Summary Readings 1ZM40 Topics 3 and 4
Content
Topic 3 – Open Innovation .................................................................................................................. 1
❖ The Era of Open Innovation - Henry W. Chesbrough.............................................................. 1
❖ Interorganizational Alliances and the Performance of Firms: A Study of Growth and
Innovation Rates in a High-Technology Industry – Toby Stuart...................................................... 5
❖ Open Innovation & Strategy – Chesbrough & Appleyard ....................................................... 9
❖ When Does Scientist Recruitment Affect Technological Repositioning? – Daniel Tzabbar .. 15
Topic 4 – Innovation Ecosystems (20.20).......................................................................................... 21
❖ Ecosystem as Structure: An Actionable Construct for Strategy - Adner ............................... 21
❖ Towards a Theory of Ecosystems – Jacobides, Cennamo & Gawer (1.05u) ......................... 26
❖ Match Your Innovation Strategy to Your Innovation Ecosystem – Adner (0.75u)................ 30
Maneuvering in Poor Visibility: How Firms Play the Ecosystem Game when Uncertainty is High –
Dattée, Alexy & Autio (12.02-12.57, 13.50- ) ................................................................................ 32
Topic 3 – Open Innovation
❖ The Era of Open Innovation - Henry W. Chesbrough
In the past, internal R&D was a valuable strategic asset, even a formidable barrier to entry by
competitors in many markets. These days, however, the leading industrial enterprises of the past have
been encountering remarkably strong competition from many upstarts. Surprisingly, these
newcomers conduct little or no basic research on their own, but instead get new ideas to market
through a different process.
From Closed to Open
Then why is internal R&D no longer the strategic asset it once was? The answer lies in a fundamental
shift in how companies generate new ideas and bring them to market. In the old model of closed
innovation, firms adhered to the following philosophy: Successful innovation requires control. In other
words, companies must generate their own ideas that they would then develop, manufacture, market,
distribute and service themselves. For most of the 20th century, the model worked — and it worked
well.
Toward the end of the 20th century, though, a number of factors combined to erode the
underpinnings of closed innovation in the United States. Perhaps chief among these factors was the
dramatic rise in the number and mobility of knowledge workers, making it increasingly difficult for
companies to control their proprietary ideas and expertise. Another important factor was the growing
availability of private venture capital, which has helped to finance new firms and their efforts to
commercialize ideas that have spilled outside the silos of corporate research labs.
,Thus, the virtuous cycle of innovation was shattered: The company that
originally funded a breakthrough did not profit from the investment, and
the firm that did reap the benefits did not reinvest its proceeds to finance
the next generation of discoveries.
In this new model of open innovation firms commercialize external (as
well as internal) ideas by deploying outside (as well as in-house) pathways
to the market -> companies can commercialize internal ideas through
channels outside of their current businesses in order to generate value for
the organization. Vehicles for accomplishing this include start-up
companies and licensing agreements + ideas can originate outside the
firm’s own labs and be brought inside for commercialization.
Open innovation is based on a landscape of abundant knowledge, which
must be used readily if it is to provide value for the company that created
it. However, an organization should not restrict the knowledge that it
uncovers in its research to its internal market pathways, nor should those
internal pathways necessarily be constrained to bringing only the
company’s internal knowledge to market. For example, no longer should
a company lock up its IP, but instead it should find ways to profit from
others’ use of that technology through licensing agreements, joint
ventures and other arrangements. (Also see David Kline’s article, “Sharing
the Corporate Crown Jewels,” p. 89.)
One major difference between closed and open innovation lies in how
companies screen their ideas. In any R&D process, researchers and their
managers must separate the bad proposals from the good ones so that
they can discard the former while pursuing and commercializing the latter.
Both the closed and open models are adept at weeding out “false
positives” (that is, bad ideas that initially look promising), but open innovation also incorporates the
ability to rescue “false negatives” (projects that initially seem to lack promise but turn out to be
surprisingly valuable) (Xerox’ PARC).
How Prevalent Is Open Innovation?
This is not to argue that all industries have been (or will be) migrating to open innovation. At this point,
different businesses can be located on a continuum, from essentially closed to completely open. P&G
wants to have 50% of its innovations from outside the company in five years, now it’s 10%. It also tries
to move its own innovations outside. Goal: prevent promising projects from losing momentum and
becoming stuck inside the organization.
,The Different Modes of Innovation
Many firms have focused their activities into one of three primary areas: funding, generating or
commercializing innovation.
1. Funding Innovation;
o Two types of organizations — innovation investors and benefactors— are focused
primarily on supplying fuel for the innovation fire.
▪ The original innovation investor was the corporate R&D budget but now a
wide range of other types has emerged, e.g. venture capital, angel investors,
corporate VC entities. Their capital helps move ideas out of corporations and
universities and into the market, typically through the creation of start-ups.
In addition to financing, innovation investors can supply valuable advice for
helping start-ups avoid the common growing pains that afflict many fledgling
firms.
▪ Innovation benefactors provide new sources of research funding. Unlike
investors, benefactors focus on the early stages of research discovery. Some
companies are devoting a portion of their resources to playing the role of
benefactor. By funding promising early-stage work, they get a first look at the
ideas and can selectively fund those that seem favourable for their industry.
Interesting development is the possible rise in philanthropy from private
foundations, especially those backed by wealthy individuals.
2. Generating Innovation
o There are four types of organizations that primarily generate innovation: innovation
explorers, merchants, architects and missionaries.
▪ Innovation explorers specialize in performing the discovery research function
that previously took place primarily within corporate R&D laboratories. A
number of explorers evolved as spinoffs of laboratories that used to be a part
of a larger organization. (Xerox, PARC)
▪ Innovation merchants must also explore, but their activities are focused on a
narrow set of technologies that are then codified into intellectual property
and aggressively sold to (and brought to market by) others. In other words,
innovation merchants will innovate but only with specific commercial goals in
mind, whereas explorers tend to innovate for innovation’s sake. Royalties
from their IP enable them to do more research in their areas of focus.
(Qualcomm)
, ▪ Innovation architects provide a valuable service in complicated technology
worlds. In order to create value for their customers, they develop
architectures that partition this complexity, enabling numerous other
companies to provide pieces of the system, all while ensuring that those parts
fit together in a coherent way. (Nokia, GSM)
▪ Innovation missionaries consist of people and organizations that create and
advance technologies to serve a cause. Unlike the innovation merchants and
architects, they do not seek financial profits from their work. Instead, the
mission is what motivates them. This is characteristic of many community-
based non-profits and religious groups but also occurs in the software
industry. (Linux)
3. Commercializing Innovation
o Two types of organization are focused on bringing innovations to market: innovation
marketers and one-stop centres.
▪ Innovation marketers often perform at least some of the functions of the
other types of organization, but their defining attribute is their keen ability to
profitably market ideas, both their own as well as others’. (Intuit)
▪ Innovation one-stop centres provide comprehensive products and services.
They take the best ideas (from whatever source) and deliver those offerings
to their customers at competitive prices. Like innovation marketers, they
thrive by selling others’ ideas, but are different in that they typically form
unshakable connections to the end users, increasingly managing a customer’s
resources to his or her specifications. (Yahoo)
ALTHOUGH MANY COMPANIES are focusing on just funding, generating or commercializing
innovation, some are continuing to do all three. As mentioned earlier, industrial powerhouses like GE,
DuPont and AT&T (with Bell Labs) were the exemplars of this approach in the United States during the
20th century, and the success of those corporations has cast the mold for most central R&D
organizations. To this day, several companies, called fully integrated innovators, continue to espouse
the closed innovation credo of “innovation through total control.”
IBM is a one-stop centre for consulting services and a fully integrated innovator with respect to
mainframes. Competing modes can coexist in the same industry.
Fully integrated innovators have become an endangered species in many industries. Other modes of
innovation are in a position to profit from them. The explorer mode depends on external sources of
funding because of the considerable resources and uncertainty of conducting long-term research.
Innovation merchants must determine how best to gain access to the complementary assets that
might be needed to commercialize an innovation + laws for IP protection are ill-defined at best -> risky
to limit their revenue stream solely to the marketing of their IP. Innovation architects have plentiful
ideas, but that very abundance can make it extremely difficult to create useful systems + they must
balance the creation of value with the need to capture a portion of that value.
Long Live Open Innovation
Today, in many industries, the logic that supports an internally oriented, centralized approach to R&D
has become obsolete. Useful knowledge has become widespread and ideas must be used with alacrity.
If not, they will be lost. Such factors create a new logic of open innovation that embraces external
ideas and knowledge in conjunction with internal R&D.
