Collaborative Open Source Software Utilization in Competitive Advantage

Creation

Author: Erkko Anttila

Supervisor: Heikki Hämmäinen, Professor

Instructor: Valtteri Halla, M. Sc. Engineering & B.Sc. Economics

Index

•Introduction & Background

•Research Structure & Objective

•Research Methods

•Software Product Competition

•Industry Disruption and OSS Maturity

•Firm Level Collaboration Model

•Collaborative Product Framework

•Validating Case Studies

•Conclusions

Introduction & Background

• Open Source Software (OSS) = source code is distributed with the executable binary, the software is free to use and anyone is free to modify and redistribute it

• Increasingly adopted as a part of the software industry even though fundamental change to traditional development approach

• Free licensing vs. Commercial licensing

• Unclear for commercial parties how collaboration with community can create competitive advantages

• Informal relationship

• Openness of software

• Benefiting competition

• Research Question: How can collaborative OSS utilization create a competitive advantage for product companies?

Significant companies involved with

Open Source Software:•Nokia

•Apple

•IBM

•Motorola

•Palm/Access

•Samsung

•Hewlett-Packard

•Sun Microsystems

•Yahoo

•Google

•Microsoft

•Red Hat

•Ericsson

•Trolltech

•Montavista

•……

Research Structure & Objective

Chapter 1

Research IntroductionChapter 1

Research Introduction

Chapter 3

Synthesis as Collaborative

Framework

Chapter 3

Synthesis as Collaborative

Framework

Chapter 2.4

Findings from LiteratureChapter 2.4

Findings from Literature

Literature ReviewLiterature Review

Chapter 2.1

Competitive AdvantageChapter 2.1

Competitive Advantage

Chapter 2.2 & 2.3

Software ProductsChapter 2.2 & 2.3

Software Products

Chapter 2.3

Open Source SoftwareChapter 2.3

Open Source Software

Chapter 4

Framework Validation

With Case Studies

Chapter 4

Framework Validation

With Case Studies

Chapter 5

Discussion of ResearchChapter 5

Discussion of Research

Chapter 6

ConclusionChapter 6

Conclusion

Chapter 1

Research IntroductionChapter 1

Research Introduction

Chapter 3

Synthesis as Collaborative

Framework

Chapter 3

Synthesis as Collaborative

Framework

Chapter 2.4

Findings from LiteratureChapter 2.4

Findings from Literature

Literature ReviewLiterature Review

Chapter 2.1

Competitive AdvantageChapter 2.1

Competitive Advantage

Chapter 2.2 & 2.3

Software ProductsChapter 2.2 & 2.3

Software Products

Chapter 2.3

Open Source SoftwareChapter 2.3

Open Source Software

Chapter 4

Framework Validation

With Case Studies

Chapter 4

Framework Validation

With Case Studies

Chapter 5

Discussion of ResearchChapter 5

Discussion of Research

Chapter 6

ConclusionChapter 6

Conclusion

• Objective: Identify collaborative OSS

utilization strategies, that create competitive

advantages and form a framework that in

detail describes the implementation

• Scope: Product companies including both pure licensing companies and software products for consumption with complementary goods e.g. hardware.

•Substantial utilization: Product software consists of at least e.g. 50% or more OSS.

Research Methods

• Literature Review Theoretical understanding, OSS Impact and Collaboration Framework

• Two Descriptive Case Studies Validation of Collaboration Framework

• Nokia Oyj (ITSE 2005)• Apple Computers Inc (Mac OS X & Server)• Interviews with key people in organizations• Active participant observation• Source code analysis Initial and

continuous cost structure• COCOMO model software value estimation• Industry comparison to key competitors

Kernel

Applications

User-Interface

System utilities

Deve

lopm

ent T

ools

9%

61%

21%

52%

Kernel

Applications

User-Interface

System utilities

Deve

lopm

ent T

ools

9%

61%

21%

52%

Kernel

Applications

User-Interface

System utilities

Deve

lopm

ent T

ools

54%

12%

100%

Kernel

Applications

User-Interface

System utilities

Deve

lopm

ent T

ools

54%

12%

100%

Initial Development Cost Structure (Nokia)

Continuous Development Cost Structure (Nokia)

Software Product Competition

• Special Characteristics:

• Information Goods

• High Fixed costs

• Minimal marginal costs

• Knowledge intensive production

• Easy Duplication

• Intellectual property rights (IPR), Strong Competitive Factor

• Systems Competition and Network Externalities

• Competitive issues

• Cost of Software

• Time to Market

• Low quality of Products

• Commoditization impacting value of software• Software common across competition

Marginal Costs of Software Production

Software Development Value Chain

Industry Disruption & OSS Maturity

Factor Definition Impact

Community Growth

The community has reached 1.5 million

developers

The resource pool is substantially large to impact the industry

Commercial Investment

Continuous diffusion of commercial

investment to the OSS asset

Substantial growth of the value in the OSS asset and proof of changing development approach

Software Maturity

Part of the OSS asset has reached

commercial quality

Directly usable for product companies and

continuous devaluation

Development Concentration

Concentrated to the lower layers of the

software stacks and generic technologies

Opportunity for commercial value to reside in higher

layers or specific implementations

Commercial Value

Commodity software due to openness and relatively low innovativeness

Does not create product differentiation but cost

reductions and matched quality

•OSS is a growing industry wide disruption

•Software product industries have moved to a transition phase Heterogeneous collaboration

•Closed Source, Dual Licensing, Direct utilization, Collaboration

OSS Maturity Factors

Firm Level Collaboration Model

•Differentiating software moves to small part of products

•Competition

•Commoditization

•Model defined based on:•Technology differentiation

•Level of collaboration

•Three main strategies•Closed

•Gated community

•Open development

•Strategies exhibit different

advantages and disadvantages!

Firm Level Collaboration Model

Internal DevelopmentGated Community

DevelopmentOpen Development

Advantage

- IPR - Lock-In

- Systems competition -High entry barriers

- Reduced maintenance cost

-Impact on value of software

- Interaction with competent resources

- Reduced initial and continuous investment

- Faster time-to-market- Direct relationship with OSS

asset- Impact on industry software

value - De facto standardization

Disadvantage

- Cost of software - Time to market

- Risk - Commoditization

- Reduced impact of IPR - Collaboration includes

uncertainty and issues

- Challenges in legal domain - Reduced impact of IPR

- Collaboration is not trivial

•Advantages and Disadvantages relative to Firm Level Collaboration Strategy

Collaborative Product Framework

Firm level strategy

•Define value of software in relation to environment

•Reconfigure development value chain to match internal and external environment

•Integrating and reconfiguring the external development resources by utilizing collaborative R&D in the non-differentiating software asset

•Continuously managing the interface of non-differentiating and differentiating software.

•Create relative advantages during transition phase of industry

•Concentration on value

•Expand scope of competencies

•Impact external software and competence value

•First-mover Advantage in collaboration

Firm level strategies & relative advantages Impact industry competition & redefine industry competitive forces

Collaborative Product Framework

Split Based

on software

Value

Relative Advantages-Concentrate to Value

Creation

-Increase Value of Internal Advantages

-Expand Scope of Competencies

-First-Mover Advantage in Industry

Transition

Existing Communities- Form Of Collaboration

- Transaction Costs

- Community Social Capital

-Company Specific Social Capital

- Experience Curve

- De Facto Standard Creation

Created Communities-Attract Community Investment

-Gated or Open Community

-Software Control Points

-Productization Process-Software Control Points

-Productization Process

Open Software

Closed Software

Existing Communities-Initial and Continuous Investment Reductions

-Faster Time-to-Market

-Higher Efficiency Collaboration

-First-mover Advantage in Collaboration Efficiency

Created Communities-Reduce Maintenance Cost

-First-mover Advantage

-Create or Lead De Facto Standardization

Benefits

-Leverage Existing Advantages

-Competitive Control

-Remaining Cost Drivers

-Leverage Existing Advantages

-Competitive Control

-Remaining Cost Drivers

Differentiate

Firm Level Strategies

Value Creation-Controlled and Sustained Value on Top

of Collaborative R&D

Value Creation-Controlled and Sustained Value on Top

of Collaborative R&D

Split Based

on software

Value

Relative Advantages-Concentrate to Value

Creation

-Increase Value of Internal Advantages

-Expand Scope of Competencies

-First-Mover Advantage in Industry

Transition

Existing Communities- Form Of Collaboration

- Transaction Costs

- Community Social Capital

-Company Specific Social Capital

- Experience Curve

- De Facto Standard Creation

Created Communities-Attract Community Investment

-Gated or Open Community

-Software Control Points

-Productization Process-Software Control Points

-Productization Process

Open Software

Closed Software

Existing Communities-Initial and Continuous Investment Reductions

-Faster Time-to-Market

-Higher Efficiency Collaboration

-First-mover Advantage in Collaboration Efficiency

Created Communities-Reduce Maintenance Cost

-First-mover Advantage

-Create or Lead De Facto Standardization

Benefits

-Leverage Existing Advantages

-Competitive Control

-Remaining Cost Drivers

-Leverage Existing Advantages

-Competitive Control

-Remaining Cost Drivers

Differentiate

Firm Level Strategies

Value Creation-Controlled and Sustained Value on Top

of Collaborative R&D

Value Creation-Controlled and Sustained Value on Top

of Collaborative R&D

•Three Firm Level Strategies

Collaborative Product Framework•Industry Transition from Previous Transition Resulting

Industry Level Competition

Previous IndustryPrevious Industry

Advantage

IPR

Lock-in

Systems Competition

High R&D Investment

Resulting IndustryResulting Industry

Homogenous Collaboration

Strategies

Newly Defined Advantages

First-Mover Advantage From

Transition Collaboration

Industry TransitionIndustry Transition

Competitive Issues

Cost of Software

Time to Market

Commoditization

Competitive Issues

Cost of Software

Time to Market

Commoditization

Closed Source Collaborative

Relative Advantage

Concentrate to Value

Expand Scope

Impact Value

Relative Advantage

Concentrate to Value

Expand Scope

Impact Value

SubstitutesSubstitutes

Entry BarriersEntry Barriers

SuppliersSuppliers Buyers

Buyers SuppliersSuppliers

Entry BarriersEntry Barriers

SubstitutesSubstitutes

BuyersBuyers

Changed Supplier

StructureChanged Supplier

Structure

Changed Entry BarriersChanged Entry Barriers

New SubstitutesNew Substitutes

New

BuyersNew

Buyers

Industry Level Competition

Previous IndustryPrevious Industry

Advantage

IPR

Lock-in

Systems Competition

High R&D Investment

Resulting IndustryResulting Industry

Homogenous Collaboration

Strategies

Newly Defined Advantages

First-Mover Advantage From

Transition Collaboration

Industry TransitionIndustry Transition

Competitive Issues

Cost of Software

Time to Market

Commoditization

Competitive Issues

Cost of Software

Time to Market

Commoditization

Closed Source Collaborative

Relative Advantage

Concentrate to Value

Expand Scope

Impact Value

Relative Advantage

Concentrate to Value

Expand Scope

Impact Value

SubstitutesSubstitutes

Entry BarriersEntry Barriers

SuppliersSuppliers Buyers

Buyers SuppliersSuppliers

Entry BarriersEntry Barriers

SubstitutesSubstitutes

BuyersBuyers

Changed Supplier

StructureChanged Supplier

Structure

Changed Entry BarriersChanged Entry Barriers

New SubstitutesNew Substitutes

New

BuyersNew

Buyers

Validation Case Studies

Kernel

Applications

User-Interface

System utilities

Deve

lopm

ent T

ools

9%

61%

21%

52%

Kernel

Applications

User-Interface

System utilities

Deve

lopm

ent T

ools

9%

61%

21%

52%

Kernel

Applications

User-Interface

System utilities

Deve

lopm

ent T

ools

54%

12%

100%

Kernel

Applications

User-Interface

System utilities

Deve

lopm

ent T

ools

54%

12%

100%

Kernel

Applications

User-Interface

System utilities

Dev

elopm

ent To

ols

10%

95%

40%

34%

100%

Kernel

Applications

User-Interface

System utilities

Dev

elopm

ent To

ols

10%

95%

40%

34%

100%

Kernel

Applications

User-Interface

System utilities

Dev

elopm

ent To

ols95%

100%

100%

40%

Kernel

Applications

User-Interface

System utilities

Dev

elopm

ent To

ols95%

100%

100%

40%

Initial Development Cost Structure (Nokia)

Continuous Development Cost Structure (Nokia)

Initial Development Cost Structure (Apple)

Continuous Development Cost Structure (Apple)

•Reconfigured development value chain

•Proven reduction of transaction costs

•Substantial amount of software maintained in collaborative effort

•Closed software and investment concentrated to areas that create the most value

Validation Case Studies

Empirical Factor Nokia Apple

OSS Originated Code (SLOC) 8.9M 13.6M

Company Created OSS Code (SLOC) 0.8M 3.4M

Duration of Collaborative Development4-5 years

~10 years

Value of Utilized OSS $228M $350M

Share of Collaborative development (Kernel)

~100% ~0%

Share of Collaborative development (System)

~88% ~60

Share of Collaborative development (UI Toolkit)

~46% 0%

Developer amount (Existing Communities) ~2500 ~700

Commercial parties (Existing Communities) >10 0-10

Created Community Duration 1 year 4 years

Created Community Size ~10 ~150

Created Community Contribution (Code contributions)

~5-10~300-

500

•Substantial amount of utilized OSS

•Enormous value of utilized OSS based on COCOMO model

•Large community contribution to continuous

development

•Commercial parties investing to same communities

Conclusions

• OSS is an industry wide disruption with continuously growing impact

• Firm Level Strategies

• During transition phase of the industry, collaboration can lead to relative advantages

• Strategic split of software manages disadvantages and enables different firm level strategies

• Value chain can be reconfigured to best match internal competencies and external environment

• Value creation possible in addition to substantial collaboration

• First-mover advantage in collaboration

• Industry Competition

• Outlook is increasing movement to collaborative R&D Gradual converging of collaboration and redefining industry

• Further increases the value of the OSS asset through network externalities and positive cycle

• First-mover advantage from transition phase results in absolute advantage• Mature collaboration processes

• Social Capital with prevailing communities

• Bound to company and community resources and processes

The Future is Open?

Questions? Comments?