2014.05.08 MC1 From Open Innovation to Innovation Ecosystems

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From open innovation to innovation ecosystems:

Prof. dr. Wim Vanhaverbeke Hasselt University

ESADE Business School National University of Singapore

May 6, 2014

What is open innovation (OI)?

Traditional definition

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What is Open Innovation?

“Open innovation is the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively.”

Chesbrough, Vanhaverbeke, West Open Innovation: Researching a New Paradigm

(OUP, 2006)

A Closed Innovation System

Research Investigations

Development New Products /Services

The Market

Science &

Technology Base

R D Source: Henry Chesbrough

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What changed? New Division of Innovation Labor n  Increasingly mobile trained workers n  More capable universities n  Knowledge distributed more widely throughout

the world n  Diminished US hegemony in many leading

technology fields n  Erosion of oligopoly market positions n  Deregulation (EU-liberalization) n  Enormous increase in Venture Capital

Source: Henry Chesbrough

Current Market

Internal Technology

Base

R D

Inbound OI: Filling the gaps with external technology

Technology Insourcing

New Market

External Technology

Base External research projects

Venture investing

Technology in-licensing Technology acquisition

Source: H. Chesbrough, Sloan Management Review, Spring 2003

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Breakaway innovation takes a lot of time for reaching large business sizes

Immediate growth requires acquisition of early growth ventures

Source: Loek Nijman - Philips

CAGR

Revenue in 10 years

100

10M 100M 1B

10

1M

Start 600 K

Start 600 K

Start 600 K

10% 3M

30% 10M

75% 1B

Acq. 60M 30% 1B

Venturing in the outside world

Current Market

Internal Technology

Base

R D

Outbound OI: Profiting from others’ use of your technology

Technology Insourcing

New Market

Technology Spin-offs

External Technology

Base

Other Firm’s Market

Licensing

Source: H. Chesbrough, Sloan Management Review, Spring 2003

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Extension of the original model

By combining open / closed innovation with open / closed business models

Business models - Chesbrough (2006)

n  Performs two important functions: u  it creates value, and u  it captures a portion of that value

n  Creation of value: by defining a range of activities that will yield a new product or service valued by a (target) customer group

n  Value capturing: by establishing a unique resource, asset or position within that series of activities where the firm enjoys a competitive advantage

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Open business models - Chesbrough (2006)

Open business model:

u  create greater value by leveraging more ideas (external ideas)

u  capture greater value by using key asset, resource, or position not only in the company’s own business but also in other companies’ businesses

Innovation

Business Model

Outside in

Open

Closed

Closed

Inside out

Unused technology

used by others

(Glad at P&G)

Technology licensed to strengthen own BM

(IBM- Linux)

Closed innovation

model (Tide in P&G - Foat glass in Pilkington)

Search for assets

owned by others (iPhone)

Use others’ technology

for own products

(iPod – Swiffer at P&G)

Use others’ technology for VNPs

(Orchestrator:Curana / KLM

SkyNRG)

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P&G – Clorox: Joint-venture with a competitor

n  P&G : develops a promising plastic film technology discovered through diaper research proved successful in test market

n  It was not strategic for P&G to be a new player in such a well-established category.

n  C+D led to a joint venture with Clorox who already had strong brand equity and the leading plastic wrap – Glad.

n  What partners bring in : u  P&G brings global marketing expertise and intellectual property behind

Press’n Seal as well as future innovations, including the revolutionary Glad ForceFlex trash bag technology.

u  Clorox brings brand equity, focused R&D in plastics and resins, and the organizational structure for creating and distributing new plastic film products.

u  Source: P&G C+D

Innovation

Business Model

Outside in

Open

Closed

Closed

Inside out

Unused technology

used by others

(Glad at P&G)

Technology out-

licensing to strengthen own BM

(IBM- Linux)

Closed innovation


Search for assets



for own products



(Orchestrator:Curana /

KLMSkyNRG)

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Outside-in open innvation

Critical success factors: •  Openness of development

process •  Fast decision making •  Iterative collaborative

relationship with PortalPlayer and other partners

Innovation

Business Model

Outside in

Open

Closed

Closed

Inside out

Unused technology

used by others

(Glad at P&G)


(IBM- Linux)

Closed innovation


Search for assets



for own products




SkyNRG)

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Innovation

Business Model

Outside in

Open

Closed

Closed

Inside out

Unused technology

used by others

(Glad at P&G)


(IBM- Linux)

Closed innovation


Search for assets



for own products




SkyNRG)

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•  KLM Royal Dutch Airlines, the North Sea Group and Spring Associates joined forces and founded SkyNRG in Nov 2009.

n  Goal: to help create and accelerate the development of a market for sustainable jet fuel (safe, sustainable and affordable) & avoid large price swings in petro-based kerosene

n  Creating a viable market for sustainable jet fuels for aviation can only be achieved by combining expertise and experience in the fields of air transport, product knowledge, R & D, regulation and effective sustainability criteria

n  SkyNRG is the hub firm in the ecosystem

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SkyNRG

Financial world

(VCs…)

Airline industry

Govern-mental

agencies

Biofuel value chain

KLM’s value driver? KLM profits as a

customer of a steady supply of sustainable and affordable biofuel

Open innovation: SkyNRG sets up the aviation

biofuel value chain and drives the acceleration of

joint technological innovations between

partners

Broadening the scope n  OI when it is not related to your NPD:

u  You are a service company with no technical expertise

u  SME with insufficient technological expertise u  Government agency:

t Nasa: new technologies may help you a lot in your mission as space agency

n  Insourcing knowledge of others in an indirect way through an open business model (OBM)

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What if your products are commodities?

n  BP pumps crude oil from wells and produces petro products (commodities)

n  Product innovation is not a value driver n  Oil well exploration and extraction are major

value drivers n  Collaborate with Schlumberger and others

technology services to advance their technology in order to find the best wells earlier than competitors.

Strategy as ecosystem building

n  Multiple partners in a network innovation ecosystem

n  Health of your company depends in the health of your ecosystem

n  Nurturing your ecosystem is necessary n  Nambisan and Sawhney; Network-centric

innovation, AMP, 2011 u  Tasks: - Innovation leverage

–  Innovation coherence –  Innovation appropriability

n  The wide lens – Ron Adner

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Risks to Realizing Innova0on Value

Co-Innovation Risk

Execution Risk

Adoption Chain Risk

Data-Based Strategy and

Return

Innovation/ Product Plan

n  Co-‐Innova(on Risk: requirement of other innova0ons for successful commercializa0on

n  Execu(on Risk: requirements for your company to bring forth your product with required specifica0ons on 0me/budget

n  Adop(on Chain Risk: requirement of partners to adopt your product before end customers can assess the full value proposi0on

Slide adapted from “The Wide Lens” by Ron Adner

Begin with the End in Mind

n Traditional Marketing training focuses on the internal company ecosystem: u Innovation management u Customer definition and engagement u Execution of advertising, sales,

distribution, legal HR and finance n However, the broader external ecosystem is

often ignored or addressed in too little detail 30


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Co-Innovation Risk

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Operator

Component 1

Component 2

Component 3

Formatting Software

Nokia Handset

3G Phone Database Features

Digital Rights Management


Co-innovation risk •  Collaboration = Dependence

•  The joint probability that all innovations are successful will determine when and if your product will be!

•  Alignment is required: •  Resources •  Profits •  Strategy •  Relationship

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Digital Film

Innova0ons: Digital film processing and projec0on n “DVD” form, rapid distribu0on, less piracy, improved picture resolu0on, cheap reproduc0on, 3D n Huge benefits to film industry and film goers n 1996 – DLP projector n 1999 – T3 lines n All in order – but no adop0on

What about the theaters who show the films? n  $70-100,000 to purchase the

projector n  Switching costs too high n  No regulation or incentive of

increased customer value could create adoption

33 Slide adapted from “The Wide Lens” by Ron Adner

New adoption chain

Studio +++++

Theater ---

Viewer ++

Digital Projector ++

X

Studio +++++

Theater +

Viewer ++

Digital Projector

++

Bank +

Digital Theater Integrator +

(VPF)

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Ochestrating a network-centric innovation Hub firm as integrator

Key objective •  Integrate partners’ technological assets and capabilities in the development of new product or service

Primary tasks •  Define and explicate the innovation architecture •  Assign specific roles/responsibilities to partners •  Provide a common technological/process infrastructure

1. Managing innovation leverage

•  Network members leverage (reuse or redeploy) the technologies, processes, and other innovation assets of other members to facilitate or enable their own innovation. Positive for asset owners and those that leverage these assets. Structure relations between these partners!

2. Managing innovation coherence

•  Make appropriate changes in the innovation architecture to maintain external innovation coherence and ensure that partners adapt their modules accordingly

•  Coordinate interactions/activities among partners to ensure internal innovation coherence

3. Managing innovation of appropriability

•  Establish policies and guidelines for fair and equitable distribution of rights associated with all intellectual property assets created during the innovation project

•  Allocate and distribute partners’ share of the rewards from product/service commercialization

Open commercialization

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Open commenrcialization: The Flavr Savr tomato Calgene 1994

Flavr Savr Traditional

The Flavr Savr tomato ripens on the vine – resulting in fuller flavor. It is modified so that it remains firm after harvesting.

The traditional tomato must be harvested while it is still green and firm so that it is not crushed on the way to the supermarket.

The traditional tomato is sprayed with ethylene after shipping to induce ripening

Ripe but decreased Flavour.

Ripe and Increased Flavour + Longer shelf live

Supermarket Supermarket

Two examples from Calgene: Flavr Savr tomato

Calgene

11 growers

7 packers

40 (+60) grocers

Consumers

Lots of channel partners required

Motivation? Why would they partner with Calgene? Value proposition?

Why take on channel partners? - to assure supply - to reap retail margins

Value proposition: Better taste for 2.5 to 3.5 times the price Fresh tomato market :$ 5 billion Flavr Savr: 30% of premium + 15% premium of superpremium = $ 375 million. How realistic is this?

seeds

tomatoes

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Two examples from Calgene: Bromotol Cottonseed (herbicide resistant)

Calgene

All growers

Distributors / Manufacturers

Retailers

Consumers

All the action is here

Value proposition -  increased yield -  increased market share

Result : -  increased margin -  increased market share

No changes for these groups

seeds

Cotton

Clothing

Value networks from a managerial point of view

VN-wide value creation •  Rel .attractiveness of product offering •  Configuration of VN •  Value drivers •  Etc…

Value distribution among VN-players •  Everyone should be better off than in competing offerings

VN-management •  External transaction management •  Supporting activities •  Specialized assets •  Etc…

Set up strategies •  Thin market problems •  Risk sharing (contracts) •  Etc…

Competing offerings •  Existing and new

Government •  E.g. environmental policy

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OI and SMEs

Low tech industries: A fruitful place for OI by SMEs

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Curana

Curana: combining innovation and industrial design

n  The old situation: u  steel mudguards and fenders u  Belgium as market (10 million inhabitants) u  Family owned business

n  Challenge: u  Growing economies of scale and globalization of the industry u  Strategic change:

t  differentiation through innovation t  or price competition with low-cost import

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Curana: B"Lite : Mudguard of Curana

06/05/14 Wim Vanhaverbeke 45

Curana: innovation combined with industrial design in low-tech markets

n  Advantages: u  Lighter mudguard (25% less weight than plastic

mudguards). u  Production cost are low enough to be competitive with

standard mudguards u  Installation of the mudguard is easier u  Nice design u  Aluminum separated by plastic can be used as a conductor

for electricity (no more wires required for lights) n  IP

u  European patents u  Curana also applied for a patent on the production process

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Curana : Open innovation u  combination of internal and external knowledge

t  external design company t  polymer extrusion manufacturer t  coordination with customers (bicycle producers) in

exchange of an exclusive deal that is limited in time (Batavus and Sparta (both belong to the Accell-group)

Curana: Spectacular results


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Curana: a small company in transformation


Original Design Manufacturer

•  price setting •  design driven •  added value

OEM ODM OSM OBM

Original Equipment Manufacturer

•  price pressure •  technology driven •  no added value

Original Strategic Management

•  vision driven •  proactive design solutions •  Innovative

Original Brand Management

•  Image driven •  Reliability & authenticity •  Market pull from customers

> > >

Curana’s innovation ecosystem

Curana

Steel and market

knowledge

Polymer extruder

Bicycle manufac-

turers

Design offices

Material suppliers,moldma-kers, etc

Technical centers

Exclusive deal with a customer for a particular

accessory Does this always

work?

Open innovation? Innovation

capability is in the network. Managing

the network for innovation

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Managing your external network (partners) as a key process

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Managing your innovation network (key process)

n  Connecting partners (SMEs and other knowledge partners) is based on strong personal ties between the main partners

n  Trust + transparency about the objectives of the partners n  Time and money have to be invested

•  Does everybody want to take risk? •  Important that the different firms are prepared to grow

together n  Cooperation is easier between companies of the same size

•  But cooperation with large ones is possible too (different logic)

n  Over time assimilate the knowledge of different partners. Become smarter by knowing more partners (knowing who) and knowing more than your partners

•  … 60

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n  Project management (central partner) with partners is quite different from internal project management

u  Each one is busy with a part of the project : costs easily raise excessively

n  Diplomacy and mutual respect n  Same corporate culture n  Tensions will pop up after a while

u  Good relationship may become under pressure u  Open innovation? Open communication! u  Organize (mutual) evaluation session with partner(s) u  Open bookkeeping with main partners (their problems will be

yours) u  Set out rules for disloyal behavior

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n  IP? •  Make proper arrangements with your partners •  Who is the owner? •  How partners can make use of the technology? •  Who is going to court (and who pays) in case of patent

infringement? n  Make sure that all partners are better off than

when they would not join / stay in the network n  Open innovation: benefits should be a multiple

of when companies work on their own. 62

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Open innovation in services: Example: Pet insurance! §  Combining resources, knowledge and

databases of insurance company, pet food manufacturer

§  Collaboration between different partners §  Bonding of clients in commodity like

markets §  Cross industry innovation, §  Relational capital / open innovation §  Sustainable competitive advantage

§  Similar example: Yacht insurance

OI: New frontiers and applications

Edited by: Henry Chesbrough, Wim Vanhaverbeke Joel West

2003

2006

2006 2008 2011

2013 2011

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Exnovate as a network of excellence for OI-practitioners and scholars? n  www.exnovate.org n  An international network of excellence on Open and

Collaborative Innovation n  Projects

u  PhD course OI in ESADE (5th time – 20-22 Janaury Barcelona, 2014)

u  CE and OI Masterclass 10 times already; 12th time at ESADE Barcelona last week of May 2014)

u  Study on open innovation metrics u  Using best practices to improve OI in SMEs u  …

http://www.innovationmanagement.se/welcome-to-the-the-mooi-project/

[email protected]

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http://www.exnovate.org/

[email protected]