Open Innovation and Business Success

Contents

List of Figures

List of Tables

List of Abbreviations

Abstract

1 Introduction
1.1 Research motivation

2 Research design
2.1 Research structure
2.2 Research methodology and strategy
2.3 Research question and research purpose
2.4 Delimitations and target group
2.5 Origin of empirical data sources

3 Literature Review
3.1 Study of innovation
3.2 Studies of innovation management
3.3 Open Innovation literature review
3.3.1 Open Innovation and networking
3.3.2 Research on Open Innovation

4 Theoretical foundation
4.1 Closed and Open Innovation paradigm
4.1.1 Closed Innovation theory
4.1.2 Open Innovation concept
4.2 Open business model and its value
4.3 Methods for transition to Open Innovation model
4.3.1 Strategies of Open Innovation
4.3.2 Open source software movement
4.3.3 Enterprise 2.0 as social software
4.4 Role of the management in Open Innovation
4.4.1 Leadership and culture in Open Innovation
4.4.2 Intellectual Property management
4.5 Role of the government in Open Innovation
4.5.1 National system of innovation and policy framework
4.5.2 Open Innovation policy

5 Situation analysis in selected case studies
5.1 Empirical evidence
5.2 Open Innovation model in Procter and Gamble
5.3 Enterprise 2.0 and its challenges
5.3.1 Business use of Web 2.0 technologies
5.3.2 German companies and Enterprise 2.0
5.3.3 CoreMedia and business success
5.4 Social networks
5.4.1 Social networks and worker productivity
5.4.2 InnoCentive and innovation networking
5.5 Networks of Competence
5.5.1 Emergence of clusters and its performance
5.5.2 Management in German clusters
5.5.3 European clusters and critics of their efficiency

6 Advantages and contras in implementation of Open Innovation
6.1 Motives and potential benefits of Open Innovation approach
6.2 Benefits from “Connect and Develop” model
6.3 Clusters and benefits from transnational collaboration
6.4 Risks and barriers
6.5 Extension and complexity

7 Discussion
7.1 Suggestions for future research
7.2 Conclusions

References

Appendices

Appendix 1: Characteristics of the five waves of growth

Appendix 2: Models of innovation

Appendix 3: Components of business models in Xerox and its selected Spin-offs

Appendix 4: Presence of Open Innovation Policies in the three countries

Appendix 5: Management Metrics in Open Innovation

Appendix 6: IP Protection in “Connect and Develop” innovation model in P&G

Appendix 7: Initiative Networks of Competence Germany by topic

List of Figures

Figure 1.1: Innovativeness of the leading industrial countries 2008

Figure 2.1: Generative benefit processes attracted by Open Innovation

Figure 4.1: Closed Paradigm for managing industrial R&D

Figure 4.2: Open paradigm for managing industrial R&D

Figure 4.3: Principles of Closed and Open Innovation

Figure 4.4: German start-ups by business division

Figure 4.5: Value of new business model in Open Innovation concept

Figure 4.6: Alternative paths to market

Figure 4.7: Traditional software development steps vs. XP development cycles

Figure 4.8: Concept of Enterprise 2.0

Figure 4.9: Technology life cycle

Figure 5.1: Internal and external innovation assets in Procter and Gamble

Figure 5.2: Transition to Open business model in Procter and Gamble

Figure 5.3: Comparison of worldwide Enterprise 2.0 usage to German companies

Figure 5.4: Enterprise 2.0 and CoreMedia business success

Figure 5.5: Distribution of the competence networks’ members by topic

Figure 5.6: Cluster performance according to the type of cluster emergence

Figure 5.7: Main activities of German clusters by their category

Figure 6.1: Motives for corporate venturing (spin-in and spin-out)

Figure 6.2: Potential benefits of Web 2.0 in German companies

Figure 6.3: Reasons for the internationalisation of cluster networks

Figure 6.4: Barriers to Web 2.0 usage in German companies

Figure 6.5: Barriers to different types of Open Innovation in Dutch SME companies

Figure 6.6: Main barriers, hindering a possible cooperation between European networks

List of Tables

Table 3.1: World’s most innovative companies

Table 3.2: Typology of innovations

Table 3.3: Studies of innovation management

Table 3.4: Existing literature on Open Innovation

Table 4.1: Percentage of US industrial R&D by size of enterprise

Table 4.2: Percentage of German total R&D investments by size of enterprise

Table 4.3: Open Innovation strategies

Table 5.1: Comparison of previous and current P&G’s innovation models

Table 5.2: Profits from innovation in Open business model in Procter and Gamble

Table 5.3: P&G report card

Table 5.4: InnoCentive facts and statistics

Table 5.5: InnoCentive Solvers’ location by country or region

Table 6.1: Motives for different types of Open innovation in Dutch SMEs

List of Abbreviations

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Abstract

Companies and governments spend immense funds on internal research and development to sustain business excellence. Firms continuously innovate in the complex, competitive and global market, but only few are satisfied with the return that they receive for this substantial investment. Companies compete with increasing adoption speed of the new products and services to the market. Open Innovation proposes an entirely new perspective towards problems such rising costs of innovation or shorter product life in the market.

Open Innovation searches to leverage external and internal ideas in own business model, and seeks to capitalize unused ideas in other companies’ business models. Opening the innovation process - in the traditional approach generally closed - organizations can accelerate their time to innovation, increase their business growth, and enhance their profits.

1 Introduction

Innovation is a crucial topic in the study of economics, business, technology, sociology, and engineering. The questions asked in research nowadays focus not on it why innovation is important, but how to innovate and how innovation processes can be managed. Furthermore the discussion on innovation is about how to maintain strong economic growth in an era that is increasingly being defined by the globalisation of competition, major financial and demographic challenges.

Recently the economy continues to upset the market and recession tempts to cut back on the investments in research and development in the organizations. But even now in spite of crisis and its impacts on the economy seems to be the perfect time to increase firms’ innovation efforts.

The increasing competition processes and the development of Web 2.0 technologies (soon Web 3.0) are challenging the business to build more interactive relationship between the real-time market participants. The companies must nowadays find out how to achieve a competitive advantage for future.

This paper presents the concept of Open Innovation, which can help public and private institutions achieve better performance or business success and at last win the competition with market rivals.

1.1 Research motivation

Inspiration for this study was the report “Innovation systems - the engine of the economy” by Belitz and Schrooten from the German Institute for Economic Research (DIW Berlin 2008). The authors provide in their analysis the international comparison of the national systems and examine Germany's international competitiveness, its innovation capability as well innovation performance. Researchers from one of the leading research institutes in Germany recommend bringing in action important activities for German innovation policy makers (Belitz/Schrooten 2008; 9):

- Investment in education with new educational approaches concepts to increase the willingness and ability for studding
- Promotion the innovation processes to large sections of the population
- Strengthening incentives for innovation
- Securing the diversity of the national innovation system
- Seizing opportunities from international integration

Figure ‎1.1: Innovativeness of the leading industrial countries 2008

Abbildung in dieser Leseprobe nicht enthalten

Source: Innovationsindikator Deutschland 2008 (Werwatz et al. 2008).

The DIW’s suggestions are pointed out above to indicate on importance in the promotion of the innovation process and its popularization using the policy mixes. It is significant for German economy to support the innovative entrepreneurs at national as well local level. A worrying issue is that there have been evidenced some weaknesses of the innovation performance in Germany. According to German Institute for Economic Research (Werwatz et al. 2008; 10) “Germany’s innovativeness among leading industry countries is in a wide midfield after the leading trio from Sweden, USA and Switzerland “(Figure ‎1.1).

Recently discussed both in academia and in practice concept of Open Innovation could solve the Germany innovation performance problematic case.

First who introduced the concept of Open Innovation theory and examined the organizations that have shifted from so-called Closed Innovation processes towards a more open way of innovating was Chesbrough in his work: “Open Innovation - The new imperative for Creating and Profiting from Technology” (2003c). The concept challenges to build through cooperation with innovative entrepreneurs, universities, partners, suppliers and with innovative customers an Open Innovation business model. This model shall to enable the new innovators to bring new ideas and technologies, to speed up the innovation process and to improve the innovation based growth strategies.

2 Research design

2.1 Research structure

With the acceleration of the globalisation process, innovation is seen as the appropriate tool to create business value. This study focus on importance of the networking, the external and internal knowledge (Intellectual Property) acquisition, the transformation from Closed to Open Innovation model and the management of the knowledge in the company.

The first chapter provides general introduction to the innovation process and current business challenges in the complex and competitive market. There is as well the presentation of research motivation that explains the reasons to conduct the analysis on the Open Innovation phenomena.

The second chapter concentrates on research methodology and its strategy. In methodology part there are devised the research hypothesis as the statement created to speculate upon the outcome of this research. As the next are presented the research structure and research questions. The research proposal is explicitly defined to give an overview about the aims of this study. Delimitations provide the information about limitations in the scope of the inquiry as determined by decisions that were made throughout the development of the proposal. The presentation of the research target group indicates the primary group of people this paper is aimed at appealing to. Origin of empirical data informs about sources from which later conclusions are derived to this paper.

Third chapter focuses on the current knowledge on innovation and Open Innovation topic. A brief literature review enables to introduce the theoretical achievement in the Open Innovation theory.

As the next, in the chapter four there are presented both Closed and Open Innovation concepts based on Chesbrough’s work. The idea of Open Innovation is supported by the term of Open business model that offers the promise of the winning the market sooner and at lower cost (Chesbrough 2003c; XXV). As next are presented some useful Open Innovation instruments based on the Reichwald/Piller’s work (2006; 155). The demonstration of the instruments is followed by the challenging problem of the management in the Open Innovation projects. The role of the management in the implementation of Open Innovation idea seems to be significant (Huston/Sakkab 2006). The presentation of the management of Intellectual Property demonstrates successful transition from a mentality Closed Innovation Company to one with Open culture.

The last section of the chapter four closes theoretical foundation in wider, economical context and points out the role of the state in the fast changing environment of the technology, where borders are becoming increasingly transparent. Since regional clusters as a part of the national system of innovation have been chosen as governmental initiatives that popularize the networked model of collaboration between different institutions, it is worth to present in this study their emergence and performance.

The practical implementation earlier presented Open Innovation theory is demonstrated in the chapter five. Through the development of first case study “Connect and Develop” in the Procter and Gamble Company it is shown how to broaden the horizon by looking at external sources for innovation. In choosing of the Procter and Gamble’s new innovation model has been made an indication on the technology and networks application to seek out new ideas for future products.

The second case study recognizes the current key challenges within the company regarding collaboration, exchange of knowledge and information based on the Enterprise 2.0 concept and open source model (Berlecon Research 2007).

The next case study from recent research of MIT (Massachusetts Institute of Technology) focuses on the impact of social networks on the worker productivity and the importance of these networks in the information diffusion. The illustration of Open Innovation scientific online community- InnoCentive - supports the hypothesis about correlation of increasing diversity of social network to its productivity in the intermediaries market.

Findings about performance of the German Networks of Competence from national governmental initiative close this chapter’s section.

In the chapter six there are explained the benefits of implementation and transition to an Open business model at local and national level in relevance to presented case studies. The selected examples support the validation of proposed hypothesis and enable to answer research questions. Positive correlations from examined various data allow to not reject the thesis. As the next are depicted some existing barriers and risks, that unable public or private institution to contribute in an extended and complex Open system of Innovation. Chapter six provides information, if there are any challenges that firms have to face while opening its business model.

The chapter seven presents some suggestions for future research based on human and organizational dimension of Open Innovation. There are identified some findings about areas that make up importance for the future research in the central issues of Open Innovation. At least, in closing part is presented summary of the achievements and findings from entire study. It enables to point out some conclusions made after various observations of the Open Innovation phenomena in the theory and practice. The challenging fact is that various businesses with different sizes have great opportunity to contribute in the process of Open Innovation. General observation and assumption that Open Innovation drives business success should complete the research paper.

To conclude the analysis there is presented a list of references used as a source for theory or claims in this study which contains complete bibliographic information.

2.2 Research methodology and strategy

Methodology includes the following concepts as they relate to Open Innovation field of the master thesis inquiry:

1. Collection of theories, concepts or ideas on Open Innovation paradigm.
2. Comparative study of different approaches of the Open Innovation’s practitioners in their case studies.
3. Critique of the individual methods in different studies.

Methods used in each survey, which are secondary database in this paper, are explained in details in chapter five.

Figure ‎2.1: Generative benefit processes attracted by Open Innovation

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Source: author

In the Figure ‎2.1 there is presented master thesis idea: the two main concepts interact with Open Innovation concept and its outcomes resulting in a generative benefit process of Open Innovation giving potential increasing returns and higher workers productivity.

Figure ‎2.1 leads to three hypotheses applying to the research questions outlined in previous section. These hypotheses are as follows:

- Hypothesis 1: Companies with Open business model set in motion increasing returns process and profit from diversification of the research and development.
- Hypothesis 2: Organizations with Open Innovation model benefit considerably by constructing social networks. Social knowledge capital generated from social networks is positively correlated with information worker productivity.
- Hypothesis 3: Knowledge capable regions (clusters) operating in the Open Innovation model are supposed to have benefited from economic governance practices and strategies.

The estimation to extent an Open Innovation idea to cluster concept (knowledge capable regions) shall present the role of the government in supporting innovation by policy mixes at national level. Research relates to companies using social network instruments as important new elements in their performance success and regional economical growth. “Such growth is hypothesised to occur also in locations that need not to be metropolitan or global cities” (Cooke 2006; 217). Cooke mentions here less favoured locations (e.g. with medical schools, universities or other kinds of public research organizations) where comes out the advantage to prosper and take a part in the perspective to attend the operation of increasing returns forces.

2.3 Research question and research purpose

The main motivation of this study is to understand how both small and medium firms (SME) and large corporations (MNC) can foster innovation process in order to compete with other rival companies. The exploration of the way to increase the efficiency and effectiveness in the innovation processes follows trough examining and comparing of different theories on Open Innovation as well different firms’ case studies.

In order to sustain the interest and to focus on Open Innovation phenomena there are posed following research questions:

1. How to build an Open business innovation model that enables to increase firms’ competitiveness?

2. How should be the Open Innovation process managed to benefit successful from innovation in the competitive market?

3. What is a role of the government and policymakers in creation of Open Innovation friendly markets and how to support it with regulations?

The purpose of this paper is to describe a new model of cooperation in the use of innovative processes starting with the entrepreneurship unit level and closing on the national governmental level. The national systems are described as ”the network of institutions in the public and private sector whose activities and interaction initiate, import, and diffuse new technologies” (Freeman 1987), so the performance of these networks seems to be worth of the extensive research and consideration as well.

The intention of the study is to understand the way how companies integrate “Open and Networked Innovation” concepts in their corporate strategy to increase innovation capability, and win the competition with their business rivals. The paper is likely to determine the key factors of successful transition to an Open business model, but also to identify the risks that companies have to face while making the transition.

Nowadays the entry to the wealth of knowledge is supported by the growth of public scientific databases, online journals and articles combined with low-cost Internet access and high transmission rates. The successes of Wikipedia or the Linux collaborating Ecosystem are examples of the extent of Social Creativity and User Innovation. Active social communities of users as co-designers are more important than ever before. Participators of networked communities develop and create innovative products with support of evolutionary software design known as Web 2.0 or Enterprise 2.0 technology.

Discovering the right way to access the external knowledge with suitable Open business model, to manage the companies’ Intellectual Property and then to create the market value are also purposes of the thesis. The challenge is to tap the full potential of the social creativity networks of companies’ partners, suppliers, customers and even potential business rivals.

This paper aims to give an overview of the strategies and business models based on different case studies of companies that implemented an Open Innovation concept into their organizations structure. Investigating in “the best practice” cases should help creating an organizational Open Innovation model for driving profits, market value and productivity with that model. The findings on Open Innovation proposed in this thesis could improve the Germany innovation performance both at local and national level.

2.4 Delimitations and target group

This paper mainly focuses on researchers that explicitly use term of Open Innovation. There are as well researchers that investigations of closely relate to Open Innovation without using the term e.g. user-innovation, Enterprise 2.0 (Web 2.0), innovation intermediaries, region clusters and national system of innovation, but this is only these terms laying in the scope of the thesis.

The paper investigation is directed toward managers and specialists involved in innovation projects, those who lead strategic innovation in organisations and professionals involved in building relationships with suppliers and customers. It is also aimed towards students and academic researchers. The concept of Open Innovation is not particularly specified to high-tech industries or Information and Communication Technologies “intensive” companies, but to “every company [that] has a technology, that is, a means to convert inputs into goods and services that the company sells” (Chesbrough 2003; XXVI).

2.5 Origin of empirical data sources

The empirical data presented in the paper is based on a qualitative approach of following researchers’ case studies:

1. Chesbrough’s extensive field research, academic study and his personal experience from the Haas School of Business at the University of California, Berkley.
2. Berlecon Research’s study commissioned by CoreMedia: “Enterprise 2.0 in Germany Prevalence, opportunities and challenges”.
3. Huston and Sakkab’s study on innovation model in Procter and Gamble Company: "Connect and Develop".
4. De Jong, Van De Vrande, Vanhaverbeke and de Rochemont’s report: “Open innovation in SMEs: Trends, motives and management challenges”.
5. Study of The Massachusetts Institute of Technology (Pentland, Aral et al.) on social networks and workers productivity.
6. Meier zu Köcker’s study: “Clusters in Germany. An Empirical Based Insight View on Emergence, Financing, Management and Competitiveness of the Most Innovative Clusters in Germany” from The Institute for Innovation and Technology in Berlin.
7. Meier zu Köcker and Buhl’s study: “Internationalization of Networks. Barriers and Enablers, Empirical analysis of European networks.” from The German Ministry of Economy and Technology in Berlin.
8. Study of The German Institute for Economic Research in Berlin: “Innovation systems - the engine of the economy” with editorial by Heike Belitz and Mechthild Schrooten.
9. De Jong, Vanhaverbeke, Kalvet and Chesbrough’s study: “Report on Policies for Open Innovation: Theory, Framework and Cases” from VISION Era-Net - a network of nationally leading innovation policy agencies from Finland.

Presented empirical case studies are generally taken to mean the collection of data from which there are derived the conclusions on Open Innovation paradigm in the next chapters.

3 Literature Review

3.1 Study of innovation

Businesses must be able to adapt and evolve different innovation techniques if they wish to operate in the competitive market. The idea of innovation has become part of our culture. A scientist’s view of innovation may be different from that of an accountant in the same organization.

“Not to innovate is to die”, wrote Christopher Freeman (Freeman 1982) in his noted study of the economics of innovation. The dominant companies who have established themselves as technical and market leaders demonstrate ability to innovate and deliver impressive revenue growth and stock returns to their shareholders (Table ‎3.1).

Table ‎3.1: World’s most innovative companies

Abbildung in dieser Leseprobe nicht enthalten

Source: Business Week 17th April 2008.

The analysis of economic history shows that industrial technological innovation has changed substantial economic development and brought benefits for innovating company and innovating country.

First economist who emphasised the importance of the innovation in the meaning of new consumers, goods, the new methods and markets as “fundamental impulse that sets and keeps the capitalist engine in motion” was Schumpeter (Schumpeter 1934, 1939 and 1942).

He argued that the competition posed by new products was fundamentally more important than marginal changes in the prices of existing product (Schumpeter 1942).

Table ‎3.2: Typology of innovations

Abbildung in dieser Leseprobe nicht enthalten

Source: Trott 2008.

Around the 1930s Schumpeter started studying how the capitalist system was affected by market innovations. This scientist believed in “process of industrial mutation, which incessantly revolutionizes the economic structure from within, incessantly destroying the old one and incessantly creating a new one”. He called this process “creative destruction” that causes continuous progress and improves the standards of living for everyone (Schumpeter 1942; 137).

Schumpeter’s innovation concept refers to the following cases and simultaneously delivers broad definition of innovation (Schumpeter 1934):

1. The introduction of a new good or of a new quality of a good.
2. The introduction of a new method of production.
3. The opening of a new market.
4. The conquest of a new source of supply of raw materials or half-manufactured goods.
5. The carrying out of the new organization of any industry, like the creation of a monopoly position or the breaking up of a monopoly position.

Table ‎3.2 presents recent typology of innovations (Trott 2008; 16) that indicates some similarities to Schumpeter’s definition of innovation.

First who suggested innovation as cyclical and being associated with waves of economic growth was Karl Marx. He argued that capital economies would eventually decline.

Other economist - Nicholai Kondratieff - stated that “long wave” theory of innovation was associated with idea of an elongated business cycle (Kondratieff 1935, 1951). These forty to fifty year “long waves” represented the rise and fall of the overall capitalist system (see detailed description of the five waves of growth in Appendix 1).

The view of the life cycles of many industries was popular, but it has failed in offer of understanding how to innovate successful. In the post-war period economists such as Harrod (1949) and Domar (1946) began research deeper on the causes of economic growth.

One of the most important influences on innovation seemed to be the industrial research and development that caused a period of rapid growth in expenditure by countries on R&D. There was general “overemphasis on big science and technology” which in fact showed the weakness of the science policies in the 1950s (Freeman 1997; 390).

A series of studies concentrating on the internal characteristics of the innovation process were implemented in the 1950s. Researchers attempted to understand why firms behaved differently and why some firms appeared to be more successful then others (Simon 1957, Woodward 1965, Carter and Williams1959).

The Innovation models have been changing during the past decades. The first simple "technology push" and "market pull" innovation models were used in the 1960s and 1970s (Langrish et al. 1972) and after than "coupling models" emerged in the 1980s (Rothwell 1992) (see all these three innovation models in Appendix 2).

Studies in the 1960s uncover significant differences in organisations characteristics (Myers and Marquis 1969, Burns and Stalker 1961, Cyert and March 1963). Hence, the new framework emphasised that firm and how it used its resources seemed to be as the key influence on innovation. The contribution to this innovation view was delivered by researchers and their innovation theories like:

- Nelson and Winter: Specific R&D (Research and Development) investment is necessary for innovation; The competitive advantage of firms is based on their innovative capacity; The selection of firms is determined by their innovative capacity (Nelson/Winter 1982),
- Cohen and Levinthal: Absorptive capacity, the ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends is critical to its innovative capabilities (Cohen /Levinthal 1990; 128), Failure to invest in research and technology will limit the organisation’s ability to capture technological opportunities (1990; 130).

Abernathy and Utterback popularised the view, where product innovation, process innovation, competitive environment and organizational structure were all interacting and closely linked together (Abernathy & Utterback 1978).

Economists found that there was no direct correlation between R&D spending and national rates of economic growth. Mansfield (1991) has undertaken many studies concerning the relationship between R&D expenditure and economic growth and productivity.

3.2 Studies of innovation management

Contemporary studies on innovation attach the importance of satisfying the needs of the customers. Important roles play here product management, marketing and activities fed into the new product development process. Much evidence characterizes innovation as the main driver for companies to expand, grow and sustain a high profitability (Drucker 1988, Christensen 1997, Thomke 2001). Recent studies (Christensen 2003) suggest that listening to the customer may determinate long-term business success. Christiansen indicates on firms that compete by using “Sustaining Innovations” with current and existing customers market or by “Disruptive Innovations” that either create new markets or take eventually root among established customers.

The focus of the current studies lays on that how to innovate and how the innovation process can be managed. Innovation is extremely complex process and involves the effective management of different activities. Over the last 50 years have been attempted numerous studies of innovation management (see some of the key studies in the Table ‎3.3 ).

Table ‎3.3: Studies of innovation management

Abbildung in dieser Leseprobe nicht enthalten

Source: Trott 2008.

The main factor to manage innovation successful seems to be focusing on the interactions of the functions inside the organisations as well the interactions of the functions like marketing, research, manufacturing and business planning with external environment (Trott 2008; 26). Scientist and engineers within firm interact with research colleges in universities and other firms about scientific and technological developments. Similar suppliers, distributors, customers and competitors as well business planers and senior management network and communicate with each other in order to innovate.

Other external institutions such governmental departments, public supplier and customers give also their contribution to the process of innovation.

The general frame in which innovation production and diffusion take place applies to different elements composing a market. Porter uses five competitive forces model at the industry level to explain the ability to serve customers and make a profit (1980; 4):

1. Entry of competitors.
2. Threat of substitutes.
3. Bargaining power of buyers.
4. Bargaining power of suppliers.
5. Rivalry among the existing players.

Sometimes a sixth competitive force is added:

6. Government.

Porter's five competitive forces model is a most influential model in the free trade market economy. Some researchers propose to rethink and reinvent that model to develop it a lot further in more practical way, including (Grundy 2006; 213):

- Mapping the competitive forces, which can significantly vary over market and competitive terrain and within the same industry
- Understanding its dynamics
- Prioritising the forces
- Doing macro analysis of the sub-drivers of each of the five forces
- Exploring key interdependencies, both between and within each force

Other researcher, Merchant (2007) argues a courageous statement about Porter’s Five Forces and Web 2.0 (the 2nd Internet revolution). Merchant is opinion that there are differences between traditional business framework and the new, perceived 2.0 framework, which means for businesses:

- Manufacturing costs have been reduced
- Investment costs have been reduced
- Marketing is decentralized
- Many different revenue models have emerged

Merchant (2007) says that “Porter’s model needs to be tweaked”, because “the Web 2.0 market opens up a lot of new revenue models and a very low cost of entry”.

Recently proposed and popularised model for the management of innovation is based on the need for companies to open up their innovation processes and combine internally and externally developed technologies to create business value. The concept of Open Innovation has been proposed by Chesbrough (2003c). Detailed studies and publications on this subject are presented in the next chapter’s section.

3.3 Open Innovation literature review

3.3.1 Open Innovation and networking

Innovation is sometimes described as an information-creation process that arises out of social interaction (Nonaka 1991). In effect, the firm provides a structure within which the creative process is located. Interactions (formal and informal) within the innovation process provide the opportunity for sharing and exchanging of the thoughts, potential ideas and views. A study of Japanese firms (Nonaka 1991) supports the view, that knowledge can only be learned through practice and experience. To gain access to such knowledge – specific “know how” not easily understood - one has to be practising in this area of knowledge. Nonaka (1991) argues that the creation of new knowledge within an organisation depends on tapping the tacit and often highly subjective insights of individual employees.

The importance of informal interactions is emphasised in research as well. A number of studies (Allen 1977, Tushman 1978) have documented engineers' information needs and the relationship between information use and their work performance. Sharing the same language with similar background or viewpoint within organisations facilitates internal communications and provides to effective interactions between actors in this organisation proposed that oral communication is effective only where information "actors" share common language with similar background or viewpoint (Tushman 1978; 625).

At least the business world understood the importance of flexibility and intercompany networking in the innovation process. Rothwell understands this networking and illustrates it in his coupling “Strategic Integration and Networking"' model (1992; 221) (Appendix 2). However companies’ R&D processes were still closed from outside the company it was promising approach to conduct the innovation. Innovations developed from different stages starting with the idea creation and ending to the launch phase. Later the funnel approach was connected to Cooper's State-Gate System that focused on a step-by-step process on what to do during the stages and gates of the product development (Cooper 1990; 46).

A recently proposed by Chesbrough the new knowledge-based economy innovation model of Open Innovation (2003) presents an argument that the process of innovation has shifted from one of Closed (internal to the firm) to a new Open system, where players are distributing up and down the supply chain. The linkages and relationships of firms through those cheap and instant information flows enable the firms to capture and utilities ideas. This seems to support the application of network theory into areas of business management (Parkhe et al. 2006).

One of the important change drivers at the moment seems to be the Web 2.0 based Online Social Networks movement which generally refers to communities and hosted services facilitating collaboration and sharing between users (Cachia et al. 2007). According to McKinsey's second annual survey on Web 2.0 (2008), companies are using more Web 2.0 tools and technologies than they were 2007, sometimes for complex business purposes. Fundamental changes are beginning to take place among the satisfied companies as a result of understanding of the usage benefits from Web 2.0. These companies leverage technologies to change management practices and organizational structures. Some are taking steps to open their corporate "ecosystems" by encouraging customers to join them in developing products and by using new tools like blogs, wikis, social networking and podcasts (downloadable via Web digital audio or video media files) to tap distributed knowledge (McKinsey 2008; 39). The importance of networks that “strongly influence information diffusion and access to novel information” presents recent MIT’s study by Pentland (2009) and Aral et al. (2007, 2009). Availability of these networks as the research shows is a highly significant predictor of worker productivity. This information reflecting the nature and structure of human relationships and delivering the tools that support human social relationships, communication and interaction, will provide a significant ROI to the enterprise.

3.3.2 Research on Open Innovation

Changes in society and industry have led to increased mobility of knowledge workers and development of the new financial structures such as venture capital. The boundaries of innovation processes with earlier vertical character of technological competition have been broken up in a world of abundant knowledge and competence (Chesbrough 2003c; 49). Chesbrough emphasises that “Companies must open themselves horizontally” by application of Open Innovation concept. He defines Open Innovation as “the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively. Open Innovation is a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as the firms look to advance their technology” (Chesbrough 2006; 1).

Enkel and Gassmann (2007) identify three cores of Open Innovation processes:

1. The outside-in process: the enriching a company’s own knowledge base through the integration of suppliers, customers, and external knowledge sourcing can increase a company’s innovativeness.

2. The inside-out process: the external exploitation of ideas in different markets, selling IP and multiplying technology by channelling ideas to the external environment.

3. The coupled process: the linking outside-in and inside-out by working within alliances with complementary companies.

Furthermore Gruber and Henkel (2006) explore challenges for new ventures like market entry barriers in open source software (OSS) development, which the ideas of Open Innovation originated from. Both researchers exploit business opportunities based on OSS and on open innovation in general. Open Innovation scientists focus on the one of the most important actors in a distributed Open Innovation process: customers or so-called users (Piller/Walcher 2006). Research has shown that many inventions originate not from the manufacturer domain, but from the user (von Hippel 2001). Explanations how to collaborate with large set of customers in the technological landscape discusses Dodgson, Gann and Salter (2006). The proposed technique “Connect and Develop” by the “practitioners” from Procter and Gamble - Huston and Sakkab (2006, 2007) - places importance on the role of the leadership, responsibilities and relationships of the people and process in the organizations (see Chapter 5.2).

Chesbrough informs how companies should manage their Intellectual Property (IP) and shows different strategies to connect IP to own business models in order to leverage internal and external IP through these models (Chesbrough 2003a).

The broader scope of Open Innovation paradigm focuses on the network and industry level (Vanhaverbeke et al. 2006). Vanhaverbeke draws conclusion that Open Innovation concept is wider applicable then to ICT (Information and Communication Technologies) or to industry settings where network economies play a role. The agricultural biotech innovations research (Vanhaverbeke et al. 2006) and biotech start-ups with their pharma-based applications (Cooke 2003) provide evidence that Open Innovation in value networks is abundant as well in other growing range of industries.

From a regional innovation system perspective there are intra-firm knowledge asymmetries that firms have to overcome (Cooke 2005, 2006). They tap into the regional knowledge capabilities in places called “mega-centres” (e.g. in biotechnology).

The theoretical framework arguing that Open Innovation and Closed Innovation cultures needs to be different and the empirical evidence for many of the hypothesized differences in innovation culture provides in his study Herzog (2008). The necessities of cultural changes as well as the new management skills recognize also Dodgson, Gann and Salter (2006).

The Table ‎3.4 presents briefly review of existing literature in the Open Innovation subject (Fredberg et al. 2008; 23) and categorizes the theory into main focusing in literature topics.

Table ‎3.4: Existing literature on Open Innovation

Abbildung in dieser Leseprobe nicht enthalten

* Chapter in Chesbrough, Vanhaverbeke and West (2006)

Source: Fredberg et al. 2008.

Furthermore Christensen, Olesen and Kjaer (2005) place the idea of Open Innovation in the context of industrial dynamics and applied evolutionary economics. They argue the different ways that companies manage Open Innovation in regard to:

- Emerging technology within the innovation system
- Nature and stage of maturity of the technological regime
- Particular value proposition pursued by companies

Berkhout et al. (2006) identifies the necessity of a cyclical model of innovation. It considers innovation process as a coupled “cycles of change” in our society connecting four production factors: capital, labour, knowledge and creativity enabling the “innovation economy”.

Currently a new approach to corporate research and development has been introduced. It uses modern software and internet as brokers between firms requiring research and those worldwide willing provide it at appropriate costs (Bromley 2004).

In the Open Innovation paradigm Chesbrough (2003c, 2006) identifies following key aspects:

- Networking and its value proposition (2003c; 65), (2006; 109)
- Collaboration (2003c; 60), (2006; 129)
- Corporate entrepreneurship like venturing activities, spin-offs (2003c; 56), (2006; 40)
- Intellectual Property management like IP licensing (2003c; 155), (2006; 165)
- Internal R&D (2003c; 58), (2006; 23)

Still there is a need for a critical view and discussion on the concept of Open Innovation.

The aim of this literature review is to gain some insights to research conducted within the Open Innovation field. The most published and cited author is Henry Chesbrough who formed the term Open Innovation 2003. Several of the publications refer only to some of the major themes and categories in Open Innovation concept as it Table 3.4 illustrates.

4 Theoretical foundation

4.1 Closed and Open Innovation paradigm

4.1.1 Closed Innovation theory

Firms that don’t invest in research and development of the new products or services, bear the risks of losing market shares to their business competitors. The fact is that “most innovations fail. And companies that don’t innovate die” indicates Chesbrough - the “creator” of Open Innovation paradigm (2003; XVII).

The companies in the 20th century have invested heavily in internal R&D and engaged the best people – enabling them to develop the most innovative ideas and protect them with Intellectual Property strategies. The generated profit was used to reinvest in R&D – in a virtuous circle of innovation (Chesbrough 2003a). Chesbrough argues that companies for all these years have innovated (and still now innovate) in so-called Closed Innovation model, where "successful innovation requires control” (Chesbrough 2003c; XX). The industries like computers, semiconductors, information technology, pharmaceuticals or biotechnology have strongly internally focused innovation logic, since it is not guaranteed that others' technologies or ideas are available and of sufficient quality. Chesbrough identifies some of the implicit rules of Closed Innovation (2003c; XX):

1. Firm should hire the best and brightest people.

2. Being first to market requires that research discoveries originate within the own firm

3. Profiting from innovative efforts requires a firm to discover, develop, and market everything itself.

4. Being first to market also ensures that the firm will win the competition.

5. Leading the industry in R&D investments results in coming up with the best and most ideas and eventually in winning the competition.

6. Controlled IP management must prevent other firms from profiting from the firm's ideas and technologies.

In this closed model firm has to do everything by itself beginning with idea generation, development in labs and production to marketing, distribution, service, and financing. This shows that innovation projects:

- can only enter the innovation process at the very beginning
- are developed using only internal resources and competencies
- can only exit the process by getting commercialized via the firm's own distribution channels

Once ideas or technologies are rejected or projects cancelled, they are stored and collected in internal databases, “placed on the shelf”, until a downstream business would be ready and willing to use them.

Figure ‎4.1: Closed Paradigm for managing industrial R&D

Abbildung in dieser Leseprobe nicht enthalten

Source: Chesbrough 2003c.

In the post-war age companies invested in large central research labs and relished their significant downstream market positions. Firms captured a considerable portion of the value they created from the technology in their laboratories. Under control of their knowledge output firms created value-added products with their technology in order to reinvest these returns in more research and create a virtuous cycle (Chesbrough 2003c; 34). Figure ‎4.1 illustrates the Closed Innovation model for industrial R&D management as the traditional approach to the innovation process.

The traditional approach to innovation described above is increasingly disappointed both researchers and top-managers. Its effects do not correspond to the needs and expectations of customers, while engaging inefficient more and more resources. Scientists from the Booz Allen Hamilton – a leading consulting firm from Virginia US - examined in their recent study “Money isn’t Everything” the 1000 most innovative, publicly held companies in the world (Jaruzelski et al. 2005). Research demonstrates that “R&D spending levels within the Global Innovation 1000 had no apparent impact on sales growth, gross profit, operating profit, enterprise profit, market capitalization, or total shareholder return” (Jaruzelski et al. 2005; 57). This is the myth that higher R&D spends stand for competitive advantage and that belief has been ruled around for decades.

In networked and complex economy that we are already experiencing companies can not rely only on in-house closed R&D activities anymore. In the end of the 20th century, a number of factors have changed. The boundary of the firms started to breaking up by following reasons:

- Availability and mobility of skilled workers increase (Chesbrough 2003c; 34)
- Availability of the venture capital market grows (Chesbrough 2003c; 37)
- External options for unused ideas appear (e. g. employees, could be financed by VC in order to commercialize their ideas). (Chesbrough 2003c; 38)
- Capability of external suppliers increases (e.g. the expansion of universities and university enrolments, the availability of well-trained workers to companies of all sizes (Chesbrough 2003c; 39)

Chesbrough identifies that these factors significant change the innovation model in the companies and lead to the shifting and transformation of the management of innovation (2003b). The knowledge diffusion, the wealth of the information and the presence of the VC (venture capital) change the innovation process for everyone.

These insights led to the development of Open Innovation model. Firms could commercialize external and internal ideas by applying outside and inside pathways to the market, where “the boundary between firm and its surrounding environment is more porous” (Chesbrough 2003a; 37).

To ensure firms’ future success they have to open their innovation process and collaborate with “actors” from external environment to build open creative partnerships. This is the reason why the companies need to be active sellers and buyers of Intellectual Property. If companies operate in Open Innovation model they will not lose the value of their unused ideas.

4.1.2 Open Innovation concept

The concept of Open Innovation theory has been proposed and popularized by Chesbrough (2003). He examined the organizations which have shifted from so-called Closed Innovation processes towards a more open way of innovating. Chesbrough presented an example of the US firm XEROC PARC and its spin-offs (e.g. 3Com and SynOptics), which valuable projects (computer hardware and software innovations) initially seemed worthless, but then turned out to be surprisingly valuable and find the value in the new or current market (Chesbrough 2003c; 1).

Valuable ideas need not to origin within their firm, and the release of those ideas into the market need not to be accomplished by the firms' own activities. That means firms should use external ideas and technologies as well as external paths to market in order to advance their innovation projects.

The not limited abundance of knowledge landscape (e.g. virtually database, universities and research agendas from governmental funding) changed the logic of Closed Innovation (Chesbrough 2003c; 43). Following factors indicate on knowledge diffusion:

1. Excellence in university scientific research ends the era of knowledge monopolies by centralized R&D organizations,

2. Increasing shares of US industrial R&D for companies with less then one thousand employees (see Table ‎4.1)

Table ‎4.1: Percentage of US industrial R&D by size of enterprise

Abbildung in dieser Leseprobe nicht enthalten

Sources: Chesbrough 2003c, 2006.

German shares of total R&D investments show also knowledge diffusion among German enterprises. It indicates on continuous decreasing value of R&D investments especially for large companies (MNC) with more then ten thousand employees (so-called knowledge silos) (Table ‎4.2).

Table ‎4.2: Percentage of German total R&D investments by size of enterprise

Abbildung in dieser Leseprobe nicht enthalten

Sources: Das Institut für Mittelstandsforschung Bonn 2002, Stifterverband für die Deutsche Wissenschaft 2007.

Creators of the one of first successful Open Innovation models “Connect and Develop” note as well that important innovation are increasingly being done at small and midsize entrepreneurial companies (Huston/Sakkab 2006; 60). Chesbrough (2003c; 48) recognizes it as indicator of knowledge diffusion, where the share of overall R&D spending (1999 -2005) in US companies with more then 10,000 employees has fallen from 55 percent to 52 percent (Table ‎4.1) (Germany from 55 percent to 47 percent, see Table ‎4.2).

The logic of Open Innovation exploits the phenomena of knowledge diffusion. Companies instead of providing benefits by accumulating technology (ideas) for own use, make money by leveraging multiple paths to market for their technology or ideas. “Instead of restricting the research function exclusively to inventing new knowledge, good research practice also includes accessing and integrating external knowledge” (Chesbrough 2003c; 51). Not excluding anyone else from using firm’s technology, but managing IP to advance its own business model will allow making additional profits. R&D strategy should be able to estimate the external start-up companies (e.g. by supporting in foundation young start-up) in order to initiate organizational experiments such as commercializing technologies (Chesbrough 2003; 53).

Figure ‎4.2 presents how the opening of “the boundary between a firm and its surrounding environment” enables “innovation to move easily between the two” (Chesbrough, 2003a; 37).

Open Innovation projects can be launched from internal or external sources and new technology can enter at various stages. Projects can also get to market in many ways, such as out-licensing or a spin-off venture in addition to traditional sales channels (Chesbrough 2003b).

Open Innovation is described as “both a set of practices for profiting from innovation and also a cognitive model for creating, interpreting and researching those practices” (Chesbrough et al. 2006; 286).

Figure ‎4.2: Open paradigm for managing industrial R&D

Abbildung in dieser Leseprobe nicht enthalten

Source: Chesbrough 2003c.

In later work Chesbrough (2006a) claims that Open Innovation responds to two anomalies in previous research on innovation. First, he treats the spill-overs as an explicit consequence of the business model (instead of something to avoid) and the Intellectual Property rights as a new class of assets (instead of as a tool for protection). He claims that both can deliver additional revenue to the current business model (Chesbrough 2007; 22).

There are identified five key themes in research on Open Innovation (Chesbrough 2006):

1. Business models.
2. External technologies.
3. Managing and linking knowledge.
4. Start-ups.
5. IP rights.

Early models of Open Innovation were studied in the industry of open source software development (OSS) and later converted to more general Open Innovation practices (see Chapter 4.3.2).

Summarizing we could enumerate some of the principles of Open Innovation that are illustrated in Figure 4.3. Chesbrough contrasts them with earlier logic of the Closed Innovation approach (2003c; XXVI).

Figure ‎4.3: Principles of Closed and Open Innovation

Abbildung in dieser Leseprobe nicht enthalten

Source: Chesbrough 2003c.

Other scientists such as West and Gallagher (2006) identify four generic Open Innovation strategies:

1. Pooled R&D – shared R&D (require shifting in culture).
2. Spinouts – a way of escaping large firm bureaucracies.
3. Selling complements – accepting commoditization or develop differentiated products based on commodities.
4. Donated complements – general purpose technologies are sold, so users can develop differentiated products (e.g. so-called user toolkits).

Chesbrough describes the character of openness as a shifting from vertical to horizontal way (2003c; 61): “The earlier vertical character of technological competition in the immature phase of the technology, in which internal R&D was critical to sort out the complexities, gives way to a more horizontal phase of technological competition, in which external technologies compete within the partitions of an established architecture.”

The shifting from Closed to an Open approach and from deeply vertical integration system to horizontal one (modular architecture with independent components) may involve buying ideas from others or offering components externally in order to save money, reduce development time and provide desired features (profits) to organization.

Significant role in advancing the Open Innovation concepts have start-ups (Chesbrough 2006; 34). Start-ups are “carriers of new technologies, and sometimes explorers of new markets. They also often represent experiments with new and different business models” (Chesbrough et al. 2006; 32). The Christensen’s view of the start-ups depicts them as an important source of novel technologies into an industry (Chesbrough et al. 2006; 52). Also West and Gallagher see that start-ups experiment with new business models associated with open source software (OSS) movement. “They introduce new variety into the software community or ecosystem, and help that community penetrate into very large enterprises (Chesbrough et al. 2006; 32).

German start-ups companies seem to be also mostly (51%) oriented by setting up their business in the field of Web-based Services (E-Business) and open source software (Software and Community-Portals) as it the Figure ‎4.4 illustrates (Bitkom 2008).

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