11/27/15

1

Open Innovation: The Next Decade

Joel West KGI - The Keck Graduate Institute

Claremont, California

Universität Bern 26 November 2015

Plan

• What is open innovation? • Three modes of open innovation

-  Inbound -  Outbound -  Coupled

• What’s next?

11/27/15

2

What is KGI?

•  Keck Graduate Institute of Applied Life Sciences

•  Youngest of 7 Claremont Colleges •  Federation of colleges (like 18th C cantons) •  50 km east of downtown Los Angeles

•  Founded in 1997: Harvey Mudd spinoff •  Funded by grant from Keck Foundation •  300+ graduate students •  Preparing students for biotech careers

Where is KGI?

KGI

11/27/15

3

Open Innovation

Invention vs. Innovation

“Inventions … do not necessarily lead to technical innovations. In fact the majority do not. An innovation in the economic sense is accomplished only with the first commercial transaction.”

—Freeman (1982: 7)

11/27/15

4

Latent value of an innovation

“The inherent value of a technology remains latent until it is commercialized in some way. “A business model unlocks that latent

value, mediating between technical and economic domains.”

– Chesbrough & Rosenbloom (2002)

Bringing innovation to market

• Creation -  Technical invention -  Basic research, applied research, product

development • Commercialization

-  Production, marketing, sales, distribution -  Requires different complementary assets

(Teece 1986)

11/27/15

5

Vertical Integration

Research by Al 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

Research Investigations

Development New Products & Services

The Market

Science &

Technology Base

Source: Chesbrough (2006)

Vertically Integrated R&D

11/27/15

6

Open Innovation

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

-  Find alternate sources of innovation v Either markets or spillovers

-  Find alternate markets for innovation -  Central role of the business model

• Cognitive managerial paradigm • Overlaps with other work such as user

innovation

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.”

Henry Chesbrough, Open Innovation:�Researching a New Paradigm (2006)

11/27/15

7

Source: Chesbrough (2006)

Current Market

Internal Technology

Base

Technology Insourcing

New Market

Technology Spin-offs

External Technology

Base

Other Firm’s Market

Licensing

“Open” innovation strategies

R&D under Open Innovation

What’s new?

• Many antecedent/overlapping areas -  Technology sourcing, IP markets,

university licensing, alliances, supplier innovation, user innovation

• New ideas include -  Role of the business model -  Agnostic to internal/external paths -  Rise of innovation intermediaries

Cf. Chesbrough (2006)

11/27/15

8

Open innovation: a common practice

• Qualcomm -  Outlicensing patents -  Selling components to handset makers -  Acquiring Snaptrack, Flarion, Atheros

• Amgen -  Licensed EPO to J&J (Procrit) -  Today in-licenses oncology drugs

•  IBM -  Selling components to others -  Collaboration with Apache, Eclipse, Linux open

source communities

Open vs. user innovation

Open Innovation User Innovation Focal actor Firm User Knowledge transfer IP Needs IP regime Patents Free revealing Innovation production

Hierarchy Community, individual

Motivations Monetary Social, personal utility

Frank Piller & Joel West, Ch. 4 of Open Innovation: New Frontiers & Applications

11/27/15

9

Three open innovation processes

1.  Inbound (or “outside-in”) -  External technology commercialized by the

focal firm 2.  Outbound (or “inside-out”)

-  A firm’s technology commercialized by others 3.  Coupled combines these two

-  Various forms of collaboration Cf. Chesbrough (2003, 2006), Gassmann & Enkel (2004), Enkel et al (2009), West & Gallagher (2006)

Inbound Open Innovation

11/27/15

10

Why Look Outside for Innovation?

“Not all the smart people in the world can work in one place.”

Bill Joy �

co-founder�Sun Microsystems

Recent comprehensive review

• Goal: Synthesize inbound (& coupled) • Sample from top management &

innovation journals •  Either mention “open innovation” or cite

Chesbrough (2003) •  Hand selected 291 down to 165

• 161 articles, 3 books, 1 chapter

Joel West & Marcel Bogers, Journal of Product Innovation Management, July 2014

11/27/15

11

Breakdown of 165 OI pubs Inbound: 118 Outbound: 50

Coupled: 70

57 14

11

24

26 1

32

4-stage process model

Innovation Source† Customers

Commercializing Obtaining Integrating

Interaction

Focal Firm

R&D Other

Functions

† Sources may include suppliers, rivals, complementors and customers.

11/27/15

12

1. Obtaining Innovations • Best covered of the phases

-  Searching, enabling, filtering -  Sourcing particularly well covered

• Most popular area: sources of innovation -  Many crowdsourcing studies -  Also user-generated content

2. Integrating Innovations • Considers org capabilities and culture

-  Limited examination beyond “Not Invented Here”

-  Clear challenges of processes, incentives • Integration seems to be a black box

-  How are these innovations integrated to the firm?

-  What skills are needed to do this well?

11/27/15

13

3. Commercializing Innovations • Lots of value creation

-  Increased product releases, revenues -  What is net benefit? Do costs go up?

• Assumes external innovations commercialized same as internal ones -  How do firms differ in external innovation

commercialization capabilities?

4. Reverse Paths Beyond the linear model, this includes • Feedback mechanisms

-  Information flow upstream • Reciprocal measures

-  Ongoing interactions -  Includes co-creation, communities

11/27/15

14

Outbound Open Innovation

What is outbound OI?

• Firms should find best/highest use of their IP -  Not all IP aligns to the firm’s business model

• Avoids Type II (false negative) error • Can include licensing to rivals, spinoffs

-  In parallel or instead of internal use

Inspired by Chesbrough study of Xerox PARC spinoffs (Chesbrough & Rosenbloom, 2002)

11/27/15

15

Various IP licensing models

• Dolby Labs: $700m/yr, 88% margins • Genentech: Humulin, Interferon • IBM: licensing IP portfolio • Dupont: licensing core technologies • Game mods, e.g. Half-Life • Xerox: creating spinoffs

Key challenges of outbound OI

• Identifying underused IP • Simultaneous internal/external

commercialization • Functioning IP markets • Dilemma over appropriability

-  Fear of sharing if weak IP -  Strong IP can delay other’s innovation

Chesbrough (2003, 2006b), Fabrizio (2006), Enkel et al (2009), Dahlander & Gann (2010)

11/27/15

16

Coupled Open Innovation

Coupled open innovation

• “Coupled” is different from inbound and outbound

• Two modes of coupled interaction -  Bi-directional (Gassmann & Enkel, 2004)

v Combines inbound & outbound v Applies to firm-to-firm R&D collaborations

-  Interactive collaboration (Piller & West, 2014) v Joint production outside the firm v Different from either inbound or outbound

11/27/15

17

Coupled open innovation

Focal Firm Organization

Focal Firm Organization or Individual Co- Creation

Bidirectional Coupled

Interactive Coupled

Source: Piller & West (2014), p. 39

Coupled open innovation

Examples of coupled open innovation: • Open source (West & Gallagher, 2006) • Communities (West & Sims, 2013) • R&D consortia (Müller-Seitz & Sydow,

2013) Still don’t have best practice for coupled; instead, different for each context

11/27/15

18

What’s Next?

Recent trends in OI research

• Linking to established theory • Greater precision of constructs • Better measurement • Better understanding of performance • Different levels of analysis • Role of appropriability • Nonprofit actors and motivations

See Vanhaverbeke et al (2014), West et al (2014) also http://bit.ly/1v2Gf7

11/27/15

19

Opportunity #1: Within companies

• Open innovation originally about how a firm adopts OI

• Large firms selectively use OI -  Sometimes they use it -  Sometimes they don’t -  Both inbound/outbound

• One way is studying project-level OI

See Du et al (2014); Vanhaverbeke, Du et al (2014)

Opportunity #2: Management theory

• Original OI derived from practice • Not explained in terms of management

theory • Potential linkages of OI to

-  Theory/boundaries of the firm -  Absorptive capacity -  Firm resources and capabilities

See West et al (2014),Vanhaverbeke & Cloodt (2014)

11/27/15

20

Opportunity #3: SME

• OI extrapolated from big companies -  IBM, Intel, P&G

• Issues are different for SMEs -  Lack resources and the slack -  Necessity vs. opportunity approach -  Crucial importance of networks

• Some research on small, not new firms

van de Vrande et al (2009), Brunswicker & van de Vrande (2014)

Opportunity #4: Networks

• Most OI between two organizations • Crucial importance of value networks

-  Alliance networks -  Consortia -  Ecosystems -  Communities -  Platforms

See West (2014)

11/27/15

21

Opportunity #5: Open Social

• Original OI focus is firm profit • Dahlander & Gann (2010) identify

many examples of non-monetized OI • New “Open Social Innovation”:†

-  Applicability to govt, NGO, etc. -  Need for innovation and change -  Ties to “social innovation” interest

†As defined by Chesbrough & Di Minin (2014)

Opportunity #6: Outbound OI

• Inbound is most often researched -  Also seems most popular in industry

• Outbound practices predate OI -  IP business models, technology markets

• How is licensing different under OI? • What about non-monetized outbound?

-  When does it benefit the firm?

See Dahlander & Gann (2010), West & Bogers (2014)

11/27/15

22

Opportunity #7: Failures

• OI research celebrates successes • No theory is universally applicable • Failures set limits of theory

-  When does OI not work/not appropriate? -  Is it strategy? Execution?

• Opportunities to learn from failure

See West & Bogers (2014); Mortara & Minshall (2014)

Conclusions

• Open innovation has had a sizable impact on industry

• Now a mainstream innovation theory -  10,000+ cites to Chesbrough (2003) -  100s of scholars, 1000s of papers -  Pervades innovation journals, conferences

• Many research opportunities

11/27/15

23

Further Info

Recent OI compilations

• Research Policy special issue (June 2014) -  10 articles -  See http://bit.ly/openinno2013

• Open Innovation: New Frontiers & Applications (Oxford) -  15 chapters -  See http://bit.ly/NFOI2014

11/27/15

24

Thank you! blog.OpenInnovation.net