g., generating thousands of ideas is
one thing, evaluating them another)
• Consider what's next in the long term: Think of, e.g., community
management
• Look on your budget (especially if you are piloting)
© tim.rwth-aachen.de
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16. 43
This also provides great
opportunities for
technology transfer
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Piloting open innovation via broadcast search as
an innovative measure of technology transfer (DFG project in the
material sciences and EU FP7 funded project for the nano-technologies)
Starting situation: The European Paradox
Europe is leading in basic research in the material sciences (and especially "nano"
research) ...
... but is lacking behind North America and Japan in exploitation of research results
Same on German level fro DFG: Plenty of initiatives, but no large impact in transferring
research results from basic research into practice
Idea to pilot open innovation: Research contract to RWTH-TIM
First stage
Background research on state of technology transfer system
Empirical research and broad qualitative research (today)
TAM study on level of researchers
Second stage
Piloting of open innovation for technology transfer
Idea is to complement traditional transfer channels, not to substitute them
Third stage
If evaluation of pilots positive, establishment of OI platform on level of DFG / European
Community
© tim.rwth-aachen.de 44

17. Traditional pattern of university-firm technology transfer
University
scientists Companies
Search for
interesting
document results Transfer technologies
database
Incentives for transfer Search for research in universities etc.
- Part of grant contract - Screening of usual suspects
- Expected value of potential - Using existing networks
demand of knowledge by a firm
- Local search bias
- Increasing reputation
- Transfer often stopped by
"Not-invented-here"
© tim.rwth-aachen.de 45
Using Open Innovation for Technology
Transfer: A project for the German National
Academy of Science (DFG)
University
scientists Companies
screening of problems Open Broadcasting
innovation problems
platform
Activities on research site: Activities on company site:
- Screening of problems - Transfer of problems
- Reaction only when problems seems to be - Screening and evaluation of problems
known and cost to answer affordable
- Transfer of "best" solution
- Transfer of solution idea
- Contracting of further directed research
- Transfer of suggestion for contract research
© tim.rwth-aachen.de 46

18. 47
From market places
(for technologies) to
problem places for solutions
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From "global" to
"small worlds":
Providing an arena for
local open innovation
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19. 49
And there is so much
capacity for this
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200 billion hours of television watched
each year (US only!)
200.000.000.000
This equals about 2000 times the total(!)
human hours invested in creating the
English Wikipedia
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20. 52
The BIG question for innovation
management today:
How to capture the "cognitive
surplus" existing for innovation
in the world (but not in your
company's R&D lab)?
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Our theme for today
We problems!

21. 54
Open for interaction:
Prof. Dr. Frank T. Piller
TIM-Group at RWTH Aachen University
Tel.: +49 (0)241-809-3577
piller@tim.rwth-aachen.de
tim.rwth-aachen.de
open-innovation.com
mass-customization.blogs.com
scg.mit.edu
twitter: @masscustom
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