Open Innovation And strategy includes the Long term growth of the company in which industries/technologies a firm wants to be active – new business development
1. Open Innovation and Strategy
MOOI Theme # 1 – presentation & discussion
December 3, 2013
2. MOOI Theme 1:
Open Innovation and Strategy
Prof. Henry Chesbrough, University of California, Berkeley & ESADE
Prof. Wim Vanhaverbeke, Hasselt University, ESADE & National
University of Singapore
Dr. Nadine Roijakkers, Hasselt University
December 3, 2013
3. Statements about OI and strategy
– … the need to align open innovation with the
organizational strategy
– …. firms need to audit the current status of their
innovation strategy and identify areas where
value could be added by open innovation
– Innocentive project:
•
“Quantitative Model to Aid Strategy Decisions When
Applying Open Innovation”
•
Crowdsourcing applied to the link strategy & open
innovation
3
4. Overview
•
OI and corporate strategy
•
OI and business strategy
•
OI and strategy types
•
A process view on the link between strategy
and OI
4
6. OI and corporate strategy
Corporate strategy:
– Long-term growth of the company
– in which industries/technologies a firm wants to
be active – new business development
– OI and cap ability building (dynamic view):
•
Absorptive capacity/connective capacity/desorptive
capacity (Lichtenthaler and Lichtenthaler, JMS 2009)
– OI as instrument to drive cognition of future
strategy (Itami & Numagami, SMJ 1992). OI frames and
drives the way managers think – try to integrate it in the
corporate strategy formulation process
6
9. McKinsey model and OI
•
Innovation efforts aimed at all three time
horizons
•
H1: Current business:
– BM determined/clear
– Incremental innovations with existing partners
– Market related partners more important?
– Short OI innovation cycles with low uncertainty
9
10. McKinsey model and OI
•
H2: Related businesses
•
H3: New businesses or disrupting businesses
•
Work on the three horizons simultaneously
10
11. BCG matrix – Adapted for OI
Frank Mattes - Applied Innovation management - nr 3 – 2011 (p. 13)
11
13. Growth matrix – Adapted for OI
Frank Mattes - Applied Innovation management - nr 3 – 2011 (p. 14)
13
14. Incubation and EBAs: Growing beyond the
mainstream businesses
•
Role of corporate incubators & EBAs (DSM) in
growth strategy of the firm
•
OI in EBAs is quite different than in mainstream
businesses
•
New capability building through external relations
•
Also: capabilities become non-strategic, obsolete
(open up to 3rd parties, e.g. Philips Research in specific
technical areas)
14
15. Accelerating and supporting
innovation
Page 15
DSM Innovation Center
EBA Biomedical
EBA Advanced
Surfaces
EBA Bio-based
Products & Services
Business Incubator
New Business Development
~80% ~20%
CTO Office
Venturing
Excellence in Innovation
Licensing
Enablers
16. OI and the cognition of future
corporate strategies
•
Different people working together with
external partners:
– Different views on the technical and market
opportunities
– Scouters, incubators, EBAs: focusing on LT
technical developments vs. mainstream
businesses
– Tools to bring bottom-up insights into corporate
strategy? (corporate strategic dialogues?)
Page 16
18. Top-down & bottom-up approaches
Ifm report (2009)
18
Top down
Strategically driven
Bottom up
Achieved by evolution
DistributedOIActivities
CentralisedOIActivities
21. Chesbrough & Appleyard
(CMR 2007)
ABSTRACT: The article discusses a process of business innovation
known as open innovation and its relation to traditional business
strategy. The competitive strategy developed by Michael Porter
emphasized rivalry, buyer power, and barriers to entry as forces
that could enhance a producer's surplus. The authors discuss the
impact of the Porterian value chain, the processes of production
through to the consumer, on subsequent business practices.
However, this theory does not account for external sources of
value to a company, such as innovation communities, volunteer
contributors and surrounding networks, including social networking
web sites, open source software and the Wiki model of open
contributions. The concept of openness requires shifting from
ownership to value creation and value capture.
21
23. Chesbrough 2006
23
•
A business model performs two important functions:
– it creates value, and
– it captures a portion of that value
•
Creation of value: by defining a range of activities
that will yield a new product or service valued by a
(target) customer group
•
Value capturing: by establishing a unique resource,
asset or position within that series of activities where
the firm enjoys a competitive advantage
24. Chesbrough 2006
24
Open business models:
Division of labor:
– one party develops a novel idea but does not carry
this idea to the market itself
– sells it to another party,who carries it to the
market
Open business model: uses the division of labor to
– create greater value by leveraging more ideas
(external ideas)
– capture greater value by using key asset, resource,
or position not only in the company’s own
business but also in other companies’ businesses
25. The relation between OI and OBM
25
Open
Innovation
Closed
Innovation
Closed
Business
Model
Open
Business
Model
I-Pod
Apple
http://open--
innovation.blogspo
t.nl/2010/02/ipod-
thanks-to-open-
innovation.html
SkyNRG
http://skynrg.com
Tide (P&G)
http://www.acs.or
g/content/acs/en/
education/whatisc
hemistry/landmark
s/tidedetergent.ht
ml
Senseo
(Philips/Sar
a Lee)
http://www.entrepre
neurship.ethz.ch/edu
cation/lectures/Allian
ce_Advantage/Trust_
Risk_de_Man_2009.p
df
(P/SL)
32. References
- Abernathy and Clark, Harvard Business R., September 1981
- Chesbrough & Appleyard, California Mgt R., 2007
- Chesbrough and Crowther, R&D Mgt, 2006
- How to implement OI, IfM report, 2009, University of Cambridge
- Itamy & Namagami , Strat Mgt J., 1992
- Lichtenthaler & Lichtenthaler, J Mgt Studies, 2009
- Jaruzelski & Holman/Booz & Company, Ivey Business Journal, 2011
- Mattes Frank, How to make OI work for your R&D, Applied Innovation
management - nr 3 – 2011
- Slowinski & Sagal, Research Technology Mgt, 2010
- Brandenburger en Nalebuff, Co-opetition, HBS press, 1996
32
Additional info from the Innocentive RfP:
“The Seeker and InnoCentive desire a new predictive, quantitative economic/financial model that underpins a decision-making framework that R&D-based companies can use to:
1. Optimize the distribution of its R&D budget between expenditures internally and the use of Open Innovation,
2. Decide on which specific R&D projects and/or project tasks are most suitable for Open Innovation, and
3. Assess the costs and benefits of projects using the optimum approach vs. a classical use of primarily internal resources.”
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“Horizon One
represents the company’s core businesses today. By definition these tend to be fairly mature so management must unlock and realize their remaining potential before maximizing the value of the businesses through their decline. This first horizon involves implementing innovations that improve your current operations
Horizon Two includes the rising stars of the company that will, over time, become new core businesses. These businesses may be step-outs from the core or more related extensions that simply require new capabilities and time to build. Regardless of their form they have the potential to shift to the company’s revenue base and replace the current cash generators. Horizon two innovations are those that extend your current competencies into new, related markets,
Horizon Three consists of nascent business ideas and opportunities that could be future growth engines But with uncertainty at an unprecedented level in today’s business environment even the best analysis to determine probable outcomes will leave many unknowns about these potential businesses. Horizon three innovations are the ones that will change the nature of your industry.”
Paul Hobcraft
http://paul4innovating.com/2010/09/10/the-three-horizon-approach-to-innovation/
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Figure: Paul Hobcraft (http://paul4innovating.com/2010/09/10/the-three-horizon-approach-to-innovation/)
“H1: Current business: The first is that you must have innovation efforts aimed at all three time horizons.
H2: Related business: The second issue is that horizon 2 is incredibly difficult to manage. H2 innovations seem very similar to your current products and services, and the overpowering temptation is to use the same metrics to assess their success. You have to figure out a way to ring fence H2 innovation efforts.
The final point is that people often mistake the three horizons model for a planning tool – it isn’t.”
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Deloitte’s Growth Framework:
“Though this framework is not as simple as the other two frameworks, it does a good job of laying down the business opportunities as core, adjacent and new. It also helps business leaders understand the risk/uncertainty involved in each opportunity (for example, new opportunities are much more riskier with uncertain outcomes than the core opportunities).
Business leaders can plot their current and future business opportunities on this framework as a bubble chart (size of bubble corresponds to revenue potential of the opportunity), and clearly see where to invest their time, effort and capital. Also, it helps them think out of the box and really explore other areas which are beyond the core, which helps the business leaders in focusing and creating long-term value for their shareholders.
Though this helps in framing the strategic opportunities well, it does lack the time aspect. And I have solved that issue in the past by portraying a product /services road-map. This allows me to have a healthy discussion about investment opportunities followed by a investment timing discussion.
Based on my experience, I would recommend Deloitte Growth Framework for figuring our investment priorities with some aspects of McKinsey’s Horizon framework to figure out metrics/talent/capabilities across the time horizons.”
Jahan Nemani (http://www.jagannemani.com/2011/11/23/strategy-frameworks-for-innovation/)
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Very short explanation of the Figure
“Chart 3 shows a methodology for
finding suitable time slices that has proved
its value in quite a number of projects.” (p. 14)
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L&L 2009
“In knowledge exploration, this issue has been termed ‘make-or-buy’ decision
(Cassiman and Veugelers, 2006). In knowledge retention, firms face the ‘integrate-or-relate’
issue, which refers to the possibility of incorporating knowledge into the internal
knowledge base or relying on interfirm relationships, which represent the external
knowledge base. In knowledge exploitation, a firm is confronted with the ‘keep-or-sell’
problem (Lichtenthaler, 2007).” (p. 1318)
Absorptive capacity: Exploring external knowledge. “recognizing, assimilating, and applying external knowledge”
Connective capacity: refers to a firm’s ability to retain knowledge in inter-firm relationships. External networks have to be maintained and managed over time (Kale and Singh, 2007).
Desorptive capacity: describes a firm’s capability of external knowledge exploitation, which is complementary to internal knowledge application
in a firm’s own products. (e.g., outlicensing, spin-offs)
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How to implement
open innovation
IFM 2009
Routes to OI in practice
“The examples below illustrate the four main routes to OI, three of
which we observed
1. Top-down, strategically-driven, centralised
activities
Two major FMCG organisations have reviewed their innovation
processes in the light of the OI framework. Having relied for a
long time on internal resources to innovate, they now see OI as
an opportunity to accelerate innovation and continue growing in
a sector where revolutionary innovation is very hard to achieve,
competition is very high and the market is very demanding.
A large US consumer electronics corporation has seen its
business disrupted by new software-based technologies. To
maintain a prime position in the market, internal competencies
had to be integrated speedily with new external competencies.
2. Top-down, strategically-driven, distributed
activities
A company from the energy sector has implemented OI within
its blue sky research group. The group selects projects from
prospective partners in areas that are mostly related to their
core business. The sources include start-ups, universities or
even private individuals, operating in areas of breakthrough
innovation.
Another company in the same sector is interested in new
technologies, both those that could lead to new lines of activity
and those relating to its core business. In order to identify
promising technologies, a small group of managers makes
regular contact with potential partners to cultivate new business
opportunities.
3. Bottom-up, evolutionary, distributed activities
A large telecommunications provider has been moving for some
time towards a more open approach to innovation. This entails
setting up relationships with a series of external providers along
the whole innovation chain.
These developments took place as a result of the evolving
nature of telecommunications technologies and the consequent
changes in the nature of the business. The company selected
preferential partners from its customers, major universities and
government agencies. It has also started working with lead users
and start-up companies. The company has gradually built up a
portfolio of capabilities and services to support open innovation
during the last ten years. These include technology intelligence,
licensing, technology transfer, spin-out management, suppliers
and partnership services, strategic university partnerships and
relationships with consumers.
4. Bottom up, evolutionary, centralised activities
Although we have not observed any real examples of this
approach to OI, we believe it is theoretically possible. For
example, a group of R&D managers might autonomously create
a community of practice for the implementation of OI in their
companies.” (pp.14-17)
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CASTING A WIDE NET: BUILDING THE CAPABILITIES FOR OPEN INNOVATION (Ivey Business Journal, 2011) by Barry Jaruzelski and Richard Holman
STRATEGIES AND CAPABILITIES
The resources that companies like Apple and P&G allocate to their open innovation efforts are not insignificant, however, and some companies’ innovation strategies will require a more robust open innovation capability than others. So, innovation executives need to carefully determine whether such a capability is actually required to help achieve their strategic goals. How can they best approach this issue?
As part of our annual Global Innovation 1000 study, we identified three fundamental and distinct innovation strategies: Need Seekers, Technology Drivers and Market Readers.
A Need Seeker strategy actively and directly engages current and potential customers to better capture their unarticulated needs, shapes new products and services, and strives to be the first to market with those new offerings.
A Technology Driver Strategy follows the direction suggested by the company’s technological capabilities, leveraging its investment in research and development to drive both breakthrough innovation and incremental change, often seeking to solve customers’ unarticulated needs with new technology.
A Market Reader Strategy monitors customers and competitors with equal care, but the company maintains a more cautious approach, focusing largely on creating value through incremental change and being “fast followers” of proven concepts.
Our research shows that any of these strategies can deliver comparable financial success if tightly aligned with a company’s overall business strategy. But it also demonstrates that each of these innovation models requires a distinct set of innovation capabilities to succeed. As Exhibit 1 shows, open innovation is a critical capability only for Need Seekers and Tech Drivers, both of which rely on being early to market, with the latest innovations rooted in either the latest technology or new customer insight. In the case of Need Seekers, they are continuously looking for ideas, often from customers, to drive incremental improvements in their products as well as entirely new offerings. Tech Drivers depend heavily on developing new, often untested, technologies that can be converted into products. Their success is highly dependent not just on importing fresh ideas from a wide variety of sources, but also on ensuring that the products that they do go on to develop will ultimately succeed in the marketplace.
n light of these findings, companies that develop the appropriate innovation strategy align it with the overall corporate goals and assemble a cohesive set of capabilities to gain a clear financial advantage. We call this the “Coherence Premium” as such companies significantly outperform their rivals in both profit margin and market-cap growth over time.
The key isn’t to be good at everything, but rather to excel at what matters most to your success. That’s why open innovation only matters for some companies, namely those whose strategy is dependent on finding and testing as many ideas as possible, and bringing the good ones to market first. Companies that have built their strategy around a fast-follower model should focus on being strong in other capabilities, particularly in the product-development and commercialization stages.
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“Abernathy and Clark point out,
see chart 6, that firms are pursuing four generic innovation
strategies. Depending on whether the firm
pursues a market leader strategy (i.e. conquering all
relevant market niches) and/or a technology leader
strategy, its innovation strategy can be positioned in a
corresponding portfolio.
If the firm is pursuing an ‘Efficiency leader’ strategy,
an Academia/Start-up innovation network will not
be beneficiary. If the firm is pursuing a ‘Market leader’
strategy it will be of limited value to arrange for
VC-based technology in-sourcing; on the other hand
in order to open up new market niches systematically
building up Go-to-market Joint Ventures and nourishing
the firm’s ecosystem of complementary products
and service providers may have a large benefit.” (P. 20)
Reference; Abernathy, W. and Clark, K. ‘The new industrial competition’, Harvard Business Review, September 1981, pp. 68-81
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