An Overview of DistributedAn Overview of DistributedPerspectives on InnovationPerspectives on Innovation
Joel Westblog.OpenInnovation.netSan José State University
Center for Open InnovationUC Berkeley, Haas School of Business
August 31, 2010
Today’s Story
• Traditional and distributed innovation• Similarities and differences• Emerging areas of research and
practice• Conclusions
What is “Innovation”?
Defining “Innovation”
Some disagreement over “innovation”:• Technical vs. economic (or both)• Radical vs. incremental
Is cost reduction radical? (Leifer et al)• Adopter vs. producer perspective• New to the firm vs. new to the world
Source: Bogers & West (2010)
Latent value of an innovation
“The inherent value of a technology remainslatent until it is commercialized in some way.”
A business model unlocks that latent value,mediating between technical and economicdomains.
– Chesbrough & Rosenbloom (2002)
Invention vs. Innovation
“Inventions … do not necessarily leadto technical innovations. In fact themajority do not. An innovation in theeconomic sense is accomplished onlywith the first commercial transaction.”
—Freeman (1982: 7)
Non-commercial Application
“Innovation is composed of two parts:
(1) the generation of an idea or invention, and
(2) the conversion of that invention into abusiness or other useful application.”
— Roberts (1988: 12)
ResearchResearchInvestigationsInvestigations
DevelopmentDevelopment New ProductsNew Products& Services& Services
TheMarket
Science&
TechnologyBase
Source: Chesbrough (2006)
Vertically Integrated R&D
Research of Alfred D 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
Vertical Integration
Distributed* Perspectiveson Innovation
* i.e. OI/UI/CI
Value Network
Suppliers
Focal Firm
Comple-mentors
Users
Rivals
Focal Firm Suppliers Customers RivalsVertical
integration X
Userinnovation X † X
Cumulativeinnovation X X
Openinnovation X X X X
X = Sources of Innovation; † limited emphasis
Sources of Innovation
Source: West (2009)
User Innovation
• From von Hippel (1988, 2005)• Users know their needs best• Goal: engage users in innovation
Use empowerment, other motivations Direct (toolkits) & indirect (feedback) Requires processes, tools, design
• Found in ever-wider domains
Free vs. Paid Revealing
What do users do with their innovations?• Use them and keep quiet• Free revealing (Harhoff et al 2003)
Share them with other users Give them back to companies
• Make money Sell them back to companies User-entrepreneur (Shah & Tripsas 2007)
Cumulative Innovation
• Promoted by Scotchmer (1991, 2004)• Focus: developing radical innovations
Initial innovation is rarely complete Subsequent shared technological progress
• Competitors build on each other Need rights to each others’ work Some IP regimes hinder C.I.
• Jungle vs. commune view of rivalry
Three Cumulative Patterns
1. Core technology, many derivatives E.g., Cohen-Boyer patent
2. Derivative of many building blocks• E.g., GSM/W-CDMA MP3 cameraphone
3. Incremental quality improvements• E.g., higher resolution inkjet print heads
Source: Scotchmer (2004)
Open Innovation
• By Chesbrough (2003, 2006, 2007)• Key points:
Find alternate sources of innovationEither markets or spillovers
Find alternate markets for innovation Central role of the business model
• Cognitive managerial paradigm• Framework consonant with UI, CI
Source: Chesbrough (2006)
CurrentMarket
InternalTechnology
Base
Technology Insourcing
New Market
TechnologySpin-offs
ExternalTechnology
Base
Other Firm’s Market
Licensing
“Open” innovation strategies
R&D under Open Innovation
ICT: Systems Integration Model
Component
Complements
Systems AdoptionTechnology
Integrator Users
Complement Provider
Innovator
Component
Component Rival
Source: West (2006)
Key Issues for Open Innovation1. Maximizing returns to internal innovation2. Identifying/incorporating external
innovations3. Motivating an ongoing stream of external
innovations (with or without money)
R&DFirm
Ideas Products
LicenseesLicensorsMotivating
Incorporating Maximizing
2
3
1
Source: West & Gallagher (2006)
Related Innovation Models
Collaborative, peer-to-peerinnovation without monetization:
• Open Science• Free Software• Shared Production
Similarities Across O/U/CI
Dispersal of Knowledge
• “In Open Innovation, useful knowledge isgenerally believed to be widely distributed,and of generally high quality.” (Chesbrough,2006: 9)
• “Different users and manufacturers will havedifferent stocks of information … eachinnovator will tend to develop innovations thatdraw on the sticky information it already has”(von Hippel 2005: 70)
Other Similarities
• Orientation outside the firm• Innovation activities take place across
organizational boundaries†
• Overall, rejecting Vertical Integration
† Some UI ignores firms and is entirelyoutside any firm
Source: Bogers & West (2010)
Contrasting Modes ofCommercialization
Innovation Flows in Value Chain
Suppliers
Focal Firm
Comple-mentors
Users
Rivals
Open InnovationUser InnovationCumulative Innovationall forms
Sample Modes (1)
Employeeentrepreneurs
User sharing
Outbound OIOutsideInsideOutbound
Verticalintegration
InsideInsideIntegratedModeDiffusionCreationCell
Sample Modes (2)
Left on the shelfN/AInsideOrphan
Userentrepreneurship
Lead users
Inbound OIInsideOutsideInbound
ModeDiffusionCreationCell
Sample Modes (3)
User’s own needN/AOutsideEgocentric
Sharedproduction
Open science
User sharingOutsideOutsideCollabo-rative
ModeDiffusionCreationCell
Sample Modes (4)
Cooperativespillovers
Rivalrousspillovers
Inside &Outside
Co-creationInsideInside &Outside
CoupledModeDiffusionCreationCell
Distinct Commercialization Paths
insidefocal firm
outsidefocal firm
insidefocal firm
outsidefocal firm
Cre
ati
onCommercialization
† Includes non-commercialdiffusion of innovations
notcommercialized
Egocentric
OrphanIntegrated Outbound
Inbound Collaborative†
co-creation frontierCoupled
Antecedents for Selecting Modes
• Supply conditions Scale economies Cost of production and distribution
• Demand conditions Heterogeneity of demand
• Institutional conditions Strength of IP regime Markets for innovation
Selecting Inside/Outside Paths
• Lack complementary assets(Teece 1986)• Doesn’t fit business model
(Chesbrough & Rosenbloom2002)
• Strong distribution,other complementaryassets; or• Weak appropriability
(Teece 1986)
Commer-cialization
• Because not all knowledge is inone firm (Chesbrough 2003)• To exploit sticky user
information (von Hippel 1994)• Share scale economies of R&D
(West & Gallagher, 2006)
• Strong R&Dcapabilities• Unable to source firm-
specific R&D (Dierickx& Cool, 1989)
Creation
OutsideInside
Communities
Importance of Communities
• Best known from open source software• Implicit in CI research
E.g. Meyer (2006) on 19th century airplane• Increasingly important in UI
E.g. Franke & Shah (2003), von Hippel(2005), Jeppesen & Frederiksen (2006)
• Finally being recognized in OI
Communities in OI
• Two pre-requisites: Voluntary association of independent actors Enabling innovation commercialization
• Open questions Who are the members? Individuals (cf. UI
communities) or firms (cf. ecosystem, networks …) What are the boundaries? Upstream vs. downstream communities Interactions within vs. with communities
Source: West & Lakhani (2008)
Communities as Third Mode
Open innovation has three modes1. Outside-in: using external innovations2. Inside-out: commercializing internal
innovations3. Coupled: communities, ecosystems,
alliances, consortia etc.
Source: Enkel, Gassmann, Chesbrough (2009)
Findings about OI Communities
Study of three innovation communities:• Participants from multiple organizations• Anchored to specific innovation• Shared goals, objectives, identity• Leverage distributed competencies
Source: Fichter (2009)
Are Firms Only “Open Enough”?
• Firms, OI communities share interests• Firms chronically unwilling to give up control
E.g. OSS communities: Apple, Google, Nokia, …• Is it possible for firms to be open?
Optimistic view: firms gain more by openness Pessimistic view: Firms are only as open as they
need to be (West, 2003; West & O’Mahony, 2008)
Emerging Patterns ofPractice
Learning from Observation
”The field of innovation studiesarguably operates in Pasteur’sQuadrant, in that the processesand practices of industry actorsoften extend beyond the boundspredicted by academic theory.”
– Chesbrough (2006)
Are Acquisitions OI or VI?• Firms buying innovation by buying firms
Cisco growth strategy (Mayer & Kenney 2004) Now Google, this month Intel
• Is this inbound open innovation? Externally developed, internally
commercialized?• Is it vertical integration?
Ongoing innovation, commercializationcontrolled by one firm
Is ICT Vertical Integration Dead?
• Silicon Valley: distributed innovation Ecosystems Component-based business models User innovation via beta sites, toolkits 1990s, even IBM became distributed Grove (1996) pronounced VI dead
• Today: more vertical integration Apple, Google, HP, Microsoft, Nokia
What is Crowdsourcing?
• A user innovation model? Users have sticky knowledge Apply knowledge to solve own problems Make it easy to obtain free revealing
• An open innovation model? Users/non-users have knowledge Maximize return from that knowledge Use markets to identify, source ideas
OI: Substitute or Complement?
• Open innovation offered as a complement totraditional corporate innovation Increasingly, OI used as a substitute
• OI-Inbound: OI vs. internal R&D Instead of correcting atrophied internal R&D Firing internal R&D workers (e.g. HP) What about absorptive capacity?
• OI-Outbound: OI vs. actual business model IP licensing -> Patent trolls Where is the value creation?
Monetizing Knowledge Flows
• Contrasting views of charging for knowledge UI, CI celebrate free spillovers
Open source softwareOther collaborative communities
OI emphasizes monetizationUniversities chasing patent royalties Impact on open science?
Which is socially optimal?• Tied to IPR policy
Ongoing debates over patent trolls, patent reform
Conclusions
Summary
• Rapidly growing research on distributedinnovation Distinct but overlapping O/U/CI streams
• Distributed innovation is here to stay Requires different conceptual approaches Requires different processes Requires different metrics
Thank You!
Joel Westblog.OpenInnovation.net