Digital Innovation and Entrepreneurship
Week 1
Stand out – demonstrate high levels of digital development while continuing to lead in innovation and new growth.
Stall out – many developed countries such have a history of strong growth, but their momentum is slowing. Without further
innovation, they are at risk of falling behind.
Break out – though still at relatively lower absolute levels of digital advancement, these countries demonstrate the fastest
momentum, are poised for growth and are attractive to investors.
Watch out –face significant challenges, constrained both by low levels of digital advancement and a slow pace of growth.
Platform advantages
• Platforms scale more efficiently by eliminating gatekeepers
o Editorial pipeline vs. Amazon self-publishing platform
• Platforms unlock new sources of value creation and supply
o Hotel industry vs. Airbnb
• Platforms use data-based tools to create community feedback loops
o Wikipedia vs. Encyclopedia Britannica // Feedback loops allow for quality signals
• Platforms invert the firm
o Focus shifts from inside to outside the firm
o E.g., from broadcasting to segmentation (mktg), from control to orchestration (strategy, ops),
from labs to crowdsourcing (innovation)
,Week 2 TOPICS
I. Innovation
II. Open Innovation
III. Choosing between competitive markets & collaborative communities
IV. Open Strategy
V. Where should organizations be more open?
ARTICLES
• How to Manage Outside Innovation
• Critical issues that managers should take into account when deciding approach
o Type of innovation that will be shifted to external innovators
▪ collaborative communities →If the innovation problem involves cumulative
knowledge, continually building on past advances→Open innovation: mandatory
when technology has yet to be established and customer needs are highly varied and
not fully understood
• examples = Linux operating system, the Mozilla Firefox Web browser, the
Apache Web server and other open-source technology projects
▪ competitive markets→ If the innovation problem is best solved by broad
experimentation across a set of technical approaches or customer groups, they foster
diversity and spur regular “creative destruction.” →Internal development of a
technology « pipeline » fashion: works well when the tech. & consumer preferences
are well understood
• maintain own proprietary interests
• when their efforts are successful, the benefits will accrue as individuals
• incentives to differentiate, to search for novel solutions and to protect rather
than share their knowledge
o Motivations of those individuals
▪ Extrinsic→competitive markets→e.g financial/ acquisition of skills/reputation
• implementation of formal and competitive mechanisms that will tend to
discourage most of a community’s essential qualities (for instance,
knowledge sharing)→ need to discourage those external innovators who are
willing to work for free; profit-seeking individuals otherwise might be
dissuaded from investing and participating.
• markets require mechanisms to ensure the direct flow of income to external
innovators. Such mechanisms do not exist in collaborative communities, but
they are essential in competitive markets and should not be taken for
granted.
▪ Instrisic→collaborative communities→e.g. enjoy task/ inherently interesting or
intellectually challenging / part of some larger cause.
• culture of sharing (and learning), a sense of affiliation (as well as identity
and status), a norm of reciprocity and perhaps even personal relationships
• communities must establish mechanisms to prevent profit seekers from
skimming communal knowledge to make a buck.
o Nature of the platform business model. ( who-sells-to-whom )
both of those approaches are inherently predisposed to platforms of minimal control.
In a competitive market, profit-seeking innovators might be particularly wary of getting locked into a platform
,In a collaborative community, members concerned that their work could be coopted or used in ways that they
did not intend.
▪ Integrator→ between external innovators and customers
• the platform’s owner sells to customers, conferring upon the company a
relatively high degree of control.
o Between iPhone software developers and consumers, Apple is able to
monitor and directly control transactions with customers=30% of
revenue
▪ product → external innovators (and not the platform) directly transact with users
• external innovators build “on top” of a foundation technology. The platform
owner might directly contract with the external innovators and have some
additional control over them through the technical design of the core
technology.
▪ two-sided→ the platform facilitates transactions between the two parties
• external innovators and customers are free to transact directly with one
another as long as they also affiliate with the platform owner
• external innovators do not need to interact directly with the platform owner
during the design, development and manufacturing of a new product.
• the platform owner can still impose some degree of control over external
innovators by, for instance, issuing to them various rules and regulations as
a condition for their affiliation.
,
,
, • Open Innovation and Strategy examine the increasing adoption of more open
approaches to innovation
Traditional business strategy
• defensible positions against the forces of competition and power in the value chain,
• constructing barriers to competition
Open strategy balances the tenets of traditional business strategy with the promise of open innovation.
Benefits of openness as a means of
• expanding value creation for organizations. It places certain limits on traditional business models when
those limits are necessary to foster greater adoption of an innovation approach.
• introduces new business models based on invention and coordination undertaken within a community
of innovators.
• sustain open innovation approaches over time. Sustaining a business model requires a means to capture
a portion of the value created from innovation.
• balance value capture and value creation, instead of losing sight of value capture during the pursuit of
innovation.
1. The Insights and Limits of Traditional Business Strategy
• Kenneth R. Andrews said
o Business strategy →product market choices made by division or product line management in
diversified company
o Corporate strategy → superset of business strategy. →defines products and markets—and
determines the company’s course into the almost indefinite future. There is only one corporate
strategy but may incorporate many business strategies.
• Porter → not maximizing consumer surplus (the usual economic objective), but= producer surplus.
o Porter extended the Five Forces concept by linking it to the value chain of a firm, defined as
those activities from raw materials through to the final consumer in which a firm’s products
were developed and marketed.
• None take much notice of the potential value of external resources that are not owned by the firm in
question, but may nonetheless create value for the firm→ growing sources of value creation.
2. Emerging Anomalies that Challenge Traditional Business Strategy
• Openness = pooling of knowledge for innovative purposes where the contributors have access to the inputs
of others and cannot exert exclusive rights over the resultant innovation
• value created = public good
o “non-rival” in that when someone “consumed” it, it would not degrade the experience of a
subsequent user
o “non-excludable” so all comers could gain access.
▪ Eg. MySpace to open source software such as the Linux operating system have created value along
the lines of a public good in that multiple people can use them and no one is excluded from using
them
Openess value enhanced with every user in two ways.
• First, users directly contribute ideas and content to improve the quality and variety of the product.
o MySpace relies on individual contributors, Wikipedia relies on individuals for both data entry and
editing, and Linux relies on a global innovation community. Raymond popularized this notion
through “Linus’s Law,” which states, “Given enough eyeballs, all bugs are shallow” (i.e., easy to
fix).
• Second, the more users, the more momentum behind the product such that other companies producing
complementary goods or services would be attracted to the mass of users. This dynamic, where more users
beget more users, has been labeled a “network effect.”
o MySpace, Rupert Murdoch’s News Corporation found value in the web site’s ability to outpace
other social networking sites in terms of membership whose demographics—in addition to
numbers—are coveted by advertisers
o News Corp.’s $580 million acquisition of MySpace’s parent company in 2005 put a dollar figure
on the value created.
o The value of Linux’s contributions to global computing is reflected in the value of its ecosystem
which was estimated to reach roughly $18 billion in 2006.
, These types of open innovation products challenge some of the basic tenets of traditional business
strategy
• The first tenet called into question is the need to have ownership over the resources that are creating the
value
• The second tenet is the ability to exclude others from copying the product
3. Towards a More Open Approach to Strategy
two primary manifestations of openness
• Knowledge creation via open invention → without direct monetary compensation, a vast
number of resources have been committed to open invention= the creation of a new product
or service.
o Linux. Countless person-hours committed to the development, testing, and adoption
of this operating system.
• Ecosystem creation via open coordination →business ecosystem represents the interplay
between multiple industries, so a decision to open up a segment of one industry can have
widespread reverberations.
On the value creation dimension, initiatives can differ in whether value is created in-house or via a
community. On the value capture dimension, an initiative might see its value realized by a company, or by the
larger community.
• A company might be able to capture value by closing off the innovation and protecting it with intellectual
property (IP) rights—Microsoft’s source code for its operating system & Google’s case, while it captures value
from advertisers rather that its user-base, it has been able to distinguish itself through proprietary search
algorithms and auction-bidding systems for advertisers. While significant value has accrued to these individual
companies, they also have created value that has been captured by their surrounding ecosystems, hence they are
