Open innovation and strategy
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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
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Open innovation and strategy
- 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
- 5. OI and corporate strategies 5
- 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
- 7. The McKinsey Growth Model 7
- 8. McKinsey Model & innovation strategy 8
- 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
- 17. Capability building (Lichtenhaler & Lichtenthaler, JMS, 2009) Knowledge exploration Knowledge retention Knowledge exploitation Internal (intrafirm) Inventive capacity Transformative capacity Innovative capacity External (interfrm) Absorptive capacity Connective capacity Desorptive capacity 17
- 18. Top-down & bottom-up approaches Ifm report (2009) 18 Top down Strategically driven Bottom up Achieved by evolution DistributedOIActivities CentralisedOIActivities
- 20. OI and Business Strategy Page 20
- 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
- 22. Chesbrough & Appleyard (CMR 2007) 22
- 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)
- 26. OI and Strategy Types 26
- 27. Jaruzelski & Holman/Booz & Company (Ivey Business Journal, 2011) 27
- 28. OI and Innovation strategy types Frank Mattes - Applied Innovation management - nr 3 – 2011 (p. 20) 28
- 29. A PROCESS VIEW ON THE LINK BETWEEN STRATEGY AND OI 29
- 30. Slowinski & Sagal (Research Technology Mgt 2010) 30
- 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
- 33. Q&A 33
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- 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.” <number>
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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/ <number>
- 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.” <number>
- 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/) <number>
- 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) <number>
- 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) <number>
- 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) <number>
- 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. <number>
- “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 <number>