Part 1: What is open innovation? Chapter 2: Unbundling of the product through open innovation strategy.
This post is part of a blog series on “In what ways can Organisation(s) benefit from open innovation through challenge-based design sprint? ”( A thesis study on SprintHacks 2016, Singapore )
What is open innovation?
With the rising technology development costs and shorter product life cycles, gaining sustaining competitive advantage through external acquisition of knowledge has become a crucial part of a company’s long-term growth strategy (Chesbrough 2003; Grandstrand et al. 1992, 1997; Jones, Lanctot and Teegen, 2001; Keil, 2002; Laursen and Salter, 2005; Tsai and Wang, 2008), yet it is a major challenge for companies. However, in a world of abundant knowledge, not all smart people work for you (Chesbrough, 2003). A widely distributed knowledge/base of mobile workers in companies of all sizes, and with an abundance of venture capital, has led to an increase in these infomediaries. University- and company spin-offs (op.cit.) have shifted the innovation imperatives, a closed innovation paradigm where the business environment in which firms have operated for the past few decades is turned into a more open way of innovating, combining both internal and external sources of knowledge (op.cit.); one of the strategies in balancing organisational ambidexterity is open innovation (OI) (Figure 8).
OI employs purposive outside-in and inside-out flows of knowledge to acquire knowledge from external sources and to expand the markets (commercialisation) for external use of innovation (op.cit.) to exploit technologies. The concept of inside-out innovation is to “distribute “internal resources outside the entity or group to generate, develop and implement ideas outside the entity or group of organization without hindrance”; the concept of outside-in innovation is the “use of sources outside of the entity or group to generate, develop and implement ideas”. While the flows are without hindrance, the OI process involves multiple actors; one is involved in producing/distributing their research, while there are other actors who absorb it. Open innovation (OI) firms must be adept enough in the two-way coupled processes that involve two entities interacting backward and forward, in order to explicitly collaborate through the different forms of openness.
Outside-in open innovation
To support the unbundling of product disruptive innovation, outside-in (or inbound) innovation supports OI firms with two forms of openness (Dahlander and Gann, 2010):
1) Sourcing and
2) Acquiring expertise
This comes from external sources to reduce the cost of the company’s own research and development activities by paying for utilised components and accelerating its metabolism of knowledge starting from mid-way through leveraging on pre-established external inputs and contributions to achieve cost-time efficiency on milestone objectives and commercial pursuits.
Acquiring (pecuniary inbound innovation) occurs when firms acquire external knowledge/resources for the innovation process through obtaining licenses and acquiring expertise from the marketplace. In an OI context, in order to invest in a high level of openness in terms of external sources of innovation, firms should still retain some degree of control over a number of the elements in their network (von Zedtwitz and Gassmann, 2002). Internal expertise is required to search for and evaluate the appropriate benefits and working relationship (Garry and Annarosa, 2014) of these buy-in or in-sourced external ideas to the organisation. Incorporating knowledge bases that are too close to what the firm already knows may hamper the positive effect of assimilating external inputs. Inputs that are too distant are harder to align with existing practices, and if knowledge bases are too similar it is difficult to come up with novel combinations (Sapienza et al., 2004).
Sourcing (non-pecuniary inbound innovation) occurs when firms can use and access external resources after they scan and search the repertoire of available external knowledge (Chesbrough, 2006). Firms rely on many external sources of ideas (Rothwell et al., 1974) which constitute an important factor of successful innovation. OI firms leveraging on the discoveries of others require a larger number of external sources of innovation (Laursen and Salter (2004, p. 1204) to create a synergy and absorptive capacity between their own processes and externally available ideas may be able to benefit from the creative ideas of outsiders to generate profitable new products and services. Thus, available resources become larger than a single firm can manage; they enable innovative ways to market, or the creation of standards in emerging markets. Yet, firms struggle to search amongst the various knowledge repertoires because they may fail to identify the solution to their problem or, if they do not find a solution, they may not recognise when to stop searching/or over-search (Garry and Annarosa, 2014); they may spend too much time looking for external sources of innovation due a curvilinear relationship between innovative performance and their search for new innovations (Ahuja and Katila, 2001). Further, sourcing from qualified innovators for non-existing solutions addressing a known problem can be problematic. Companies still needed to produce new innovations or pursue market-related motives, but with fewer resources turn towards “outsourcing” for new inventions by offering financial incentives to independent inventors (Hintz, 2010).
Yet one of the real difficulties that OI companies [Solution Seekers (SS(s))] encounter when they wish to seek out external technologies for their products or services — or external markets for their own technologies from the agent [Solution Providers (SP(s))] — is that they face The Arrow Information Paradox, where the party with less information bears the risk of failure. As such, the principal contracts with another — the agent — to pursue a given goal (Chesbrough, 2006).
1) If payment is not conditional on success and the SS’s ability to observe and measure effort is limited, the agent can shirk or behave in such a way that is aligned with its own, but not the SS’s, incentives (G. Newell and E. Wilson, 2005).
2) Simultaneously, SPs were limiting the information they provide and principally must make an evaluation of highly incomplete information.