An Overview of DistributedPerspectives on Innovation

Joel Westblog.OpenInnovation.netSan José State University

Center for Open InnovationUC Berkeley, Haas School of Business

January 24, 2011

Today’s Story

• Traditional and distributed innovation• Similarities and differences• Emerging areas of research and

practice• Conclusions

What is “Innovation”?

Defining “Innovation”

Some disagreement over “innovation”:• Technical vs. economic (or both)• Radical vs. incremental

Is cost reduction radical? (Leifer et al)• Adopter vs. producer perspective• New to the firm vs. new to the world

Source: Bogers & West (2010)

Latent value of an innovation

“The inherent value of a technologyremains latent until it is commercialized insome way.

“A business model unlocks that latentvalue, mediating between technical andeconomic domains.”

– Chesbrough & Rosenbloom (2002)

Invention vs. Innovation

“Inventions … do not necessarily leadto technical innovations. In fact themajority do not. An innovation in theeconomic sense is accomplished onlywith the first commercial transaction.”

—Freeman (1982: 7)

ResearchInvestigations

Development New Products& Services

TheMarket

Science&

TechnologyBase

Source: Chesbrough (2006)

Vertically Integrated R&D

Research of Alfred D Chandler (1918-2007)• Studied large US firms 1840-1940• Firms vertically integrate to supply own

inputs and control their outputs R&D is an essential part of integration Technology industries require large R&D labs Markets don’t exists to buy/sell innovation

• Integration widely adopted in practice Pattern of large 20th C US and MNC firms

Vertical Integration

Distributed* Perspectiveson Innovation

* i.e. open, user, cumulative innovation

Value Network

Suppliers

Focal Firm

Comple-mentors

Users

Rivals

Focal Firm Suppliers Customers RivalsVertical

integration X

Userinnovation X † X

Cumulativeinnovation X X

Openinnovation X X X X

X = Sources of Innovation; † limited emphasis

Sources of Innovation

Source: West (2009)

User Innovation

• From von Hippel (1988, 2005)• Users know their needs best• Goal: engage users in innovation

Use empowerment, other motivations Direct (toolkits) & indirect (feedback) Requires processes, tools, design

• Found in ever-wider domains

Free vs. Paid Revealing

What do users do with their innovations?• Use them and keep quiet• Free revealing (Harhoff et al 2003)

Share them with other users Give them back to companies

• Make money Sell them back to companies User-entrepreneur (Shah & Tripsas 2007)

Cumulative Innovation

• Promoted by Scotchmer (1991, 2004)• Focus: developing radical innovations

Initial innovation is rarely complete Subsequent shared technological progress

• Competitors build on each other Need rights to each others’ work Some IP regimes hinder C.I.

• Jungle vs. commune view of rivalry

Three Cumulative Patterns

1. Core technology, many derivatives E.g., Cohen-Boyer patent

2. Derivative of many building blocks• E.g., GSM/W-CDMA MP3 cameraphone

3. Incremental quality improvements• E.g., higher resolution inkjet print heads

Source: Scotchmer (2004)

Open Innovation

• Chesbrough (2003,2006,2007,2011)• Key points:

Find alternate sources of innovationEither markets or spillovers

Find alternate markets for innovation Central role of the business model

• Cognitive managerial paradigm• Framework consonant with UI, CI

Source: Chesbrough (2006)

CurrentMarket

InternalTechnology

Base

Technology Insourcing

New Market

TechnologySpin-offs

ExternalTechnology

Base

Other Firm’s Market

Licensing

“Open” innovation strategies

R&D under Open Innovation

ICT: Systems Integration Model

Component

Complements

Systems AdoptionTechnology

Integrator Users

Complement Provider

Innovator

Component

Component Rival

Source: West (2006)

Key Issues for Open Innovation1. Maximizing returns to internal innovation2. Identifying/incorporating external

innovations3. Motivating an ongoing stream of external

innovations (with or without money)

R&DFirm

Ideas Products

LicenseesLicensorsMotivating

Incorporating Maximizing

2

3

1

Source: West & Gallagher (2006)

Increasing OI Research

Related Innovation Models

Collaborative, peer-to-peerinnovation without monetization:

• Open Science• Free Software• Shared Production

Similarities Across O/U/CI

Dispersal of Knowledge

• “In Open Innovation, useful knowledge isgenerally believed to be widely distributed,and of generally high quality.” (Chesbrough,2006: 9)

• “Different users and manufacturers will havedifferent stocks of information … eachinnovator will tend to develop innovations thatdraw on the sticky information it already has”(von Hippel 2005: 70)

Other Similarities

• Orientation outside the firm• Innovation activities take place across

organizational boundaries†

• Overall, rejecting Vertical Integration

† Some UI ignores firms and is entirelyoutside any firm

Source: Bogers & West (2010)

Contrasting Modes ofCommercialization

Source: Bogers & West (2010)

Innovation Flows in Value Chain

Suppliers

Focal Firm

Comple-mentors

Users

Rivals

Open InnovationUser InnovationCumulative Innovationall forms

Sample Modes (1)

Employeeentrepreneurs

User sharing

Outbound OIOutsideInsideOutbound

Verticalintegration

InsideInsideIntegratedModeDiffusionCreationCell

Sample Modes (2)

Left on the shelfN/AInsideOrphan

Userentrepreneurship

Lead users

Inbound OIInsideOutsideInbound

ModeDiffusionCreationCell

Sample Modes (3)

User’s own needN/AOutsideEgocentric

Sharedproduction

Open science

User sharingOutsideOutsideCollabo-rative

ModeDiffusionCreationCell

Sample Modes (4)

Cooperativespillovers

Rivalrousspillovers

Inside &Outside

Co-creationInsideInside &Outside

CoupledModeDiffusionCreationCell

Distinct Commercialization Paths

insidefocal firm

outsidefocal firm

insidefocal firm

outsidefocal firm

Cre

ati

on

Commercialization

† Includes non-commercialdiffusion of innovations

notcommercialized

Egocentric

OrphanIntegrated Outbound

Inbound Collaborative†

co-creation frontierCoupled

Antecedents for Selecting Modes

• Supply conditions Scale economies Cost of production and distribution

• Demand conditions Heterogeneity of demand

• Institutional conditions Strength of IP regime Markets for innovation

Selecting Inside/Outside Paths

• Lack complementary assets(Teece 1986)• Doesn’t fit business model

(Chesbrough & Rosenbloom2002)

• Strong distribution,other complementaryassets; or• Weak appropriability

(Teece 1986)

Commer-cialization

• Because not all knowledge is inone firm (Chesbrough 2003)• To exploit sticky user

information (von Hippel 1994)• Share scale economies of R&D

(West & Gallagher, 2006)

• Strong R&Dcapabilities• Unable to source firm-

specific R&D (Dierickx& Cool, 1989)

Creation

OutsideInside

Communities

Importance of Communities

• Best known from open source software• Implicit in CI research

E.g. Meyer (2006) on 19th century airplane• Increasingly important in UI

E.g. Franke & Shah (2003), von Hippel(2005), Jeppesen & Frederiksen (2006)

• Finally being recognized in OI

Communities in OI

• Two pre-requisites: Voluntary association of independent actors Enabling innovation commercialization

• Open questions Who are the members? Individuals (cf. UI

communities) or firms (cf. ecosystem, networks …) What are the boundaries? Upstream vs. downstream communities Interactions within vs. with communities

Source: West & Lakhani (2008)

Communities as Third Mode

Open innovation has three modes1. Outside-in: using external innovations2. Inside-out: commercializing internal

innovations3. Coupled: communities, ecosystems,

alliances, consortia etc.

Source: Enkel, Gassmann, Chesbrough (2009)

Findings about OI Communities

Study of three innovation communities:• Participants from multiple organizations• Anchored to specific innovation• Shared goals, objectives, identity• Leverage distributed competencies

Source: Fichter (2009)

Are Firms Only “Open Enough”?

• Firms, OI communities share interests• Firms chronically unwilling to give up control

E.g. OSS communities: Apple, Google, Nokia, …• Is it possible for firms to be open?

Optimistic view: firms gain more by openness Pessimistic view: Firms are only as open as they

need to be (West, 2003; West & O’Mahony, 2008)

Emerging Patterns ofPractice

Learning from Observation

”The field of innovation studiesarguably operates in Pasteur’sQuadrant, in that the processesand practices of industry actorsoften extend beyond the boundspredicted by academic theory.”

– Chesbrough (2006)

Are Acquisitions OI or VI?• Firms buying innovation by buying firms

Cisco growth strategy (Mayer & Kenney 2004) Now Google, Intel, Qualcomm

• Is this inbound open innovation? Externally developed, internally

commercialized?• Is it vertical integration?

Ongoing innovation, commercializationcontrolled by one firm

Is ICT Vertical Integration Dead?

• Silicon Valley: distributed innovation Ecosystems Component-based business models User innovation via beta sites, toolkits 1990s, even IBM became distributed Grove (1996) pronounced VI dead

• Today: more vertical integration Apple, Google, HP, Microsoft, Nokia

Is Crowdsourcing UI or OI?

• A user innovation model? Users have sticky knowledge Apply knowledge to solve own problems Make it easy to obtain free revealing

• An open innovation model? Users/non-users have knowledge Maximize return from that knowledge Use markets to identify, source ideas

OI: Substitute or Complement?

• Open innovation offered as a complement totraditional corporate innovation Increasingly, OI used as a substitute

• OI-Inbound: OI vs. internal R&D Instead of correcting atrophied internal R&D Firing internal R&D workers (e.g. HP) What about absorptive capacity?

• OI-Outbound: OI vs. actual business model IP licensing -> Patent trolls Where is the value creation?

Monetizing Knowledge Flows

• Contrasting views of charging for knowledge UI, CI celebrate free spillovers

Open source softwareOther collaborative communities

OI emphasizes monetizationUniversities chasing patent royalties Impact on open science?

Which is socially optimal?• Tied to IPR policy

Ongoing debates over patent trolls, patent reform

Conclusions

Summary

• Rapidly growing research on distributedinnovation Distinct but overlapping O/U/CI streams

• Distributed innovation is here to stay Requires different conceptual approaches Requires different processes Requires different metrics