OPEN INNOVATION NOT FAD BUT A PHENOMENON

THE ROLE OF OPEN INNOVATION IN TODAY’S GLOBAL AND DIGITAL ECONOMY Prof. Sabine Brunswicker Purdue University, USA and Fraunhofer Society, Germany

INNOVATION IS OFTEN THOUGHT TO BE ABOUT SPECIAL PEOPLE

THE INNOVATION GAME HAS CHANGED¹

Source: 1) Chesbrough (2003)

SINCE 2003… FIRMS ENGAGE IN SO CALLED “OPEN INNOVATION PRACTICES”

Google Search Open Innovation : 10/2011 > 8 Mio Hits 05/2013 > 700 Mio Hits

Open Model

existing market

new market

other firm’s market

idea sourcing

running/successful innovation projects discarded innovation projects

Closed Model

market +

+

+

new product/ service

internal innovation resources

internal innovation resources

external innovation resources

technology sourcing

co-development partnerships

spin-out

Source: Brunswicker (2011); see also Chesbrough (2003, 2006)

LET‘S RECAP – WHAT‘S OPEN INNOVATION OPEN INNOVATION DESCRIBES A COGNITIVE FRAMEWORK FOR A FIRM’S STRATEGY TO PROFIT FROM INNOVATION

INNOVATION “CROWDSOURCING” HAS BECOME POPULAR…

Firms outsource the task to solve an innovation problem to the public “crowd” - rather than to a designated group of actors - via an

open call

CROWDSOURGING IS BUILD UPON THE IDEA THAT „DIVERSITY“ IS THE GENERATIVE MECHANISM FOR INNOVATION

source: Chris Anderson (2004), Lakhani (2006), Laursen & Salter (2006)

Popularity of resources

In-house resources

Access to a small number of experts and disciplines

„Long tail“ of resources outside the firm‘s boundaries

Access to large number of different competencies and various disciplines

Range of potential problem solving resources

THE GOLDCORP STORY….

Crowdsourcing challenge: GoldCorp put 000’s of pages of complex geological data online to help discover new veins of gold at its Red Lake mine, Ontario, Canada. US ~$500,000 in prize money

Over 1,400 corporations, consultants and universities from 50 countries entered the

contest. More than 8 million ounces of gold found.

Company’s value rocketed from $100M to $9B

Participation and outcome Over 1,400 corporations, consultants and universities from 50 countries entered the contest. More than 8 million ounces of gold found. Company’s value rocketed from $100M to $9B

OPEN SOURCE IS DIFFERENT FROM OPEN INNOVATION….

Value Capture

Company

Ecosystem

In-House Community-driven

Value Creation

e.g. Microsoft OS

e.g. MySpace

e.g. pirated music complementors

e.g. Linux Kernel

…….with the right business model it can be a successful open innovation practice

OPEN INNOVATION IS ABOUT „PROFITING“ FROM INNOVATION

Open Source Versus Open Innovation

…….Open Innovation requires a business model to ensure both value creation AND value capture

CASE STUDIES SUGGEST THAT THERE IS PERFORMANCE IMPACT

Idea-fairs, e.g. tinkerers or suppliers

Technology acquisition

Research institutes

Strategic suppliers

Customer integration

Further partners

Universities

Internal/external ventures

Internet platform

Licensing

Outside-In

Inside-Out

Co-Development/Networks

Source: Huston & Sakkab (2006), Enkel, Gassmann (2009)

“ In Connect & Develop we set the goal to acquire 50% of our innovations externally “ (VP of Innovation)

Improvement of the R&D productivity by 60%

Within two years P&G has marketed more than 100 new products

OUR RESEARCH SUGGESTS THAT OPENESS IMPROVES PERFORMANCE Success rate of innovation projects

(share of successful innovation projects; median) Comparison of firms from different age classes

Income from new products/services that are younger than 3 years (median)

Comparison of firms from different age classes

11 to 25 years

Older than 25 years

6 t 10 years

2 to 5 years

Datasource: IMP3rove, Oktober 2010; N=1469; see also Brunswicker (2011): Beyond open innovation in large organisations

47.0% 23.0%

29.0%

19.0%

19.0% 10.0%

15.0%

9.0%

50.0% 20.0%

50.0% 25.0%

60.0% 50.0%

50.0% 5.0%

11 to 25 years

Older than 25 years

6 to 10 years

2 to 5 years

Wide and diverse open innovation sourcing*

Closed/selective approach towards innovation sourcing**

10 YEARS LATER

A FAD OR A PHENOMENON ?

Executive study UC Berkeley and

Fraunhofer

Study among the largest firms in Europe and US Firm criteria: >1000 employees

and >250 million USD in sales Key informants: CEO, COO, or

CTO at headquarter Data collection October– December 2012 125 datasets

Adoption of open innovation

Abandonment

Open innovation experience

Management support

Intensity

78% practice open innovation today

No firm has abandoned open innovation

Median of 5 years

71 % have increased management support

82 % have increased open innovation activity

IN OUR NEW EXECUTIVE SURVEY WE FOUND THAT OPEN INNOVATION IS ON THE RISE

THERE IS A BUNCH OF OPEN INNOVATION PRACTICES

Challenge Powering the Grid

Powering your Home

Source: www.ge.com, Chesbrough (2012) California Management Review

Co-investment strategy

VCs: Emerald Capital, Foundation

Capital

LARGE FIRMS LIKE GE EXPERIMENT WITH IDEA COMPETITIONS

High participation 4000 ideas

75013 entrepreneurs participating

Innovation partnerships 23 partnerships

USD 200 million investment GE

OTHERS USE OPEN INNOVATION INTERMEDIARY SERVICES

Open Innovation Marketplaces

Searcher Solver Community (Technology experts,

individuals, entrepreneurs, etc.)

Request for proposal Proposes solution and

ideas

Market for Ideas and Technologies

Problem: Strong durable gear materials that do not require lubrication

• 26 solutions submitted • 16 new solutions • 8 solutions with potential

for development

INNOVATION CO-CREATION WITH USERS IS POPULAR…

More than 27 000 visitors More than 350 design contributions

884 members 3980 hours spent

LET‘S TRY TO CLASSIFY THEM….

Direction

Inbound

Outbound

Pecuniary Non-pecuniary

Financial flows

Acquiring Sourcing

Selling Free revealing

THERE ARE A RANGE OF INBOUND PRACTICES

IP In-licensing

Informal networking

Publically funded R&D projects

Contracting external R&D services

Open Innovation Intermediaries

Inbound

University grants

Supplier innovation awards

Own crowdsourcing initative

Customer and

consumer co-creation

Idea and start-up competition

CO-CREATION WITH USERS MATTERS THE MOST

2.34

2.64

2.66

3.37

3.71

3.73

3.87

4.19

4.38

4.43

1 2 3 4 5 6 7

3.80

4.09

3.76

4.01

4.47

4.04

4.11

4.28

4.12

4.68

1 2 3 4 5 6 7

Customer and consumer co-creation

Informal networking

University research grants

Publically funded R&D consortia

Contracting of external R&D service

Idea and start-up competitions

IP in-licensing

Supplier innovation awards

Crowdsourcing (unknown problem solvers)

Specialized services OI intermediaries

Not important Highly important

Significant decrease

Significant increase

No change

Source: Open Innovation Executive Survey Fraunhofer & UC Berkeley; n = 91

Importance in 2011 (mean values)

Change of importance 2008-2011 (mean values)

Inbound practices

Corporate business Incubation and

business venturing

Donations to commons or non-profits

IP out-licensing and patent selling

AND THERE ALSO DIFFERENT KINDS OF OUTBOUND PRACTICES

Participation in standardization

Participation in standardization

Selling of market-ready ideas

Joint venture activities with

external partners

Inbound

TRADITIONAL PRACTICES ARE THE MOST POPULAR ONES

2.26

2.43

2.84

3.45

3.75

3.85

4.21

1 2 3 4 5 6 7

3.91

3.74

4.20

4.63

3.97

4.39

4.62

1 2 3 4 5 6 7

Joint venture activities

Selling of market-ready products

Participation in public standardization

Corporate business incubation & venturing

IP out-licensing & patent selling

Donations to commons or nonprofits

Spin-offs

Not important

Highly important

Significant decrease

Significant increase

No change

Importance in 2011 (mean values)

Change of importance 2008-2011 (mean values)

Outbound practices

Source: Open Innovation Executive Survey Fraunhofer & UC Berkeley; n = 91

CUSTOMERS ARE THE MOST CRITICAL EXTERNAL PARTNER

2.13 2.47 2.54

3.67 3.82 3.82

4.22 4.30

4.51 4.88

5.17 5.54

1 2 3 4 5 6 7

Unrestricted communitiesRestricted communities

CompetitorsExternal consultants

Contracted R&D service providersEntrepreneurs and start-upsPublic research organisations

Indirect customer or final consumerSuppliers

UniversitiesCustomers

Internal employees

Importance of open innovation partners (mean values; 1= not important to 7=highly important)

Average = 3.9*

not important highly important Source: Open Innovation Executive Survey Fraunhofer & UC Berkeley; n = 82

IT IS NOT ABOUT THE INDIVIDUAL PRACTICE AND SOURCE

1 2 3

Supply-chain oriented Technology oriented Ecosystem-wide Supplier programs Supplier awards etc. Direct customer co-

creation

Source: see also Chesbrough (2006)

University grants Developer communities Contracted R&D services

Third-party developers and service providers

Trusted partner network Complementary network

partners

3 categories of Open Innovation orientation

IT IS NOT ABOUT THE INDIVIDUAL PRACTICE AND SOURCE

….BUT OPEN INNOVATION IS HARD

SOME PEOPLE THINK OPEN INNOVATION REDUCES RESOURCES AND EFFORTS

Source: Open Innovation Executive Survey Fraunhofer & UC Berkeley; n = 91

THERE IS AN INTERNAL COMPONENT OF OPEN INNOVATION THEY JOURNEY FROM CLOSED TO OPEN REQUIRES NEW CAPABILITIES, ROLES, AND VALUES

3.69

4.55

4.53

4.53

4.89

5.26

3.61

4.28

4.49

4.6

4.97

5.6

1 2 3 4 5 6 7

Avoidance of external or already existing knowledge

Effectiveness of intellectual property protection

Identifying new innovation sources

Protecting internal critical know-how

Management of external relationship with innovation sources

Managing the organizational change internally

Challenges of engaging in open innovation (mean values, 1=not important to 7= highly important)

when firm's startedtoday

Not important Highly important

WHY ARE FIRMS NOT SATISFIED WITH CROWDSOURCING AND CHALLENGES?

Task description Start: Submission of Ideas

Many are designed for COMPETITION …

And not for COLLABORATION and CO-CREATION

THERE IS A SOCIAL DIMENSIONS OF CO-CREATION

1

4

2

3

Fun

Fullfillment

Fame

Furtune

New SCN platform

Gamified TechEd 2011

12 months rolling points

THE EVOLUTION OF SAP‘S SCN SUGGESTS THAT GAMIFICATION MATTERS

2003 2005 2007 2009 2011 2013

Ask the Expert

Points introduced

Top Contributors Annual Contest

SAP Mentoring Program

Launch of Gamification

Module

10 years SCN

Some outcome measures Activity up by 1,113% Community feedback up by 250% Points up by 147 %

OUTLOOK: OPEN INNOVATION IS EVOLVING FINAL SLIDE WITH “WEB” AND NEW MODELS OF INNOVATION

The GRAVITY IS SHIFTING EVEN MORE…

..people-centric & decentralized innovation ecosystems

COMPLEMENTORY PARTNERS ARE CRUCIAL IN TODAY‘S BUSINESS ECOSYSTEM

^^

Internet

ISP

T

T T

Phone

WiFi

Enduser

system Handset

Distribution GUI

Shop

OS APIs

Audio-

Dateiformat

A A A

Millions of songs

Thousands of Apps

Assembly C

C

C C

Hundreds of components

Hardware

interface

BIOS

Betriebs-

system

iTunes

Design

Closed IP

External supplier

Complementor

Open Source

Closed Standard

Open Standard

Legend

A LIFECYCL-ORIENTED PERSPECTIVE IS BECOMING MORE AND MORE IMPORTANT BOUNDARIES ARE BLURRING

DATA

Con-tinued Value

Creation Lifecycle-oriented

Innovation Ecosystems

Standardize and open

data Co-create

app

Application lifecycle

Co-create

service

Users Application developers

Application platform

Service providers

Service integrator

Open data provider

Launch app &

service

Operate & con-

tinuously improve

FIRMS ESTABLISH DIVERSIFIED INNOVATION ECOSYSTEM

Trusted Network

New partners

Pearlfinder

Supplier

Government

Researcher Development partner

Pearlfinder • Company owned digital community • Challenge-driven innovation • Multi-staged process and individual

Terms + Conditions • Link with other open innovation

practices

Partner and partner selection • Suppliers, universities, development

partners, customers • No start-ups • Selection based on„manageral fit“

and stabiltiy, IPR-Policy, „Academic Excellence“ and concrete idea

• Selection process based on new methods such as incubation lab

Challenge Uni

Customers

…AND PROFESSIONALIZE THE MANAGEMENT OF NETWORK RELATIONSHIPS

Internal net-

works

Expert communities

Expert support

New research partners

Market places

Web 2.0 Communities

New suppliers

New development

partners

Tier 1

Loose innovation contacts

New opportunities

„Leverage“ (invest)

Tier 2/3

Trusted networks

Shift

towa

rds o

penn

ess

Phase 1 Phase 2 Phase 3 Phase 4

Source: CAS 2010; Ehrenmann & Brunswicker (2012)

Closed System

Firm-centric innovation networks

New infrastructures

New decentralized innovation ecosystems

InterneTechnologie-

Basis

AktuellerMarkt

AktuellerMarkt

Gescheiterte Ideen/ abgebrochene Projekte

Erfolgreiche Ideen/ erfolgreiche Projekte

InterneTechnologie-

Basis

AktuellerMarkt

AktuellerMarkt

Gescheiterte Ideen/ abgebrochene Projekte

Erfolgreiche Ideen/ erfolgreiche Projekte

Gescheiterte Ideen/ abgebrochene Projekte

Erfolgreiche Ideen/ erfolgreiche Projekte

THE SHIFT IS CONTINUING; IT REQUIRES MORE EXPERIMENTATION

New facilitation skills and leadership capabilities

New socio-technical infrastructures

Experimentation (rather than control)

Lifecycle-oriented innovation ecosystems

„If you’re not failing every now and again, it’s a sign you’re not doing anything very innovative.“ Woody Allen

Contact: Prof. Sabine Brunswicker, sbrunswi@purdue.edu

BACK-UP

AGENDA

Let‘s recap: 2003 – The emergence of Open Innovation as a new model of industrial innovation 10 years later - The Adoption of Open Innovation Practices in Large firms Organizing and managing for open innovation – dynamics and socio-technical infrastructures The emerging landscape of Open Innovation: Towards an Innovation Ecosystem Perspective