Modes of Inbound Open Innovation in the Context of Dynamic Knowledge Creation Ilari Kaarela VTT Technical Research Centre of Finland, Espoo, Finland ilari.kaarela@vtt.fi Abstract: Knowledge and its management have been studied extensively in the last decades from many aspects, including the dynamic creation process (Nonaka et al., 2000), the nature of knowledge (Nonaka, 1994) and the knowledge boundaries and boundary objects (Carlile, 2002; Carlile & Rebentisch, 2003). Indeed, the existence (Grant, 1996) and structure (Birkinshaw et al., 2002) of companies have suggestively been explained by the facilitation capability for knowledge accumulation and integration they provide. The innovation processes are dynamic processes that create knowledge through activities that integrate information from multiple sources and transform it into a commercially feasible innovation. This phenomenon, often called open innovation (Chesbrough, 2003), has been paid notable attention on in current organizational research (West et al., 2006). The ability of a company to absorb external knowledge is limited by their current level of expertise (Cohen & Levinthal, 1990), their existing contact network and the limited resource of managerial attention (Laursen & Salter, 2006; Ocasio, 1997). Thus, companies have a need to prioritize the acquired knowledge and the explored sources. Also, the political nature of pragmatic, interorganizational knowledge creation must not be overlooked (Swan & Scarborough, 2005; Carlile, 2004). This paper aims at describing the logic in which these decisions can be made. The study is primarily conceptual, and aims at explaining why the selected modes of interaction and the type of partners the companies resort to in their information acquisition processes have strong path dependencies. Three case interviews are briefly introduced to exemplify our preliminary findings. Keywords: open innovation, knowledge creation, knowledge boundaries

1. Introduction Knowledge required for decision-making and innovation activities is dispersed among individuals in organizations (Becker, 2001). Knowledge is created across functions (Carlile, 2002; Carlile & Rebentisch, 2003) and even among organizations (Chesbrough, 2003). The dialogical nature of knowledge creation in organizations is widely accepted (Tsoukas, 2009; Bechky, 2003). Semi-isolation of intraorganizational groups is beneficial for organizations as they allow heterogeneity of ideas and belief sets (Fang et al., 2010). Also, diverse knowledge increases the variation of co-operation results (Taylor & Greve, 2006). Semi-permanent contacts to other organizations could produce even more prominent effects.

2. Previous research New knowledge is created in a dynamic process in organizations (Nonaka et al., 2000) that are formed to make use of the knowledge dispersed among individuals (Grant, 1996; Becker, 2001). Furthermore, in current business environments the knowledge possessed by an organization is rarely sufficient. Instead, organizations gather knowledge from external sources to enhance knowledge accumulation (Chesbrough, 2003).

2.1 Knowledge creation in organizations Knowledge is created within organizations in continuous spiral-like processes (Nonaka, 1994). Tacit knowledge in organizations possessed by individuals is moved on to others in a process called socialization, coded to explicit knowledge through externalization, combined with other explicit knowledge, and transformed to tacit knowledge in a process called internalization (Nonaka et al., 2000). Nonaka (1994) calls this the socialization-externalization-combination-internalization process – or SECI process in short. The actors in this process must share a context for knowledge creation. Nonaka et al. (2000) use the concept of ba for a specific space and time of knowledge creation and communication that also includes the social, historical and cultural context of interaction. Knowledge boundaries that exist between individuals, functional groups, or organizations are important in knowledge processing (Carlile, 2004). According to Carlile (2002; 2004) knowledge and related boundaries between functions can be analyzed from three perspectives: syntactic, semantic and pragmatic, as illustrated in Figure 1. Syntactic knowledge is readily transferred between communicators, and semantic needs special care in communication in order to be understood correctly. Pragmatic view takes into account the complex social environment in which knowledge is

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exchanged, developed and used. Actors can misunderstand not only the message, but also the goals and effects of the interaction. (Carlile, 2004)

Figure 1: An integrated framework for managing knowledge across boundaries (Carlile, 2004) Individuals’ and organizations’ actions at knowledge boundaries are limited and defined by boundary objects (Carlile, 2004). These are tools that are used to process and communicate knowledge at knowledge boundaries. Boundary objects have to be conscientiously generated for new boundaries (Gkeredakis & Samiotis, 2006), and their types vary depending on the boundary type at hand (Carlile, 2002). Boundary objects are used in transforming the knowledge to create a collective solution (Carlile, 2002).

2.2 Knowledge creation in interorganizational networks Although knowledge can be created inside an organization, it is increasingly common that it is created outside or at the boundaries with the help of external sources or partners (Chesbrough, 2003). In this paper we incorporate the different sources under one concept from an unrelated context. Tui is a concept developed by Bertol Brecht in his unfinished Tui-Novel in the mid-1930s, and refers to an intellectual that sells knowledge as a commodity. Political undertones aside, we use this neologism as an expression for an individual or organization that shares knowledge. Sharing knowledge is bound to carry benefits, either financial or strategic, to both the receiver and the tui. Thus, shared knowledge is always sold. Tuism is a cynical way of viewing open innovation – it leaves no room for altruistic knowledge sharing communities. Knowledge needs of companies vary greatly. Tui are multifarious: companies exploit end-user, customer and supplier information and R&D partnerships, universities and research organizations, consultants and patent databases in their innovation activities. Organizations must decide which sources are followed continuously, and which focused on in some particular knowledge creation processes. Knowledge vision sets the direction of the dynamic process in which knowledge is created within organizations (Nonaka et al., 2000). As in the case of closed knowledge creation process, open knowledge creation process needs vision. As part of this vision, network contact portfolio sets the balance of wide and deep ties of the organization (Simard & West, 2006). Relying on the current business partners may result in trustworthy relationships, but also easily strengthens existing viewpoints creating redundant knowledge.

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The bottleneck of information integration is between organizations. Carlile (2004) explained that the integration of knowledge at a pragmatic knowledge boundary within an organization requires negotiations, as changes to existing knowledge affect the operations of the interacting functions, and raise other, political issues (Swan & Scarborough, 2005). These negotiations gain more importance in interorganizational context.

3. Preliminary findings We present exemplary findings from three case companies. Company A is a medium-sized company supplying semiconductors to electronics industry, company B a large company in heavy machinery industry, and company C a bakery company. The contextual factors affecting the openness of these companies are notable but in the interviews of R&D managers of each company we noticed important similarities. Selected statements from the interviews are presented in Table 1. Table 1: Selected quotations from the interviews in the case companies

Quotations Clarifications

“We have tight and lasting contacts also outside our customer base, but they are more personal; our

employees interact with people from other organisations.”

Formal contacts to key business contacts are not enough to sustain a creative environment for business renewal.

“These [personal] contacts may change, when for example a professor at a university retires – in this sense

the continuity of such contacts may be uncertain.”

Informal contacts as interorganizational links are troublesome, but they add to the understanding of the

organization, and provide external information that extends beyond the ad-hoc needs.

”We plan to further develop it [our contact network], but we have to keep in mind that the wider the network, the

more expensive it is to maintain.”

Even sustaining existing contact networks is costly and time-consuming, but absolutely necessary. The quality of the

contacts is crucial.

"Our customers are often fierce competitors with each other - we have to be very careful in keeping the

confidential things confidential."

Issues of interorganizational trust easily arise in situations where the number of players is relatively limited and the

appropriability of the innovation results is low.

"It is challenging to develop a new innovation culture, as the industry is traditionally so conservative."

Traditionally the R&D investment has been relatively low compared to turnover. Also, the R&D work has been

securely closed. Changes take time.

“Even though customers inhibit innovation, they and their needs do change – we have to be there in time to offer

our new views to bring additional value to the customer.”

Customers are very conservative, and the life-cycle of the offerings is exceendigly long - they are wary of sudden innovations and radical solutions. Eventually they will, however, require new solutions to their problems and

develop new needs.

"Our goal is that our products are standard that can be sold to all potential customers."

Highly customized products are not cost-effective. Even the results of co-developed innovation results are almost never

non-exclusive. This limits knowledge co-creation possibilities with customers considerably.

”Deeper partnerships are becoming more and more important, but we’ve had some conflicts in commercial

partnerships, when we’ve co-operated with two competing companies.”

Organizations are wary of companies that interact closely with their competitors. Trust issues and other conflicts of

interest easily arise.

"In the beginning of co-operative projects it is often difficult to estimate the end results, their appropriability

and value."

Innovations are rarely patentable, and the tacit knowledge co-created in co-operative projects is impossible to price. Often only basic research is conducted in such projects,

whereas application ideas are kept strictly secret.

”There is open information exchange with colleague companies, for example from Britain, that are in the same

industry, but due to geographical distance cannot compete in the same markets.”

The bakery companies are traditionally relatively local, as is the competition. Thus, global co-operation in innovation activities is less prone to trust issues than in other, more

global industries.

“The lack of information is never the cause of trouble; the problem lies in ingesting, absorbing and refining the

information.”

An excess of information flows into the company from the mother company, science world and suppliers. It is difficult

to recognize what is relevant.

Company C

Current external exploration in the company

Company B

Company A

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The companies discussed their external exploration underlining political issues. Company A emphasized disagreements arising from partnering with competing companies simultaneously, and trouble related to the short lifecycle of informal contacts to fellow organizations. Company B complained that the conservativeness of customers limits the renewal of their innovation culture. Customers also demand an unrealistic level exclusivity. Company C claimed that low appropriability of innovations and trust issues result in basic research co-operation, whereas applicative research is done in-house. They also named the same problem of competing partners as company A. It seems that especially pragmatic boundary capabilities are relevant in interorganizational innovation activities. All interviewees stress conflicts of interest and difficulties of agreeing on innovation results. We propose that these challenges are related to pragmatic boundaries and insufficient ba between the actors. The companies have repeatedly failed to find a common goal with their tui. The solutions have been reactive rather than proactive. More attention should be paid in creating common meaning and context.

4. Implications Tui can enhance knowledge creation in organizations in multiple ways: by providing new inputs or perspectives and facilitating co-operation with other tui. Knowledge asset enhancing tui are used to widen the organizational base knowledge. Ba tui act as intermediaries between an organization and other tui. They build common context, take part in defining the problem, connect problem solvers to appropriate problems, help overcome uncertainty, and maintain online communities. Tui can also take part in the actual SECI process in various ways: they can provide inputs for market or technological foresight or specifications or act in direct research roles. Clearly, alternate modes of interaction function optimally in different SECI phases, as their inputs and outputs vary. Roughly, socialization and externalization require co-operative interaction, whereas combination and internalization phases can be aided with acquisitive measures. In summary, there are three types of tui, presented in Figure 2: ba tui, knowledge asset enhancing tui and SECI tui. These classifications are not specific, as some sources can act in multiple tui roles even during a single innovation process. Especially SECI tui offer quick variation of external sources in knowledge creation processes; they are often activated to solve problems ad hoc. Ba tui can also be exploited fairly quickly, but knowledge asset enhancing tui require time and consideration to function. A rough tui classification is shown in Table 2.

Figure 2: External tui in knowledge creation processes (modified from Nonaka et al., 2000)

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It is important to recognize the conflicts of interest that naturally reside in interorganizational relationships. As organizations never interact without an agenda, the pragmatic view of knowledge co-creation is usually natural. However, organizational boundary types vary. Ultimately, the interplay of ba (Nonaka et al., 2000), and the positive effects of a common meaning (Swan & Scarborough, 2005), will solve these problems. Table 2: Different types of tui, their primary uses and the main problems related in utilizing them

Useful for Examples of Tui Boundary types Typical challenges

creating boundary objects, sustaining platforms of

interaction, increasing the number of contacts

intermediaries, online community providers, consultants, workshops,

conferences

semantic, pragmatic

agreeing on the problem at hand,

understanding each other's motives

increasing the available knowledge base, increasing indirect absorptive capacity

informal and personal contacts to universities and research

organizations, purchasing licenses or patents from other companies

pragmaticsustaining the relevant

contacts, time and resource issues

Tui for Socialising receiving hidden messages and mapping latent needs

customers and end-users in online communities and direct contacts

semantic, pragmatic

motivating participants, recognizing the prevailing trends

Tui for Externalisingsystemizing knowledge into

documentable form for storage, reuse and sharing

research organizations, universities, suppliers, consultants

syntactic, pragmatic

motivating the experts of the tacit knowledge

for documentation work

Tui for Combiningreducing the risk of overlaps in

research, finding synergy in research work

studies, publications, (patent) databases, acquired patents and

licensessyntactic

recognizing the most relevant pieces of

information

Tui for Internalising turning theory into practice consultants, workshops, conferencessyntactic, semantic, pragmatic

fitting theoretical frameworks into own organizational needs

Ba Tui

Knowledge asset enhancing Tui

SECI Tui

Hafkesbrink and Schroll (2010) suggest a framework of organizational capabilities related to open innovation dividing them into organizational readiness, collaborative capabilities and absorptive capabilities (Hafkesbrink & Schroll, 2010). They are conceptually comparable to Carlile’s (2004) pragmatic, semantic and syntactic boundary capabilities, respectively, in interorganizational context. Path dependencies constrain organizations’ access to external knowledge by both limiting absorptive capacity and available set of viable contacts (Teece et al., 1997; Cohen & Levinthal, 1990). Familiar contacts may result in a high level of redundancy of knowledge in existing network relationships (Simard & West, 2006). Choi & Lee (2002) suggest that the internal knowledge strategy should be aligned dynamically to fit the knowledge creation process at hand; whereas Birkinshaw et al. (2002) see knowledge an organization handles as a contingency variable that predicts how the organization is structured. It is reasonable to assume that also the external knowledge strategy, including the selection of appropriate tui and modes of interaction, is shaped with respect to the nature of knowledge and the related boundaries.

5. Conclusion Companies make knowledge acquisition decisions based on availability of knowledge, the politics inherently included in interorganizational dealings, and the nature of knowledge. Depending on the problem, different tui in different knowledge creation process phases are activated. The unique interorganizational boundary to each tui is considered regarding the ba and boundary objects available. Co-creational openness is more likely to produce a common meaning for the information exchange. Actors process knowledge in their common context with suitable boundary objects. The set of network contacts is adjusted to the nature of business and size of the company, as these define the knowledge needs. The modes of interaction in these relations depend not only on process phase and type of knowledge, but also on other contextual factors that create conflicts of interest between organizations resulting in pragmatic boundaries.

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