Content M-3: Open Innovation

Question 1

Recap: What were some methods to overcome intertia? (resistance to change)

Answer 1

• A new business unit with decision-making authority focusing on new technology or business model that works separately fromt he rest of the organization.

** - Open innovation: getting input for innovation processes from outside of the organization. **

• Strategic alliances with other organizations to develop new products based on the new technology or business model.

Question 2

The innovation process (or so-called innovation funnel) consists of four steps. What are these?

Answer 2

1. Idea generation
2. Conceptualisation
3. Development
4. Commercialization

Question 3

Recap: Why open innovation?

Answer 3

Open innovation enables access to:
- New product and business model ideas
- New technological solutions
- New commercialization capabilities

This, in turn, results in:
- More efficient innovation
- Faster time-to market

[ Only internal R&D for innovation –> Old ways of thinking (intertia) and effort spent on solutions that exist elsewhere (externally) –> Ineffective innovation –> Lower competitiveness ]

Question 4

Why do firms carry out their activities in-house rather than buying finished products from the market?

Answer 4

• Developing innovations in-house provides firms with know-how (deep understanding of how and why something works)
  > This know-how resides in the organization, not in specific persons. Therefore, when specific employees leave, know-how still remains in the firm.
• Know-how cannot be bought from the market
  > Tesla, for instance, can buy batteries from suppliers, but it cannot buy a deep understanding of how to make batteries - this must be developed by actually making batteries.
• Know-how provides organizations with combinative capabilities (the ability to recombine knowledge elements in unique ways to produce competitive products)

A firm’s competitiveness is determined by its ability to recombine knowledge elements in unique ways, i.e., its combinative capabilities!

Question 5

What does a firms’ combinative capability mean?

Answer 5

The ability to recombine knowledge elements in unique ways to produce competitive products.

Question 6

Why, according to the knowledge-based view (KBV) of the firm, do firms carry out innovation activities in-house even though buying form market is often easier, quicker, and cheaper?

Answer 6

Internal innovation activities (R&D) –> Innovation know-how –> Combinative capabilities –> Ability to re-combine knowledge elements in unique ways –> Enhanced competitiveness

According to KBV, this is why firms carry out innovation activities in-house, even though buying from market is often easier, quicker and cheaper!

Question 7

KBV: General information

Answer 7

• Combinative capabilities can also enable unique recombination of internal and external knowledge elements!
• A firm’s competitiveness is determined by its ability to combine internal and external knowledge elements in unique ways.

This leads to open innovation!

Question 8

What is a firm’s absorptive capacity?

Answer 8

The ability to locate valuable external knowledge, evaluate its usefulness and utilize it for commercial purposes (link to combinative capabilities).

Question 9

Two important questions for open innovation are:

Answer 9

• How to manage relationships between internal and external R&D?
• How to protect valuable knowledge when collaborating with external partners?

Question 10

Three dimensions of relationship between internal and external R&D:

Answer 10

• Absorptive capacity
• Not-invented-here syndrome
• Coordination burden

Question 11

Why can internal R&D be perceived as important?

Answer 11

Absorptive capacity.
Internal R&D does not only lead to new products, but also increases the understanding of technological knowledge in general, which enhances the ability to locate valuable external knowledge, evaluate its usefulness, and utilize if for commercial purposes.

Question 12

Relationship between internal R&D and absorptive capacity.

Answer 12

Strong internal R&D -> Greater absorptive capacity -> Greater ability to evaluate outside knowledge and to benefit form it.

Question 13

Relationship between internal R&D and ‘Not-invented-here” syndrome (NIH).

Answer 13

Strong internal R&D -> Overconfidence in internal innovation capabilities -> Suspicion towards the value of ideas and knowledge from external sources.

“If we hire the best people, the smartest people in the industry must work here so the best discoveries must be invented here”.

Question 14

Open innovation requires the need for coordination. Why?

Answer 14

• Benefiting from external knowledge requires substantial effort to:
  > Identify potential partners with valuable knowledge
  > Allocate tasks between the focal firm partners
  > Exchange knowledge
  > Monitor progress of collaboration
• Performing more of these activities means performing less actual R&D.
• If the existing R&D system is overburdened with these activities, the cost of coordination with new external knowledge sources may exceed the benefits.

Question 15

What is the relationship between internal and external R&D on innovation performance?

Answer 15

• Low share of external innovation
  > Missing out on knowledge outside of the firm boundaries
  > Not-invented-here syndrome -> Stronger internal focus -> More NIH…
  Resulting in, low innovation performance!
• Moderately strong share of external innovation
  > Healthy balance between absorptive capacity, NIH, and coordination costs.
  Resulting in, high innovation performance!
• Very strong share of external innovation
  > Low absorptive capacity -> Lower ability to benefit from external knowledge
  > Excessive coordination burden
  Resulting in, low innovation performance!

Question 16

Are internal and external R&D complementary?

Answer 16

Yes! But only when they are in balance!

• Healthy balance between absorptive capacity, NIH, and coordination costs.
• Does not mean necessarily 50-50
• Efficiency in organizational processes, and openness of organizational culture determine the balance.
  > Firms with efficient processes and open culture can engage in external R&D to a greater extent.

Question 17

Protecting knowledge. What is the paradox of openness?

Answer 17

Sharing knowledge with partners if vital for attracting partners and for joint value creation. But it exposes partners to that knowledge and allows them to internalize it!

So ideas might lose their value once they are shared, but they also have to be shared to show a potential partner that you have knowledge that might be valuable to them.

To manage this paradox, companies use different knowledge protection methods to prevent their valuable knowledge form leaking to innovation partners.

Question 18

What are some examples of knowledge protection mechanisms?

Answer 18

• Formal (good protection for codified knowledge)
  > Patents
  > Contracts/agreements
• Informal (good protection for knowledge that can’t be codified (know-how))
  > Secrecy: Efforts to keep knowledge secret
  > Complexity: Encouraging the development of know-how through internal interactions. Make knowledge complex so it can only be understood by insiders who know the background of the knowledge.

Question 19

How to determine how much information to share?

Answer 19

It’s a strategic decisions.
- Depends on the characteristics of the project and the partner.
- In general, don’t share what you cannot afford to lose!

Question 20

One of the formal knowledge protection mechanisms is a patent. What is a patent?

Answer 20

A paten tis a form of intellectual property that gives its owner the legal right to exclude others form making, using, or selling an invention for a limited period of time.

After the patent expires, anyone may make, use, offer for sale, sell or import the invention without permission of the patent owner!

Question 21

Knowledge protection mechanisms. How does the informal kind, “secrecy” work?

Answer 21

Secrecy: Efforts to keep knowledge secret

• Secrecy measures are sets of rules that limit the transfer of knowledge to specified others, social interactions with them or restrictions on physical access to certain locations (e.g. laboratories).
• Employees may be granted access to knowledge only after they have made a contractual commitment to knowledge protection (e.g. non-competition clauses).
• Secrecy is particularly effective for protecting knowledge that is easier to keep invisible from potential imitators (e.g. innovations based on complex or tacit knowledge that is difficult to codify and replicate).

Question 22

Knowledge protection mechanisms. How does the informal kind, “complexity” work?

Answer 22

Complexity: Encouraging the development of know-how through internal informal interaction.

(Toyota QMS example; didn’t work at GM because they did not fully understand the system)

Question 23

Strength of knowledge protection strategy. What is the relationship/link between knowledge protection strategy and the number of (external) collaboration?

Answer 23

• Weak knowledge protection strategy
  > Signals to potential partners that there is no knowledge worth protecting
  This results in, low number of external collaboration!
• Moderately strong knowledge protection strategy
  > Signals to potential partners that there is knowledge worth protecting, but also a willingness to share it.
  This result in, high number of external collaborations!
• Strong knowledge protection strategy
  > Signals to potential partners that there is knowledge worth protecting, but little willingness to share it.
  This results in, low number of external collaboration!

There needs to be a good balance.

Question 24

What are the two levels of engagement in open innovation?

Answer 24

• Soft form of openness (one-time deal, less intensive)
  > Getting external input for innovation processes
• Hard form of openness (usually longer-term, intensive)
  > Formal collaboration to jointly develop innovations

Question 25

What is the relationship between knowledge protection strategy and hard/soft collaborators?

Answer 25

A strong knowledge protection strategy scares off hard collaborators (e.g. formal collaborations to jointly develop innovations) more than soft collaborators (e.g. getting external input) because soft collaborators may have other incentives (e.g. licensing fees) to collaborate than accessing a focal firm’s knowledge.

Question 26

Is a strong knowledge protection strategy also perceived as a bad thing by innovation partners when collaborating with competitors?

Answer 26

No not necessarily. Firms who cooperate with competitors are “forgiven” by potential innovation partners for having a strong knowledge protection strategy –> This is not perceived as a lack of willingness to share knowledge.

In summary:
- Strong protection strategy in hard collaboration with non-competitors: might be seen as lack of willingness to share knowledge (collaboration in bad faith).
- Strong protection strategy in hard collaborations with competitors: not seen as a lack of willingness to share knowledge, but as a necessity since the firm is collaborating with competitors and must guard their knowledge (collaboration in good faith).

Question 27

Conclusion. In what ways can open innovation be useful?

Answer 27

• Reduce the negative effects of organizational intertia
• Enlarge the pool of ideas and solutions for innovation
• Shorten the time to market for new products

Question 28

Conclusion. What can be consequences of relying excessively on external input for R&D?

Answer 28

• Excessive coordination burden
• Resistance from internal R&D department
• Lower absorptive capacity in the future.

Question 29

Is it essential to strike a balance between the need to share knowledge and to protect it?

Answer 29

YES!

Question 30

What are some examples of sources in open innovation to get external ideas?

Answer 30

• Universities
• Suppliers
• Technology entrepreneurs
• Competitors (half of alliances in high technology industries are formed between competitors)

Question 31

Why is it important to incorporate the input from outside partners into the innovation process?

Answer 31

• Knowledge is widely distributed and is growing rapidly.
• The best solutions for organizational problems and creative ideas are likely to be found outside of the company. So open innovation initiatives open up much larger pool of solutions for the companies than they can create internally.