III. External R&D

Question 1

New paradigm

Answer 1

• In comparison to traditional paradigm companies have permeable boundaries
• Ideas can be license/spin in (bought) or license/spin out (sold)
• External R&D = Buying ideas via licensing

Question 2

Open Innovation

Answer 2

• Accelerate internal innovation by the use of inflows and outflows of knowledge
• Expand the markets for external use of innovation
• This paradigm demands to make use of external as well as internal ideas to advance

Question 3

Reasons for Open Innovation

Answer 3

• Shorter product lifecycle
• Codification of knowledge & stronger IPR protection
• Diminishing EOS in R&D
• Diminished US dominance in R&D (Now also China)

Question 4

P&G Example

Answer 4

• The “not invented here” syndrome
• Myopic organization = Limited horizon/ Only inventing within the company
• Stocked up inside R&D employees to 15.000 and opened boundaries to outside innovations
• Enabled open innovation by: Technology scouts/ Legal templates for Innovation process/ Investments in innovation brokers
• Now are sourcing innovations 50% internally and 50% externally

Question 5

Sources of external R&D

Answer 5

• From informal relationships to formal relationships

- (Informal) Knowledge Clusters -> Customers/Users -> Universities -> Other firms (Formal)

Question 6

Knowledge Clusters

Answer 6

• Locations where several firms operate (e.g. Silicon Valley)
• Firms in this area might work with the same supliers, customers or complements
• Firms can benefit of Cluster’s labor pool
• Informal knowledge exchange between firms caused by proximity (knowledge spillovers = knowledge is in the air)

Question 7

Customers/Users

Answer 7

• Innovations driven by users by applying crowdsourcing
• Users have a deep understanding of their own needs and motivation to fulfill them
• Companies create innovation to make profit, user create innovation purely for their own use
• Crowdsourcing = Collecting of many ideas/ Variance of ideas from an open pool
• Crowdsourcing does not work if fixed costs of project are high (No Eos possible) e.g. Pharma / If search is incremental (=schrittweise) and uncertainty is low (Innovation is just matter of resources on any single project)

Question 8

Universities

Answer 8

• Publishing research that leads to useful innovations
• Revenues from university inventions are quite small though
• Technology-Transfer-Offices (TTO) manage the trade of ideas with companies

Question 9

Other companies

Answer 9

• Licensing = Selling the rights to use an idea/ Technology already exists (Fixed lump sum payment plus variable amount based on sales (Royalties))
• Buyer = Licensee, Seller = Licensor
• Partnership = Technology has to be developed (R&D Alliance/ Joint Venture (3rd entity))
• Market for technology (Contractual exchange of ideas)
• Revenue for licensing is increasing continuously (Positive correlation between number of patents and revenue)
• Small company should sell knowledge while big companies should source knowledge externally

Question 10

Information paradox

Answer 10

• Buyer does not know the information but needs it to know his WTP
• Information loses value once it is disclosed
• Solution -> Seller can protect his ideas with patents (IPR)

Question 11

Winner curse (Buyer perspective)

Answer 11

• Buying technology of uncertain value is like an auction (Multiple potential buyers/ Information asymmetry)
• Common value = Value is the same for everybody
• If multiple potential buyers attend auction -> Lower the bid
• Risks of buying from a better-informed seller -> Do not buy
• Example below = All offers 0,55,100 lead to losses or zero/ Seller will never sell under value of item (Selling for 55 if value 100 is unrealistic)