Revised slides for talk given August 31, 2010 at the UC Berkeley Center for Open Innovation, in the Open Innovation Speaker Series. Book references are hot-linked. See http://openinnovation.haas.berkeley.edu/speaker_series.html for the context

1. An Overview of Distributed
Perspectives on Innovation
Joel West
blog.OpenInnovation.net
San José State University
Center for Open Innovation
UC Berkeley, Haas School of Business
August 31, 2010

2. Today’s Story
• Traditional and distributed innovation
• Similarities and differences
• Emerging areas of research and
practice
• Conclusions

3. What is “Innovation”?

4. Defining “Innovation”
Some disagreement over “innovation”:
• Technical vs. economic (or both)
• Radical vs. incremental
 Is cost reduction radical? (Leifer et al)
• Adopter vs. producer perspective
• New to the firm vs. new to the world
Source: Bogers & West (2010)

5. Latent value of an innovation
“The inherent value of a technology remains
latent until it is commercialized in some way.”
A business model unlocks that latent value,
mediating between technical and economic
domains.
– Chesbrough & Rosenbloom (2002)

6. Invention vs. Innovation
“Inventions … do not necessarily lead
to technical innovations. In fact the
majority do not. An innovation in the
economic sense is accomplished only
with the first commercial transaction.”
—Freeman (1982: 7)

7. Non-commercial Application
“Innovation is composed of two parts:
(1) the generation of an idea or invention, and
(2) the conversion of that invention into a
business or other useful application.”
— Roberts (1988: 12)

8. Vertically Integrated R&D
Source: Chesbrough (2006)
Science
& The
Technology Market
Base
Research Development New Products
Investigations & Services

9. Vertical Integration
Research of Alfred D Chandler (1918-2007)
• Studied large US firms 1840-1940
• Firms vertically integrate to supply own
inputs and control their outputs
 R&D is an essential part of integration
 Technology industries require large R&D labs
 Markets don’t exists to buy/sell innovation
• Integration widely adopted in practice
 Pattern of large 20th C US and MNC firms

10. Distributed* Perspectives
on Innovation
* i.e. OI/UI/CI

11. Value Network
Rivals
Suppliers Users
Focal Firm
Comple-
mentors

12. Sources of Innovation
Focal Firm Suppliers Customers Rivals
Vertical
integration
X
User
innovation
X † X
Cumulative
innovation
X X
Open
innovation
X X X X
Source: West (2009) X = Sources of Innovation; † limited emphasis

13. User Innovation
• From von Hippel (1988, 2005)
• Users know their needs best
• Goal: engage users in innovation
 Use empowerment, other motivations
 Direct (toolkits) & indirect (feedback)
 Requires processes, tools, design
• Found in ever-wider domains

14. Free vs. Paid Revealing
What do users do with their innovations?
• Use them and keep quiet
• Free revealing (Harhoff et al 2003)
 Share them with other users
 Give them back to companies
• Make money
 Sell them back to companies
 User-entrepreneur (Shah & Tripsas 2007)

15. Cumulative Innovation
• Promoted by Scotchmer (1991, 2004)
• Focus: developing radical innovations
 Initial innovation is rarely complete
 Subsequent shared technological progress
• Competitors build on each other
 Need rights to each others’ work
 Some IP regimes hinder C.I.
• Jungle vs. commune view of rivalry

16. Three Cumulative Patterns
1. Core technology, many derivatives
 E.g., Cohen-Boyer patent
2. Derivative of many building blocks
• E.g., GSM/W-CDMA MP3 cameraphone
3. Incremental quality improvements
• E.g., higher resolution inkjet print heads
Source: Scotchmer (2004)

17. Open Innovation
• By Chesbrough (2003, 2006, 2007)
• Key points:
 Find alternate sources of innovation
 Either markets or spillovers
 Find alternate markets for innovation
 Central role of the business model
• Cognitive managerial paradigm
• Framework consonant with UI, CI

18. R&D under Open Innovation
Source: Chesbrough (2006) Other Firm’s
Market
Licensing
Technology New
Internal Spin-offs Market
Technology
Base Current
Market
External
Technology
Base
Technology Insourcing
“Open” innovation strategies

19. ICT: Systems Integration Model
Innovator Integrator Users
Technology Component Systems Adoption
Component Complements
Component Rival Complement Provider
Source: West (2006)

20. Key Issues for Open Innovation
1. Maximizing returns to internal innovation
2. Identifying/incorporating external
innovations
3. Motivating an ongoing stream of external
innovations (with or without money)
Licensors Licensees
Motivating
3
Incorporating Maximizing
Firm 2 1
Ideas R&D Products
Source: West & Gallagher (2006)

21. Related Innovation Models
Collaborative, peer-to-peer
innovation without monetization:
• Open Science
• Free Software
• Shared Production

22. Similarities Across O/U/CI

23. Dispersal of Knowledge
• “In Open Innovation, useful knowledge is
generally believed to be widely distributed,
and of generally high quality.” (Chesbrough,
2006: 9)
• “Different users and manufacturers will have
different stocks of information … each
innovator will tend to develop innovations that
draw on the sticky information it already has”
(von Hippel 2005: 70)

24. Other Similarities
• Orientation outside the firm
• Innovation activities take place across
organizational boundaries†
• Overall, rejecting Vertical Integration
† Some UI ignores firms and is entirely
outside any firm
Source: Bogers & West (2010)

25. Contrasting Modes of
Commercialization

26. Innovation Flows in Value Chain
Rivals
Suppliers Users
Focal Firm
Comple-
Open Innovation mentors
User Innovation
Cumulative Innovation
all forms

27. Sample Modes (1)
Cell Creation Diffusion Mode
Integrated Inside Inside Vertical
integration
Outbound Inside Outside Outbound OI
User sharing
Employee
entrepreneurs

28. Sample Modes (2)
Cell Creation Diffusion Mode
Orphan Inside N/A Left on the shelf
Inbound Outside Inside Inbound OI
Lead users
User
entrepreneurship

29. Sample Modes (3)
Cell Creation Diffusion Mode
Collabo- Outside Outside User sharing
rative
Open science
Shared
production
Egocentric Outside N/A User’s own need

30. Sample Modes (4)
Cell Creation Diffusion Mode
Coupled Inside & Inside Co-creation
Outside
Inside & Rivalrous
Outside spillovers
Cooperative
spillovers

31. Distinct Commercialization Paths
†
Includes non-commercial
diffusion of innovations
Commercialization
inside outside not
focal firm focal firm commercialized
inside Integrated Outbound Orphan
focal firm
Creation
Coupled co-creation frontier
outside Inbound Collaborative† Egocentric
focal firm

32. Antecedents for Selecting Modes
• Supply conditions
 Scale economies
 Cost of production and distribution
• Demand conditions
 Heterogeneity of demand
• Institutional conditions
 Strength of IP regime
 Markets for innovation

33. Selecting Inside/Outside Paths
Inside Outside
Creation • Strong R&D • Because not all knowledge is in
capabilities one firm (Chesbrough 2003)
• Unable to source firm- • To exploit sticky user
specific R&D (Dierickx information (von Hippel 1994)
& Cool, 1989) • Share scale economies of R&D
(West & Gallagher, 2006)
Commer- • Strong distribution, • Lack complementary assets
cialization other complementary (Teece 1986)
assets; or • Doesn’t fit business model
• Weak appropriability (Chesbrough & Rosenbloom
(Teece 1986) 2002)

34. Communities

35. Importance of Communities
• Best known from open source software
• Implicit in CI research
 E.g. Meyer (2006) on 19th century airplane
• Increasingly important in UI
 E.g. Franke & Shah (2003), von Hippel
(2005), Jeppesen & Frederiksen (2006)
• Finally being recognized in OI

36. Communities in OI
• Two pre-requisites:
 Voluntary association of independent actors
 Enabling innovation commercialization
• Open questions
 Who are the members? Individuals (cf. UI
communities) or firms (cf. ecosystem, networks …)
 What are the boundaries?
 Upstream vs. downstream communities
 Interactions within vs. with communities
Source: West & Lakhani (2008)

37. Communities as Third Mode
Open innovation has three modes
1. Outside-in: using external innovations
2. Inside-out: commercializing internal
innovations
3. Coupled: communities, ecosystems,
alliances, consortia etc.
Source: Enkel, Gassmann, Chesbrough (2009)

38. Findings about OI Communities
Study of three innovation communities:
• Participants from multiple organizations
• Anchored to specific innovation
• Shared goals, objectives, identity
• Leverage distributed competencies
Source: Fichter (2009)

39. Are ms Only “Open Enough”?
• Firms, OI communities share interests
• Firms chronically unwilling to give up control
 E.g. OSS communities: Apple, Google, Nokia, …
• Is it possible for firms to be open?
 Optimistic view: firms gain more by openness
 Pessimistic view: Firms are only as open as they
need to be (West, 2003; West & O’Mahony, 2008)

40. Emerging Patterns of
Practice

41. Learning from Observation
”The field of innovation studies
arguably operates in Pasteur’s
Quadrant, in that the processes
and practices of industry actors
often extend beyond the bounds
predicted by academic theory.”
– Chesbrough (2006)

42. Are Acquisitions OI or VI?
• Firms buying innovation by buying firms
 Cisco growth strategy (Mayer & Kenney 2004)
 Now Google, this month Intel
• Is this inbound open innovation?
 Externally developed, internally
commercialized?
• Is it vertical integration?
 Ongoing innovation, commercialization
controlled by one firm

43. Is ICT Vertical Integration Dead?
• Silicon Valley: distributed innovation
 Ecosystems
 Component-based business models
 User innovation via beta sites, toolkits
 1990s, even IBM became distributed
 Grove (1996) pronounced VI dead
• Today: more vertical integration
 Apple, Google, HP, Microsoft, Nokia

44. What is Crowdsourcing?
• A user innovation model?
 Users have sticky knowledge
 Apply knowledge to solve own problems
 Make it easy to obtain free revealing
• An open innovation model?
 Users/non-users have knowledge
 Maximize return from that knowledge
 Use markets to identify, source ideas

45. OI: Substitute or Complement?
• Open innovation offered as a complement to
traditional corporate innovation
 Increasingly, OI used as a substitute
• OI-Inbound: OI vs. internal R&D
 Instead of correcting atrophied internal R&D
 Firing internal R&D workers (e.g. HP)
 What about absorptive capacity?
• OI-Outbound: OI vs. actual business model
 IP licensing -> Patent trolls
 Where is the value creation?

46. Monetizing Knowledge Flows
• Contrasting views of charging for knowledge
 UI, CI celebrate free spillovers
 Open source software
 Other collaborative communities
 OI emphasizes monetization
 Universities chasing patent royalties
 Impact on open science?
 Which is socially optimal?
• Tied to IPR policy
 Ongoing debates over patent trolls, patent reform

47. Conclusions

48. Summary
• Rapidly growing research on distributed
innovation
 Distinct but overlapping O/U/CI streams
• Distributed innovation is here to stay
 Requires different conceptual approaches
 Requires different processes
 Requires different metrics

49. Thank You!
Joel West
blog.OpenInnovation.net