Open Innovation: The First Decade

Open Innovation:The First Decade

Joel WestKGI - The Keck Graduate Institute

Claremont, California

UCSD, Rady School of ManagementJanuary 27, 2015

Plan

• What is open innova tion?

• Three modes of open innova tion- Inbound

- Outbound

- Coupled

• What’s next?

• Keck Graduate Institute of Applied Life Sciences

• Youngest of 7 Claremont Colleges• Founded in 1997: Harvey Mudd spinoff• Funded by grant from Keck Foundation• 300+ graduate students• Preparing students for biotech careers• Genentech, Amgen are biggest employers

What is KGI?

Where is KGI?

KGI

Open Innovation

Open innovation: a common practice

• Qua lcomm- Outlicens ing pa tents- Se lling components to handse t makers- Acquiring Snaptrack, Fla rion, Atheros

• Amgen- Licensed EPO to J&J (Procrit)- Today in-licenses oncology drugs

• IBM- Se lling components to othe rs- Collabora tion with Apache , Eclipse , Linux open source

communitie s

Invention vs. Innovation

“Inventions … do not necessarily lead

to technica l innova tions . In fact the

majority do not. An innova tion in the

economic sense is accomplished only

with the firs t commercia l transaction.”

—Freeman (1982: 7)

Latent value of an innovation

“The inherent va lue of a technology

remains la tent until it is commercia lized in

some way.

“A bus iness model unlocks tha t la tent

va lue , media ting be tween technica l and

economic domains .”

– Chesbrough & Rosenbloom (2002)

Bringing innovation to market

• Crea tion- Technica l invention

- Bas ic research, applied research, product deve lopment

• Commercia liza tion- Production, marke ting, sa les , dis tribution

- Requires diffe rent complementa ry asse ts (Teece 1986)

Vertical Integration

Research of Alfred D Chandle r (1918-2007)

• Studied la rge US firms 1840-1940

• Firms vertica lly integra te to supply own inputs and control the ir outputs- R&D is an essentia l part of integra tion

- Technology indus tries require la rge R&D labs

- Marke ts don’t exis ts to buy/se ll innovation

• Integra tion wide ly adopted in practice- Pa tte rn of la rge 20th C US and MNC firms

ResearchResearchInves tiga tionsInves tiga tions

Deve lopmentDeve lopment New ProductsNew Products& Services& Services

TheMarket

Science&

TechnologyBase

Source : Chesbrough (2006)

Vertically Integrated R&D

Open Innovation

• Chesbrough (2003, 2006, 2007)

• Key points :- Find a lte rna te sources of innovation

Either marke ts or spillovers

- Find a lte rna te marke ts for innova tion

- Centra l role of the bus iness model

• Cognitive manageria l pa radigm

• Overlaps with other work such as user innova tion

What is “open innovation”?

“Open innova tion is the use of purpos ive

inflows and outflows of knowledge to acce le ra te

inte rna l innova tion, and expand the marke ts for

exte rna l use of innova tion, respective ly.”

Henry Chesbrough, O p e n Inno va tio n:Re s e a rching a Ne w Pa ra d ig m (2006)

Source : Chesbrough (2006)

CurrentMarke t

Inte rna lTechnology

Base

Technology Insourcing

New Market

Technology Spin-offs

Externa lTechnology

Base

Other Firm’s Marke t

Licens ing

“Open” innova tion s tra tegies

R&D under Open Innovation

What’s new?

• Many antecedent/overlapping a reas- Technology sourcing, IP marke ts ,

univers ity licens ing, a lliances , supplie r innova tion, use r innova tion

• New ideas include- Role of the bus iness model- Agnos tic to inte rna l/exte rna l pa ths- Rise of innova tion inte rmedia ries

Cf. Chesbrough (2006)

Open vs. user innovation

Open Innovation User Innovation

Focal actor Firm User

Knowledge transfer IP Needs

IP regime Pa tents Free revea ling

Innova tion production

Hiera rchy Community, individua l

Motiva tions Mone ta ry Socia l, persona l utility

Frank Pille r & Joe l West, Ch. 4 of O p e n Inno va tio n: Ne w Fro ntie rs & App lic a tio ns

Three open innovation processes

1. Inbound (or “outs ide-in”)- Externa l technology commercia lized by the foca l

firm

1. Outbound (or “ins ide-out”)- A firm’s technology commercia lized by others

1. Coupled combines these two- Various forms of collabora tion

Cf. Chesbrough (2003, 2006), Gassmann & Enke l (2004), Enkel e t a l (2009), Wes t & Gallagher (2006)

Inbound Open Innovation

Why Look Outside for Innovation?

“Not a ll the smart people in the world can work in one place .”

Bill Joyco-founder

Sun Microsys tems

Recent comprehensive review

• Goa l: Synthes ize inbound (& coupled)

• Sample from top management & innova tion journa ls

• Either mention “open innovation” or cite Chesbrough (2003)

• Hand se lected 291 down to 165

• 161 a rticles , 3 books , 1 chapte r

Joe l West & Marce l Bogers , Jo urna l o f Pro duc t Inno va tio n Mana g e m e nt, July 2014

Breakdown of 165 OI pubsInbound: 118 Outbound: 50

Coupled: 70

57 14

11

24

26 1

32

4-stage process model

InnovationSource† Customers

CommercializingObtaining Integrating

Interaction

Focal Firm

R&DOther

Functions

† Sources may include suppliers, rivals, complementors and customers.

1. Obtaining Innovations• Bes t covered of the phases

- Searching, enabling, filte ring- Sourcing particula rly well covered

• Mos t popula r a rea : sources of innova tion- Many crowdsourcing s tudies- Also use r-genera ted content

2. Integrating Innovations• Cons iders org capabilities and culture

- Limited examina tion beyond “Not Invented Here”

- Clear cha llenges of processes , incentives

• Integra tion seems to be a black box- How are these innova tions integra ted to

the firm?

- What skills a re needed to do this well?

3. Commercializing Innovations• Lots of va lue crea tion

- Increased product re leases , revenues

- What is ne t? Do cos ts go up?

• Assumes exte rna l innova tions commercia lized same as inte rna l ones- How do firms diffe r in exte rna l innova tion

commercia liza tion capabilitie s?

4. Reverse PathsBeyond the linea r mode l, this includes

• Feedback mechanisms- Information flow ups tream

• Reciproca l measures- Ongoing inte ractions

- Includes co-crea tion, communities

Outbound Open Innovation

What is outbound OI?

• Firms should find bes t/highes t use of the ir IP- Not a ll IP a ligns to the firm’s bus iness model

• Avoids Type II (fa lse nega tive) e rror• Can include licens ing to riva ls , spinoffs

- In para lle l or ins tead of inte rna l use

Inspired by Chesbrough s tudy of Xerox PARC spinoffs (Chesbrough & Rosenbloom, 2002)

Various IP licensing models

• Dolby Labs : $700m/yr, 88% margins

• Genentech: Humulin, Inte rfe ron

• IBM: licens ing IP portfolio

• Dupont: licens ing core technologies

• Game mods , e .g. Ha lf-Life

• Xerox: crea ting spinoffs

Key challenges of outbound OI

• Identifying underused IP• Simultaneous inte rna l/exte rna l

commercia liza tion• Functioning IP marke ts• Dilemma over appropriability

- Fear of sharing if weak IP- Strong IP can de lay other’s innovation

Chesbrough (2003, 2006b), Fabrizio (2006), Enkel e t a l (2009), Dahlander & Gann (2010)

Coupled Open Innovation

Coupled open innovation

• “Coupled” is diffe rent from inbound and outbound

• Two modes of coupled inte raction- Bi-directiona l (Gassmann & Enkel, 2004)

Combines inbound & outboundApplies to firm-to-firm R&D collabora tions

- Inte ractive collabora tion (P ille r & West, 2014)Joint production outs ide the firmDiffe rent from e ithe r inbound or outbound

Coupled open innovation

Focal Firm Organization

Focal FirmOrganization or

IndividualCo- Creation

BidirectionalCoupled

InteractiveCoupled

Source : P ille r & West (2014), p. 39

Coupled open innovation

Examples of coupled open innova tion:•Open source (Wes t & Gallagher, 2006)•Communities (West & Sims , 2013)•R&D consortia (Mulle r-Se itz & Sydow, 2013)̈

Bes t practice seems very particularis tic to the se tting

What’s Next?

Recent trends in OI research

• Linking to es tablished theory

• Grea te r precis ion of cons tructs

• Bette r measurement

• Bette r unders tanding of pe rformance

• Diffe rent leve ls of ana lys is

• Role of appropriability

• Nonprofit actors and motiva tionsSee Vanhaverbeke e t a l (2014), West e t a l (2014) a lso http://bit.ly/1v2Gf7

2014: new OI publications

• Re s e a rch Po lic y specia l is sue (June 2014)- Chesbrough, Sa lte r, Vanhaverbeke & West,

gues t editors- 10 a rticles- See http://bit.ly/openinno2013

• O p e n Inno va tio n: Ne w Fro ntie rs & App lic a tio ns (Oxford)- Chesbrough, Vanhaverbeke & Wes t, eds .- 15 chapters- See http://bit.ly/NFOI2014

Thank you!

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