DEVELOPING DYNAMIC CAPABILITIES AND OPEN

INNOVATION STRATEGIES FOR

CORPORATE GROWTH

Keywords: corporate growth strategies; open innovation; open business model; dynamic
capabilities; collaborative know-how; lead users and outside innovation

Alar Kolk
PHD Candidate

Helsinki University of Technology

Institute of Strategy and International Business

September 2007
TABLE OF CONTENTS
Introduction………………………………………………………………………… 3
1 Dynamic Capabilities…………………………………………………………….. 9
2 Open Innovation…………………………………………………………………..20
2.1 From Closed to Open Innovation……………………………………… 21
2.2 Open Innovation paradigm……………………………………………. 25
2.3 Open Innovation and large, established companies…………………… 29
3 Open Business Architecture and Open Business Model………………………… 32
3.1 Open Business Architecture…………………………………………… 32
3.2 Open Business Model………………………………………………….. 33
4 Sources of Open Innovation……………………………………………………... 39
4.1 Sources of external knowledge………………………………………… 39
4.1.1 Alliance Networks…………………………...………………. 40
4.1.2 Lead users (Outside Innovation) and Open Innovation……… 49
4.1.3 Universities………………………………………………… 52
4.1.4 Start-up firms………………………………………………… 54
4.2 Collaborative know-how and Open Innovation……………………….. 55
5 Management of Intellectual Property (IP)……………………………………….. 59
6 Open Innovation management and strategies……………………………………. 64
6.1 Managing Open Innovation…………………………………………… 64
6.2 Open Innovation Strategies…………………………………………….. 68
Summary…………………………………………………………………………….88
References………………………………………………………………………….. 95

2
INTRODUCTION

Not long ago internal R&D was viewed as a strategic asset and a barrier to competitive
entry in many industries. Only large companies with significant resources and long-term
research programs were able to compete. Big research-based companies did most of
their research in respective industries. Thus they earned most of the profits as well.
Rivals had to create their own labs from own resources in order to compete. Therefore
companies invested in internal R&D, which led them to breakthrough discoveries that in
turn enabled them to bring new products and services to market and realize more sales
and higher margins. (Chesbrough 2003) This is distinctive to closed architecture
industries, which are composed of system integrators and vertically integrated product
suppliers, who define the overall product architecture and the design specifications of
each of its components (Kamel 2006).

However during the end of 1980-s firms operated in an environment where the Internet
did not exist in its current form, cellular telephony was only beginning to emerge among
a very narrow niche of sales professionals and on the social technology front venture
capital as an industry and market was relatively new (Chesbrough, Birkinshaw et al.
2006).

However, the ways in which innovative firms can profit from their innovation activities
are different, since the world has significantly changed since then (Chesbrough,
Birkinshaw et al. a. 2006). Firms, who want continually achieve synergies, must be
capable of coevolving – shifting their web of relationships to exploit fresh opportunities
and dropping deteriorating ones (Eisenhardt and Galunic 2000). Innovations will
continue to emerge; however the choices firms make in how to appropriate value from
them have varied over time (Chesbrough, Birkinshaw et al. a. 2006).

Today companies who, want to deliver consistent organic growth to their shareholders,
customers, and their employees can do that only through innovation (Chesbrough 2006).

3
Innovation is increasingly recognised as the major source of sustainable competitive
advantage of companies, industries, and sectors (Kamel 2006) and there is a growing
demand for companies to be innovative (Fetterhoff and Voelkel 2006). Nonetheless
most innovations fail. Thus it is crucial for firms to manage innovation (Chesbrough
2003) and to do that in today’s rapidly changing environment, firms need dynamic
capabilities – abilities to integrate, build, and reconfigure internal and external
competencies (Teece, Pisano et al. 1997).

Deriving from that firm’s ability to exploit external knowledge is a critical component
of innovative capabilities (Cohen and Levinthal 1990) instead of exploiting only
internal knowledge. For instance almost 80 percent of large companies across industries
currently rely on external innovation for market growth (Fetterhoff and Voelkel 2006).
Therefore in the new economy, sustainable competitive advantage of business firm
flows from the creation, ownership, protection and use of difficult-to-imitate
commercial and industrial knowledge assets (Teece 2000). Moreover, managing such
knowledge requires the development of dynamic capabilities – the ability to sense and
then seize opportunities quickly and proficiently. This is especially so in environments
characterised by increasing returns, irrespective of the appropriability regime (Teece
2000).

Furthermore building competitive advantages in such environment by dynamic

capabilities approach depends on firm’s distinctive processes, shaped by the firm’s
specific assets positions and the evolution paths it has adopted and inherited (Teece,
Pisano et al. 1997) while associated with knowledge assets (Teece 2000). This also
incorporates industrial dynamics approach where complementary assets are necessary
for successful commercialisation (Christensen, Olesen et al. 2005) and co-evolution
theory that discusses how firms ability to co-evolve its web of collaborative links and
thus create synergies (Eisenhardt and Galunic 2000).

Moreover the dynamic capabilities approach is closely tied with and builds upon firm’s
absorptive capacity based ability to source external technologies (Kim and Inkpen
2005); ability to identify, assimilate and commercialise new knowledge (Cohen and
Levinthal 1990) and absorptive capacity’s influence on firms´ path dependence (Ahuja
and Lampert 2001) as well as on inter-firm reciprocal learning (Lane and Lubatkin

4
1998). Put together, absorptive capacity influences firms´ abilities to create competitive
advantages out of knowledge assets, through building dynamic capabilities that refer to
distinctive processes (that include learning), using specific asset positions within firm’s
evolutionary paths. Hence Chapter 1 of this paper discusses the dynamic capabilities
approach that gives insights how firms can achieve competitive advantages within new
economy.

As the global competitive battles in high-technology industry increase, an expanded

paradigm is needed to understand how competitive advantages are achieved within
these new circumstances. The dynamic capabilities framework herewith analyses the
sources and methods of wealth creation and capture by private firms operating in
environments of rapid technological change. (Teece, Pisano et al. 1997) By Teece,
Pisano et al. (1997) the competitive advantage of a firm requires both the exploitation of
existing internal and external firm-specific capabilities, and developing new ones.
Therefore Open Innovation paradigm, where firms use external as well as internal ideas
and paths to market (Chesbrough 2003) builds upon it as a significant aspect of how
firms can achieve competitive advantages in rapidly changing technological
environments.

Anyhow, considering the previous argumentation, Open Innovation paradigm has

become important. As a result of both – rising development costs and shorter product
life cycles – companies are finding it increasingly difficult to justify investments in
innovation (Chesbrough 2007). As the companies ability to earn a satisfactory return
from their innovation investments reduces (Chesbrough 2006), there is a widespread
dissatisfaction with the return on R&D investments (Allio 2005).

Moreover as companies are dependent on their co-opetitors, technological changes also

influence their performance through their co-opetitors, especially when the capabilities
of their co-opetitors have become obsolete (Afuah 2000). Despite that Open Innovation
sometimes has to be conducted under conditions of high transactions costs (Christensen,
Olesen et al. 2005) innovation is shifting from Closed Innovation, where successful
innovation requires control, to Open Innovation, where firms use external as well as
internal ideas and paths to market (Chesbrough 2003).

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This shift is influenced by changes in the context of technological innovation that has
significantly contributed to undermine the validity of some of the earlier strategy
imperatives. These changes are associated with increasing vertical disintegration,
outsourcing, modularisation, use of open standards, and the growth of the market for
specialized technology. (Chesbrough, Vanhaverbeke et. al. 2006, 35) Moreover external
knowledge expands more rapidly than internal knowledge (Chesbrough, Vanhaverbeke
et al. 2006), which leads to in-house knowledge asymmetries associated with corporate
scale (Cooke 2005). Herewith industrial dynamics perceptive suggests that in case of
rich opportunity base and distributed knowledge base firms depend critically on external
knowledge assets for the successful realisation of their innovative endeavours
(Christensen, Olesen et al. 2005).

Increasingly and in part due to the internationalisation of venture capital, companies are
able to access global capital markets for technology. This process, less visible during
the 1980s, increasingly provides companies with financial resources to access
complementary assets while also providing an anticipated return to inventors and early
investors. (Chesbrough, Birkinshaw et al. 2006)

As a result of these different ongoing trends most new knowledge emerges from outside
the firm. Companies cannot base themselves on a few deep core competencies anymore
that are cumulated over decades. (Chesbrough, Vanhaverbeke et al. 2006) Firms
acknowledge the risk of trying to commercialise a technology without the necessary
complementary assets. Increasingly interconnected nature of the global economy
however has made it easier for firms to identify partners with complementary assets
wherever in the world they are located, and to commercialise their ideas in multiple
markets simultaneously. Thus corporate venturing operations, and less regulated
markets are making it possible for firms to commercialise their technology assets
without investing in traditional forms in manufacturing, distribution and marketing.
(Chesbrough, Birkinshaw et al. a. 2006)

Thus a Closed Innovation approach (focus on internal knowledge) is likely to overlook

business opportunities from this large pool of external knowledge, while also it can
prevent internally built knowledge from leaking out (Chesbrough, Vanhaverbeke et al.
2006). Today even companies like Eli Lilly, Procter & Camble, BASF, DuPoint and

6
Dow Chemical find it wise to seek out ideas and solutions from outside (Chesbrough
2006). Therefore as the traditional paradigm that companies’ use for managing
industrial R&D in most industries is over, firms should recognize the new logic of Open
Innovation that exploits current diffused knowledge landscape instead of ignoring it,
and makes money by leveraging multiple paths to market for technologies (Chesbrough
2003). Hence Chapters 2 of this paper discusses more thoroughly why Closed
Innovation paradigm has shifted to Open Innovation, which are the main factors causing
such transition, what Open Innovation paradigm is all about, and what that means to
large established firms.

Anyhow, regardless of paradigm shift in innovation, in any case a successful innovation

demands an innovative business model and product offering. The value of an idea or a
technology depends on its business model (Chesbrough 2003). Innovations have to be
extended to business models (Chesbrough 2006) because there is no inherent value in
technology per se. However the business architecture in turn organises the different
parts of the system together by creating connections between internal and external
R&D. (Chesbrough 2003) Therefore Chapter 3 discusses the essence of an Open
Business Model and Open Business Architecture that are the key factors for firms while
creating and capturing value form Open Innovation.

Moreover Chapter 4 discusses the main sources of internal as well as external

knowledge that Open Innovation approach embraces in capitalising them though Open
Business architecture and Open Business model. Furthermore, as economic actions are
embedded in social structure (Uzzi 1997), it is pertinent to discuss development of
collaborative know how to access and make the best use of all various sources of
external knowledge.

In addition, effective knowledge management is necessary for building competitive

advantages as it involves managing intellectual property, and managing the
development and transfer of industrial and organisational know-how (Teece 2000).
Thus Chapter 5 gives insights about management of IP within Open Innovation
paradigm.

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Finally Chapter 6 sheds light on strategies that firms have used to create and claim value
while incorporating Open Innovation. Mainly are offered examples and cases of firms
that have implemented such strategies. Additionally will also be discussed few of the
most critical issues associated with managing Open Innovation.

Last but not least, the evidence that supports validity of Open Innovation is taken
exclusively from qualitative evidence from in high-technology industries, such as
computers, information technology, pharmaceuticals. These industries represent only a
few of the many sectors in advanced industrial economy. Thus it remains an open
question whether the concepts of open innovation apply to low technology or mature
industries as well. (Chesbrough, Vanhaverbeke et. al. 2006)

8
1 DYNAMIC CAPABILITIES

Even though sources of sustained competitive advantages are based on and focused on
valuable, rare, imperfectly imitable, and non-substitutable resource endowments
(Barney 1991), it does not any more explain adequately why certain firms have
competitive advantage in situation of rapid and unpredictable change (Eisenhardt and
Martin 2000). In rapidly changing environments firms must develop capabilities to
adapt and capitalize such environment, because certain innovative responses are
required when time-to-market and timing is critical, the rate of technological change is
rapid, and the nature of future competition and markets is difficult to determine. In such
shifting landscape dynamic capabilities become the source of competitive advantages.
(Teece, Pisano et al. 1997)

Dynamic capabilities approach herewith endeavours to analyse the sources of wealth

creation and capture by firms (the dynamic capabilities framework is based on the
terminology brought in Table 1.1.). Such firm’s ability to achieve new forms of
competitive advantages is its “dynamic capabilities”. The term “dynamic” refers to the
capacity to renew competencies, so as to achieve congruence with the changing
business environment. However the term “capabilities” emphasises the key role of
strategic management in appropriately adapting, integrating, and reconfiguring internal
and external organisational skills, resources, and functional competencies to match the
requirements of a changing environment. (Teece, Pisano et al. 1997)

There may be many dimensions of the business firm that must be understood to grasp
the creation of firm-level distinctive competencies/capabilities. Nevertheless
subsequently are described several classes of factors that will help determine a firm’s
distinctive competence and dynamic capabilities. There are three main groups:
processes, positions, and paths. Competitive advantage of firms lies with its managerial
and organisational processes, shaped by its (specific) asset position, and the paths

9
available to it. Hence in general the competitive advantage according to dynamic
capabilities framework is seen as resting on distinctive processes (ways of coordinating
and combining), shaped by the firm’s specific assets positions (such as difficult to trade
knowledge assets and complementary assets), and the evolution paths it has adopted
and inherited. (Teece, Pisano et al. 1997)

Table 1.1. Terminology of dynamic capabilities framework

NOTION EXPLANATION
Dynamic capabilities Dynamic capabilities are the firm’s ability to integrate, build, and
reconfigure internal and external competencies to address rapidly
changing environments.
Factors of production “Undifferentiated” inputs available in disaggregate form in factor
markets. In such case property rights are usually well defined for
factors of production.
Resources Resources are firm specific assets that are difficult if not impossible to
imitate. Such assets are difficult to transfer among firms because of
transactions costs and transfer costs, and because those assets might
contain tacit knowledge.
Organisational When firm-specific assets are assembled in integrated clusters
routines/competencies spanning individuals and groups so that they enable distinctive
activities to be performed, these activities constitute organisational
routines and processes
Core competencies Competencies that define a firms fundamental business as core. The
value of core competencies can be enhanced by combination with the
appropriate complementary assets.
Products End products, final goods and services produced by the firm based on
utilizing competencies that it possesses.
Source: adopted from Teece, Pisano et al. 1997

Nonetheless deriving from that dynamic capabilities themselves are considered to be

specific and identifiable processes, e.g. product development, strategic decision-making
or alliancing, these processes create value for firms within dynamic markets by
manipulating resources into new value creating strategies. This means that dynamic
capabilities themselves are necessary but not sufficient conditions for competitive
advantage. Their value for competitive advantage lies in the resource configurations
that they create, through altering the resource base by creating, integrating,
recombining, and releasing resources. (Eisenhardt and Martin 2000)

That is also why competitive advantage is considered to be dependent on firms´ ability

to create, transfer, utilise and protect difficult-to-imitate knowledge assets.
Development, ownership, protection and astute utilisation of knowledge assets, not

10
physical assets, provides the underpinnings for competitive advantage in the new
economy (Teece 2000). Subsequently will be discussed the processes, positions and
paths, which ought to be configured in order to achieve competitive advantages out of
knowledge assets.

Processes

Managerial and organisational processes refer to the way things are done in the firm,
or what might be referred to as its routines, or patterns of current practice and learning
(Teece, Pisano et al. 1997). Hence Teece, Pisano et al. (1997) also considered these
processes evolving though learning or about how firms learn to improve these processes
themselves. Hence these processes might be considered also as “deutero” learning or
process learning, which is about learning how to learn. “Deutero” learning requires
individuals within the organization to develop the competence for improving learning
capabilities (Schon 1975) through skills like abstraction, system thinking, experimental
inquiry and collaboration (Mai 1996). It encompasses studying process itself rather than
learning some particular information (Probst and Büchel 1997).

By Teece, Pisano et al. (1997) organisational and managerial processes have three roles:
1) coordination/integration (static); 2) learning (a dynamic concept); and 3)
reconfiguration (a transformational concept) within the framework of dynamic
capabilities. (Teece, Pisano et al. 1997)

1) Coordination and integration refers that managers coordinate or integrate actively

inside the firm and likewise for external coordination. Strategic advantage increasingly
requires the integration of external activities and technologies, which makes external
integration and sourcing important. (Teece, Pisano et al. 1997)

2) Learning is a process by which repetition and experimentation enable tasks to be

performed better and quicker (Teece, Pisano et al. 1997). Learning mechanisms guide
the evolution of dynamic capabilities (Eisenhardt and Martin 2000). However the
learning process discussed here could be considered as higher and/or lower level
learning, which is learning about some particular information (Fiol and Lyles 1985) that
respectively to Argyris and Schon´s, distinction are single- or double loop learning.

11
Learning involves organisational as well as individual skills. Thus learning processes
are intrinsically social, collective and occur not only through the imitation and
emulation of individuals, but also because of joint contributions to the understanding of
complex problems. Organisational knowledge generated by such activity resides in new
patterns of activity, in “routines”, or a new logic of organisation. (Teece, Pisano et al.
1997)

However firm’s benefits from learning will depend significantly on the firm’s ability to
learn (Kim and Inkpen 2005) and thus absorptive capacity is critical to innovative
capabilities. The ease of learning and thus technology adoption is affected by the degree
to which an innovation is related to the pre-existing knowledge base of prospective
users (Cohen and Levinthal 1990).

Absorptive capacity is firm’s ability to recognize the value of new, external information,
assimilate it and afterwards apply it to commercial end (Cohen and Levinthal 1990).
Without absorptive capacity firms can’t identify the new needed or relevant knowledge
(Levinson and Asahi 1995). Or even when the knowledge is available they may not
have the ability to absorb it and apply it to their own use (Tsai 2001). Therefore also
ability to learn enables new production opportunities to be identified (Teece, Pisano et
al. 1997).

Moreover Kim and Inkpen (2005) claim that the extent to which firms can source
external technology is therefore determined, to some extent, by absorptive capacity.
External knowledge acquisition is not a substitute, but a complement to internal
development, as new external technology builds upon existing internal technologies.
(Kim and Inkpen 2005) Firm’s absorptive capacity may be seen as a precondition and
one of the most important influential factors for successful organisational learning.

3) Reconfiguration and transformation. Reconfiguration of firms asset structure to

accomplish necessary internal an external transformation requires constant surveillance
of markets and technologies and the willingness to adopt best practice. The capacity to
reconfigure and transform is itself a learned organisational skill. The more frequently
practiced the more easily accomplished. (Teece, Pisano et al. 1997)

12
Positions

By positions is being referred to current specific endowments of technology, intellectual

property, complementary assets, customer base, and its external relations with suppliers
and complementors (Teece, Pisano et al. 1997). The strategic posture of a firm is
determined not only by its learning processes and by the coherence of its internal and
external processes and incentives, but also by specific assets, for instance specialised
plants and equipment. These assets also include difficult-to-trade knowledge assets and
assets complementary to them as well as its reputational and relational assets. (Teece,
Pisano et al. 1997) Table 1.2 summarises different assets that are relevant when
discussing positioning and which determine firms competitive advantage at any point in
time (Teece, Pisano et al. 1997).

Table 1.2 Assets determining firm’s competitive advantage

ASSETS BASE FOR DIFFERENTIATION

* All technology does not enter into emerging markets of know-how

Technological because firms are unwilling to sell it is difficult to transfer.
assets * Thus ownership protection and utilisation are key differentiators among
firms.
Complementary * Technological innovations require the use of certain related assets to
assets produce and deliver new product and services.
Financial assets * Firm’s cash position and degree of leverage have strategic implications.
* Reputations often summarize a good deal of information about firms and
Reputational shape the responses of customers, suppliers, and competitors.
assets * These intangible assets enable firms to achieve various goals in the
market.
* Formal and informal structure of organisations and their external linkages
have an important bearing on the rate and direction of innovation, and how
Structural assets
competencies and capabilities co-evolve (for instance integrated structures
work better for systemic innovations).
Institutional * Public polices are important in constraining what firms can do.
assets * Institutions are a critical element of the business environment.
* Market position in regimes of rapid technological change is often
extremely fragile.
Market
* Strategy should be formulated with regard to the more fundamental
(structure) assets
aspects of firm performance, which is rooted in competencies and
capabilities and shaped by positions and paths.
Source: adopted from Teece, Pisano et al. 1997

Moreover assets that can build sustainable competitive advantage embrace tacit and
codified know-how, both technical and organisational, whether or not protected by the

13
instruments of intellectual property (Teece 2000). However the focus is on asset
structures for which no ready market exists, because they are the only assets of strategic
interest (Teece, Pisano et al. 1997).

By industrial dynamics perspective differently positioned firms or “commercial players”

in a sectoral system of innovation pursue different innovation strategies to leverage their
technologies (Christensen, Olesen et al. 2005). Therefore also organisational
boundaries are an important dimension of firms “positions”. Location of firm’s
boundaries or the degree of integration (vertical, lateral, horizontal) contain the
complementary assets as well as coordinate what can be achieved internally as
compared to through markets. (Teece, Pisano et al. 1997)

Nevertheless the specific mode in which different companies manage Open Innovation
with regard to emerging technology reflects their different positions within the
innovation system in question and the stage of maturity of the technology along with
their choice of value proposition. Thus there may be substantial variations in the modes
of practicing Open Innovation and much of that variation in innovation strategies
among different types of firms can be attributed to their differential point-of-departure
positions within the innovation system and the stage of the technology cycle in which
they initiated innovative efforts. (Christensen, Olesen et al. 2005)

Previous positioning approach to creating competitive advantage could be exemplified

based on the class D amplification in the field of consumer electronics. As the
knowledge base necessary for leveraging embryonic class D technology is complex, it
requires the mobilization of different specialized knowledge areas. Hence the
innovation system of consumer electronics comprises four categories of firms that have
played important complementary roles in the technological evolution of class D
amplification: small technology-based firms (for the most part start-ups), small or
medium-sized AV OEMs, large-scale component providers and large-scale AV OEMs.
However small firms were able to set the innovative agenda in the early stages; large
incumbents have tended to take over an increasingly dominant role in organizing and
maturing the technology. Thus the position in the innovation system and the stage of the
technology provides an indicator of the scope and limits of innovation strategies.
(Christensen, Olesen et al. 2005)

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Paths

By path in dynamic capabilities framework is referred to as the strategic alternatives

available to the firm, and the presence or absence of increasing returns and attendant
path dependencies (Teece, Pisano et al. 1997).

Path dependencies of a firm refers that the path it has travelled often shapes firm’s
current position (Teece, Pisano et al. 1997) and history becomes embedded within
organisations (Greener 2002). For instance while early in the organisational or the
market history the a number of different paths may be equally possible and probable,
once given path has been laid each subsequent decision is at least influenced by and
probably reinforces what has gone before (Greener 2002).

Mahoney (2000) specifies that concept even more and argues that path dependence
characterizes specially those historical sequences in which contingent events set into
motion institutional patterns or event chains that have deterministic properties. Path
dependence therefore involves both tracing a given outcome back to a particular set of
historical events, and showing how these events are themselves contingent occurrences
that cannot be explained on the basis of prior historical conditions. (Mahoney 2000)
Nonetheless the notion of “path dependency” suggests that the evolution of institutions,
organizations or practices does not necessarily follow a pure logic of efficiency (Djelic
and Quack 2007).

Firm’s absorptive capacity influences path dependency as well (Ahuja and Lampert
2001), besides the firm’s ability to learn. By Cohen and Levinthal (1990) the ability
derives from the organisation’s level of prior related knowledge, which may include
some basic skills as well as scientific technological developments or, also firm-specific
technological strength or prior alliance experience (Kim and Inkpen 2005). Moreover,
firms might even invest in R&D not only to pursue new innovations, but also to develop
and maintain their broader capabilities to assimilate and exploit externally available
information (Cohen and Levinthal 1989) or in general to maintain and develop the
ability to learn, besides just developing new innovations. Thus R&D contributes into
firm’s ability to learn (Cohen and Levinthal 1989) and the level of absorptive capacity

15
within a firm depends on the firm’s prior level of knowledge, skills, technologies and
experiences.

As the absorptive capacity is the function of firm’s level of prior related knowledge
(Cohen and Levinthal 1990), then Ahuja and Lampert (2001) suggest that as absorptive
capacity increases firm’s ease of learning, competencies and problem solving abilities, it
does that in some specific direction and therefore makes adoption of alternate directions
of development less attractive and also less rewarding. Moreover in uncertain
circumstances when firms solve technological problems, they usually use elements of
approaches that are known to have succeeded in past. This creates a “propinquity trap”,
where large areas of novel solutions to problems remain unexplored. (Ahuja and
Lampert 2001)

Therefore as “history matters” a firms previous investments and repertoire of routines

constrain its future behaviour. That tends to make technologies and products embodying
those technologies the more attractive the more they are adopted. (Teece, Pisano et al.
1997) Especially when greater adoption provides greater returns (Teece, Pisano et al.
1997) these previous trajectories stabilize technological developments as a result of
increasing returns (Djelic and Quack 2007). However without exposure to novel
technologies breakthrough solutions are increasingly unlikely (Ahuja and Lampert
2001). By Ahuja and Lampert (2001) this phenomenon is referred to as the “familiarity
trap” that could only be overcome by exploring new technologies, even if firm has no
previous experiences with these technologies.

Paths in technological opportunities herewith indicates to how far and how fast a
particular area of industrial activity can proceed in part due to the technological
opportunities that lie before it. Technological opportunities may not however be
complexly exogenous to industry, not only because some firms have the capacity to
engage or support basic research but also because technological opportunities are often
fed by innovative activity itself. (Teece, Pisano et al. 1997)

Moreover Cohen and Levinthal argue (1990) that increase in technological opportunities
– the amount of available relevant technological knowledge – will elicit more R&D in
more difficult learning environments. Greater technological opportunity signifies

16
greater amounts of external information, which increase the firm’s incentive to build
absorptive capacity, and more challenging learning environment increases the level of
R&D necessary to build capacity. (Cohen and Levinthal 1990)

Regardless of such facilitating effect of absorptive capacity, firms past experience

conditions the alternatives the firm’s management is able to perceive (Teece, Pisano et
al. 1997). Therefore as the path dependence occurs, when a contingent historical event
triggers a subsequent sequence that follows a relatively deterministic pattern (Mahoney
2000), the depth and width of firms previous technological opportunities impact firms
options about current R&D activity (Teece, Pisano et al. 1997).

Similarly paths in assessment indicate that essence of a firm’s competence and dynamic
capabilities are being resident in the firm’s organisational processes that are in turn
shaped by the firm’s assets (positions) and it’s evolutionary path (Teece, Pisano et al.
1997).

Replicability and imitatability of organisational processes and positions

Replication and imitation are phenomena, which determine how readily competitors can
clone a competence or a capability. Therefore it determines also distinctiveness of the
competence and the durability of its advantage. Hence competencies and capabilities are
intriguing assets, as they typically must be built because they cannot be bought. (Teece,
Pisano et al. 1997)

Competencies and capabilities (and hence competitive advantage) of a firm rest

fundamentally on processes, shaped by positions and paths. However competencies can
provide competitive advantage and generate rents only if they are based on a collection
of routines, skills, and complementary assets that are difficult to imitate. (Teece, Pisano
et al. 1997)

Herewith replication refers to transferring or redeploying competences from one

concrete economic setting to another. Since productive knowledge is embodied this
cannot be accomplished by simply transmitting information. Only when all relevant
knowledge is fully codified and understood, can replication be collapsed into a simple
problem of information transfer. (Teece, Pisano et al. 1997)

17
Imitation is simply replication performed by a competitor. If self-replication is difficult
then imitation is likely to be harder. In competitive markets it is the ease of imitation
that determines the sustainability of competitive advantage. (Teece, Pisano et al. 1997)

The ease of imitation is described by the appropriability regimes. Appropriability is a

function both at the ease of replication and the efficacy of intellectual property rights as
a barrier to imitation. (Teece, Pisano et al. 1997) Imitability is a function of both legal
impediments (patents, copyrights, trade secrets, trade marks) and the inherent
replicability of the technology, which depends in part on whether the know-how is tacit
or codified (Teece 2006). Appropriability is strong when a technology is both inherently
difficult to replicate and the intellectual property system provides legal barriers to
imitation. When it is inherently easy to replicate and intellectual property protection is
either unavailable or ineffectual, then appropriability is weak. Intermediate conditions
also exist. (Teece, Pisano et al. 1997)

Anyhow Open Innovation regards spill-overs as a part of a business model and it should
be seen not as costs, but rather as opportunities (Chesbrough, Vanhaverbeke et al.
2006). Moreover building on absorptive capacity, the more competitor’s spill-overs
there are, the more incentives the firm has to invest in its own R&D, which permits to
exploit these spill-overs (Chesbrough, Vanhaverbeke et al. 2006). Nevertheless there is
little convincing evidence that, past a certain threshold, stronger appropriability leads to
more innovation. Despite that many developing economics may not yet be there, and
they believe that much of the important innovation occurred during periods of weak
appropriability, most western economies are at or past this threshold. (Chesbrough,
Birkinshaw et al. a. 2006)

Regardless of that, clear implication of Teece’s analysis refers that firms however are
not simply passive players in the appropriability game. Firms can and do construct
varying levels of appropriability for their innovations, making appropriability only
partly determined by public policy. (Chesbrough, Birkinshaw et al. a. 2006)

In general although idiosyncratic, dynamic capabilities exhibit commonalities or best

practices across firms. Their structural patterns vary with market dynamism, ranging
from robust routines in moderately dynamic markets into fragile semi-structured ones in

18
high-velocity ones. However they evolve though well known learning mechanisms.
(Eisenhardt and Martin 2000)

Generally as firms develop their capability to adapt with rapidly changing environments
then achieving competitive advantage through developing dynamic capabilities requires
both the exploitation of existing internal and external firm-specific capabilities, and
developing new ones (Teece, Pisano et al. 1997). In order to become technologically
mature and commercially viable the innovation process needs complementary
contributions from different types of firms (Christensen, Olesen et al. 2005).

Hence winners of the global marketplace have been firms who response to rapid and
flexible product innovation, coupled with the management capability to effectively
coordinate and redeploy internal and external competences (Teece, Pisano et al. 1997).
Similarly industrial dynamics perspective suggests that in a context of highly complex
and distributed knowledge base firm depends critically on external knowledge assets
(Christensen, Olesen et al. 2005). Herewith the Open Innovation paradigm that
discusses firms exploiting external as well as internal knowledge while innovating,
could be considered a significant part of building dynamic capabilities to achieve
competitive advantages.

19
2 OPEN INNOVATION

As companies that don’t innovate die (Chesbrough 2003), it will be subsequently

explained what could be considered as an innovation. Innovation is invention
implemented and taken to market (Chesbrough 2003). Invention however is the creation
of something that was previously unknown (Chesbrough, Vanhaverbeke et al. 2006).
Thus innovation could be considered as commercialisation of a novel technology that
provides customers with new capabilities (Fetterhoff and Voelkel 2006). Discovery may
include invention, but need not always (Chesbrough, Vanhaverbeke et al. 2006).

In general innovativeness of a product might express on subsequent levels: (1) cost

reduction, as new products provide similar performance at lower cost; (2) repositioning,
as new products are targeted at new market segments; (3) improvements in existing
products, as they provide improved performance with greater value; (4) additions to
existing product lines as new products supplement establishes product lines; (5) new
product lines, as new products that allow a firm to enter an established market for the
first time, and (6) new-to-the-world products that create entirely new markets (Kotabe,
Swan 1995).

The most important nevertheless are radical innovations (RI), which are widely viewed
as an approach to generate growth (Chesbrough, Vanhaverbeke et al. 2006). Firm’s
resources can only be a source of competitive advantage or sustained competitive
advantage when they are valuable or/and rare (Barney 1991). Hence building on that,
radical breakthroughs or inventions are considered to hold the central of entrepreneurial
activities and wealth creation (according to Shumpeter 1975) while breakthrough
inventions serve as the basis of “future” technologies, products and services (Ahuja and
Lampert 2001).

More precisely a Radical Innovation is the ability of an organisation to commercialise

products and technologies that have high impact on the market in terms of offering

20
wholly new benefits. They have also high impact on the firm in terms of the
innovation’s ability to span spawn whole new lines of businesses. (Chesbrough,
Vanhaverbeke et. al. 2006) Thus radical innovations are also considered to serve as the
basis of new technological trajectories and paradigms. They are an important part of the
process of creative destruction, where new technologies and products are replacing
extant techniques and approaches. (Ahuja and Lampert 2001)

2.1 From Closed to Open Innovation

Explaining of the transition from Closed Innovation Paradigm to Open Innovation

paradigm starts with shedding briefly light on Closed Innovation paradigm. It is
considered to be the opposite of Open Innovation.

Closed Innovation paradigm refers that companies do everything themselves, from

generating ideas until financing and marketing them (Chesbrough 2003). Centrally
organised research and development (R&D) is central of companies’ strategies and
regarded as critical business investment. R&D functions are salient features in the
knowledge landscape of economy, relatively insulated from universities and small
enterprises and also relatively unconnected to the government, and largely self-
contained. (Chesbrough 2003)

Hence in case of Closed Innovation paradigm the protection of intellectual property is

very tight, regulatory restrictions are very high, start-ups seldom arise and venture
capital makes little investments. Firms store their technologies until they are ready to
use them without significant leakages of that technology out of the company and into a
start-up or another rival company. (Chesbrough 2003)

Moreover, as the R&D functions are organised as separate functions within

organisations, then projects might remain sitting in the buffer waiting for organisations
to make use of them. This gap between different functions occurs in situations where
projects’ funding stops by research department but is also being deferred by
development (Chesbrough 2003). Herewith R&D projects pile up in that buffer because

21
they are no longer actively pursued by the R&D organisation, nor are actually being
used by the business unit as well. (Chesbrough, Vanhaverbeke et. al. 2006)

In this manner the research outputs are managed as a knowledge bank, in which ideas
are kept on the shelf, until downstream business is ready and willing to use them
(Chesbrough 2003). Nevertheless, as the number of those un- or under-utilised
technologies within firms is substantial, then it should be enabled for others to utilize
those under-performing technologies (Chesbrough, Vanhaverbeke et. al. 2006).

Anyhow, as the underlying logic of Closed Innovation paradigm has become

fundamentally obsolete and eroded, then Closed Innovation Paradigm is giving place to
Open Innovation paradigm (Chesbrough 2003). Chesbrough (2003) identified four main
factors that have caused such shift.

Firstly, the increasing availability and mobility of skilled workers erodes that paradigm
(Chesbrough 2003). As the “labour market” is highly tied with the market of know-how
(Teece 2000), then such eroding factor is caused among other reasons by the expansion
of supply of well-trained, knowledgeable people, who diffuse the knowledge that they
possess to various parties and sell their talents for the highest bitter. That makes labour
markets highly mobile. With information more widespread, new companies can access
useful knowledge that they previously could not and rival firms can access each other’s
extensive experiences and capabilities at a fraction of their true cost. (Chesbrough 2003)

Secondly, increasing venture capital market erodes the paradigm of Closed Innovation
(Chesbrough 2003). The globalisation of financial markets and the narrowing of
information asymmetries between borrowers and lenders are eroding access to capital as
a major determinant of competitive advantage (Teece 2000). Prevalence of VC-s and
the emergence of markets for relatively early-stage technologies enable firms with
important innovations to obtain profits by selling or licensing their complementary
assets and profiting from innovation through existence of intermediary markets
(Chesbrough, Birkinshaw et al. a. 2006). Moreover formerly start-up companies that
rose from large firms struggled to find capital and beard therefore higher risk for
employees leaving these big companies. However, enormous expansion of venture

22
capital enables personnel much more easily be lured away by attractive risk/reward
compensation. (Chesbrough 2003)

Thirdly, external options for ideas sitting on the shelf erode the paradigm of Closed
Innovation. As mobility and availability of workers as well as venture capital markets
have been increasing, an outside path to market for many of those ideas has occurred.
Life cycle of technology shortens and external options grow. Therefore it becomes
important for companies to increase the rate at which they process knowledge. Putting
ideas on the shelf to wait until development group works on them might provoke
disillusioned employees, possibly financed by venture capital, to find other ways for
commercialising them. (Chesbrough 2003)

Fourthly, increasing capability of external suppliers erodes the paradigm of Closed

Innovation because they offer equal or even superior quality to what a company can
achieve internally (Chesbrough 2003). Nonetheless the presence of capable external
suppliers is a double-edged sword for large companies with extensive internal R&D
investments. Although usage of external suppliers supports the ability of firms to apply
their investments in a wide variety of areas in less time, it also enables other companies
to move forward faster and cover new markets as well. Thus unused ideas and
technologies lying on a shelf of a firm might move into the market with or without the
participation of the company that funded the original R&D. (Chesbrough 2003)

There are also some additional reasons that have caused the shift from Closed
Innovation to Open Innovation. However more or less they reflect within those
previously descried factors identified by Chesbrough in 2003 as well.

The general tendency towards vertical disintegration derives from changes in economic
and institutional dynamics (Chesbrough, Vanhaverbeke et al. 2006). Also the rise and
diffusion of venture capital makes it possible and profitable for small firms to drive
technological innovations in many areas and therefore un-bundle the vertical corporate
structure (Chesbrough, Vanhaverbeke et al. 2006). Small firms continue to increase
their share of the total industrial R&D spending (Chesbrough 2006). Moreover
innovation is becoming an increasingly open process thanks to a growing division of
labour (Chesbrough 2007). Thus the tendency towards vertical disintegration,

23
modularisation, outsourcing, and networks gives rise to more open innovation models
(Chesbrough, Vanhaverbeke et. al. 2006).

Moreover great R&D laboratories have been redirected to new purposes and often
downsized. At the same time new ones emerge in such countries as India and China as
well as in smaller countries like Finland and Israel. Time horizons on R&D expenses
are being shortened and universities are putting up patent fences around new research
discoveries. Within the future innovation is growing “division of innovation labour”,
where the party developing the novel idea do not always have to carry it to the market.
Instead it partners with or sells it to another party, who carries it into the market.
(Chesbrough 2006)

Also widely distributed knowledge changes the viability of Closed Innovation approach
(Chesbrough 2003). Ideas and practices can become obsolete very quickly (Chesbrough
2006). Even though core competencies will still be needed, they turn to rigidities when
technological opportunity set rapidly expands and external knowledge expands more
rapidly than internal knowledge. As knowledge is widely available, the importance of
architectural knowledge increases. (Chesbrough, Vanhaverbeke et al. 2006) Ideas
cannot be stored on the shelf anymore and a company that fails to utilize its
technologies might later see those ideas exploited by other firms. Thus landscape of
knowledge has been reshaped and the distribution of knowledge has shifted from
internal R&D facilities towards knowledge distributed across the landscape.
(Chesbrough 2003)

As useful knowledge has been widely diffused, many important pools of knowledge
have been distributed among companies, customers, suppliers, universities, national
labs, industry consortia, and start-up firms. Today’s knowledge landscape includes also
an abundance of knowledge that is virtually accessible. Even global community of
scholars is created due to Internet databases. (Chesbrough 2003) Thus vertical and
horizontal integration strategies may not suit to excising distributed knowledge
environment (Chesbrough, Vanhaverbeke et al. 2006).

Finally many technologies today are systemic (Teece 2006). Thus innovations are
becoming increasingly systemic and that makes companies increasingly dependent on

24
external parties (Chesbrough, Vanhaverbeke et al. 2006) as successful
commercialisation requires bringing together complementary technologies as well as
patents (Teece 2006). As increasing inter-dependency changes the resource allocation
(relevant resources are located outside) then systemic innovations require herewith more
open approach to innovation (Chesbrough, Vanhaverbeke et al. 2006).

Despite that Closed Innovation paradigm and its associates mind-set towards organising
industrial R&D has led to many important achievements and commercial success, it
does not fit with knowledge landscape at the beginning of twenty-first century.
Traditional industrial R&D management in most industries is over. The future of
innovation has changed. Now new mechanisms to access such abundance of knowledge
must be created. Central R&D cannot provide those solutions. That is why firms have to
learn how to benefit from different innovation models. (Chesbrough 2003)

2.2 Open Innovation paradigm

Companies cannot afford to rely on their own internal ideas anymore (Chesbrough
2003). In a more distributed environment, where organisations of every size may have
potentially valuable technologies, firms would do well to make use of extensive
technologies (Chesbrough, Vanhaverbeke et. al. 2006). As the process of innovation
changes it is not necessary for large companies any more to conduct basic research on
their own in order to be a leading enterprises in their industry (Chesbrough 2003).
Furthermore, small start-ups can also enhance their initial performance through external
sources like establishing alliances, configuring them into efficient networks that provide
access to diverse information and capabilities, and allying with established rivals that
provide more opportunity for learning and less risk of intra-alliance rivalry (Baum,
Calabrese et. al. 2000).

Moreover the ability itself to realise the potential of a novel combination presupposes
that in-house R&D as existing organisational form is not sufficient and opening up to
cognitive variety as well as restructuring is needed (Gilsing and Nooteboom 2006).
Therefore innovation does not have to originate from inside a firm anymore in order to

25
profit from it. It’s also possible to innovate with discoveries of others. (Chesbrough
2003) For instance Dell innovates extensively with the inventions of others
(Chesbrough 2006).

Furthermore, firms can and should use external as well as internal ideas and paths to
market as they look to advance their technology. This refers that internal R&D itself has
not become obsolete. Companies however should structure themselves to leverage
current distributed landscape of knowledge instead of ignoring it and pursuing only
internal R&D. (Chesbrough 2003) In general Open Innovation paradigm treats R&D as
an open system (Chesbrough, Vanhaverbeke et. al. 2006).

Open Innovation paradigm is therefore the opposite of traditional vertical integration

model where internal R&D activities lead to internally developed products and services
that are distributed by the firm (Chesbrough, Vanhaverbeke et. al. 2006). Open
innovation means that valuable ideas come from inside or outside the company and
can go to market from inside or outside the company as well (Chesbrough 2003).

External ideas and paths to market are on the same level of importance as internal ideas
and paths. That way firms can do a great deal by focusing on a particular area, without
having to do everything (Chesbrough 2003). In case of Open Innovation firms are able
to monetize their innovations without having to build the complete solution
(Chesbrough, Vanhaverbeke et. al. 2006). Therefore Open Innovation offers the
prospect of lower costs for innovation, faster times to market, and the chance to share
risks with others (Chesbrough 2006).

Despite that Open Innovation is mostly examined on firm’s level, it nevertheless occurs
on individual and group level, on network level, on industries and sector level as well as
on political and economic institutions level. For instance individual and group level in
open innovation refers that innovation begins with the efforts of one or more
individuals. However innovation sourcing between (at least) two companies implies
already to dyads of innovations partners as well as the inter-organisational networks
constructed from dyads. (Chesbrough, Vanhaverbeke et al. 2006)

26
As useful knowledge in today’s knowledge landscape has been widely diffused, then
Open Innovation makes use of the purposive inflows and outflows of knowledge to
accelerate internal innovation, and expands the markets for external use of innovation.
Thus the model is called “open”, because there are many ways for ideas to flow into the
process, and many ways as well to flow out into the market. Therefore Open Innovation
is premised on widespread useful knowledge and even the biggest and most
knowledgeable companies cannot develop all of the important technologies they require
on their own. (Chesbrough, Vanhaverbeke et. al. 2006)

Generally Open Innovation assumes cooperation of two or more organisations – at least

one generating an innovation and at least one utilizing it – with a viable business model
for each. Thus Open Innovation is both a set of practices for profiting from innovation,
and also a cognitive model for creating, interpreting, and researching those practices
(Chesbrough, Vanhaverbeke et al. 2006).

However the role of utilizing external technologies within that model is to leverage
firm’s business model by filling caps within the firms own road map and by creating
complementary products and services that stimulate faster and higher acceptance of
internal technologies (Chesbrough, Vanhaverbeke et. al. 2006). Additional benefits to
internal R&D in Open Innovation context is that continuing importance of internal
R&D can fill the gaps in what others are doing, to finish the solution that current
company needs as well as forge architectures and systems knowledge that organise and
direct the work of others (Chesbrough 2006).

Open Innovation changes the role of research function. Besides that good research
practice integrates and accesses internal as well as external knowledge, internal
researchers do not only create new knowledge but also brokerage it. (Chesbrough 2003)

That in turn changes the way to see management of intellectual property as well. Instead
of managing intellectual property (IP) as a way to exclude anyone else from using a
technology, managing IP includes advancing the business model and profiting also from
competitors use. Open Innovation companies regard IP as an integral part of technology
strategy and insist on managing it at a strategic level within the company. (Chesbrough
2003)

27
As the “division of innovation labour” is spreading, then intermediate markets are
becoming an integral part of innovation and growth. Intermediate markets are markets
for innovations. These markets emerge after the creation of new technologies, before
these technologies have been sold. In these markets an upstream supplier licences its
know-how and intellectual property to downstream developer and producers. Ideas and
technologies are developed by sellers and sold to buyers who in turn sell those ideas to
customers. (Chesbrough 2006)

Therefore in intermediate markets different ingredients of business success (the idea, its
development, manufacturing and distributing assets, IP) may all lie in different hands.
Moreover innovative specialization needn’t be based on products per se. There are
secondary, intermediate markets for services as well. (Chesbrough 2006)

Anyhow there has to be a rationale for companies to want to buy someone else’s IP if
there was to be a market for these assets. Open innovation provides a clear rationale for
participating within intermediate markets. Even though intermediate markets provide
more revenue sources for discoveries, others might impair the creator’s ability to use
these discoveries later. (Chesbrough 2006)

Therefore there are risks in the rise of intermediate markets as well. Intermediate
markets can help with entering new businesses, but if not managed well, these markets
may be used by others to block the firms from entering into new businesses or tax the
firm in businesses in which it already participates. (Chesbrough 2006)

The emergence of secondary markets is also being limited by the lack of information
about the extent and terms of trade in secondary markets for innovations. It is typical for
inefficient markets, where you don’t know what you don’t know. Thus it is hard for
sellers to know what price to except to receive or what price is reasonable, given similar
transactions in the past. (Chesbrough 2006)

In general Open Innovation companies do not need to invent the most new knowledge
or the best new knowledge to win. Instead they win by making the best use of internal
and external knowledge in a timely way, creatively combining that knowledge in new
and different ways to create new products or services. (Chesbrough 2003)

28
2.3 Open Innovation and large, established companies

Anyhow when taking into account that innovation could be considered as the “cycle of
discovery”, within where exploration builds upon and also shifts existing systems of
exploitation (Gilsing and Nooteboom 2006), then in the early stages of a development
project exploratory search is being undertaken to discover something new and after
successful exploration the process turns to exploiting that new knowledge (Rothaermel
and Deeds 2004).

Nevertheless whether large established companies can do both – develop and

commercialise – radical innovations (RI) or not is the moot point. They need to do it
anyway, because especially mature firms depend on radical, breakthrough innovation to
provide the next platform for their growth. Radical innovations (RI), that were widely
viewed as an approach to generate growth, are important especially for large established
companies (Chesbrough, Vanhaverbeke et al. 2006)

Radical innovation competency is a firm’s ability to commercialise RI-s repeatedly. As

radical innovations can conduce firms into new markets, technical, and business model
territories, the management system that worked well for incremental innovations
mismatches with requirements of RI. What large companies lack is supportive
infrastructure necessary to enable breakthroughs to be commercialised. The RI life cycle
is rife with uncertainty, stochasm, starts and stops. (Chesbrough, Vanhaverbeke et al.
2006)

Despite that there are evidence that some large firms are able to establish routines that
enable them to generate significant technological breakthroughs, reinvent themselves
and thus retain technological leadership (Ahuja and Lampert 2001), mostly managing
such life cycle is difficult for large established companies to tolerate from beginning to
end. Herewith Open Innovation model offers help with building the infrastructure for
enabling breakthroughs. (Chesbrough, Vanhaverbeke et. al. 2006)

While large firms are highly adept for managing markets that currently exist, they lack
ability to create wholly new markets (Chesbrough, Vanhaverbeke et al. 2006).
Established firms tend to favour mature technologies despite that the opportunities to

29
make fundamental breakthroughs is higher in emerging technologies (Ahuja and
Lampert 2001). Using technologies in more than one possible market and more than in
one configuration, increases the chance of finding a highly valued use for the
technology (Chesbrough 2003).

Regardless of that, large companies usually find it hard to market-experiment. Despite

having well-developed processes for testing new technologies in a variety of ways in
their current business they usually lack processes for trying out early technologies in a
variety of different markets that might become a new business. Nonetheless these
companies need to improve their ability to experiment with new technologies in new
markets. Learning these skills is important in order to survive. (Chesbrough 2003)
Herewith also Open Innovation offers great help with enabling RI in large established
firms. (Chesbrough, Vanhaverbeke et al. 2006)

Anyhow, with the emphasis on external knowledge, companies still have to develop or
maintain in-house core competencies and innovative assets that are unique, complex,
and difficult to imitate in order to obtain competitive advantage. However, large
incumbents have to accept, more or less voluntarily, to give up full control and
ownership over increasing parts of the value chain within their product markets and
instead leave these parts to external suppliers with highly specialized expertise.
(Chesbrough, Vanhaverbeke et. al. 2006) This does not mean that firms have to give up
developing deep core competencies, but however these seem to play a relatively
decreasing role in the overall technology profiles. (Chesbrough, Vanhaverbeke et. al.
2006)

As tendencies toward more diverse technology profiles of large R&D intensive

companies make big companies choose between whether they strive for a world leading
position in one of a few fields or wish to obtain some (more superficial) level of
knowledge in many areas. Although “core technologies” play a significant role, it is also
a relatively decreasing role in the technology profiles of large companies. They show in
turn increasing involvement in non-core technology areas, “background competencies”
and emerging areas of knowledge. (Chesbrough, Vanhaverbeke et al. 2006)

30
Thus large companies gain the increasingly important role as system integrators,
innovation architects and platform leaders, standard creators or market coordinators of
increasingly distributed and vertically disintegrated value chains. However as large
firms increasingly take that role of innovation architects and market coordinators, they
have to develop integrative competencies for system integration involving experience-
based and firm-specific architectural knowledge. (Chesbrough, Vanhaverbeke et. al.
2006)

These integrative competencies are also considered to be dynamic capabilities, which

are as the capacity for reconfiguring the firm’s knowledge and resource base. That
becomes a central asset, which is strongly related to, but not identical with,
competencies of systems integration. (Chesbrough, Vanhaverbeke et. al. 2006)

31
4 OPEN BUSINESS ARCHITECTURE AND OPEN
BUSINESS MODEL

3.1 Open Business Architecture

Architecture is a hierarchy of connections between disparate functions within a system

that joins the technology into a useful system (Chesbrough 2003). Similarity to co-
evolution theory that emphasises the importance of business systems in new economy
corporations (Eisenhardt and Galunic 2000), Open Innovation process also tries to
combine ideas (internal and external) into architectures and systems where internal
R&D has to be utilised within the system along with the external one (Chesbrough
2003). However within the context of Open Innovation, mainly vertical architecture
defines the scope of a firm and the extent to which it is open to final and intermediate
markets (Jacobides, Billinger 2006).

Thus in order to develop an Open Innovation approach, it is necessary to design a new

architecture by organising parts of the system that include internal as well as external
technologies (Chesbrough 2003). Business model’s role is that it is utilized for defining
requirements for these architectures and systems (Chesbrough, Vanhaverbeke et. al.
2006).

Architectures are generally used to add value to internal R&D (Chesbrough 2003). For
instance opening up to intermediate markets through vertical permeability could be used
as a value-adding process (Jacobides, Billinger 2006). As the parts of the system are
usually dependent on each other, an important part of companies innovation system is to
develop an understanding of the relationships between the parts of the system as well as
about the whole system. Therefore it is necessary in order to create value to reduce
interdependencies and limit complexity. (Chesbrough 2003)

32
A valuable architecture not only reduces and resolves technical interdependencies but
also creates opportunities for others to contribute their experiences into the system
being built (Chesbrough 2003). Moreover Open Innovation architecture, as vertical
architecture, improves transparency and monitoring, leads to greater efficiencies and
more effective operations, affects capital allocations, supports strategic objectives,
facilitates innovation, and dynamically shapes the firm (Jacobides, Billinger 2006).

Nevertheless the need for such effective connections requires firms to collaborate with
others in their ecosystem, as well as to compete with them. Therefore companies must
open themselves horizontally by participating in the intermediate markets within the
architecture (Chesbrough 2003), and also develop vertically permeable structures using
for instance external and internal customers and suppliers (Jacobides, Billinger 2006).

However Open Innovation approach to business architecture does not concentrate only
on external options. Complete reliance on external technologies determines the
interconnections between the parts of the system to fail in highly uncertain
circumstances. For instance when each component maker wants its technologies to
serve as the critical technology within the system. The key is to figure out, which
necessary missing pieces should be internally supplied and how to integrate both
internal and external pieces together onto the system’s and architecture. (Chesbrough
2003)

3.2 Open Business Model

Concept of a business model is a key construct in Open Innovation due to its functions.
It must create value within the value chain and it must also capture a piece of value for
the firms in that chain. (Chesbrough, Vanhaverbeke et. al. 2006) A business model is a
useful framework to link technical decisions to economic outcomes (Chesbrough 2003)
and it is also a construct that creates architecture for the business through a blend of
internal and external activities (Chesbrough 2003). Functions that make business model
a key construct in Open Innovation are subsequently explained in Table 1.3.

33
Business model innovation is vital for sustaining open innovation (Chesbrough,
Schwartz 2007). Technology by itself has no single objective value. The economic
value remains latent until it is commercialised in some way. For instance the same
technology commercialised in two different ways will yield different results. Herewith
the role of a business model is to convert technological potential into economic value
and firms should find an appropriate business model or the “architecture of the revenue”
to capture that value from those technologies. (Chesbrough 2003)

However innovating openly and searching for new ideas externally as well as licensing
out own ideas is not enough; it is necessary to innovate with the business models as well
(Chesbrough 2006) and firms need to develop the ability to experiment with their
business models (Chesbrough 2007). Thus innovative business models need prototyping
as well (Chesbrough 2003).

In case of Open Innovation a business model encompasses external and internal ideas to
create value, while it is not tied to the boundaries of a firm (Chesbrough 2003).
Herewith one important mechanism for innovating with a business model is
establishment of co-development alliances that improve innovation effectiveness
(Chesbrough, Schwartz 2007).

Table 1.3 Main functions of a business model

FUNCTION IMPORTANCE
Articulating the value * Value proposition is the value created for users by the offering
proposition based on the technology.
* Value proposition from the customer’s point of view refers to
what customer problems would be solved and how big of
problems they are to the customer.
* In case of intermediate market exchanges the value propositions
may not be so clear.
Identifying a market * Market segment comprises of the users to whom the technology
segment is useful as well as the purpose for which it will be used.
* A business model targets a group of customers or a market
segment to whom the proposition will be appealing and from
whom resources will be received.
* Defining a set of customers is important in order to decide
which technological attributes to target in development and thus
where scientist and engineers should focus their activities.
* In case of intermediate market exchanges however the target
market for the offering may not be so clear.
Defining the structure of * Structure of a value chain is required to create and distribute the
the firm’s value chain offering, and to determine the complementary assets needed to

34
 support the firm’s position in this chain.
* Value chain delivers value proposition to market segment.
* Value chain must create value and it must allow the firm to
claim some sufficient portion of that value from that chain to
justify its participation.
Specifying the revenue * This includes estimation of the cost structure and target
generation mechanisms margins of producing the offering, given the value propositions
for the firm and value chain structure chosen.
* Defining of the architecture of the revenue.
Describing the position of * Linking of suppliers and customers.
the firm within the value * Identification of potential complementors and competitors.
network linking suppliers * Building strong connections to a value network can leverage the
and customers value of a technology.
Formulating the * Competitive strategy helps the innovating firm to gain and hold
competitive strategy advantage of their ideas over the rivals.
* Key factors for sustaining competitive success includes:
- ability to gain differential access to key resources,
- creation of internal processes that are valuable to
customers and hard to imitate by competitors;
- the past experience and future momentum of the firm
in the market.
Source: adapted from Chesbrough 2003; Chesbrough 2006.

Thus it could be analysed as open innovation or even open commercialisation

(Chesbrough, Vanhaverbeke et al. 2006). Moreover as the initial value of a technology
is being captured through rapid commercialisation, then rapid commercialisation can
help secure the unique value proposition and capture from external technologies
(Fetterhoff and Voelkel 2006).

Hence an effective business model creates an internal logic of its own how value is
created and claimed (Chesbrough 2003) for various parties involved. A business model
depends not only on the value perceived by customer, but also suppliers, competitors,
complementors (Chesbrough, Vanhaverbeke et. al. 2006). Therefore value
constellations, as a specific class of inter-organisational networks, are established to
create and extract value. They consist of a set of transactions and combine resources and
capabilities of different partners. Four constituent dimensions of value constellations are
therefore value creation, transactions, resources, and networking. (Chesbrough,
Vanhaverbeke et al. 2006)

The most important role of a business model is to create a simplified cognitive map,
from the technical domain of inputs to the social domain of outputs (Chesbrough 2003).
However managers cannot exhaustively valuate every alternative and apply cognitive

35
filters to reduce this complexity to manageable level (Chesbrough 2003). By internal
view the technologies potential is more likely biased by the current business model of
the company (Chesbrough 2006). That may lead to a cognitive trap where firm misses a
better business model because it conflicts with the firm’s current model. (Chesbrough
2003) An external view of the technology’s value may be more unbiased then the
internal view (Chesbrough 2006).

It is especially relevant to acknowledge in case of big companies where established

business model already in use is successful and has a strong influence over the way
about how to commercialise new opportunities. The more successful the firm has been
with its business model the more wedded to the model it will be as new opportunities
arise. Therefore a business model could be seen as a double-edged sword. In unlocks the
potential value in a new innovation, but its very success can create a subtle cognitive
trap for the company later. (Chesbrough 2003)

Nevertheless Open Innovation suggests that inventive output from within the firm
should not be restricted to the current business model, but instead have the opportunity
to go to market through a variety of channels (with the current business model perhaps
having a right of first refusal) (Chesbrough, Vanhaverbeke et. al. 2006). Hence an open
business model connects internal and external innovation (Chesbrough 2003) and
enables organisations to be more effective in creating as well as capturing value
(Chesbrough 2007).

Companies have to adapt their current business models to make them more open and to
external ideas and paths to market. Bringing effectively ideas “outside in” taps into
tremendous potential for identifying and creating new value. Also moving ideas “inside
out” enables others to use unused ideas, realise them in new ways to capture more value
and sustain themselves in these times of increasingly global markets and competition.
This kind of business model uses today’s new division of innovation labour to create
and capture value. (Chesbrough 2006)

36
However open business models should just not only be developed but they must also be
managed once developed. There are six kinds of business models (Chesbrough 2006):

1) Undifferentiated business model;

2) Business model with some differentiation;

3) Segmented business model;

4) Externally aware business model;

5) Innovation process and the business model are integrated;

6) Business model is able to change and its changed by the market.

By the first models companies have difficulties at sustaining their competitive

advantages (first type), or they conduct some innovative work and generate and protect
some IP occasionally (second type) or even plan innovation organisationally inside the
firm (third type). (Chesbrough 2006)

However starting from the fourth type companies start to open themselves up to external
ideas and technologies, which unlocks a significantly greater set of resources available
to the company. External technologies are being incorporated in serving customers and
can be extended to adjacent markets for new growth. Innovation becomes a cross-
functional activity between multiple internal functions and IP is managed as an enabling
asset that generates value. (Chesbrough 2006)

In case of the fifth type, the business model is already focused on new markets and new
businesses along with current ones. Innovation is now a business function and IP is
managed as another kind of financial asset managed within a profit centre. Moreover
the sixth type of business model drives the business models of key suppliers and
customers, innovates with the companies business model itself and at the same time is
widely shared across the company. In this model external partners share technical and
financial risks and rewards with the company in the innovation process. IP is also
managed as a strategic asset helping company to enter new businesses. (Chesbrough
2006)

37
Clearly in any case (large or small company) effectively opening up the innovation
process could be done through connecting the business model to the innovation process.
When opening up the business model ideas become available as well as many new paths
for unused ideas will emerge to unlock latent economic potential as those ideas go to
market. Companies building or changing effectively their business model to be more
open are more likely to prosper. (Chesbrough 2006)

Anyhow companies have to open up their innovation process (Chesbrough 2006).

However applying a diagnostic at first is needed (Allio 2005), before firm’s business
model as well as innovation process can become more open (Chesbrough 2006). A
stagnant business model might limit firm’s ability to grow (Allio 2005), but it should
not be neglected entirely as it still can create value (Chesbrough 2003).

38
4 SOURCES OF OPEN INNOVATION

4.1 Sources of external knowledge

Sources of knowledge are diffused geographically, requiring flows from the periphery
to the centre, and from one node on the periphery to another (Teece 2000). There is an
enormous amount of public information available about technologies from around the
globe. These tools are available to anyone with access to Internet. However they require
a thoughtful creative mind to exploit them to their fullest. It may not be sufficient to rely
on traditional processes for producing external technology. For instance it may not be
obvious what the right parameters are to identify a promising technology that solves a
particular problem. (Chesbrough 2006)

Anyhow, there are several sources of external knowledge as well as strategies accessing
such knowledge. Various sources of external knowledge might include firm’s
customers, rivals, academics, and other firms, even from un-related industries.
Companies can rely upon informal network of external contractors to generate and
develop wild ideas and inventions. Moreover companies partnering and leveraging
universities and other companies knowledge learn quicker and more inexpensively,
develop co-opt new capabilities and actually begin to create new markets. (Chesbrough,
Vanhaverbeke et. al. 2006)

Anyhow, sourcing external technologies, to meet firm’s strategic intents, starts with
identifying what external resources firm wants to access from outside (Witzeman,
Slowinski et al. 2006). As the complementary assets and technologies required for
successful commercialisation are located around the marketplace (Teece 2006), then for
accessing knowledge firms have created external programs for locating outside
opportunities through universities, venture capital investments, or strategic alliances.
Firms undertake experiments with exploratory marketing groups, which serve as

39
mechanisms to proactively discover RI opportunities at the technology market.
(Chesbrough, Vanhaverbeke et. al. 2006)

Firms have also used dedicated RI hunters (individuals who actively seek out RI ideas)
and/or gatherers responsible for identifying RI´s within internal and/or external
environments. Idea gatherer is a more passive role – various ideas are simply being
gathered among employees, customers or some other groups within or outside the
company. RI hunters and gatherers conduct idea generation workshops in the business
units, visit laboratory scientists working on exploratory research and identify
opportunities. (Chesbrough, Vanhaverbeke et. al. 2006)

Moreover there are a variety of innovation intermediaries that can help companies
search from outside; they help companies to participate in the emerging secondary
markets for innovation and IP. For instance for such purposes have been created buffers
via public and private Internet rooms, buffers via e-mail lists, buffers through trusted
intermediaries. Companies also act as agents for inventors, serve as IP brokers or as IP
merchant banks. In this way, using intermediaries, companies can test the idea of an
external search before committing significant resources to redesign internal processes to
sustain searches on a consistent basis. (Chesbrough 2006)

Nonetheless traditional strategic planning should not be taken of the basis when
identifying external resources. Such approach mostly begins from inventory of internal
resources, however external resources do not manifest. (Witzeman, Slowinski et al.
2006) However the main sources of external knowledge will be subsequently discussed
more thoroughly.

4.1.1 Alliance Networks

Open Innovation and networks

As consistent organic growth could only be delivered to shareholders, customers, and

their employees through innovation (Chesbrough 2006), then there is a growing demand
for companies to be innovative (Fetterhoff and Voelkel 2006). In case of widespread

40
dissatisfaction with the return on R&D investment (Allio 2005) and rapid technological
change firms in order to create competitive advantages should exploit existing internal
and external firm-specific capabilities as well as develop new ones (Teece, Pisano et al.
1997) through Open Innovation, where firms use external as well as internal ideas and
paths to market (Chesbrough 2003).

Thus within new economies, where technological complexity and the need for acquiring
dynamic capabilities are turning competitors into co-opetitors, there is a significant need
for collaboration (Kamel 2006). Moreover co-opetitors play a critical role during
innovation as good source of innovation (Afuah 2000), as products of cooperating firms
tend to be more innovative than products of a single firm (Kotabe, Swan 1995). Thus
inter-organisational relationships are recognized as an increasingly important source of
competitive advantage (Hoffmann 2007). Therefore Open Innovation encompasses
networking and inter-organisational relations – external ideas are being in-sourced,
while creating and capturing value within the network (Chesbrough, Vanhaverbeke et
al. 2006). Business networks in which a company operates are a fruitful source of
external possibilities (Chesbrough 2006).

Contemporary knowledge environment is distinguished by intra-firm knowledge

asymmetries. Hence firms in various industries are trying to overcome it by regional
knowledge capabilities and systemic innovation strengths of accomplished regional and
local clusters (Cooke 2005). As some firms need to identify external knowledge and
incorporate it into the firm, and others seek external markets for their existing
innovations, the pathways of network ties creates opportunities for both types of Open
Innovation (Chesbrough, Vanhaverbeke et al. 2006).

Accessing a network allows firms to rapidly fill in specific knowledge need without
enormous amount of time and money for building such knowledge internally or through
vertical integration. Networks can also facilitate efforts to commercialise internal
technologies through creation of spin-off, corporate venture investment in a start-up, or
establishment of a joint venture. (Chesbrough, Vanhaverbeke et al. 2006)

Generally networks can imply to exchange of public information, for instance during
larger communities like industry conferences and trade shows. Also technical standard

41
bodies comprise a resource for accessing knowledge about a particular technology and
then forging a shared approach across a number of firms for how to apply that
technology. (Chesbrough 2006)

Nevertheless networking also implies to business-to-business information systems as

well as inter-firm collaboration (Chesbrough 2006). Those networks are based on the
collaborative efforts of specialist companies each providing complementary
intermediate goods and services (Chesbrough, Vanhaverbeke et al. 2006).

For instance two large-scale component companies, TI and STMicroelectronics, have

managed to establish leading positions in the market for chip-based digital amplification
through the use of comprehensive up-front strategies of Open Innovation involving
alliance building or acquisitions. (Christensen, Olesen et al. 2005) Moreover large
companies may carry out more than one hundred R&D-alliances simultaneously with
foreign partners (Lichtenthaler and Lichtenthaler 2004).

Open Innovation and alliances

Herewith emerges the importance of strategic alliances that are a specific form of
cooperative agreements (Dussauge and Garrette 1999). Nevertheless embedding
cooperation within a strategic alliance involves arrangements that are significantly
different from those of simple cooperative outsourcing. Firms engaged in an alliance
typically share or risk more, and usually give up some assets, such as knowledge,
facilities or capital, in order to gain strategic advantages that they would not be able to
obtain on their own. (Suarez-Villa 1998)

Strategic alliances are voluntary arrangements between firms, involving exchange,

sharing or co-development of products, technologies or services (Gulati 1998). What
makes these arrangements strategic is that firms contribute significantly to the
strategies, pursued by the partner companies and the strategies involve pooling and
combining partners’ capabilities (Dussauge and Garrette 1999).

Alliances occur as a result of wide range of motives and goals, in a variety of forms and
occur across vertical and horizontal boundaries (Gulati 1998). Nevertheless they

42
maintain separate identities and integrity of individual partners, and in doing so, protect
their self-interests (Doz and Hamel 1998).

Alliance networks, however, are collections of several alliances linked by individual

“actors”. Considering an alliance network from the perspective of a focal company—
i.e., focusing on all alliances that the observed company has – is known as an alliance
portfolio (Hoffmann 2007). Alliance portfolio can therefore seen as all alliances of a
focal company (Hoffmann 2005) that might include besides managing multi-alliances
also the international dimension (Lichtenthaler and Lichtenthaler 2004).

Thus firms might engage alliances with various incentives. However within the context
of Open Innovation, main motives could be seen deriving from knowledge theory.
Knowledge theory stresses the importance of learning and knowledge creation, which
leads to innovation that in turn leads to competitive advantages (Seppälä 2004).
Generally main cooperation-engaging motivator is learning partner’s capabilities
(Colombo 2003).

Nevertheless firms engage alliances mainly for various resources – for instance firms
that come up with important inventions but lack technical, commercial or social capital,
form a high number of inter-firm linkages (Ahuja 2000). This is especially important for
smaller companies and start-ups that by configuring effective alliance networks access
social, technological, and commercial competitive resources that normally would
require them years of operating experience to accumulate (Baum, Calabrese et. al.
2000).

Nonetheless alliances are seen as tools for learning and creating skills that will secure
future competitive advantages (Bamford, Comes-Casseres et al. 2003) through inter-
partner knowledge transfer and afterwards internalising the knowledge (Seppälä 2004).
Therefore knowledge sharing plays the most important role. Moreover, in the context of
alliance learning process, knowledge sharing involves exchanging and disseminating
individually and organizationally held alliance management knowledge, which is both
tacit and/or codified, through interpersonal interaction within the organization. (Kale
and Singh 2007) Thus the transfer occurs through individuals, who interact with each

43
other as a result, change themselves, others, the organization and the environment
(Nonaka and Toyama 2005).

Alliance performance

Therefore also built on the knowledge theory, in general achieving expected benefits
from R&D alliances depends on securing successful inter-partner learning (Doz and
Hamel 1998; Dussauge, Garrette et al. 2000; Child, Faulkner et al. 2005). The more
developed a firm’s alliance learning process, the greater its overall alliance success.
Firms with a stronger alliance learning process to learn and accumulate alliance
management know-how and practices have greater alliance success. (Kale and Singh
2007)

The alliance learning process is directed toward having alliance capability and greater
alliance success by helping firms learn, accumulate, and leverage alliance management
know-how. Alliance learning process in general involves articulation, codification,
sharing, and internalization of alliance management know-how. (Kale and Singh 2007)
Nevertheless pooling knowledge from networks depends therefore also absorptive
capacity or the ability to successfully replicate new knowledge (Tsai 2001). This in turn
implies that developing alliance management capability is a step-by-step process: first,
companies generate the organisational capability to manage single alliances, and
second, building on this expertise, they develop the organisational capability to manage
whole alliance portfolio (Hoffmann 2005). Nevertheless the alliance learning process
could be seen as a process directed toward helping a firm (and its managers) learn,
accumulate, and leverage alliance management know-how and best practices (Kale and
Singh 2007).

However, the key to successful knowledge transfer is not only the existence of ties. The
main key moderator is the level of trust by the disclosing party. (Chesbrough,
Vanhaverbeke et al. 2006) It is also important, besides economic factors, to consider
social and behavioural patterns affect on firm’s performance (Goersen 2007). While
cooperation creates dependence, it requires trust to succeed. Trust in alliance may
relation on three levels: between partners, between groups within an alliance and
between individuals (Child, Faulkner et al. 2005). Trust, in alliances, is often based on

44
whether partners pursue self- or mutual interests (Doz and Hamel 1998) and trust
between firms therefore refers to mutual confidence that one partner will not exploit the
vulnerabilities of the other (Barney and Hansen 1994).

Even though transaction cost theory assumes, that all exchange partners are likely to
engage in opportunistic behaviour, Barney and Hansen (1994) rejected such
assumptions and moreover they claim that it is possible to know how opportunistic a
partner can be, though discovery. Different kinds of trusts can thus all create
competitive advantages. For instance weak form trust can only be a source of
competitive advantage when invested in unnecessary and expensive governance
mechanisms. However especially strong trustworthy exchange partners (found through
discovery) can gain important competitive advantages. (Barney and Hansen 1994) Thus
in general trust refers to the quality of the relationship (Hoffmann 2007).

Alliance portfolio

As a result of alliance activities companies become embedded in a dense network of

relationships and they develop an alliance portfolio - all the alliances of the focal
company, which can crucially influence companies competitiveness and financial
performance (Hoffmann 2005). Henceforth a network of alliances is distinguished from
a portfolio of alliances. Currently is under focus portfolio of alliances, where a focal
firm enters into individual alliances and transactions within the portfolio are analysed as
bilateral exchanges between the parent and each partner. However in general within
networks transactions are analysed at multilateral level. (Koza and Lewin 1999)

Even though in practice alliances and licensing contracts between technology

entrepreneurs and large incumbents often suffer from heavy coordination costs
(Christensen, Olesen et al. 2005), firms are working more and more as part of broader
networks to create customer value (Chesbrough, Vanhaverbeke et al. 2006).

Networks are dynamic, involve relational and embedded ties and can be beneficial but
also constraining (Doz, Olk et. al. 2000). Moreover, as many technologies today are
systemic (Teece 2006), then inter-organisational networks should successfully create
systemic innovations. Therefore they need tools for managing networks instead of

45
bilateral cooperation. The latter one is more relevant in case of autonomous innovations.
In case of systemic innovation there must be collective governance giving each partner
incentives to stick to the network. (Chesbrough, Vanhaverbeke et al. 2006) Hence
managing complex alliance portfolios calls for tasks that exceed those for managing
individual alliances (Hoffmann 2005) – firms have to develop capabilities to manage
different alliances simultaneously (Lichtenthaler and Lichtenthaler 2004).

Alliance portfolio management

Moreover, companies trying to experience better network performance occupy central

network positions, which provide them access to new knowledge developed by others
(Tsai 2001). Therefore external network management has become one of the new roles
for the central firm (Chesbrough, Vanhaverbeke et al. 2006) and companies engaging
multiple alliances face new management tasks. That is also why importance of goal-
orientated management of the alliance portfolio - all the alliances of the focal company
– has increased significantly (Hoffmann 2005) and plays a decisive role in company
performance (Hoffmann 2007). Moreover it is important in case of small companies,
which most probably will suffer scarcity of resources when they fail to develop
effective alliance networks (Baum, Calabrese et. al. 2000).

As companies with complementary capabilities or positions in the value system have to

be fully committed to cooperate, creating value cannot be done unilaterally based on the
efforts of a single, focal firm, nor can it be done without keeping the different and
divergent interests of collaborating partners in mind (Chesbrough, Vanhaverbeke et al.
2006). Moreover as companies are dependent on their co-opetitors, technological
changes that impact their co-opetitors influence them as well. Especially when the
capabilities of co-opetitors become obsolete it might impact reduce their own
performance. (Afuah 2000)

Network structures can herewith determine the level of commitment of the firms
involved (Suarez-Villa 1998). Moreover, there is a temptation for all firms to free ride
on the innovations of others and without willingness to invest in creating their own
innovations (Chesbrough, Vanhaverbeke et al. 2006). Moreover as companies’
performance and value creation is dependent on other network companies’ capabilities

46
(Afuah 2000), the focal companies management of different intertwined relationships
influences significantly its competitiveness (Hoffmann 2005). Companies still have to
create and capture value while being highly dependent on each other (Chesbrough,
Vanhaverbeke et al. 2006).

Generally managing Open Innovation in a world of intermediate markets for ideas

requires the construction and support of a rich internal innovation network, which in
turn should be connected to an incredibly large, diverse external innovation community
(Chesbrough 2006). Moreover in high-velocity markets that emerge, grow, split, and
combine such networks and collaborative links between businesses and markets should
be updated in order to create synergies (Eisenhardt and Galunic 2000).

Anyhow based on the co-evolution theory, ties between companies are temporary and
thus the number as well as the content of the ties matters (Eisenhardt and Galunic
2000). Therefore when managing the alliance portfolio all alliance strategies need to be
aligned with company’s strategies. Individual alliances of the portfolio should be co-
ordinated and also the strategically important aspects of alliance portfolio management
need to be integrated in the regular strategy planning and strategy review processes.
(Hoffmann 2005) It is not important any more whether a single alliance succeeds or
fails, but instead that company achieves its strategic goals with the whole bundle of the
alliances (Hoffmann 2007). Hence also not only the number but also the content of
different toes has to support these aims.

Generally by Chesbrough and Vanhaverbeke et al. (2006) managing an effective

network involves a foresight process and a shaping process. The foresight process is
necessary, as systemic innovations require companies to monitor the development of
multiple innovations simultaneously. The foresight process allows companies to create
new offerings that provide the highest potential value for targeted customers. The
shaping process however is necessary to avoid the strategic hazards related to and
influencing the resource allocation decisions of other companies. (Chesbrough,
Vanhaverbeke et al. 2006)

Previously discussed aspects however referred which processes generally are necessary
for managing networks in Open Innovation context. In addition, what concerns to

47
managing portfolio of alliances as a network of companies then four more specific tasks
are necessary: portfolio strategy, portfolio co-ordination, portfolio monitoring and
establishment of an alliance management system. The tasks of managing alliance
portfolios in turn require specific processes, tools and organisational solutions. In
companies with multiple alliances, the alliance management system must provide the
infrastructure to assure that formulating and implementing portfolio strategies,
coordination and monitoring are accomplished consistently and professionally
company-wide. (Hoffmann 2005)

Therefore companies ought to create a dedicated alliance function and develop

company-wide standards and customised tools for multi-alliance management to
implement these four tasks (Hoffmann 2005). Moreover separate alliance function when
takes the role of coordinating and process-spanning perspective, optimizes the results of
individual alliances, the alliance’s portfolio itself and thus also the corporate strategy
(Lichtenthaler and Lichtenthaler 2004). For instance Dutch specialty materials company
DSM created a business group dedicated to business development and venturing in
order to speed up innovation in DSM using both internal and external leads at all stages
in business development (Kirschbaum 2005).

As the alliance function is also being considered to enhance the alliance learning
process that leads to higher performance, the alliance function therefore also influences
firm’s overall alliance success (Kale and Singh 2007). Hence establishing a centre of
competence and a community of practice for alliance management is important for
systematically creating and disseminating alliance management capability (Hoffmann
2005). Especially in case of large companies with numerous alliances, professional
alliance management is important and requires specialised roles and positions,
standardised tools and formal processes. (Hoffmann 2005)

48
4.1.2 Lead users (Outside Innovation) and Open Innovation

Based on strong empirical evidence firms’ product development and modification by

both user firms and users as individual consumers is frequent, pervasive, and important
(Hippel 2005). Customers might often have important information that can be vital for
Open Innovation and therefore Open Innovation companies invite customers into the
innovation process as partners and co-producers (Chesbrough 2003).

This “outside in” approach refers to flip the innovation process around and assume that
customers have outcomes they want to achieve; they have deep knowledge about their
own circumstances and contexts (Seybold 2006). Customers can develop and modify
products for their own use in many fields (Hippel 2005), because they know their own
problems and often have to make significant adaptations to the technologies that they
purchase in order to solve these problems (Chesbrough 2006). Moreover, as customers
can push products or services to extremes with their demands it actually creates new
combinations and thus customers act as innovators themselves and they become lead
users (Chesbrough 2003). However these adaptations point the way for further
innovation in products and services (Chesbrough 2006).

Herewith the “lead user” or “lead customer” is an end user or an end customer (the
ultimate customer) who is passionately interested in achieving an outcome and who will
usually figure out how to accomplish that outcome on their own, with or without the
encouragement or assistance. Lead customers are the small percentage of current
customers who are truly innovative. Lead users however can be both customers and
non-customers who are passionate about getting things accomplished. They have to be
involved within innovation. Customers’ scenarios however are the jobs that customers
are trying to do. They need help creating the outcomes they’re seeking. In essence the
customers scenarios should fuel the business strategy. (Seybold 2006)

Therefore Outside Innovation is an innovation process where lead users and passionate
customers are engaged directly and their ideas are being harnessed and commercialised.
They can co-design solutions that will better meet their needs. Besides only individual
customers, turning this around also companies are the customers to their own suppliers
(Chesbrough 2006). For instance IBM created a program within where it solved

49
commercially important and conceptually interesting problems with its leading-edge
customer. Hence customer got solutions for its problems and IBM the rights to use these
solutions in other settings and would own IP created in the process. (Chesbrough 2003)

Nevertheless, the customer-led outside innovation movement is inevitable; new

approach to business process innovations involves intentionally outside parties, most
notably customers and potential customers. Alas very few companies have made
customer co-design a core competency – the starting point for all new business
initiatives. However firms no longer win by having the smartest engineers and
scientists, they win by having the smartest customers. (Seybold 2006)

Competitive advantage for the company through Outside Innovation could be achieved
when harnessing customer innovation subsequently (Seybold 2006):

- Finding the lead users in respective industry and commercialising their

inventions;

- Engaging with most visionary customers to co-design new products and new
processes;

- Enabling customers to troubleshoot each others´ problems, hack solutions,

and modify and extend products to meet their needs;

- Engaging customers in brainstorming new products, providing new

marketing and distribution ideas, and promoting the brand to their peers;

- Providing toolkits to customers to design very specific solutions for

themselves – customized solutions that leverage the firm’s deep domain
expertise;

- Encouraging customers to generate new knowledge and contribute their

intellectual property;

- Inviting customers to vie with one another in designing new products for
selling;

- Opening up intellectual property and inviting customers to design and share

their creations;

- Encouraging customers to build on top of one another’s creations.

50
In general innovative organisations that are harnessing customer-led innovation have
engaged with different groups of customers in five distinct roles (Seybold 2006). See
Table 1.4.

Table 1.4 Customers’ roles in customer-led innovation

ROLE HARNESSING CUSTOMER-

I. Lead * Lead users/lead customers design
customers the next-generation products and
business models.
* They are innovators who invent
new solutions when they do not find
what they need.
II. * Contributors innovate within the
Contributors company’s guidelines and provide
value to the company by doing so.
* Contributors are happy to donate
their work for the benefit of others.
* Contributors contribute their time as
debuggers and testers of new products
and concepts.
III. Consultants * Consultants provide deep subject
matter expertise.
* Consultants offer valuable guidance
and insights.
IV. Guides * Guides act as advisors to other
customers, solving problems, offering
insights, and helping create “maps”
that will help other customers
navigate complicated product lines or
explain relationships among complex
concepts.
* Guides classify, filter, organise, and
review alternatives.
V. Promoters * Promoters are enthusiasts about
firms brand and products.
* Promoters come up with innovative
ideas how to attract and delight other
customers.
Source: adapted from Seybold 2006
LED INNOVATION
* They should be watched,
supported, and their inventions
commercialised.
* Giving them innovation toolkits
enables them to extend, modify
and/or redesign products and
services.
* As they enjoy seeing their
contributions and ideas used, they
should be encouraged and
acknowledged and their
contributions recognised and
appreciated.
* They should be invited to be part
of the company.
* They’ll analyse trade-offs, help in
prioritising, and recommend
winning approaches.
* They should be used to help
others make sense out of
configuration.
* They add value by creating new
knowledge.
* They can help shorter time-to-
adoption.
* They may sell and promote firm’s
wares.

It is important that companies work closely with their customers in all five roles. For
instance Lego and National Instruments are in long-time relationships with those
innovative customers. That leads to achieving not only impressive financial results but
also gaining worldwide respect and recognition as leaders in their respective industries.

51
The three key ingredients have to be in place – passionate knowledgeable users with
clear vision and a grounded understanding of reality (Seybold 2006).

Anyhow organisation’s culture pursuing customer-led innovation should support

Outside Innovation. Their approach should start with asking customers what are they
trying to do instead of what do they want from the company. Everyone in the
organisation should want to learn more about what their customers are trying to do
(customer scenarios) and how their firm’s current and future products and solutions
could help those customers accomplish their goals. It that kind of organisations
customer-led innovation happens almost organically. (Seybold 2006)

Generally Outside Innovation is customer driven innovation were lead customers and
lead users drive 50 percent of the R&D agenda. The structural tension between lead
users current reality and their desired outcomes and experiences drives innovation.
Customers design new business models; extend, customize, and modify products; and
share their ideas and creations with one another. New business models, processes, and
solutions are co-designed with customers and tested with a broader customer
community in an open process. Customers are actively engaged in co-design business
processes and business models with cross-functional stakeholders and top execs.
Customers scan the environment for complementary solutions and do the initial
integration themselves. Finally customers actively promote new products and services
to one another and help build a vibrant ecosystem. (Seybold 2006)

4.1.3 Universities

Innovation is fundamental to economic success with public and private institutions

sharing knowledge risk and rewards (Cullen 2000). The body of science represented by
university-based research is an important and growing contributor to industrial
innovation (Chesbrough, Vanhaverbeke et. al. 2006). There is an increased trend for
academic technology development and spin-outs to form start-up firms (Fetterhoff and
Voelkel 2006). In addition also faculty members typically are domain experts in fields
that are potentially useful to many companies (Chesbrough 2006).

52
Exploitation of openly published scientific research is beneficial for at least one
dimension of firm’s innovative performance. Contribution of university science to
industrial innovation is important especially due to informal, open, non-IP-related
knowledge transfer mechanisms. (Chesbrough, Vanhaverbeke et. al. 2006)

As innovations need complementary assets to go through development,

commercialisation, marketing and distribution, then university researches do not
generally possess those complementary assets. Thus commercialisation is typically left
to other organisations in case of which the technology ought to be transferred to a
holder of complementary assets in order the development and commercialisation to
occur. (Chesbrough, Vanhaverbeke et. al. 2006)

However universities are shifting from innovation benefactors to innovation explorers

(Chesbrough, Vanhaverbeke et. al. 2006). Many universities use patent royalties as a
primary source of funding and anyone using the university output have to pay for it
(Chesbrough 2006).

Anyhow in case of university researchers there is a lack of property rights since they do
not desire secrecy but wish to openly publish and distribute their contribution. Moreover
as development of university based innovation often needs enormous investments, then
firms hesitate to make such investments into not protected innovations. Thus in many
cases a patent and an excusive licence are necessary to provide the incentives for
industry development. (Chesbrough, Vanhaverbeke et. al. 2006)

The Open Innovation processes of firms would benefit from the opportunity to find out
about and license university research, although firms must make costs on negotiation as
well as paying royalties for the use of patented results. However firms with better
connections to university scientists will likely benefit the most from an increasing body
of university research applicable in industry. (Chesbrough, Vanhaverbeke et. al. 2006)
For instance Intel uses collaboration with university researchers and selective funding of
other academic research to connect fragmented university research programs into larger
research programs. These larger programs in turn give the company the ability to
coordinate external research more effectively at larger scale. (Chesbrough 2003)

53
Thus active collaboration between a university and a firm might facilitate more
complete and faster transfer of tacit research knowledge (Chesbrough, Vanhaverbeke et.
al. 2006). Moreover, these co-operative units pool their different areas of specialisation
and knowledge to form continuously evolving networks (Cullen 2000).

Hence, firms who ought to improve access and use of university research should
acknowledge that it takes some investments, even if without proprietary restrictions.
Even though the university science might be published and available to others as well, it
does not mean that all potential users are equally able to identify and make use of that
research. Such utilisation could be done through developing and maintaining the ability
to “plug in ” to the research communities. That in turn relates again to argumentation
about absorptive capacity. (Chesbrough, Vanhaverbeke et. al. 2006)

4.1.4 Start-up firms

New division of knowledge and labour between small technology specialists and large
incumbents is emanating from the dynamics of virtual disintegration. Accordingly
technology-based start-ups tend to have an advantage in the embryonic stages of
radically new technology requiring deep and specialized knowledge unrelated to the
knowledge of conventional technology possessed by incumbents. (Chesbrough,
Vanhaverbeke et. al. 2006)

Nonetheless, start-ups also face numerous disadvantages in commercialising RI-s.

Despite that they are more flexible in reading market signals and structuring appropriate
business model, they lack mostly resources, brand name, credibility with partners and
the market. They also do not have a broad base of knowledge assets to draw upon as
well as complementary assets needed to scale the innovation. (Chesbrough,
Vanhaverbeke et. al. 2006) In addition, Open Innovation relates to buying or selling
technologies and their associated IP as part of the business model. However smaller
companies have usually less IP to sell and therefore they are more frequently prone to
collaborate and share their technology and IP. (Chesbrough 2006)

54
By contrast incumbents with strong incentives to capture commercial value from the
new technology will be better situated to mobilize the integrative competencies needed
to provide the appropriate systemic/architectural innovation and large-scale
commercialisation. Critical features of such integrative competencies are the capacities
for technical system integration, for coordination with technology-based specialists, for
re-configuring the knowledge base (dynamic capabilities), and for mobilizing
complementary assets. (Chesbrough, Vanhaverbeke et. al. 2006)

Thus creation of spin-offs can provide an outside path to market for technologies that
otherwise might set on the shelf within the labs. This in turn forces technology to move
faster out of the lab and provides an experimental setting for technologies in different
uses within different markets. Moreover they provide learning opportunities for
established companies to monitor and potentially leverage if they provide value.
Therefore big companies can learn faster and adapt their strategies more rapidly as a
result of coexisting with venture capitalists and their start-up firms. (Chesbrough 2003)

Hence in case of Open Innovation firms can utilize venture capital also internally to
catalyse their own innovation process. Start-up companies can function as a series of
small laboratories that guide the strategies and the market directions of large firms.
These companies financed by venture capital act as pilot fish for potential market
opportunities. As they sell real products to real customers they provide most valid and
useful market research on future technologies and market opportunities. (Chesbrough
2003)

4.2 Collaborative know-how and Open Innovation

Deriving from the previous chapters, effective creation and commercialisation of

systemic innovations needs collaboration between incumbents, start-ups, and other
stakeholders. Collaboration already in the early stage of research can have critical
impact is the speed of convergence in the creation of systemic innovations. However the
systemic nature of innovation makes companies increasingly dependent on each other.
Herewith vertical integration is rarely an option and the innovation process becomes

55
increasingly collaborative process where innovating companies are dependent on
complementary innovators. (Chesbrough, Vanhaverbeke et al. 2006) Moreover they are
dependent on their co-opetitors capabilities as well. For creating or sustaining
competitive advantages firms must not only develop their own capabilities but also pay
attention how technological changes impact their co-opetitors capabilities. (Afuah 2000)

In general mastering collaboration skills becomes essential to company’s survival

(Kamel 2006) when attracting and retaining the commitment of external resource pools
is a critical issue for builders of systemic innovations. As innovations are becoming
more systemic and the process of innovation itself become more collaborative, then
partnerships for joint development are particularly appropriate for accessing new
knowledge and expertise quickly. Especially in highly unpredictable situation
companies need wider perspectives to resource allocation and governance models (e. g.
companies that lack knowledge about how to structure development agreements with
outside originations experience slower time to market). Even though companies
recognize the value of Open Innovation model, they often lack the capability to create
“development partnerships”. They need to learn how to collaborate effectively.
(Chesbrough, Vanhaverbeke et. al. 2006)

Therefore Open Innovation enables and builds upon inter-organisational collaboration

(Chesbrough, Vanhaverbeke et. al. 2006) as external technology sourcing might include
supplier relationships, strategic partnering with customers (lead users), institutions, and
suppliers as well as networking (Witzeman, Slowinski et al. 2006). However in any case
as economic actions are embedded in social structure (Uzzi 1997) then accessing
external technologies from various external sources bases on collaboration and
moreover in order it to be effective, on firms ability to collaborate or its collaborative
know-how.

A number of researches have discussed learning about “how to collaborate better” or

how to enhance “alliance capability” (Anand, Khanna 2000) through different
perspectives, using different notions for the concept “process learning”, but generally
they agree on this concept’s facilitating influence on successful performance of
alliances as well as learning alliances (Glaister, Husan et al. 2004; Feller 2004;

56
Sampson 2002; Anand, Khanna 2002; Zollo, Reuer et al. 2002; Dyer, Singh 1998;
Simonin 1997).

Generally result of leaning process is new knowledge (Garvey, Williamson 2002). Thus
the result of process learning, as learning process about how to collaborate, is
collaborative know-how. Collaborative know-how is a particular type of knowledge that
determines whether companies can develop specialized knowledge via expertise and
then use it to obtain further benefits (Simonin 1997). As firms develop collaborative
know-how, future collaborations should result in superior tangible and intangible
benefits and firms with higher level of collaborative know-how will achieve higher level
of tangible or intangible benefits (Simonin 1997).

Firm’s accumulated experience is essential for expanding its knowledge domain and
pursuing emerging opportunities that contribute to innovation and variation through
alliance formation (Lavie and Rosenkopf 2006). Nevertheless, while firms’
collaborative experiences influence their level of collaborative know-how, the
experiences alone are not enough to guarantee good future performance (Simonin
1997). Thus collaborative know-how is more important than experiences, because prior
history of cooperation is valuable only when the lessons from the experiences (negative
and positive) are internalised and transformed into know-how that could be used for
improving future performance. Organisations develop specialised know-how via
experience and then utilize this know-how to obtain future benefits (Simonin, Helleloid
1993).

Otherwise the knowledge will not become collaborative know-how and can’t help
provoke benefits for the firm (Simonin 1997). Ability to learn from a particular alliance
is likely to be enhanced by the trials and tribulations of past learning experiences
(Anand, Khanna 2000). Prior collaborative experiences could be internalised and learnt
through developing mechanisms and routines that are designed to accumulate, store, and
integrate relevant collaborative know how acquired through individual and
organisational experience; some companies even develop separate unit “dedicated to
alliance function” that coordinates learning and cooperation (Kale, Dyer 2002).
Experimental learning is also increased by the availability and analysis of feedback
(Organizational learning 1996).

57
As was stated, generally firm’s benefits from learning and extent to which firms can
source external technology is determined by the firm’s ability to learn and by absorptive
capacity (Kim and Inkpen 2005). However concerning to inter-firm collaboration and
inter-firm learning the firm level-construct absorptive capacity could be seen as relative
absorptive capacity or dyad-level learning construct where one firm’s ability to learn
from another depends on the both firm’s knowledge bases, organisational structures and
compensation politics, and dominant logics. Thus it in inter-organisational learning it is
relevant not only to pay attention to firm’s own previously named capabilities, but also
to partner’s respective characteristics. (Lane and Lubatkin 1998)

58
5 MANAGEMENT OF INTELLECTUAL PROPERTY (IP)

Open Innovation also reflects the transformation how firms use and manage their
intellectual property (IP) (Chesbrough, Vanhaverbeke et. al. 2006). Intellectual property
refers to the subset of ideas that are novel, useful, have been reduced to practice in a
tangible form and have been managed according to the law. Patents are the leading
source of trade in IP and many of the issues in managing patents will also apply to the
management of other types of IP as well (e.g. copyrights, trade secrets, trademarks).
(Chesbrough 2003) IP protection however creates a platform for the transfer of
knowledge assets that spring from inventive activities (Chesbrough, Vanhaverbeke et al.
2006).

Generally is considered that intellectual property rights lubricate the market for know-
how; strong intellectual property rights facilitate (licensing) transactions in the market
for know-how and in case of absence of intellectual property rights, the market for
know-how will be less efficient (Teece 2006). However the way companies manage
intellectual property (IP) depends critically on whether they operate in a Closed
Innovation paradigm or in an Open Innovation paradigm (Chesbrough 2003).

In the first case a company manages IP to create and maintain control over ideas and
exclude others from using them (Chesbrough 2003), which leads IP being created and
used only internally while external IP is regarded as suspect, unreliable, and something
to be avoided (Chesbrough 2006).

Open Innovation approach however takes into account the bountiful supply of
potentially useful ideas outside the firm and suggests that the firm should be an active
buyer and seller of IP (Chesbrough 2003). Moreover patented technologies not used in
company’s business and not used by anyone else is a waste of shareholders money as
well as waste from the societal perspective, where a new invention would be lost.

59
Disclosure however would enable other inventors to build on the earlier invention, so
that the technology can be improved over time. (Chesbrough 2006)

Therefore generally Closed and Open Innovation approach differ in publishing versus
patenting, when managing intellectual property. Publish versus patent approach refers
that in case of Closed Innovation firms making discoveries want to own and protect that
knowledge. Thus they use patents. In case of Open Innovation however firms consider
the “publish” alternative as well and think whether it is in their interest to protect their
knowledge or make it available to everyone without a cost. (Chesbrough 2003)

Viability of such Open Innovation IP management approach is also supported by

Teece´s argumentation that today'
s competitive environment favours organizations who
are able to protect knowledge assets from re-contracting hazards, but it also favours
firms which can build, buy, combine, recombine, deploy and re-deploy knowledge
assets according to changing customer needs and the changing competitive
circumstances. Successful firms of the future will be “high-flex” and knowledge-based.
(Teece 2000)

Thus in case of Open Innovation intellectual property represents a new class of assets
that can deliver new additional revenues to the current business model, and also point to
the way towards entry into new businesses and new business models. By defining
property rights IP helps to facilitate exchange ideas and technologies between various
parties who possess the knowledge. However property rights that are too strong or too
broad might inhibit the flow of ideas and technologies that is necessary for Open
Innovation to function well. (Chesbrough, Vanhaverbeke et. al. 2006)

Hence a company manages IP not only to leverage its own business, but also to profit
from others´ use of the companies ideas (Chesbrough 2003). Therefore IP can be
managed so it helps create value, not simply capture it, particularly when its
management is linked to the company’s business model and innovation process.
(Chesbrough 2006)

Knowledge that grows the value chain and firms ability to advance the complementary
products and services, is the kind of knowledge that ought to be published in case of

60
Open Innovation. However the knowledge that helps firms to position themselves to
capture a portion of that value within that chain, is the kind of knowledge that ought to
be protected. (Chesbrough 2003)

Open Innovation companies use extensively licensing to create and extend markets for
their technologies. Companies are interested in selling and also motivated and informed
buyers of IP. However companies are paying more attention to selling their own IP to
others, than they are to buying IP from outsiders. They nevertheless could realize a great
deal of value by accessing an external technology, instead of inadvertently reinventing it
internally. Buying and selling perspectives both are necessary to improve the
management of IP. (Chesbrough 2003)

Useful approach at managing IP must start from the patent issuing process, although
most analysis of managing IP start already at the stage where company already has
received a legal patent. (Chesbrough 2003)

Most discoveries are worth very little, although a few may be worth a great deal once
they are connected to the market through some viable business model. Therefore
companies should manage IP to enhance and extend their business models and they
should seek out new business models for discoveries that do not fit their present models.
(Chesbrough 2003) In case of Open Innovation IP-based business models attain
growing significance. The trend is towards vertical dis-integration between technology
development and commercialisation and therefore it is closely tied to intellectual
property rights (IP). (Chesbrough, Vanhaverbeke et al. 2006)

Moreover R&D personnel should be educated on company’s business model, so that

researchers could understand the potential connections early on in the research process.
Alas companies generally do not educate their researchers about the business side of the
innovations. For instance with Open Innovation approach to knowledge, research
managers could start evaluating researchers performance in different ways (e.g.
different paths of promotion, rotational assignments in interactive areas with external
participants or other). Hence companies should find ways to search for and reward the
creation of effective business models that leverage technologies they seek to licence. In

61
absent of an effective business model a technology may be worth very little.
(Chesbrough 2003)

Anyhow managing IP effectively in Open Innovation includes connecting IP to the

underlying technology life cycle of that IP. Companies must also change the
management of intellectual property surrounding the technology in different stages of
the technology life cycle. Technology life cycle describes the underlying patterns in the
constantly changing world of technology. However the management of IP and the
business model should be linked to the technologies life cycle. At first IP management
should align with the stage of the technologies development and also the business model
should take into account the phase of the life cycle. The key success factors are not the
same in different phases and “one-size-fits-all” approach may not be appropriate.
(Chesbrough 2006)

For instance in the earliest phase of the technology, it pays to be very open. Nobody
knows yet the best use of a particular technology and no one has appropriate business
model to commercialise any applications. As the dominant design emerges, tightening
the protection for one’s ideas becomes very important. In mature phase, IP management
must become more differentiated and segmented, to support different applications of the
technology in different uses. In the decline phase firms can aggressively harvest the
fruits of their earlier investments in the IP protection. (Chesbrough 2006)

Anyone scouting for external ideas and technologies must be alert to their legal status.
In case of Open Innovation firms should shop for rights to intellectual property that
would fill in gaps in its own IP and that would support the use of external technologies
within the firm’s business. Anyhow patent protection has strengthened considerably in
the past twenty-five years. Patents do not directly protect technologies; they may cover
aspects of a technology that is embodied in a product but the technologies in a product
may not align entirely with company’s patents. It must be made sure that no other
companies’ patents cover your technology. (Chesbrough 2006)

Thus every company needs to pay closer attention to its IP than it used to. Protecting
ideas is however costly and time consuming (Chesbrough 2006). Firms cannot acquire
and use external technologies unless they are confident that it has the legal right to

62
practice the technology. In case of Closed Innovation companies knew the entire history
of the internal technology. When technologies flow across the boundaries of the firm,
obtaining the ability to practice a technology without incurring infringement action by
another firm is more challenging because the full history of the technology’s
development is not as well known. (Chesbrough 2006)

Therefore companies can be too open. The issue of IP remains an important source of
friction in the exchange, whether it is in case of working with customers or suppliers.
For instance small companies with scarce resources limit the amount of protection it is
likely to receive. Small companies should obtain, as much protection as they can afford,
there is no substitute for a good business model to protect IP. (Chesbrough 2006)

63
6 OPEN INNOVATION MANAGEMENT AND
STRATEGIES

Even though companies understand the need for external innovation, few capture the
full value of partnerships with external technology providers. However that value could
be progressively built through the process of managing external innovation (Fetterhoff
and Voelkel 2006). Moreover Open Innovation requires especially increased emphasis
on managing knowledge (Chesbrough, Vanhaverbeke et. al. 2006).

Managing knowledge refers herewith to identifying promising sources of external

knowledge and being able to recognize it as such (Chesbrough, Vanhaverbeke et. al.
2006), which in turn refers again to firm’s absorptive capacity (Cohen and Levinthal
1990). Managing knowledge refers herewith also to linking such external knowledge
together with internal knowledge to create new systems and architecture (Chesbrough,
Vanhaverbeke et. al. 2006).

As the main sources of external knowledge were covered within the Chapter 4, then
herewith in current chapter will be shed light on the main managerial challenges and
risks as well as strategies within such linking of internal and external knowledge and
hence incorporating Open Innovation.

6.1 Managing Open Innovation

Open Innovation, when managed in a balanced way with internal capability

development, can help speed Radical Innovations (RI) through emphasis on interaction
and networks. RI-s cannot be managed as a process like incremental innovations. It
rather requires a management approach consisting of multiple elements aligned as a
system. However firms are becoming well sophisticated in building an RI capability.

64
They recognize the need for it, invest in improving that capability, and recognize it as
more than a process, but in fact a complex system. Anyhow, while external relations are
critical for successful management of innovation, there are limits to the scope of
external relations that companies can effectively manage in innovation projects.
(Chesbrough, Vanhaverbeke et. al. 2006)

Nevertheless, RI management requires three sets of competencies: discovery, incubation

and acceleration. Discovery capability involves activities that create, recognize,
elaborate, and articulate RI opportunities. The skills needed are exploratory,
conceptualisation skills, both in terms of technical, scientific discovery, and external
hunting for opportunities. In case of Open Innovation discovery involves also hunting
inside and outside the company for ideas and opportunities and licensing technology or
placing equity investments into small firms that hold promise. (Chesbrough,
Vanhaverbeke et. al. 2006)

Incubation capability however involves activities that mature radical opportunities into
business proposals. Skills needed for incubation are experimentation and interaction
skills. Finally acceleration activities concentrate on building a business to a level of
some predictability in terms of sales and operations. Acceleration involves exploration
rather than exploitation or experimentation. (Chesbrough, Vanhaverbeke et. al. 2006)

In general firms with Open Innovation approach face three inherent managerial
challenges (Chesbrough, Vanhaverbeke et. al. 2006):

I. Maximization of exploitation of diverse IP resources. Firms need a wide range of

approaches to maximize the returns to internal innovation – feeding companies’ product
pipeline, outbound licensing of IP, patent pooling, and even giving away technology to
stimulate demand for other products. (Chesbrough, Vanhaverbeke et al. 2006)

Internal R&D capabilities can be best used for (Chesbrough, Vanhaverbeke et al. 2006):

- generating innovations to be internally commercialised (traditional model);

- building absorptive capacity and using that capacity to identify IP lying

beyond the boundaries of the organisation, i.e. external innovation;

65
 - generating innovation that generates returns through external
commercialisation (e.g. licensable patent portfolios or spin-offs), and

- generating IP that does not produce direct economic benefit, but indirectly
generates a return through pullovers or sale of related goods and products.

II. Incorporating external sources with firms resources and capabilities. Existences of
external knowledge provides no value to the firm if it cannot identify the relevant
knowledge and incorporate it into its innovation activities faster than rivals and new
entrants. External sources are herewith again previously discussed suppliers and
customers, universities and government, and private laboratories, competitors etc.
(Chesbrough, Vanhaverbeke et al. 2006).

Most common way however is to imitate a rival. The challenge lies in identifying useful
knowledge and then integrating it within the firm. Environmental scanning, competitive
intelligence, sponsored research, and membership in relevant trade organisations help to
uncover external knowledge opportunities. (Chesbrough, Vanhaverbeke et. al. 2006)

III. Motivating the generation and contribution of external knowledge. Over the long
term firms must cultivate ways to assure continued supply of relevant external
technologies and IP. Somebody must provide the external knowledge to be used for
other firms, when everybody wants to pool external knowledge. Incentives for
generating knowledge spill-over are considered at two levels: individual and
organisational. (Chesbrough, Vanhaverbeke et. al. 2006)

Anyhow there are several risks and issues companies must face in bringing outside
ideas into the company (“outside-in” process) or when overcoming barriers to taking
unused internal ideas to outside (“inside-out” process). Threats as well as opportunities
have to be managed and measures should be taken to guard against these risks
(Chesbrough 2006).

Challenges that companies face while becoming more open include for instance internal
resistance to external innovations and technologies within companies (Chesbrough
2006). Dynamic tensions exist between the forces pushing for change and the desire to
defend the current model (Witzeman, Slowinski et al. 2006).

66
One main reason is that incorporation of external technologies involves rational reasons
for resisting at first. As the cycle time to complete a project is accelerating, then there is
less time evaluate and incorporate external technologies into a fast-moving project.
Thus fast moving projects often pose risks, which are being minimized by excluding
possibility of unexpected outcomes from the project by external technologies.
(Chesbrough, Vanhaverbeke et. al. 2006)

Another example of such resistance is also “not invented here” syndrome, where
external ideas are mistrusted. Moreover in case of “not sold here” syndrome firms that
do not sell a technology by themselves prevent that no one would sell it. If the
organisation cannot find sufficient value in the technology, it is highly unlikely that
anyone else will either. Overcoming “not sold here” starts by beginning with allowing
other pathways for internal ideas to go to market. These other pathways also allow the
market to provide feedback on those ideas about improving them. (Chesbrough 2006)

Generally all discussed opportunities as well as risks, which come along when
incorporating Open Innovation, could be managed within a dedicated organisational
function. For instance Dutch specialty materials company DSM created a business
group dedicated to business development and venturing in order to speed up innovation
in DSM using both internal and external leads at all stages in business development
(Kirschbaum 2005).

This is similar to dedicated alliance function used for managing alliance portfolios. As
establishing a centre of competence and a community of practice for alliance
management is important for systematically creating and disseminating alliance
management capability (Hoffmann 2005), then such dedicated organizational function
could be used also for managing Open Innovation that besides alliance networks
includes other external knowledge sources as well. For instance DSM Venturing &
Business Development group encompasses 50 people actively practicing an Open
Innovation model that includes creating and nurturing new businesses through
continuously appraising and testing ideas, projects and businesses until they are fully
developed, spun off or rejected (Kirschbaum 2005).

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6.2 Open Innovation Strategies

Although external ideas can be a powerful value-creating engine and for claiming a
portion of that value internal R&D activities are needed, a company has to make the
transition from Closed Innovation to Open Innovation. In order to do that a company
has to give up a certain amount of control to access and utilize external knowledge.
(Chesbrough 2003)

Such transition generally comprises of six subsequently explained steps. Firstly

surveying recent innovation activities that include mapping innovations of own
company as well as other companies within the industry. It also examines whether
firm’s current business model connects technical as well as business activities into the
innovation process. Secondly building of innovation roadmap that details future R&D
projects and their appearance, fills gaps and finds blind spots in firm’s current business,
renews external technologies with external experts, licences external technologies if
necessary and funds start-ups to fill unmet needs. (Chesbrough 2003)

Third step is about growing the business and discovering new businesses to expand the
company beyond through the fourth step, which is experimenting with internal
innovation process. Internal innovation process is another potential source for building a
new business. That leads to fifth step – finding the best business model for innovation
and that in turn leads to sixth step – increasing of the velocity of innovation process by
moving ideas into and out of the company to motivate a company to get ideas faster to
market. (Chesbrough 2003)

To illustrate such step-by step transition, Roche Diagnostics provides a good example.
Roche diagnostics managed its external innovation by creating a vision of the future,
based on customer insight and a comprehensive assessment of enabling technologies
through multiple perspectives (Fetterhoff and Voelkel 2006).

Subsequently will be provided examples of strategies that firms have used to create and
claim value while incorporating Open Innovation. Mainly will be offered examples and
cases of firms that have implemented such strategies. Table 1.5. sums up all strategies
discussed subsequently.

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Table 1.5 Main Open Innovation strategies

* Leveraging external knowledge for own offerings and

I. Bringing external
knowledge in and taking
internal knowledge out
II. Strategies how firms
innovated externally invested
in Open Innovation and
captured value
III. Open Source as an Open
Innovation strategy
IV. Outside Innovation
strategies
leveraging own technology to outside;
* Connecting internal and external research with corporate
VC;
* Creating new ventures out of internal technologies.
* Pooled R&D;
* Spin-outs;
* Selling complements;
* Donated complements.
* Strategies to create and capture value though software
development;
* Strategies to create and capture value though services.
* Co-designing products with customers,
* Helping customers reach their goals;
* Meeting unmet needs;
* Creating online communities;
* Profiting from customer-created intellectual property;
* Information and data turned into services.

I. Strategies how firms have used Open Innovation by bringing external knowledge
in or taking internal knowledge out of the organisation.

There are various ways for firms to imply Open Innovation approach while creating and
claiming value for their company. Chesbrough (2003) referred to three basic ways in
which firms can create and capture value from their new technology: firstly through
incorporating their technology in their current businesses, secondly through licensing
the technology to other firms, or thirdly through launching new ventures that exploit the
technology in new business areas. However what concerns especially to claiming value,
then the paths to gain an economic return from innovation are following (Chesbrough,
Vanhaverbeke et. al. 2006): firstly through licensing innovation to downstream
suppliers to incorporate in products and components, secondly through distributing
them in components that compete with other similar components, and thirdly through
incorporating them in complete solutions.

However in general Open Innovation could be implemented through bringing external

knowledge into the corporation or taking internal knowledge out to external markets.

69
a.) From Closed Innovation mind-set to Open Innovation mind-set through leveraging
external knowledge for own offerings and leveraging own technology to outside (IBM) -
bringing external knowledge into the corporation.

IBM´s innovation was concentrated on internal research in terms of corporate research

laboratories, and the path to market for the output of the research was to be entirely
within the firm (Chesbrough 2003). IBM had enormous scale and deep vertical
integration. It was almost entirely closed in terms of its ability and willingness to use
external technologies (Chesbrough 2006). The research philosophy was about
separating research from development as well as about keenly protecting its discoveries
from being used by other companies. They licensed a little of their technologies and
rather preferred to go it alone. In general their business model was built on internal
innovation, proprietary control over the architecture and all its key elements, and
extremely high switching costs for its customers. (Chesbrough 2003)

However the growing external knowledge base, burgeoning number of start-up

companies in various segments of the computer industry, and the departure of many
employees (erosion factors) combined to put great pressure on IBM’s innovation
process until IBM was facing tremendous competitive pressures from many fronts.
(Chesbrough 2003) IBM’s overhead structures become too bloated for the amount of
revenue coming into the company (Chesbrough 2006). IMB had to make tremendous
layoffs and write-offs as tensions culminated. Thus a new vision and logic for the firm
was needed (Chesbrough 2003). New revenue sources had to be found as well
(Chesbrough 2006). Therefore IBM started seeking greater returns from its investments
into research (Chesbrough 2003).

IBM started experimenting and offered its technologies to act as a foundry for other
companies’ products. They also created a research alliance within the same field.
Thereafter IBM generated funds and started licensing out its IP and technologies. IBM
started also embracing open source (Linux) and constructed its own business model
around the Linux code. IBM used collaborative processes, which shared the costs with
many other companies. Moreover to get the myriad of IBM’s internal technologies out,
IBM used a group of researchers and developers. They researched and developed

70
alternative business models by placing underused ideas and technologies outside the
firm. (Chesbrough 2006)

Therefore in order IBM to deliver value to its customers at the top of the value chain,
they turned to external technologies. These technologies included also the ones
embodied in the Internet and which were not created in any particular company’s lab
(Chesbrough 2003). Than meant leveraging technologies that they did not own and
could not control. IBM acknowledged that they cannot do everything themselves while
utilizing the value chain to deliver a complete solution to customers. Hence IBM started
capturing value through leveraging technologies available to all companies and not
controlled by IBM. (Chesbrough 2003)

Moreover IBM started investing in superior technologies. Thus they tried achieving
critical breakthroughs in technologies that were meant to sell to competitors on the open
market. Finally IBM also profited from innovation not only by leveraging external
technologies in its own offerings, but also by offering own technologies and IP for sale
to other companies. (Chesbrough 2003)

b.) From Closed Innovation mind-set to Open Innovation mind-set through connecting
internal and external research with corporate VC (Intel) – bringing external knowledge
into the corporation.

Companies can continue to profit from innovation even if they don’t own many of the
underlying technologies they use. For instance Intel has achieved success in high-
technology industry without conducting much basic research on its own. Intel had no
development facilities for years. All development occurred within existing production
labs. However later Intel established three decentralized research labs each of them
focused on their respective area. (Chesbrough 2003)

Thereafter in addition to internal research activities, Intel conducted a variety of

activities to promote linkages between its labs and external research community. For
instance internal technology conferences, research forums and seminars were being
held. Internal and external researches came together and shared their research.
(Chesbrough 2003)

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In general Intel’s way of managing innovation is effective, as it launches a few blue-sky
investigations leading to dead ends. It also builds on the research discoveries of others,
while transferring those discoveries into the companies own development process.
(Chesbrough 2003)

Moreover Intel has found a way to benefit from venture capital (VC) through a
farsighted program with corporate VC. It builds strong connections between Intel and
the start-up community that surrounds it. Intel therefore extends its business strategy by
leveraging the activities of these start-ups. (Chesbrough 2003)

In general Intel’s research philosophy fosters an external orientation to the generation of

knowledge. Intel first looks outside, before determining what internal research activities
to perform and how to connect these individual pieces of internal and external
knowledge. The primary emphasis is on accessing and leveraging external knowledge.
Internal knowledge is tried to wrap around the external knowledge, rather than being
ignored or competed with it. Furthermore, besides that corporate VC is being employed
to build and extend the value chain of suppliers that it relies on, there are being made
complementary investments to support the architecture. (Chesbrough 2003)

c.) From Closed Innovation mind-set to Open Innovation mind-set through creating new
ventures out of internal technologies – taking internal knowledge out to the external
market.

Lucent´s New Venture Group (NVG) was created to commercialise the Bell
Laboratories technologies that did not fit any of Lucent´s established businesses. The
mission of the NVG was to leverage Lucent´s technologies to create new ventures that
bring innovations to market more quickly. However, at the same time it should not harm
the innovation process within Lucent. (Chesbrough 2003)

As the uncertainty of early-stage R&D makes it hard to predict revenues, profits, and
cash flows in advance, it is difficult to communicate to external capital markets.
Therefore it is possible to address the issue of creating shareholders value for internal
innovations by creating an innovation bond. It could be the instrument that a
corporation executes with an outside capital supplier. The innovation bond would assign

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to the holder the revenues from the activities of a portfolio of venture firms created to
commercialise a corporation’s technology. The corporation in turn receives from the
bondholder a steady stream of payments over the expected period of the ventures.
(Chesbrough 2003)

Nevertheless there is an enormous amount of technical and market uncertainty involved

in commercialising an early stage venture, which NVG addressed by carefully staging
its investments in these ventures. Generally Lucent´s NVG provided a second path to
market, which in turn probably influenced the actions of the first. However, internal VC
was used to fund new external ventures and alternative paths were created for
technology to get to the market through internally financed venture spin-offs.
(Chesbrough 2003)

Similarly Procter & Gamble brought its own technologies to external market. P&G is
the forefront of using both internal and external innovation to drive toward a new
business model. After P&G experienced sharp fall of sales and quick plunge in stocks, it
had to accelerate its growth. They did it by opening up the innovation process to
external sources of technology. Despite it had to overcome “not invented here” (NIH)
syndrome, P&G started external licensing of its technologies and also created a new
equity joint venture with its oldest competitor. (Chesbrough 2006)

II. Strategies of firms innovating externally, investing in Open Innovation and

benefiting from it (Chesbrough, Vanhaverbeke et. al. 2006):

a.) Pooled R&D. Firms can donate R&D to Open Source projects and also exploit the
pooled R&D of all contributors in order to facilitate sales of related products
(Chesbrough, Vanhaverbeke et. al. 2006). For instance such strategy was used in case of
Mozilla and Linux.

Generally participants jointly contribute to share effort. These pooled contributions are
later available for all. Motivation of external innovation goes through ongoing
institutions that establish legitimacy and continuity. The main challenges however lie in
coordinating and aligning shared interests. (Chesbrough, Vanhaverbeke et. al. 2006)
Companies that choose to publish or give away a portion of their IP (to create standards

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or to establish an intellectual commons) will foster useful advantages that in turn
enhance their own business. (Chesbrough 2006)

b.) Spin-outs. Firms might use opportunities to release more value from technologies
by situating them outside the firm, but at the same time maintaining an ongoing
corporate involvement. In case of spin-outs firms transform internal development
projects to externally visible Open Source projects. These donated spin-outs might
generate demand for the donator’s other products or services. (Chesbrough,
Vanhaverbeke et. al. 2006)

Spin-outs make sense in case of technologies that are either not yet commercialised or
that will eventually become commoditized and therefore of limited commercial value.
For instance IBM and BEA donated internal innovations to create Open Source projects
that were intended to fuel adoption of the innovations. (Chesbrough, Vanhaverbeke et.
al. 2006)

Generally using spin-outs means seeding non-commercial technologies to support other

goals. That supplants internal innovation as bases of ongoing innovation. Motivation of
external innovation derives from free access to valuable technologies. The main
challenges lies however in sustaining third party interest. (Chesbrough, Vanhaverbeke
et. al. 2006)

c.) Selling complements. Often base innovation requires an investment for producing
complementary goods, specialized for that innovation, in order to make the entire
system work. Complements however are often more valuable than core innovation.
Herewith firms might adopt open source components. (Chesbrough, Vanhaverbeke et.
al. 2006) For instance such strategy was used in case of Apache.

In addition firms use strategies such as selling complements in the “dual licence” way.
This indicates that firms develop a code and release it both as an open and a commercial
product. Buyers wanting free software get neither support nor restrictions on source
code distribution in exchange for development feedback. Less price sensitive buyers
receive full features and support. (Chesbrough, Vanhaverbeke et. al. 2006)

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Generally the strategy is about targeting highest value part of whole product solution.
External components provide basis for internal development. Motivation of external
innovation derives from firms coordinating an ongoing supply of components while the
main challenges lie in maintaining differentiation when shared components add
capabilities. (Chesbrough, Vanhaverbeke et. al. 2006)

d.) Donated complements. Firms can make money off of the core innovation but seek
donated labour for valuable complements (Chesbrough, Vanhaverbeke et. al. 2006). For
instance such strategy was used in case of Avalanche Technology Cooperative.

For attracting such external innovation it is important to minimize technical obstacles by

attracting developers by platform capabilities or with the prompt availability of
development tools. It is also important to create an infrastructure that encourages
participation and collaboration (for instance by creating project website or e-mail lists)
as well as implement recognition for contributions by including added visibility for the
most popular creators. (Chesbrough, Vanhaverbeke et. al. 2006)

Donated components strategy is about providing an extensible platform for external

contributors. External innovation herewith adds variety and novelty to established
products. Motivation of external innovation derives from recognition and other non-
monetary rewards while the main challenges lie in the fact that third parties can control
the user experience. (Chesbrough, Vanhaverbeke et. al. 2006)

III. Open Source as an Open Innovation strategy

Open Source development is a combination of highly structured development process,

visibility, and the ability to harness the goodwill of hundreds of contributors to identify
bugs, test code, and offer improvements (Seybold 2006). Within the Open Source
development model developers are liberated to access and build upon the efforts of
others (Chesbrough, Vanhaverbeke et al. 2006). For instance by construction Open
Source software is created without any of the firms owing the ability to exclude others
from using the technology, provided that these other firms observe the Open Source
requirements (Chesbrough 2006). Hence firms make their technology available to the

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public in order to elicit development collaboration, but without any contractual
guarantees of obtaining it (Henkel 2006).

Open Source software developers can be considered as the end users – they both
produce and consume the software they’re co-developing. Open source model has its
roots in the hacker community and the “free-software” movement but it is also about co-
creation by a group of people who care about creating an outcome that will benefit them
and others. However “open” as in open to inspect and extend, and free as in cost free to
read, redistribute, modify, and use tend to overshadow the more profound breakthrough
represented by the Open Source model: complex products that are co-created and
evolved by a community of practitioners. (Seybold 2006)

Even though Open Source software is often considered to imply free revealing (Henkel
2006) and it is often developed by practitioners, that may not always be the case.
Commercial firms among themselves also develop Open Source software that might
accommodate a combination of free revealing as well as various means of protecting
one’s code. For instance such was the case in embedded Linux where developing firms
on average revealed half of the code they developed for embedded Linux, while
protected the other half. (Henkel 2006)

Nevertheless while commercial firms’ main incentives for revealing their code is the
importance of external development especially in the form of bug-fixes, code
improvement and code maintenance figures prominently (Henkel 2006), then for
practitioners there are three other reasons for participating in Open Source software
projects. Firstly they plan to use the resulting product and they want to be sure that it
meets their needs. Secondly they enjoy the fun of co-creating and contributing to a
group of peers. Third, they enhance reputations by becoming valued contributors and
respected community members. (Seybold 2006)

Anyhow the Open Source model is now spilling out into industries in which the final
products are not digital in nature, yet the instructions or programs that describe the
intellectual property are in digital form. For instance Open Source car design projects,
Open Source biotechnology projects or Open Source industrial design projects. Any
product category that can be digitally designed – which includes most manufactured

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products and many bio-engineered products – is a candidate for Open Source. However
people in many industries are attempting to prevent similar phenomenon from taking
effect in their industries. (Seybold 2006)

Nevertheless Open Source development model is being increasingly exploited by

leading firms who incorporate Open Innovation. Open Source is a new and different
approach to software development, however its emergence has coincided with the
emergence of stronger intellectual property protection for patents and other IP.
Emergence of independent software vendors and the growth of mass market for
standard (packaged) software have elevated the importance of formal intellectual
property rights for firms in the industry. (Chesbrough, Vanhaverbeke et al. 2006)

Open Innovation approach in managing IP reflects in emergence of open standards in

software sector. Therewith Open Source is a mechanism through which firms
access external knowledge. Firms who leverage Open Source in their business model
develop system architectures that build upon it. (Chesbrough, Vanhaverbeke et. al.
2006)

Generally Open Source as an Open Innovation strategy has two key elements:

- Shared rights to the use of technology, and

- Collaborative development of that technology.

However firms must consider a third issue, how to capture an economic return to justify
their investment. For instance all Open Source software is not an example of Open
Innovation and all Open innovation in IT industry does not relate to Open Source
software. (Chesbrough, Vanhaverbeke et al. 2006)

Open Source business model

Open Source business models are collaborative, community models of development,

based on a process that does not allow any contributor to exert a proprietary claim to
intellectual property on any portion of the code being developed within the open source
framework. (Chesbrough 2006)

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Open Source is only Open Innovation when it has a business model, otherwise it
might be Open Source, but not Open Innovation. Depending on the presence of a viable
business model. It can also be Open Innovation, but not open source, or neither Open
Source nor Open Innovation. (Chesbrough, Vanhaverbeke et. al. 2006, 101) Main Open
Source business models are taken together in Table 1.6. There are different models,
which could be focused more on development or on services.

Table 1.6 Open Source business Models

SOFTWARE DEVELOPMENT
Providing * The business model builds on industry-specific stacks, which are
industry specific integrated from the key proprietary industry software components and
solutions from open source software.
* The business model includes packaging up open source components that
customers have already adopted and finding the rest of the software they
need for their particular industry-specific applications.
Providing * The business model embraces custom software development on top of
custom open source software to fill the needs of clients, who don’t have the
development resources to do such custom development themselves.
Versioning * The business model embraces providing customers free versions as an
software entry-level offering and additionally other, more advanced versions as
value-added offerings.
Integrating * The business model embraces integrating software with other parts of
software the customer’s IT infrastructure.
Providing * The business model embraces providing proprietary complements to
proprietary open source software.
complements * Developing system architectures that build upon open source.
* Proprietary complements increase the solution’s value as the cost of the
open source code falls.
* The business model might embrace strategies such as creating of
creative commons and then building proprietary products or services on
top of the commons.
SERVICES
Support services * Providing support for maintaining the older versions of open source
for maintaining software that clients are running.
older versions * Certifying that these versions will continue to operate in customer’s
environments.
Providing * Selling services that the software performs.
software as a * It is not important how company provides the service (whether it is an
service open source software or some combination), but it its important to
guarantee the level of quality, performance and reliability.
* Customers don’t pay for licences but instead they pay for the services
performed.
Providing * Selling installation, service, and other support with the software.
support
Source: adjusted from Seybold 2006 and Chesbrough 2006.

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While creating business model including Open Source, it is important to consider that
clear governance and structure are critical for success. Also meritocracy prevails: those
who produce the best work gain the most status and clout. Moreover, critical for success
are visibility of the source code and work in process. It is also important to recognise
that only a few people actually design and build; many people improve, debug, and test
as well as provide support, offer suggestions, and promote. (Seybold 2006)

Finally Open Source does not have to be free to procure. However it does have to be
visible to examine and extend as well as enabled to be redistributed to others.
Successful Open Source projects generate surrounding ecosystems. They are magnets
for continuing innovation. (Seybold 2006)

Digium and Asterisk provides a good example of how to build a viable for-profit
business leveraging the open source model while fostering customer-led innovation
(Seybold 2006). There are several important aspects to be considered.

Firstly, the For-Profit Brand Entity was separated from Open Source Entity
(Digium.com is the for-profit company and Astersk.org is an Open Source community).
Thus developers contributing into the .org entity did not feel contributing into brand
entity. It is important to have different brands, one for the commercial company and the
other for the software community. Secondly, control of the authority and governance
was maintained – people making the final decisions about software worked for the
Digium (commercial entity). A successful business model includes establishing and
maintaining the authority to set policies, processes and to enforce compliance. (Seybold
2006) Thirdly, promotion and support of other businesses in the ecosystem was
conducted. Digium promoted and supported system integrators as well as hardware
suppliers with competing products. Finally they built a multipronged business model,
Digium had three or four different types of revenue streams (support and maintenance,
selling hardware appliances, licences and professional services). (Seybold 2006)

IV. Outside Innovation strategies

Anyhow, whether customers’ share or crate content, crate products for themselves or for
others, in any case a company has to build a viable business model around customers’

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creations. Customers can generally offer contributions in subsequent forms: customers
create the content, customers share their creations with others, customers can help other
customers solve problems, customers can build classification schemes, customers can
offer guidance, customers can and will share their experiences with one another.
(Seybold 2006) Profitable business models can include customers’ contributions mixed
and matched.

a) Co-designing products with customers. The purpose of offering co-design tools is

making it easy for customers to design their own ideal solutions. At the same time it
leverages the firm’s domain knowledge and enables the firm to learn what’s possible as
they do so. Hence by giving customers design tools, the time-consuming and laborious
handoff between the customer and the producer is being shortcut. (Seybold 2006)

LEGO. Generally Lego involved its customers in co-designing its products. Moreover,
when as unexpected customer segment emerged, Lego was quick to listen to and
support them. (Seybold 2006)

Lego identified (and sponsored) lead users who were inventing new capabilities and
afterwards commercialised their innovations. Lego also commissioned one of these lead
users/customers to develop the robotics software needed for the educational market.
Thereafter Lego continued to work closely with these lead users and their end customers
– teachers and students – as they took the commercial product (Lego Mindstorm) to
market. (Seybold 2006)

Moreover Lego quickly identified an emerging and unexpected audience (adult

hobbyists), while they also tracked Internet Usenet groups and online discussions to
monitor what lead customers cared about. Thereafter Lego sponsored its own online
community and lured the lead customers to join the Lego-sponsored communities.
When lead customers hacked Lego’s products the executives watched them and
encouraged as well as embraced their creativity. There were also competitions held for
finding innovative usage for products by customers. (Seybold 2006)

Moreover the “not-invented-here” syndrome was overcome when Lego took the advice
of a lead-customer, who suggested for Lego to partner with technology provider

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National Instruments for the software needed to drive its next generation product. Then
Lego also recruited lead customers as consultants to co-design its next generation
products. They also roped in beta testers, who promoted and enhanced the new products
among the lead customer base. Finally Lego provided customers with an open toolkit to
extend the product’s capabilities. (Seybold 2006)

Lego thrived because of the ongoing customer community that sprang up independently
of the company, which Lego has now embraced. Customers are now collaborating with
Lego and its product design. (Seybold 2006)

NATIONAL INSTRUMENTS. National Instruments encourages its end users of any

of its hardware or software products to extend these products. End users contribute
sample applications, software, and application notes or “how to´s” instruments on how
to apply or adapt solutions to solve particular problems. At the National Instruments
online Developer Zone end users can find also application notes and tutorials, example
code, technical presentations, and full-blown applications they can access and share.
(Seybold 2006)

In general National Instruments built on a legacy of soliciting and following through on

lead user input to build products that customers use to create new solutions to a wide
variety of problems. Thousands of “virtual instruments” or VI-s – programs that mirror
the appearance and functions of a physical scientific instrument – that are routinely
submitted by developers to National Instruments Developer Zone, an online repository
of notes, samples, and applications to be shared. (Seybold 2006)

National Instruments supported lead customers in developing products for unmet needs.
They restructured their pricing model to meet the needs of the education and consumer
markets. They also provided a powerful toolkit with a simple interface that can grow
with the users as they become more proficient. Moreover they recruited passionate lead
customers to specify requirements for next-generation products, while they also created
and nurtured vibrant customer communities. They also encouraged customers to extend
the product and to develop and share applications. For that they formalised a lead user
program. (Seybold 2006)

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From the beginning National Instruments was dedicated to support customer innovation
by providing toolkits to inventors and creators, with which they could design their own
solutions. Therefore they harnessed the creativity of lead customers. By creating a Lead-
User Program they added even more weight to supporting customer innovation.
Moreover, the company also encourages employees with new ideas to work with a team
of lead customers to co-design the new enhanced products. Nevertheless customers not
only have input into product design but also into business models and markets. (Seybold
2006)

b) Helping customers reach their goals.

STAPLES. Staples was successful because they made it easy for customers to achieve
their goals through developing a deep understanding of customer’s scenarios. Besides
observing the ordering processes, what went well and what went wrong, they identified
also different shopping styles and codified these into customer personas. (Seybold
2006)

In general Staples went the extra step in engaging customers in a consulting role to
create truly innovative shopping processes across channels. Staples used deep customer
insight and lead customers as consultants, to create a business that addresses its
customers’ key scenarios. Staples redesigned an industry-wide rebate process in order to
address a customer-critical issue; took on the role of facilitator between customers and
suppliers to make the rebate program a win/win for both sides, while improving the
Staples experience. Staples refocused its business strategy around customers needs,
aligning corporate policy around the “Make it Easy” brand promise. (Seybold 2006)

In order to find out customer specific needs Staples hired ethnographers to help them
observe customers´ shopping behaviour and participated in ethnographic research. That
research helped to discover and identify key customers points of pain and redesign all
channels to ease customers´ concerns. Thereafter customers helped Staples to define
merchandising categories to make products easy to find as well as tested improvements
in all channels. (Seybold 2006)

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Generally customers want more and more customised products, which provide a better
fit for the their situation as well as empower then to be creative. However in order to be
able to deliver customised or personalised products cost effectively, first must be
ensured to have a manufacturing or a production facility that can cost-effectively
produce custom-designed products. (Seybold 2006)

For instance Cisco offers its partners and customers configuration tools to configure the
hardware and software options for which they want price quotes and/or place an order.
Similarly Timbuk2 and Lands´ Ends offer customised apparel and bags and Nike and
Converse offer custom-designed shoes. Similar examples could be found from car
industry (BMW, Volvo) as well as from toy industry (Lego, Build-A-Bear workshop).

Another example of helping customers to reach their outcomes is National

Semiconductor, who empowered design engineers to use a comprehensive toolkit.
They put a lot of effort in understanding about who the target customers were and what
their most critical scenarios were. (Seybold 2006)

National Semiconductor provided its customers with online design environment,

WEBENCH, that lets them explore options, select components, explore characteristics,
design circuits, analyse designs, simulate performance and inter-operability, prototype,
test, receive samples overnight, and iterate those designs in record time. Webench
supports the trial and error, learn-by-doing mode of operation that is the hallmark of a
good innovation toolkit. (Seybold 2006)

However the most important advantage is that the environment collapses the design
cycle from weeks to hours. Also designers that solve particular problems are provided
with just-in-time learning environment, where according to their level of expertise they
are offered video lectures, online labs and tools etc. National also provides a library of
pre-built designs in dozens of application areas that could be used by designers as well
as carefully tagged product information (product parts that could be searched for based
on different parameters). Therefore it is possible to run electronic simulations on the
selected design. (Seybold 2006)

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c) Meeting unmet needs. Unmet needs of readily identifiable markets can create new
profitable businesses. That could be done also through designing for and with a very
specific audience. Unmet customers needs should identified as well as the customer
scenarios and desired outcomes should be identified. Customers’ emotional motivations
should be understood and focused on the unmet need. (Seybold 2006)

A formal program is needed to encourage, acknowledge, and engage customer

contributions for each brand or customer segment, for each product line, and for each
functional area in which you want to encourage customers to contribute. Contributors
will typically amplify your brand with their own creative offerings, supplement your
products with their own extensions, improvisations and creative content, and improve
your operations by contributing work-arounds or short-cuts. (Seybold 2006)

KOKO. KOKO created a business based on an unmet need of a large and easily
identifiable customer segment. However only through understanding of the customer,
the company was able to design an innovative product to fulfil a key customer scenario,
which in turn lead to success. (Seybold 2006)

Koko observed the target audience while they exercised, interviewed them about their
experience as well as emotional surroundings and their scenarios (what they wanted to
accomplish). After that a deep market research was conducted about exercise venues
and key scenarios of venue owners and trainers. (Seybold 2006)

Customers were thereafter involved in the design as well as testing of the content and
user interface for the software program that would guide them through their exercise
regimen. Finally the early prototype was also field-tested. In general all new processes
and the product was tested with the help of customers. (Seybold 2006)

ZOPA. Similarly Zopa Exchange was predicated on customers’ needs and co-designed
by lead customers. They identified a unique group of customers with a set of under-
served needs. Zopa founders designed a customer-led innovative business through
identifying new customer behaviour and concomitant. Thereafter they validated the
customer segment, market size, and market impact as well as researched how other

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industries were responding to this segment and whit kind of opportunities in general
were in the financial services industry. (Seybold 2006)

After that was conducted deep ethnographic research on customer’s motivation,

behaviours and needs. Representative customers were engaged also in exploration and
co-design sessions about their attitudes and needs around lending and borrowing. Lead
customers were also recruited to co-design the business model and value proposition,
business policies, processes, Web site, branding, and messaging. (Seybold 2006)

Generally they designed a customer-powered business that enabled customers to

perform their critical scenarios: some customers become borrowers and other ones
lenders. Customers themselves provided the money that was loaned and borrowed. Thus
customers are the business and they make the market. (Seybold 2006)

In addition also FLICKR identified a critical customer scenario, and met photographers
unmet needs to categorise and organise photos in many different ways. Flickr
empowered the next level of user innovation by making it easy for users to create
collages, slideshows, badges, and other ways to combine a group of photos into a static
or dynamic work of art. Flickr also empowered developers to create new applications
based on Flickr, and to combine Flickr-based applications with other Web applications
as mash up. (Seybold 2006)

Similarly Karmaloop created a successful growing business out of an observation that

there was an unmet need of a customer segment and the business was built on the
customers’ attitudes. Customer interest and loyalty was being created appealing to their
values and by making it desirable to be part of the community. They validated
merchandise selections with customers and made it easy for them to provide input.
Customers were also rewarded for promoting the products and their loyalty was gained
by making them feel they are a part of the business and honoured to be selected.
(Seybold 2006)

d) Creating online communities. Members often enjoy the experience of being part of
an online community. They form bonds with each other in the group while providing
positive and negative feedback. As the community members find commonality with

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each other, they offer insights and often contribute more then they are being asked. By
letting the customers contribute to the product research process, could be created trust
and loyal customers. In general online communities of customers are not limited to any
one demographic, most communities are vibrant and therefore they help customers to
interact with each other and about the products. (Seybold 2006)

For instance Hallmark created such customer communities where people offer product
ideas, answer each other’s questions and so on. It is also used to better understand how
people’s thinking and sense of humour has changed. Similarly Kraft created and
monitored number of online customer communities from where to learn how customers
viewed diet food and which were their concerns about health and fitness. (Seybold
2006)

e) Profiting from customer-created intellectual property. Customers could be attracted

to company’s business and products by giving them a role in creating and contributing.
The best way to do that is to enable users, fans, prospective customers, and actual
clients to show off their creativity, expertise, insights, and points of views. In that way
paying customers create the content and it is possible to build a business around
customer-created content. People want to share their creations, ideas and
accomplishments. Therefore the business model can include selling customer’s
contributions, which they offer for free. (Seybold 2006)

However it should be made easy for the customers to share their creations with others
for review and critique (either privately or publicly) as well as they should be given a
way to learn from each other and to create new mixes building on each other’s work.
Therefore customers need tools that enable them to create new applications, based on
some companies’ services and their own creations. (Seybold 2006)

For instance Tripod built a multimillion-dollar business from customers´ creations.

Tripod offered the first web design tool for people who wanted to create their own web
sites. Similarly American Institute of Physics has recognised the importance to
authors of being published in an authoritative journal. Therefore American Institute of
Physics provides tools to help authors submit papers and tools to let them track the peer
review process. American Institute of Physics adds value to the author’s work by

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carefully classifying it with the terms that are the ones most likely to be searched by
others in the field. Thus customers create content and the get in return recognition.
(Seybold 2006)

In addition, an example of profiting from customer created content is Blogosphere.

Customers contribute content and build upon journalists work. They become journalists
while competing with traditional media for ad revenues. They add value to information
by tagging and categorizing it. (Seybold 2006)

f) Information and data turned into services. Companies can turn their current
information and data into services that customers value. Customers should be able to
mix and match web-enabled services from different companies to support their
scenarios. For instance data-driven information (such as inventory, order status,
promotions, pricing, diagnostics, branch and plant locations, people and vehicle
movements, market data and etc. and expose that information as services) – both for
other applications to use and for lead customers to use in combination with services
they select from other companies. However it is important to anticipate the different
parameters or attributes that might be useful to end customers to use and to make these
accessible in ways that end users can rapidly stitch them together. (Seybold 2006)

For instance BBC uses a strategy where instead of protecting its intellectual property
and making it hard for customers to create derivative works, BBC reaches out to lead
users – Internet developers, hobbyists, and enthusiasts as well as for professionals in the
advertising and new media business. BBC team is actively working with lead users to
identify all the different ways in which people might want to mix and match their
content to create new derivative works (e.g. combining snippets with other applications
like maps and calendars). Instead of diluting this approach is actually amplifies BBC´s
brand. (Seybold 2006)

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SUMMARY

In order to survive within today’s rapidly changing environment, firms need dynamic
capabilities – abilities to integrate, build, and reconfigure internal and external
competencies (Teece, Pisano et al. 1997). Thus firms can gain sustainable competitive
advantages though dynamic capabilities, when they develop distinctive processes (ways
of coordinating and combining), shaped by the firm’s specific asset positions (such as
difficult to trade knowledge assets and complementary assets) influenced by the
evolutionary paths the firm has adopted and inherited (Ibid. 1997). The value of
competitive advantage however lies within the resource configurations these capabilities
create (Eisenhardt and Martin 2000).

Anyhow development of such competitive advantage through dynamic capabilities

relates closely to firms´ ability to learn and thus firms´ absorptive capacity. Absorptive
capacity allows recognizing the value of new, external information, assimilate it and
afterwards apply it to commercial end (Cohen and Levinthal 1990). Thus firms’ benefits
from learning will depend significantly on the firm’s ability to learn (Kim and Inkpen
2005) and absorptive capacity is critical to innovative capabilities.

Nevertheless firms absorptive capacity creates also path dependencies and the paths that
the firm has travelled, often shape firm’s current position (Teece, Pisano et al. 1997).
History that becomes embedded within organisations (Greener 2002) can create “traps”
where large areas of novel solutions to problems remain unexplored and without
exposure to novel technologies breakthrough solutions are increasingly unlikely (Ahuja
and Lampert 2001). Therefore firms investment into R&D not only to create new
innovations, but also to develop and maintain broader capabilities to assimilate and
exploit externally available information (Cohen and Levinthal 1989).

Anyhow herewith Open Innovation builds upon Dynamic Capabilities theory, as Open
Innovation paradigm suggests that firms use external as well as internal ideas and paths

88
to market (Chesbrough 2003). On the contrary to Closed Innovation paradigm, where
companies do everything internally (Ibid. 2003), Open Innovation refers to ways how
firms can achieve competitive advantages in rapidly changing technological
environments by opening up and discusses how firms exploit external as well as internal
knowledge while innovating through using dynamic capabilities to create competitive
advantages.

Creation of competitive advantage through dynamic capabilities and Open Innovation

paradigm nevertheless referrers mainly to capabilities to innovate and conduct R&D.
Companies within today’s new economy can only create consistent growth through
innovation (Chesbrough 2006). Also the ways in which innovative firms can profit from
their innovation activities have changed (Chesbrough, Birkinshaw et al. a. 2006) and it
has become crucial for firms to manage such innovation (Chesbrough 2003).

Traditional industrial R&D management in most industries is over (Chesbrough 2003).

Increasing availability and mobility of skilled workers, increasing venture capital
market and increasing capabilities of external suppliers create an outside path to market
for many ideas, technologies of companies as well as offer equal or even superior
quality to what a companies can achieve internally (Chesbrough 2003).

Anyhow as innovation in general is commercialisation of a novel technology that

provides customers with new capabilities (Fetterhoff and Voelkel 2006) then radical
innovations (RI) are products and technologies that have high impact on the market in
terms of offering wholly new benefits (Chesbrough, Vanhaverbeke et al. 2006). As
firm’s resources can only be a source of competitive advantage or sustained competitive
advantage when they are valuable or/and rare (Barney 1991) then especially RI-s are
widely viewed as an approach to generate growth (Chesbrough, Vanhaverbeke et al.
2006). Especially large, established and mature firms depend on radical, breakthrough
innovation to provide the next platform for their growth. (Chesbrough, Vanhaverbeke et
al. 2006)

However as ideas and practices become obsolete very quickly (Chesbrough 2006) and
many useful knowledge has been widely diffused, then lots of important pools of
knowledge has been distributed among companies, customers, suppliers, universities,

89
national labs, industry consortia, and start-up firms (Chesbrough 2003). Therefore as
innovations are becoming increasingly systemic, companies become increasingly
dependent on external parties (Chesbrough, Vanhaverbeke et al. 2006) because
successful commercialisation requires more and more bringing together complementary
technologies as well as patents (Teece 2006).

Hence emergence of intermediate markets, where different ingredients of business

success (the idea, its development, manufacturing and distributing assets, IP) may all lie
in different hands, are becoming an integral part of innovation and growth (Chesbrough
2006). Moreover the intermediate markets create market for IP. Even though protection
of IP can create a platform for the transfer of knowledge assets that spring from
inventive activities (Chesbrough, Vanhaverbeke et al. 2006), firms have to develop a
balance to which extent to make their IP open and to which extent to protect it.
Knowledge that grows the value chain and firms ability to advance the complementary
products and services ought to be published in case of Open Innovation (Chesbrough
2003). However knowledge that helps firms to position themselves, to capture a portion
of that value within that chain, is the kind of knowledge that ought to be protected (Ibid.
2003).

Thus in general Open Innovation means that valuable ideas come from inside or outside
the company and can go to market from inside or outside the company as well
(Chesbrough 2003). As Open Innovation paradigm treats R&D as an open system
(Chesbrough, Vanhaverbeke et. al. 2006), firms can and should use external as well as
internal ideas and paths to market as they look to advance their technology
(Chesbrough 2003) while pursuing lower costs for innovation, faster times to market,
and the chance to share risks with others (Chesbrough 2006).

Herewith Open Innovation is especially important for large establishes firms, that on the
one hand need to develop radical innovations (RI) to sustain growth, but who on the
other hand lack capabilities to do so. Open Innovation model offers help with building
the infrastructure for enabling breakthroughs, as big companies lack ability to create
wholly new markets (Chesbrough, Vanhaverbeke et al. 2006). Moreover, due to the
ongoing trends that make traditional R&D management obsolete (Chesbrough 2003),
large companies gain the increasingly important role as system integrators, innovation

90
architects and platform leaders, standard creators or market coordinators and hence it is
curial for them to develop integrative competencies – dynamic capabilities
(Chesbrough, Vanhaverbeke et. al. 2006).

However, despite that Open Innovation companies open up their innovation process
(Chesbrough 2006), such Open Innovation must create value within the value chain and
it must also capture a piece of value for the firms in that chain (Chesbrough,
Vanhaverbeke et. al. 2006). The value of an idea or a technology depends on its
business model (Chesbrough 2003). Innovations have to be extended to business models
(Chesbrough 2006), because there is no inherent value in technology per se. Thus the
business architecture organises different parts of the system together by creating
connections between internal and external R&D. (Chesbrough 2003)

As Open Innovation process combines ideas (internal and external) into architectures
and systems, a business model is a framework to links these technical decisions to
economic outcomes (Chesbrough 2003). Thus it is necessary to innovate with the
business models as well (Chesbrough 2006) and firms need to develop the ability to
experiment with their business models (Chesbrough 2007). Moreover effectively
opening up the innovation process could be done only through connecting the business
model to the innovation process (Chesbrough 2006). Therefore in general an open
business model connects internal and external innovation (Chesbrough 2003) and
enables organisations to be more effective in creating as well as capturing value
(Chesbrough 2007).

However there are also some overall strategies that various firms have used to link
internal and external knowledge and hence incorporate Open Innovation. Companies
can bring external knowledge in and take internal knowledge out, through leveraging
external knowledge for own offerings, leveraging own technology to outside,
connecting internal and external research with corporate venture capital, or creating new
ventures out of internal technologies. Firms can also innovate externally though pooling
R&D, creating spin-outs or selling and donating complements.

Open Source has also become an important Open Innovation strategy. It encompasses
mainly strategies to create and capture value though software development and services.

91
Finally there are also Outside Innovation strategies through which companies’ co-
design products with customers and hence help customers reach their goals and meet
their unmet needs. Outside Innovation strategies can build upon creating online
communities, profit from customer-created intellectual property or even from turning
information and data into services that customers value.

Anyhow, the precondition for receiving any value through Open Business Architecture
and Open Business Model is the actual sourcing of external knowledge. Generally there
are various sources of external knowledge as well as strategies accessing such
knowledge. Sourcing of these external technologies however have to be aligned with the
firm’s strategic interests and that starts with identifying these necessary resources
(Witzeman, Slowinski et al. 2006).

Most commonly various sources of external knowledge might include firm’s customers,
rivals, academics, other firms (even from un-related industries), and even networks
(Chesbrough, Vanhaverbeke et. al. 2006). Firm might access these sources throught
variety of external programs for locating outside opportunities through for instance
universities, venture capital investments, or strategic alliances (Ibid. 2006). Firms
undertake experiments with business groups, which proactively discover RI
opportunities at the technology market (Chesbrough, Vanhaverbeke et. al. 2006) or
moreover use innovation intermediaries that can help companies search from outside IP
(Chesbrough 2006). Nevertheless the most important sources for external knowledge
pooling are considered to be alliance networks, customers (lead users), universities, and
also start-up firms.

As business networks in which a company operates in are a fruitful source of external

possibilities (Chesbrough 2006) then emerges also the importance of strategic alliances
that are a specific form of cooperative agreements (Dussauge and Garrette 1999).
Alliances are seen as tools for learning and creating skills that will secure future
competitive advantages (Bamford, Comes-Casseres et al. 2003) through inter-partner
knowledge transfer and afterwards internalising the knowledge (Seppälä 2004). As
companies within a network engage with numerous alliances, they develop an alliance
portfolio. Alliance portfolio can therefore seen as all alliances of a focal company

92
(Hoffmann 2005) that might include besides managing multi-alliances also the
international dimension (Lichtenthaler and Lichtenthaler 2004).

Anyhow the benefits from alliance portfolio associated with Open Innovation relate
therefore again to organisational learning and more specifically learning how to
collaborate within alliances. Firms with stronger alliance learning process learn and
accumulate alliance management know-how and hence have greater alliance success
(Kale and Singh 2007). Thus firms need tools for managing networks (Chesbrough,
Vanhaverbeke et al. 2006) in order to achieve strategic goals with the whole bundle of
alliances (Hoffmann 2007). Especially in case of large companies with numerous
alliances, professional alliance management is important and requires specialised roles
and positions, standardised tools and formal processes (Hoffmann 2005).

However also lead users, as sources for external knowledge pooling, are important.
Firms’ product development and modification by both user firms and users as individual
consumers is frequent, pervasive, and important (Hippel 2005). The customer-led
outside innovation movement is inevitable; new approach to business process
innovations involves intentionally outside parties, most notably customers and potential
customers (Seybold 2006).

Thus Open Innovation companies invite customers into the innovation process as
partners and co-producers. Customers act as innovators and become lead users.
(Chesbrough 2003) Therefore Outside Innovation is an innovation process where lead
users and passionate customers are engaged directly and their ideas are being harnessed
and commercialised (Chesbrough 2006). Nevertheless, whether customers’ share or
crate content, crate products for themselves or for others, in any case a company has to
build a viable business model around customers’ creations (Seybold 2006).

Moreover, universities are considered to be an important source of pooling external

knowledge within Open Innovation context as well. Exploitation of openly published
scientific research is beneficial for companies, furthermore in a situation where
university researches do not generally possess complementary assets for
commercialising these results (Chesbrough, Vanhaverbeke et. al. 2006). Even though
firms must make costs on negotiation as well as paying royalties for the use of patented

93
results, they would benefit from the opportunity to find out about and license university
research (Ibid. 2006).

Finally also start-up firms are considered to be an important source of pooling external
knowledge within Open Innovation context. As technology-based start-ups tend to have
an advantage in the embryonic stages of radically new technology and they face
numerous disadvantages in commercialising RI-s, then large incumbents can capture
commercial value from these new technologies (Chesbrough, Vanhaverbeke et. al.
2006).

Nevertheless in general mastering collaboration skills becomes essential to company’s

survival (Kamel 2006), as innovations are becoming more systemic and the process of
innovation itself become more collaborative. Firms need to learn how to collaborate
effectively (Chesbrough, Vanhaverbeke et. al. 2006), because accessing external
technologies from various external sources bases on collaboration. Moreover in order
accessing external technologies to be effective, firms need to be able to collaborate and
build collaborative know-how.

However in order to create and capture value through encompassing blend of external
sources of knowledge as well as internal ones, management of Open Innovation is
necessary. Value could only be progressively built through the process of managing
external innovation (Fetterhoff and Voelkel 2006). Moreover Open Innovation requires
especially an increased emphasis on managing knowledge (Chesbrough, Vanhaverbeke
et. al. 2006). Therefore management of Open Innovation incorporates managerial
challenges as well as risks that firms have to overcome, in order to create and achieve
value.

94
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