Talk presented at UC Berkeley, Haas School of Business, October 11, 2011

1. 1
Strategic Openness
Joel West
Keck Graduate Institute, Claremont Colleges
blog.OpenInnovation.net
Program on Open Innovation
UC Berkeley, Haas School of Business
10 Oct 2011
Take-Home Message
1. Many choices of closed vs. open
v Most are continuous, not bifurcated
v Partly open is most common condition
2. Two sources of openness
v Exogenous (involuntary)
v Endogenous (voluntary): strategic
openness
Implications for competitive advantage

2. 2
Traditional Competitive Advantage
Competitive advantage=control
Traditional sources of advantage:
• Monopoly/oligopoly (Tirole 1988)
• Vertical integration to control inputs and
outputs (Chandler 1977)
• Inimitable resources (Barney 1991)
Manifest by economic rents

3. 3
Lack of control is bad
Teece (1986):
1. First mover firms often unable to
control the returns from their
inventions
• Typically due to lack of appropriability
• Particularly true for small companies
2. Partner (e.g. with big companies) to
overcome this lack of control
And yet…
• Firms build on open technologies
v Apache, Linux open source software
v Open standards
v University science
• Firms open their own technologies
v Eclipse development tools platform
v WebKit open source mobile browser

4. 4
IBM’s forays into openness
• Greatest success came from proprietary
vertical integration (Fisher et al 1983)
• But today…
v An exemplar of inbound and outbound
open innovation (Chesbrough 2003)
v Leading champion of OSS (West 2003)
v Gave away IP to gain advantage (Alexy &
Reitzig, 2010)
Prior Research on Openness

5. 5
Ways of being open
• In-licensing external technology (Bresnahan
& Greenstein, 1999; Chesbrough, 2003)
• Enabling 3rd party complements (Langlois &
Robertson, 1995; Bresnahan & Greenstein, 1999)
• Shared architectural control (West & Dedrick,
2000; West & O’Mahony, 2008)
• Information transparency (Lerner & Tirole, 2000;
West & O’Mahony, 2008)
• Out-licensing internal technology
(Chesbrough 2003, 2006)
Domains of Openness
• Open science (Merton, 1973; David, 1998)
• Open standards (Simcoe, 2006; Krechmer, 2006; West, 2007)
• Open platforms (Garud & Kumaraswamy, 1995; West &
Dedrick, 2000)
• Open source software (West, 2003; Henkel, 2006; West &
Gallagher, 2006)
• Open innovation (Chesbrough, 2003, 2006)
• Community innovation (von Hippel & von Krogh, 2003;
Jeppesen & Frederiksen, 2006)

6. 6
What’s so open about…
Domain of openness
• Open science
• Open standards
• Open source
• Open innovation
Effect
• Open information
• Easy market entry
• Shared IP, control
• Open boundaries
Degrees of (platform) openness
Platform strategy Sponsor
Multiple
hardware
vendors
Multiple
OS vendors
Source
Licensing Products
closed Vertically
integrated
proprietary
Hardware
vendors
no no no IBM S/360,
DEC VAX,
Macintosh
Horizontal
proprietary
Microsoft yes no no Windows
Unix AT&T yes no yes System V
Open Systems Consortia yes yes yes OSF, X/Open
open Open Source none/many yes yes yes Linux
Source: adapted from West (2003)

7. 7
Limits to openness
• Open standards
v Need some closedness for value capture (Simcoe
2006; West, 2007)
• Open source
v Choice of open parts vs. partly open (West 2003)
• Open innovation
v Too much inbound OI is suboptimal (Laursen & Salter
2006)
v Costs of inbound OI can exceed revenues (Faems et
al, 2010)
Involuntary Openness

8. 8
Origins of involuntary openness
• Low appropriability (Teece 1986)
• Value chain specialization (Grove, 1996; Langlois
2003)
• Open standards
v Formal de jure standardization (e.g. GSM)
v Open de facto platforms (iPhone apps)
v Most “open” are partly open (West 2007)
• Open source (can be involuntary)
Open standards not equally open
Openness has multiple dimensions
• For different stakeholders
• For different rights (e.g. complement or
implement)
v And cost of these rights (e.g. royalties)
• Range of openness on each dimension
Thus “many shades of gray” (West 2007)

9. 9
Open source not equally open
• Involuntary openness
v Community owned source (e.g. Linux, Android)
• More open than open standards (West, 2003)
• Strategic openness
v Firm sponsors open source community, releases
own code (West & Gallagher, 2006; West & O’Mahony, 2008)
• Hybrid:
v Strategic/proprietary: gated source (Shah, 2006)
Strategies under these conditions
• Compete on execution
v Dynamic capabilities, arbitrage of
information asymmetries, economies of
scale, …
v Hope for first-mover advantage
v Often transient competitive advantage
• Partner/license for scarce resources
• Niche-ification (i.e. focus differentiation)

10. 10
Results of involuntary openness
• Leads to excess entry
v Little or no differentiation
v Price-based competition, commoditization
• Reward low-cost producers
• Typically few winners, many losers
∴When openness is exogenous,
v producer firm doesn’t make the rules
v odds of success are not very good
Strategic Openness

11. 11
Strategic openness
• I define strategic openness as
“the selective opening of a firm’s control
of its technology, innovations and other
outputs in order to gain competitive
advantage”
• Builds on prior research on open
standards, open source software, open
innovation
Growing the pie vs. slicing the pie
• Value creation vs. value capture (Simcoe
2006)
• Proprietary control vs. attracting
adoption (West 2003)
• Control vs. attracting collaboration (West &
O’Mahony 2008)

12. 12
Who benefits from value creation?
Specific firm(s) benefit from growing pie:
• General growth benefits firm with most
market share (e.g. Intel, Qualcomm)
• When value creation is aligned to
business model (Chesbrough & Rosenbloom, 2002)
• Growing a sponsored ecosystem (West &
Mace 2010)
Growing an open ecosystem
If firm controls an ecosystem, opening the
ecosystem accrues to sponsoring firm
• Modular economies of substitution (Garud
& Kumaraswamy 1993)
• Faster time to market, technological
progress (Bresnahan & Greenstein, 1999)
• Upstream scale economies (West & Dedrick,
2000)
• Downstream variety (Boudreau 2010)

13. 13
Other reasons for openness
• Undercut competitor profits
• Create reputation(Henkel 2004)
• Facilitate search for external technology
or knowledge transfer (Cohen & Levinthal, 1990)
• Sell internal technology(Arrow 1962)
Different dimensions of openness
Many openness levers to experiment with
• Access, participation & cost(West 2007)
• Transparency & accessibility (West & O’Mahony
2008)
• Need to study combining multiple forms
of openness (Dahlander & Gann, 2010)

14. 14
Examples: Apple Inc.
Apple [Computer] Inc.
• Apple’s image: exemplar of proprietary
• Actually used all 3 strategies
v Closed
v Involuntary openness
v Strategic openness

15. 15
Closed Apple: Cloning
• Prosecuted Apple II clones (Apple v.
Franklin)
• Mac cloning debate (West, 2005)
v Blocked Mac clones (1985, 1992)
v Allowed, then cancelled clones (1994-7)
Exogenous openness: components
• Early pioneer of component-based
business models (cf. West 2006)
v Integrated standardized components
v Sourced CPUs from MOS Technologies,
Motorola, Intel
v Also other key components
• Increasingly, standardized peripherals

16. 16
Strategic openness: outsourcing
• Once traditional approach to manufacturing
v Automated Fremont Mac factory (1983-1991)
v Ireland (1980), Singapore (1981) factories
• Outsource all manufacturing to suppliers
v 1996-7: sold factories to SCI (later Sanmina SCI),
National Steel
v 1998-2000: outsource assembly to Quanta, LG,
Hon Hai
• Anticipates PC industry shift to contract mfr.
Source: West (2002)
Strategic openness: apps
• Provided standardized platform, APIs
• Enabled 3rd party complements
v Apple II: VisiCalc
v Macintosh: software “evangelists”
v iPhone/iPad
• App store: enables market entry

17. 17
Strategic openness: open source
Multiple experiments:
• FreeBSD/Darwin: operating system
• CUPS: printing
• WebKit:
v Safari (Mac/iPhone/iPad) browser
v Android/Chrome browser
v Also Nokia, Research in Motion
Conclusions

18. 18
Closed vs. open strategies
• Firms prefer closed strategies
v More predictable
v More control, appropriation
• However
v “pie” may be too small, e.g. mainframe
computers, minicomputers, PCs (Langlois, 1992;
Bresnahan & Greenstein, 1999)
v “not all the smart people work for us”
(Chesbrough 2003)
Inherent risks of openness
• High entry, competition
• Commoditization
• Difficulties differentiating, charging a
price premium
• Leakage of knowledge to current and
potential rivals

19. 19
Strategic vs. involuntary openness
• Involuntary openness impacts all firms
• In strategic openness
v Firms control the nature of openness
v Align to firm strengths, competitor
weaknesses
v Possibly forestall disadvantageous
openness
v Usually requires some sort of initial
advantage
Unresolved questions
• How do we measure costs, benefits?
• What/where are the moderators?
• Which firms will choose openness?
v Do some have more choice than others?
v Are some more capable than others?
v Constrained by business models?