1. Open Innovation:
The First Decade
Joel West
KGI - The Keck Graduate Institute
Claremont, California
UCSD, Rady School of Management
January 27, 2015
2. Plan
• What is open innovation?
• Three modes of open innovation
- Inbound
- Outbound
- Coupled
• What’s next?
3. • Keck Graduate Institute of Applied Life
Sciences
• Youngest of 7 Claremont Colleges
• Founded in 1997: Harvey Mudd spinoff
• Funded by grant from Keck Foundation
• 300+ graduate students
• Preparing students for biotech careers
• Genentech, Amgen are biggest employers
What is KGI?
6. Open innovation: a common practice
• Qualcomm
- Outlicensing patents
- Selling components to handset makers
- Acquiring Snaptrack, Flarion, Atheros
• Amgen
- Licensed EPO to J&J (Procrit)
- Today in-licenses oncology drugs
• IBM
- Selling components to others
- Collaboration with Apache, Eclipse, Linux open source
communities
7. Invention vs. Innovation
“Inventions … do not necessarily lead
to technical innovations. In fact the
majority do not. An innovation in the
economic sense is accomplished only
with the first commercial transaction.”
—Freeman (1982: 7)
8. Latent value of an innovation
“The inherent value of a technology
remains latent until it is commercialized in
some way.
“A business model unlocks that latent
value, mediating between technical and
economic domains.”
– Chesbrough & Rosenbloom (2002)
9. Bringing innovation to market
• Creation
- Technical invention
- Basic research, applied research, product
development
• Commercialization
- Production, marketing, sales, distribution
- Requires different complementary assets
(Teece 1986)
10. Vertical Integration
Research of Alfred D Chandler (1918-2007)
• Studied large US firms 1840-1940
• Firms vertically integrate to supply own
inputs and control their outputs
- R&D is an essential part of integration
- Technology industries require large R&D labs
- Markets don’t exists to buy/sell innovation
• Integration widely adopted in practice
- Pattern of large 20th C US and MNC firms
12. Open Innovation
• Chesbrough (2003, 2006, 2007)
• Key points:
- Find alternate sources of innovation
Either markets or spillovers
- Find alternate markets for innovation
- Central role of the business model
• Cognitive managerial paradigm
• Overlaps with other work such as user
innovation
13. What is “open innovation”?
“Open innovation is the use of purposive
inflows and outflows of knowledge to accelerate
internal innovation, and expand the markets for
external use of innovation, respectively.”
Henry Chesbrough, O pe n Inno vatio n:
Re se arching a Ne w Paradig m (2006)
15. What’s new?
• Many antecedent/overlapping areas
- Technology sourcing, IP markets,
university licensing, alliances, supplier
innovation, user innovation
• New ideas include
- Role of the business model
- Agnostic to internal/external paths
- Rise of innovation intermediaries
Cf. Chesbrough (2006)
16. Open vs. user innovation
Open Innovation UserInnovation
Focal actor Firm User
Knowledge transfer IP Needs
IP regime Patents Free revealing
Innovation
production
Hierarchy Community,
individual
Motivations Monetary Social, personal
utility
Frank Piller & Joel West, Ch. 4 of O pe n
Inno vatio n: Ne w Fro ntie rs & Applicatio ns
17. Three open innovation processes
1. Inbound (or “outside-in”)
- External technology commercialized by the focal
firm
1. Outbound (or “inside-out”)
- A firm’s technology commercialized by others
1. Coupled combines these two
- Various forms of collaboration
Cf. Chesbrough (2003, 2006), Gassmann & Enkel (2004), Enkel et
al (2009), West & Gallagher (2006)
19. Why Look Outside for Innovation?
“Not all the smart people in the
world can work in one place.”
Bill Joy
co-founder
Sun Microsystems
20. Recent comprehensive review
• Goal: Synthesize inbound (& coupled)
• Sample from top management &
innovation journals
• Either mention “open innovation” or cite Chesbrough
(2003)
• Hand selected 291 down to 165
• 161 articles, 3 books, 1 chapter
Joel West & Marcel Bogers, Jo urnalo f Pro duct Inno vatio n
Manag e m e nt, July 2014
21. Breakdown of 165 OI pubs
Inbound: 118 Outbound: 50
Coupled: 70
57 14
11
24
26 1
32
23. 1. Obtaining Innovations
• Best covered of the phases
- Searching, enabling, filtering
- Sourcing particularly well covered
• Most popular area: sources of innovation
- Many crowdsourcing studies
- Also user-generated content
24. 2. Integrating Innovations
• Considers org capabilities and culture
- Limited examination beyond “Not Invented
Here”
- Clear challenges of processes, incentives
• Integration seems to be a black box
- How are these innovations integrated to
the firm?
- What skills are needed to do this well?
25. 3. Commercializing Innovations
• Lots of value creation
- Increased product releases, revenues
- What is net? Do costs go up?
• Assumes external innovations
commercialized same as internal ones
- How do firms differ in external innovation
commercialization capabilities?
26. 4. Reverse Paths
Beyond the linear model, this includes
• Feedback mechanisms
- Information flow upstream
• Reciprocal measures
- Ongoing interactions
- Includes co-creation, communities
28. What is outbound OI?
• Firms should find best/highest use of their IP
- Not all IP aligns to the firm’s business model
• Avoids Type II (false negative) error
• Can include licensing to rivals, spinoffs
- In parallel or instead of internal use
Inspired by Chesbrough study of Xerox PARC
spinoffs (Chesbrough & Rosenbloom, 2002)
29. Various IP licensing models
• Dolby Labs: $700m/yr, 88% margins
• Genentech: Humulin, Interferon
• IBM: licensing IP portfolio
• Dupont: licensing core technologies
• Game mods, e.g. Half-Life
• Xerox: creating spinoffs
30. Key challenges of outbound OI
• Identifying underused IP
• Simultaneous internal/external
commercialization
• Functioning IP markets
• Dilemma over appropriability
- Fear of sharing if weak IP
- Strong IP can delay other’s innovation
Chesbrough (2003, 2006b), Fabrizio (2006), Enkel
et al (2009), Dahlander & Gann (2010)
32. Coupled open innovation
• “Coupled” is different from inbound and
outbound
• Two modes of coupled interaction
- Bi-directional (Gassmann & Enkel, 2004)
Combines inbound & outbound
Applies to firm-to-firm R&D collaborations
- Interactive collaboration (Piller & West, 2014)
Joint production outside the firm
Different from either inbound or outbound
33. Coupled open innovation
Focal Firm Organization
Focal Firm
Organization or
Individual
Co- Creation
Bidirectional
Coupled
Interactive
Coupled
Source: Piller & West (2014), p. 39
34. Coupled open innovation
Examples of coupled open innovation:
•Open source (West & Gallagher, 2006)
•Communities (West & Sims, 2013)
•R&D consortia (Muller-Seitz & Sydow, 2013)̈
Best practice seems very particularistic to the
setting
36. Recent trends in OI research
• Linking to established theory
• Greater precision of constructs
• Better measurement
• Better understanding of performance
• Different levels of analysis
• Role of appropriability
• Nonprofit actors and motivations
See Vanhaverbeke et al (2014), West et al (2014)
also http://bit.ly/1v2Gf7
37. 2014: new OI publications
• Re se arch Po licy special issue (June
2014)
- Chesbrough, Salter, Vanhaverbeke & West,
guest editors
- 10 articles
- See http://bit.ly/openinno2013
• O pe n Inno vatio n: Ne w Fro ntie rs &
Applicatio ns (Oxford)
- Chesbrough, Vanhaverbeke & West, eds.
- 15 chapters
- See http://bit.ly/NFOI2014
Google Amgen license cancer therapy: Kite Pharma (Jan 2015), BioVex (Jan 2011), Immunomedics (2000)
Also, the other counterpoint is the vertically integrated model, where in order to do anything, you have to do everything.
The open innovation model emphasizes flexibility in a firm’s innovation strategy:
The best source of innovation may be outside the firm (arrows going in)
The best market for an innovation may be outside the firm (arrows going out)
The importance of flexibility. Span firm boundaries. Can bring in technology at any point in the product development process.
Major goal: if firm is fighting false positives (extra cautious), you will get lots of false negatives (Chesbrough 2006). Make sure you find a way to monetize or otherwise find a path to market for these false negatives.
A lot of people when they think about open innovation they only think about the inbound mode; most of the research is about inbound
15 highly cited, with 100+ Google Scholar cites. 3 books and 1 chapter by Chesbrough
4-phase model
1. Searching (where): Sourcing, Brokerage , Limits, University research, User innovation
2. Enabling process/mechanisms (how): Contests, Intermediaries , Toolkits, PlatformsCrowdsourcing
3. Filtering (which): Gatekeepers , Technology scouts, Technology brokering
4. Acquiring: Incentives to share, Contracting, Nature of the innovation
Absorptive capacity: 80/280 articles
Chesbrough and Rivette & Klein’s Rembrandts in the Attic, IP licensing is going up; Issue of what, why and how: descriptive, causal and normative.
At least 6 OI-related papers on technology sourcing have been retracted: SMJ, Org Science, Research Policy, Strategic Organization, Industrial and Corporate Change. Google Open Innovation retraction to read all about it.