Open Innovation

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(1)Open Innovation Business Models Guidelines for designing value-creating open innovation practices. Master thesis Joost Cornelissen (S 1579347), October 2010 Technology Management Faculty of Management & Organization Rijksuniversiteit Groningen.

(2) Abstract Innovation has been identified on many occasions, as the main driver for companies to prosper, grow and sustain profitable (e.g. Drucker, 1988; Christensen, 1997; Thomke, 2001). One way to innovate is by open innovation (OI). OI is a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as the firms look to advance their technology: OI practices use purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively (Chesbrough 2003). When developing OI practices, one per definition needs to incorporate external knowledge delivering and/or receiving parties. These parties always want to capture a portion of the value created by their participation in which ever form of value they perceive as being worth the effort. How to create such open value-creating practices is not at all clear to organizations. This leads to the following problem statement: how can organizations design valuable OI practices? To innovate openly, organizations need to innovate their business models; the way that they create value, and capture a portion of that value for themselves (Chesbrough, 2006). A business model describes the rationale of how an organization creates, delivers and captures value (Osterwalder, 2009). In effect, to design OI practices, one should first develop open innovation business models (OIBM’s). This report elaborates on how organizations can develop OIBM’s (main research question), by creating guidelines to help managers of ‘OI initiating organizations’ in designing value creating OI practices by developing OIBM’s (objective). This is done by dividing the research question into two sub questions: what are open innovation business models (sub question 1) and how can one develop such models (sub-question 2). To answer the sub questions, first existing literature is reviewed. This leads to a definition and categorization of OIBM’s: an OIBM describes the rationale of how organizations participate in open innovation practices - that create, deliver and capture value - together, and how value of the innovation, in whichever form, flows back to the participating parties. The most common types for OIBM’s are: co-development partnerships, co-creation practices and spin-off open innovation practices. The literature review also leads to the following propositions on how to develop OIBM’s: • Key in developing OI practices, is transferring a portion of the value added by the innovation, over organizational boundaries, back to the ‘knowledge delivering’ party. • OI practices can be described by taking (key) elements from (potentially) participating parties and using them as epicenter(s) to design a (new) OIBM. This model can be developed based on one of the three proposed taxonomies for OIBM’s and includes the flow of value back to (knowledge) delivering parties. A case research is conducted aimed at verifying the propositions as well as creating more specific guidelines for developing the different taxonomies of OIBM’s. To do this, one case per type of OIBM is investigated based on statements about open innovation and business modeling as found in literature. Also, OIBM’s are developed for all the cases. This is done by interviewing the person responsible for the development of the open innovation practice and by studying documentations about the case. The main finding of the research is that the value for the ‘knowledge delivering parties’ is key to the development and successful execution of the OI practice, thus verifying the first proposition. The second proposition is also verified, however the research shows that every type of OIBM needs to be developed in a specific way. These differences are elaborated on in the conclusion by giving a description per type of OIBM which elaborates on its development. Also, sub-meta models are given per OIBM that can be used as basic principles for development. Finally, vital factors to be taken into account when developing specific types of OIBM’s are pointed out, based on the case research. The descriptions, sub-meta models and vital factors together can serve as guidelines for developing different types of OIBM’s. Keywords: innovation, open innovation, business models, business model generation, design, development, value creation, guidelines. I.

(3) Preface This is the final thesis for the completion of my MSc Technology Management at the University of Groningen. After having finished two bachelor degrees and all the courses of the final master year, I decided I wanted to research the topic of open innovation to complete my studies, as I found both innovation and collaboration between organizations very interesting. I decided I wanted to write the thesis whilst conducting ‘one last internship’, to ‘look into’ a possible career path at the same time. For conducting the internship, my heart wanted to find a company in the ‘creative industry’, as I am intrigued by the creative process. I thought however, that my studies did not qualify me enough to find a position in such a company at the level I aspired. Therefore, I focused on strategy consulting companies as I felt this would be the best first step towards working in the ‘real’ creative industry at a strategy level. Squarewise was my first choice for such a company. Marcel Heskes (partner at Squarewise) had the perfect opportunity for me: to participate in the startup of a new organization; foundation Creative City Lab, which also happened to be an open innovation practice. Win-win-win; I started full of energy and confidence – in April 2008. I have only now finished my thesis – in October 2010. There are many reasons why it took me a bit longer then anticipated but it pretty much all comes down to the fact that I bit off more than I could chew. I ran my own company (Mean Bean), kept working for Creative City Lab after having finished the internship-period and I started to work for another founding partner of Creative City Lab; Createtoday, taking on more projects. Next to that I also started organizing events (Weekbreek). In all – too much. It made it hard to find time to pick up that ‘other project’: L’Alpe d’Huez. However, I finished it. And I look back on the time as being the greatest learning experience I had, in many respects, ever. I would very much like to thank everyone who stood by me the last couple of years, especially my parents, Ruud and Joke, who supported me in many ways – all the way. Also my girlfriend Anke, who made me forget about my stress when needed the most and gave me the will to finish. And my best friend Michiel, who was always there and with whom I could always share everything. Also I would like to thank Marcel Heskes of Squarewise and Ellen Mensink of Createtoday for giving me the opportunity to end my studies with the best possible assignment I could wish for at the time – even though at times I wished I had decided different up front. I also want to thank Niels Faber, who ‘let me be’ but gave me constructive feedback and help whenever I asked. Finally, I would like to thank everyone who was kind enough to make time for the interviews: Ellen (again), Raymond Cloosterman (Rituals) and Tommi Vilkamo (Nokia). Over and out! Joost Cornelissen, October 2010 Ps.: what’s next?. II.

(4) Index Abstract .................................................................................................................................................................................................................................I Preface ................................................................................................................................................................................................................................. II Index ....................................................................................................................................................................................................................................III Figures & tables ............................................................................................................................................................................................................... V List of figures....................................................................................................................................................................................................V List of tables .....................................................................................................................................................................................................V . Abbreviations.................................................................................................................................................................................................................... V . 1 Motivation & objective research .............................................................................................................. 1 1.1 1.2 1.3 1.4 1.5 . Introduction...........................................................................................................................................................................................................1 Problem statement .............................................................................................................................................................................................2 Objective & research questions.....................................................................................................................................................................3 Meta-‐methodology & outline report...........................................................................................................................................................3 Scope and limitations ........................................................................................................................................................................................4 . 2 Literature review...................................................................................................................................... 5 2.1 . Open innovation (OI).........................................................................................................................................................................................5 . 2.2 . Designing business models.............................................................................................................................................................................9 . 2.3 . Connecting business models & open innovation: OIBM’s .............................................................................................................. 13 . 2.4 . Conclusion & theoretical framework....................................................................................................................................................... 15 . 2.1.1 2.1.2 2.1.3 2.1.4 2.1.5 . History, definition & stages................................................................................................................................................................ 5 Trends & motives: increasing value creation .................................................................................................................................... 5 Stages to use open innovation in development process...................................................................................................................... 6 Types & competences: core processes ............................................................................................................................................... 7 Types & competences: partners ......................................................................................................................................................... 8 . 2.2.1 2.2.2 2.2.3 2.2.4 . History, definition & purpose............................................................................................................................................................. 9 Levels for using business models...................................................................................................................................................... 10 Business model canvas; building blocks & elements ....................................................................................................................... 11 Epicenters for business model innovation ........................................................................................................................................ 13 . 2.3.1 2.3.2 2.3.3 . Defining OIBM’s (proposition #1) ................................................................................................................................................... 13 Categorization of OIBM’s: three taxonomies .................................................................................................................................. 14 Developing OIBM’s (proposition #2)............................................................................................................................................... 15 . 3 Research methodology........................................................................................................................... 17 3.1 . Research Method.............................................................................................................................................................................................. 17 . 3.2 3.3 . Objective case study........................................................................................................................................................................................ 18 Data collection methods................................................................................................................................................................................ 18 . 3.4 . Structure case research ................................................................................................................................................................................. 19 . 3.1.1 3.1.2 3.1.3 . Case study research.......................................................................................................................................................................... 17 Number of cases ............................................................................................................................................................................... 17 Case selection ................................................................................................................................................................................... 17 . 3.3.1 3.3.2 . Interviews ......................................................................................................................................................................................... 19 Documentations................................................................................................................................................................................ 19 . 4 Case research & results .......................................................................................................................... 20 4.1 . Case Creative City Lab: co-‐development partnership by Createtoday ..................................................................................... 20 . 4.2 . Case Beta Labs: co-‐creation by Nokia...................................................................................................................................................... 27 . 4.3 . Case Rituals: open innovation spin-‐off by Unilever .......................................................................................................................... 33 . 4.4 . Summary case results..................................................................................................................................................................................... 39 . 4.1.1 4.1.2 4.1.3 4.1.4 . Case introduction ............................................................................................................................................................................. 20 Case description based on theoretical framework ........................................................................................................................... 21 Results related to propositions ......................................................................................................................................................... 23 Case related conclusions .................................................................................................................................................................. 25 . 4.2.1 4.2.2 4.2.3 4.2.4 . Case introduction ............................................................................................................................................................................. 27 Case description based on theoretical framework ........................................................................................................................... 28 Results related to propositions ......................................................................................................................................................... 29 Case related conclusions .................................................................................................................................................................. 32 . 4.3.1 4.3.2 4.3.3 4.3.4 . Case introduction ............................................................................................................................................................................. 33 Case description based on theoretical framework ........................................................................................................................... 34 Results related to propositions ......................................................................................................................................................... 35 Case related conclusions .................................................................................................................................................................. 38 . III.

(5) 5 Conclusion & discussion ......................................................................................................................... 41 5.1 5.2 . Main conclusions .............................................................................................................................................................................................. 41 Guidelines for developing OIBM’s............................................................................................................................................................. 41 . 5.3 5.4 . Other findings .................................................................................................................................................................................................... 44 Limitations & discussion............................................................................................................................................................................... 45 . 5.2.1 5.2.2 5.2.3 . Co-development partnerships........................................................................................................................................................... 42 Co-creation practices ....................................................................................................................................................................... 43 Open innovation spin-off practices .................................................................................................................................................. 43 . References ................................................................................................................................................... 46 Books, articles & publications ................................................................................................................................................................................. 46 Websites............................................................................................................................................................................................................................ 48 . Appendices................................................................................................................................................... 49 Appendix 1: Open vs. closed innovation ............................................................................................................................................................. 49 Appendix 2: Core competences for open innovation .................................................................................................................................... 50 Appendix 3: Requirements for co-‐development partnerships.................................................................................................................. 51 Appendix 4: History of business model concept ............................................................................................................................................. 52 Appendix 5: Business model canvas poster ...................................................................................................................................................... 54 Appendix 6: 5 phase design process for designing business models ..................................................................................................... 55 Appendix 7: Framework for statements & propositions ............................................................................................................................. 56 Appendix 8: Guiding questionnaire for interviews in case study research ......................................................................................... 57 Appendix 9: Case interviews.................................................................................................................................................................................... 59 Interview Ellen Mensink, June 2010 .............................................................................................................................................................. 59 Interview Tommi Vilkamo, August 2010 ........................................................................................................................................................ 64 Interview Raymond Cloosterman, may 2010.................................................................................................................................................. 68 . IV.

(6) Figures & tables List of figures figure 1: figure 2: figure 3: figure 4: figure 5: figure 6: figure 7: figure 8: figure 9: figure 10: figure 11: figure 12: figure 13: figure 14: figure 15: figure 16: figure 17: figure 18: figure 19: figure 20:. open innovation principle economics of open innovation open innovation in different stages process archetypes of open innovation levels for using business models business model canvas visualized business model Createtoday contribution founding partners Creative City Lab OIBM Creative City Lab organizational structure Nokia business model Nokia co-creation practice related to 'main' business model Nokia OIBM Beta Labs embedded in Nokia business model Unilever initial contribution of Unilever in Rituals OIBM Rituals example of 'extra' business model Unilever, supporting OI spin-off practices sub-meta model co-development OIBM sub-meta model co-creation OIBM sub-meta model spin-off OIBM. List of tables table 1: table 2: table 3: table 4: table 5: table 6:. characteristics, core processes and critical capabilities related to archetypes of open innovation business model building blocks case related conclusions CCL case related conclusions Beta Labs case related conclusions Rituals combined findings of case research. Abbreviations B2B: BM: CCL: CT: FMCG’s: IP: IPR: NGO’s: NPD: NSN: OI: OIBM:. business-to-business business model Creative City lab Createtoday fast moving consumer goods intellectual property intellectual property rights non-governmental organization new product development Nokia Siemens Networks open innovation open innovation business model. V.

(7) 1 Motivation & objective research 1.1 Introduction Organizations want to deliver value to customers and other stakeholders. It is the reason they exist. To ensure continuity, these organizations need to make sure they can keep on creating and delivering value. This can be done by improving the way they currently create value, or by finding new ways to create value. In other words: they need to innovate. “Innovation is the specific instrument of entrepreneurship. The act that endows resources with a new capacity to create wealth.” Drucker, 1985. Innovation has been identified on many occasions, as the main driver for companies to prosper, grow and sustain profitable (e.g. Drucker, 1988, Christensen, 1997 & Thomke, 2001). One could even argue that innovation is a prerequisite for doing business. Whilst competitive advantage can come from size, or possession of assets, etc. the pattern is increasingly coming to favor those organizations that can mobilize knowledge and technological skills and experience to create novelty in their offerings (product/service) and the ways in which they create and deliver those offerings (Kay, 1993 & Tidd, 2005). Schumpeter (1934) explains the importance of innovation by the notion of creative destruction. He states that the value from the old is destroyed by the new. In capitalist reality, it is not price competition that counts, but the competition from a new commodity, technology, source of supply or type of organization, which strikes existing firms at their foundations. This kind of competition is much more effective than the other and is the powerful lever that in the long run expands output (adopted from Schumpeter, 1934). So to find new or improved ways to create value, organizations need to innovate. It is not why to innovate however, but how to innovate that remains the subject of much research and discussions. Increased competition, shorter innovation cycles, research and development’s increasing costs, as well as the scarcity of resources are some of the reasons for companies to look for new ways to innovate (Chesbrough, 2003). A fairly recent view on the subject is the one of open innovation (OI). “Open innovation practices use purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively.” (Chesbrough 2003) Open Innovation is based on the need for companies to open up their innovation processes by deliberately using both internal and external ideas, knowledge and markets to innovate – to create value. OI is defined as the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively. OI is a paradigm [within the broader concept of innovation] that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as the firms look to advance their technology (Chesbrough, 2003). When a firm applies practices based on the OI paradigm, one speaks of (applied) open innovation practices. The main objective of OI is to create value (as with ‘normal’, or closed innovation). Whether or not to engage in open forms of innovation depends on whether OI practices can increase the creation of value in relation to closed innovation. A problem with this is that value cannot always be quantified easily (eg. by economical measures). Reasons for companies to look into OI as first distinguished by Chesbrough (2003) are to increase innovative capacity and/or time to market of innovation, and/or to decrease uncertainty of innovation, and/or costs of innovation. These reasons indirectly come forth out of the desire to create value, but how much more value does an organization create when increasing time to market of an innovation? And how much value can be created with a higher innovative capacity? Questions like these are not easy answerable as (economic) quantification of these subjects is difficult. However, those questions should be answered by organizations before implementing OI practices. Advantages of OI should be clear to organizations before participating in OI practices: how will OI practices create value, what kinds of value and how can we capture (a portion of) that value? A framework is needed to guide the design of such practices.. 1.

(8) Chesbrough (2003a) distinguished between two types of OI: outside-in and inside-out. Outside-in OI exploits external ideas within an organization, inside-out OI provides external parties with ideas or assets lying idle within an organization. So when developing OI practices (from the perspective of an initiating organization/party), one per definition needs to incorporate external knowledge delivering and/or receiving parties into the OI practice. These delivering/receiving parties might want to participate in the OI practices for different reasons then the initiating party, but they always want a portion of the value created by their participation in which ever form of value they perceive as being worth the effort, for the same reasons as the initiating party (if there is one such party). This is congruent with the definition of De Sousa (2006): [open] innovation can be defined as the outcome of a set of activities that use knowledge to create new value to those benefiting from its use. Thus, key in developing OI practices from the perspective of an OI initiating organization, is to make sure a portion of the value added by OI is transferred over organizational boundaries, back to the ‘knowledge delivering’ party. This is true for all forms of open innovation; parties will only engage in open practices if they can capture a portion of the value created for themselves.. 1.2 Problem statement How to develop such open innovation practices however, is not at all clear. A problem these organizations often have is that they know the direction where to look (OI), but do not know exactly what it is they are looking for: “how can we design such open practices to be valuable for our organization”? This leads to the main problem statement of this research: How can organizations design valuable open innovation practices? These organizations need the right set of glasses – a means, framework or tool to guide them in the design of new and successful OI practices, to create new (open) businesses to create value: “To innovate openly, [organizations] need to innovate their business models; the way that they create value, and capture a portion of that value for themselves” (Chesbrough, 2006). Business model design (or generation) is one such set to stimulate successful innovation “A business model describes the rationale of how an organization creates, delivers and captures value.” (Osterwalder, 2009) To innovate openly, you must do more than search externally for new ideas or license out more of your own ideas. You also must innovate your business model, the way that you create value, and capture a portion of that value for yourself (Chesbrough, 2006). Also, to fully exploit (newly) developed technologies, organizations should focus on innovating underlying business models (Chesbrough 2009, interviewed by Moore, 2009). Osterwalder (2009) describes a business model as a framework for creating and capturing economic, social, and/or other forms of value. A business model describes the rationale of how an organization creates, delivers and captures value, or the logic of how a company intends to make money (Osterwalder, 2009). Chesbrough (2006) has a similar definition: A business model performs two important functions: it creates value and it captures a portion of that value. To this, he adds that [a business model] creates value by defining a series of activities from raw materials through to the final customer that will yield a new product or service with value being added throughout the various activities. The business model captures value [for an organization] by establishing a unique resource, asset or position within that series of activities, where [the organization] enjoys a competitive advantage (Chesbrough, 2006). In this report, business model theory will be used for the purpose of answering the research question. Business models that describe OI practices will be labeled open innovation business models (OIBM’s). An open innovation business model (OIBM) describes the rationale of how organizations participate in open innovation practices - that create, deliver and capture value - together. A viable OIBM thus describes the rational of how participating organizations or parties create, deliver and capture new or extra value by innovating together, and how value of the innovation, in whichever form, flows back to the participating parties. In short; OIBM’s describe (applied) OI practices.. 2.

(9) 1.3 Objective & research questions When an organization wants to design open innovation practices that create value (goal); it should first develop the open innovation business model (means). This report is written for ‘open innovation initiating organizations’ to help them in developing viable OIBM’s that describe the rational of how participating organizations or parties create, deliver and capture new or extra value by innovating together, and how value of the innovation, in whichever form, flows back to the participating parties. This leads to the following objective: The objective of this research is to create guidelines to help managers of ‘open innovation initiating organizations’ in designing value-creating open innovation practices by developing open innovation business models (OIBM’s). This objective leads to the following main research question: How can organizations develop open innovation business models? To answer this question, I will take a two-step approach. These two steps translate into the following two sub questions. First, business model theory has to be connected with OI to fully explain what OIBM’s are and get a deeper understanding on the matter. Therefore, the two concepts need to be elaborated on, explaining and connecting the goals, domains and central issues. This leads the first sub question: What are open innovation business models? After the first sub question has been answered, it still needs to be investigated how one can come to such OIBM’s, what road to take. This leads to the following sub question: How can one develop open innovation business models? Answering the sub questions will lead to guidelines on how to develop OIBM’s to design OI practices, relating to the objective of the research. Summarizing: this report should guide the development of OIBM’s, which is the road to designing OI practices.. 1.4 Meta-methodology & outline report To answer the sub-questions, I will first investigate existing literature. From the literature review I will distill general statements that contribute to answering the research question. These statements will be given in the following chapter as ‘statement #n’ and will be used for the theoretical framework. This will lead to two propositions on what OIBM’s are, and how one can develop such models. After that, I will conduct a case research to check my findings and verify propositions, which will lead to guidelines for developing OIBM’s. In chapter 3, I will go further into the methodology of this last part of the research. The report is outlined/structured in the following way. In chapter 1 (motivation & objective research), the motivation of the research is given (1.1), followed by the problem statement (1.2). This leads to the objective, research questions and sub questions as given in the previous section (1.3). In section 1.5, the scope is clarified and some limitations to the research are given. After that, existing literature on open innovation and business modeling is investigated in chapter 2 (literature review; 2.1 & 2.2). This results in propositions that connect the two concepts (2.3) and a theoretical framework (2.4). The remainder of the research focuses on verifying the propositions. Chapter 3 (methodology) describes the methodology for this further research (case studies) and elaborates on how the case studies will contribute to answering the research question. Chapter 4 (case research & results) consists of 3 cases which are used to verify the propositions as given in section 2.3. Case related conclusions are given in the concluding sections per case (4.1.4, 4.2.4 & 4.3.4), which are summarized in section 4.4. Chapter 5 (conclusion & discussion) concludes the report with main conclusions (5.1), specific guidelines for developing OIBM’s (5.2) and other findings (5.3). Finally, section 5.4 discusses the research and elaborates on some limitations. Following points summarize the outline of the report for clarification:. 3.

(10) Motivation (1.1) & problem statement (1.2) Objective, research questions & sub questions (1.3) Research: literature review (2.1 & 2.2) Propositions based on literature review & research questions (2.3) Theoretical framework (2.4) Methodology for further (case) research (3) Research: case research to verify propositions (4) Conclusion related to objective & research question (5.1, 5.2 & 5.3) Limitations and discussion (5.4). 1.5 Scope and limitations As stated in the introduction, innovation has been identified on many occasions as the main driver for companies to prosper, grow and sustain profitable (e.g. Drucker, 1988, Christensen, 1997 & Thomke, 2001). One could even argue that innovation is a prerequisite for doing business. Whilst competitive advantage can come from size, or possession of assets, etc. the pattern is increasingly coming to favor those organizations that can mobilize knowledge and technological skills and experience to create novelty in their offerings (product/service) and the ways in which they create and deliver those offerings (Kay, 1993 & Tidd, 2005). This research will focus on developing guidelines for designing OI practices by developing OIBM’s. Even though I will elaborate on OI in general and motives for OI in the next chapter, it is assumed that organizations for which this report is written, have already decided on wanting to innovate for (one of the) reasons as described above and implement (or at least explore) OI practices into their organization. Because of this, the report is primarily written for commercial (for profit) organizations. In most cases this means that the ‘final goal’ of these organizations is to increase economic value for its shareholders. Even though the ‘final goal’ of commercial organizations might be to increase economic value, this does not mean that all value is or can be measured in monetary terms. On the contrary, many (business) decisions are based on the fact that they are of some form of value to the company (which eventually should result in increased economic value). For this reason, I define value not just as the material or monetary worth of something, but as the usefulness of something considered in respect of a particular purpose (source: Oxford American Dictionaries). This means that many things might be of value to an organization even though they cannot (directly) be quantified in monetary terms, because they serve a particular non-economical purpose which is valued by the organization. When designing the new OI practices, obviously the implementation of the practices must be taken into account as one can assume that the business models are developed with actual implementation in mind. However, this thesis will not specifically go into the actual process of implementing the ‘designed to be successful’ OI practices, but will be limited to designing such practices. Initially, the research questions will be limited only by the scope of the research mentioned above. However, after having elaborated on the theory (see chapter 2: theoretical framework), some more limitations might be added to further specialize the research. Also, the statements given in the next chapter will ‘channelize’ the research. This is reflected in the conceptual model at the end of the theoretical framework. Finally, As this research is my graduation thesis for the study Technology Management at the Faculty of Management and Organization of the University of Groningen, I am also limited by some conditions related to the research process as outlined by the faculty. These conditions are outlined in the Manual Master Project Technology Management. The main limitations that relate to this research are the fact that the research has to be conducted by me alone; I am not allowed to conduct the research together with others. Also, the research should reflect at least 20 European Credits (EC’s). One European Credit formally consist of 28 study hours; this means the research should reflect at least 560 hours (or 70 days) of work.. 4.

(11) 2 Literature review This chapter is a literature review, which will conclude with a theoretical framework on what open innovation and business models are, and how they can be combined to describe OIBM’s. This framework will lead to propositions related to the sub-questions and will guide the remainder of the (case) research. I will start with an elaboration on open innovation (2.1) and business models (2.2), after which I will connect the two concepts (2.3 that will lead to a theoretical framework (2.4).. 2.1 Open innovation (OI) In the introduction I explained that to create value (goal), one should innovate (means). One way to innovate is that of open innovation (paradigm). OI is about creating value together with other parties and making sure a portion of that value is delivered to all participating parties. When applying OI principles in practice, we speak of OI practices. This section will go further into the concept of OI, and how the creation of value can be increased by OI. I will start with elaborating shortly on its history, definition and stages. After that, I will go into the trends of- and motives for OI. After that, different types and competences needed for OI will be identified; core processes and partners. 2.1.1 History, definition & stages The notion of open innovation was first proposed by Chesbrough in 2003. He states that organizations need to open up their innovation processes, deliberately using both internal and external ideas, knowledge and markets to innovate – to create value. He defines OI as: “the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively. OI is a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as the firms look to advance their technology”. The principle of OI is shown in figure 1.. figure 1: open innovation principle. OI means that a company needs to open up its solid boundaries to let valuable knowledge flow in from the outside in order to create opportunities for cooperative innovation processes with partners, customers and/or suppliers. It also includes the exploitation of ideas and IP in order to bring them to market faster than competitors can. OI principles therefore describe how to deal best with strategic assets in order to meet market demands and company requirements. The OI approach is about gaining strategic flexibility in the strategic process and creating a critical momentum in innovation diffusion in order to generate customer acceptance and create industry standards (Enkel & Gassmann, 2004). Since the introduction of the concept, OI quickly gained the interest of both researchers and practitioners, illustrated by the number of publications, dedicated conferences and a rapidly growing body of literature (Fredberg, Elmquist & Ollila, 2008). The reason for OI to attract so much attention is that it is not ‘just another management fad’; Chesbrough merely distinguished a trend in innovation practices – and gave it a name. Chesbrough (2003a, 2003b) distinguished this new model of innovation in relation to the former one: the closed innovation model, in which firms adhered to the following philosophy: successful innovation requires control. In other words, companies must generate their own ideas that they would then develop, manufacture, market, distribute and service themselves. This approach calls for selfreliance: If you want something done right, you've got to do it yourself (Chesbrough, 2003a, 2003b). Appendix 1 elaborates further on the difference between open en closed innovation. 2.1.2 Trends & motives: increasing value creation Chesbrough (2003b, 2006) explains the rise of OI practices by the changing economics of innovation. He argues that useful knowledge and technology has become increasingly widespread, distributed across companies both large and small, in many parts of the world. He distinguishes two main forces in the economics of innovation that are forcing companies to open up their innovation process (see figure 2: step 1, Chesbrough, 2006): 5.

(12) • Rising costs of technology development; • Shorter product life cycles. According to Chesbrough (2006), OI business models address both issues (see figure 2: step 2): • Open innovation business models attack the cost side of the problem by leveraging external R&D resources to save time and money in the innovation process; • Open innovation business models attack the revenue side by broadening the number of markets addressable by the innovation.. figure 2: economics of open innovation. The main objective of OI is to create value (as with ‘normal’, or closed innovation). Whether or not to engage in open forms of innovation depends on whether OI practices can increase the creation of value in relation to closed innovation. This leads to the following statement (#1, Chesbrough 2006): Motives for companies to look for open innovation practices are: - to increase innovative capacity and/or - to decrease time to market of innovation, and/or - to decrease uncertainty of innovation, and/or - to decrease costs of innovation, for the purpose of creating (extra) value. 2.1.3 Stages to use open innovation in development process Figure 3 is a diagram illustrating an OI process and the different stages at which OI can be implemented: research, development and commercialization of ideas and technologies. The boundaries of the firm, represented by the dashed lines of the funnel, are permeable and allow ideas and technologies (the mauve and green circles) to pass in and out of the firm. The R&D funnel is mostly associated with the innovation of new products or services, however, also other (core, critical or contextual) business functions or processes can be subjected to the innovation process illustrated by the OI funnel, like marketing, finance, procurement, etc. The model shows that OI can happen at different stages in the development of businesses, from research into an idea/technology to the commercialization of fully developed products or services. This leads to the following statement (#2):. figure 3: open innovation in different stages. 6.

(13) Any (sub)function of an organization is a possible candidate for open innovation practices, in which value can be created with external ideas as well as internal ideas, and internal and external paths to market, in all stages of the innovation process. For the purpose of this research, I will make a distinction between OI in general, and (applied) open innovation practices. OI (in general) is a concept or a paradigm. OI practices are (applied) ‘real-life’ practices (or projects, processes) based on the general concept of OI. The reason for this distinction is that it is one thing to believe in the power of OI and create a culture/processes for finding such opportunities, it is another to actually develop such practices in real life; “We have heard a lot about the potential of open innovation communities, but when it comes to actual execution there is a significant gap” (Nambisan 2007, cited in Gwynne, 2007). I will not go into how to make an organization ‘ready’ for OI (eg. culture), but I assume organizations to already have chosen- and be ready for this new way of innovating (also see section 1.5). I will thus focus on how to design real-life OI practices, when organizations are ready for and open to such practices. 2.1.4 Types & competences: core processes Chesbrough (2003a) distinguished between two types of OI: outside-in and inside-out. Outside-in OI exploits external ideas within an organization, inside-out OI provides external parties with ideas or assets lying idle within an organization. Enkel & Gassmann (2004) also recognized these two forms of OI, however they distinguished three different core process archetypes of OI: (1) The outside-in process: enriching a company’s own knowledge base through the integration of suppliers, customers, and external knowledge sourcing can increase a company’s innovativeness. (2) The inside-out process: The external exploitation of ideas in different markets, selling IP and multiplying technology by channeling ideas to the external environment. (3) The coupled process: Linking outside-in and inside-out by working in alliances with complementary companies during which give and take are crucial for success. Consequent thinking along the whole value chain and new business models enable this core process. Enkel & Gassmann (2004) state that the OI approach is about gaining strategic flexibility in the strategic process and creating a critical momentum in innovation diffusion in order to generate customer acceptance and create industry standards. Based on their research on the different areas of OI, Enkel & Gassmann (2004) found that not all companies choose the same core OI process, or have integrated all three processes to the same degree. Most companies choose one primary process, but also integrate some elements of the others. These process archetypes are summarized in figure 4.. figure 4: process archetypes of open innovation. Enkel & Gassmann (2004) studied companies that used one of the three archetypes of OI. Table 1 shows the most important characteristics of companies focusing on one of the three archetypes, as well as providing examples of core processes (key activities) related to the archetypes. Also, the core competences related to OI are given for the different archetypes: besides implementing core processes to enable integration of external knowledge, to exploit ideas outside the firm or to co-operate within joined innovation processes, the company needs certain capabilities to apply the OI approach effectively. For each of the core processes a different capability is needed: developing the absorptive capacity has to be complemented with developing multiplicative capability and relational capacity. 7.

(14) Characteristics. Core processes. Outside-in process - low tech industry for similar technology acquisition - act as knowledge brokers and/or knowledge creators - highly modular products - high knowledge intensity. Inside-out process - (basic) research-driven company - objectives like decreasing the fixed costs of R&D, branding, setting standards via spillovers. - earlier supplier integration - customer co-development - external knowledge sourcing and integration - in-licensing and buying patents Absorptive capacity. - bringing ideas to market - out-licensing and/or selling IP - multiplying technology through different applications. Coupled process - standard setting (pre dominant design) - increasing returns (mobile industry through multiplying technology - alliance with complementary partners - complementary products with critical interfaces - relational view of the firm - combining outside-in and inside-out processes - integrating external knowledge and competencies and externalizing own knowledge and competencies Relational capacity. Core competence Multiplicative capability related to OI table 1: characteristics, core processes and critical capabilities related to archetypes of open innovation. Appendix 2 elaborates further on the core competences needed per type of open innovation. As the coupled process is basically a mixed form of the other practices, I will focus my research on the outside-in and inside-out process, taking into account that in some cases they can be used simultaneously (coupled). Summarized, the above leads to the following statement (#3): There are two major types of open innovation practices; outside-in and inside-out open innovation practices, which each entail specific processes and require different competences. 2.1.5 Types & competences: partners Another way of categorizing OI is by defining different sorts of partners. As OI is a broad concept, so are the groups of possible participants in open practices. And one should look beyond the ‘normal’ supply chain (suppliers, customers, consumers, etc.), into different technologies, supply chains and sectors to see whether other parties/technologies/chains/pathways to market can also create additional value to the company. For the purpose of this research I will distinguish two forms of OI, both with a different view of its partners: codevelopment partnerships and co-creation practices. Co-creation is about jointly creating value in exchange with stakeholders, customers or consumers (Prahalad & Ramaswamy, 2004). In the traditional system, where firms decide on products and services they will manufacture, by implication they decide what is of value to the customer. In this system, customers have little or no role in value creation. During the last two decades, organizations found ways to partition part of the work done by the firm and pass it on to their customers. These practices range from engagement at the end of the product-manufacturing cycle (eg. letting customers decide a custom color for their product purchased) to letting customers engage in product development in early stages of the new product development (NPD) process (also called user innovation by von Hippel, 2005). Co-creation can be applied to all products/services and supplier/client relationships (collaboration between developers and stakeholders, companies and customers, managers and employees, etc.). The locus of value creation is on the customer-company interaction. This process is depicted by its key building blocks: dialogue, access, risk assessment and transparency (DART, Prahalad & Ramaswamy, 2004). Dialogue implies interactivity from both sides: the company and the customer. It means that both parties should be active in the interaction. In order to sustain an interactive, thriving dialogue, and to reach mutually satisfying and rewarding results, it is suggested that both parties should become equal in the dialogue. This means that the company and the customer should value each other as equal, and treat each other accordingly in the dialogue. In order for the dialogue to be motivating, is has to center around the issues of interest to both (Prahalad & Ramaswamy, 2004). It is noted that dialogue is difficult if the transparency of the situation, and access to information differs between parties. Therefore, it is important to realize that withholding information from the 8.

(15) customers has negative effects on co-creation. The claim that transparency and access is crucial for a meaningful dialogue is greatly emphasized (Prahalad & Ramaswamy, 2004). Dialogue, access, and transparency can be seen to lead to a higher understanding for the customer. Based on the three building blocks, the customer is better able to understand the risk-benefits of a course of action or a decision relating a product. This personalized understanding of risk-benefits implies that customers are less dependent on external information concerning their actions and decisions. This is also suggested as being an important part of successful co-creation (Prahalad & Ramaswamy, 2004). The second category, co-development partnerships, is about embodying a mutual working relationship between two or more parties aimed at creating and delivering a new product, technology or service (Chesbrough & Schwartz, 2007). Obviously, as with co-creation, the objective of such an endeavor is to create value for its participants. The difference between co-creation and co-development is the focus on participants. Co-creation focuses on supplier/client collaboration within the supply-chain – initiated by the supplier. Co-development focuses on different organizations, jointly creating value in partnerships for a new or existing target group/customer segment. Chesbrough and Schwartz (2007) state that such partnerships can increase the return from internal R&D, by leveraging the capabilities of a partner firm. However, they can also impose significant hazards and may doom a business model to failure if they are poorly designed or implemented. Four requirements for designing a business model that leverages co-development partnerships are (Chesbrough & Schwartz, 2007): • Define your business objective, • Assess the capabilities you require, • Determine the degree of business model alignment with partner, • In managing the partnership, think of future collaborations – not just the current needed. Appendix 3 elaborates further on the requirements for co-development partnerships. The second method of categorizing OI practices as described above leads to the following statement (#4): There are two different types of open innovation practices from a partner point-of-view: - Co-creation practices focus on supplier/client collaboration within the supply-chain – initiated by the supplier, - Co-development partnerships focus on different organizations, jointly creating value for a new or existing customer segment.. 2.2 Designing business models So far, I have elaborated on OI, how OI practices can create value (motives), how it can be categorized, and what competences are needed for different types of OI. This seems quite straightforward, however, how to develop such OI practices in real life is not at all clear: “We have heard a lot about the potential of open innovation communities, but when it comes to actual execution there is a significant gap” (Nambisan, 2007 cited in Gwynne, 2007). A problem these organizations face is that they know the direction where to look (open innovation), but do not know exactly what it is they are looking for: “how can we design such open practices to be valuable for our organization? Which external technologies should we use? And why and how should we use them? How can we create value with unused internal technologies? Which markets can we penetrate? And how?” These organizations need the right set of ‘glasses’ - a means, framework or tool to guide them in the design of new and successful OI practices, to create (new) value. Business model design (or generation) is one such set to stimulate successful innovation: To innovate openly, [organizations] need to innovate their business models; the way that they create value, and capture a portion of that value for themselves” (Chesbrough, 2006). In this section I will give an introduction in- and elaborate on- designing business models, after which I will connect the two concepts. 2.2.1 History, definition & purpose Descriptions of businesses and/or business processes are called business models. In recent years, much has been written about business models. Although the term ‘business model’ received first attention in academic literature in 1957 (Bellman, Clark, et al. 1957) and in the title and abstract of a paper in 1960 (Jones, 1960), business models as a concept only became popular when the Internet emerged as an enabling information technology (Osterwalder, 2005). The rise of cheap information technology fueled thinking in ‘new ways of creating and capturing value’ – and thus in business models. Appendix 4 goes further into the history of the concept. Many different definitions on business models exist. A couple of those definitions are: 9.

(16) •. •. Business models are models of organizations, with the purpose to determine the unique conformation of elements, which create value for customers and ‘revenue’ for the company (Jansen, Jägers & Steenbakkers, 2007). A business model is a conceptual tool that contains a set of elements and their relationships and allows expressing the business logic of a specific firm. It is a description of the value a company offers to one or several segments of customers and of the architecture of the firm and its network of partners for creating, marketing, and delivering this value and relationship capital, to generate profitable and sustainable revenue streams (Osterwalder, 2005).. Even though many purposes for the use of business models exist, most authors use similar descriptions of the function(s) of a business model. According to Osterwalder (2009), a business model describes the rationale of how an organization creates, delivers and captures value. Chesbrough (2006) has a similar definition: A business model performs two important functions: it creates value and it captures a portion of that value. To this, he adds that [a business model] creates value by defining a series of activities from raw materials through to the final customer that will yield a new product or service with value being added throughout the various activities. The business model captures value by establishing a unique resource, asset or position within that series of activities, where the firm enjoys a competitive advantage (Chesbrough, 2006). Business models are used for different purposes. Different functions of business models exist for different purposes; different authors/organizations have a different usage for the concept. In his research, Osterwalder (2005) clarified the usage of business models according to a categorization of its different purposes, distinguished from literature: • Understanding and sharing: business models help to capture, visualize, understand, communicate and share the business logic. • Analyzing: the business model concept can contribute in analyzing the business logic of a company. The business model becomes a new unit of analysis (Stähler, 2002). Business models can improve measuring, observing, and comparing the business logic of a company. • Managing: business models improve the management of the business logic of the firm. The business model concept helps ameliorate the design, planning, changing and implementation of business models. In addition, with a business model approach companies can react faster to changes in the business environment. Finally, the business model concept improves the alignment of strategy, business organization and technology. • Prospects: business models describe possible futures for a company. The business model concept can foster innovation and increase readiness for the future through business model portfolios and simulation. • Patenting of business models: Increasingly entrepreneurs and companies in e-business can patent ebusiness processes and even entire aspects of their business model (Beresford, 2001). Therefore business modeling may potentially play an important role in this legal domain. It remains to be seen in what direction patenting business models and business processes moves. During this research, business models are used in different ways. Relating to the objective of the research, business models will be used for the purpose of designing future OI practices. This is in line with Osterwalder’s prospects categorization. Within this categorization, understanding and sharing and analyzing are also relevant during the design process, be it for future ‘hypothetical’ business models. For the case research (see chapter 4), I will also use business models to describe and clarify real-life OI cases. For this purpose, understanding (and sharing) and analyzing will be relevant during the case-research. 2.2.2 Levels for using business models In his research on business models, Osterwalder (2005) found three levels on how business models are used/defined in literature (figure 5): 1. Overarching Business Model Concept: This first level consists of definitions of what a business model is and what belongs in them and meta-models that conceptualize them. On this level the business model is seen as an abstract concept that allows describing what a business does for a living. 2. Taxonomies: This level consists of several types or sub-meta business models (taxonomies) that are generic but contain common characteristics. 3. Instance Level: This level consists of either concrete real world business models or of conceptualization, representations, and descriptions of real world business models. 10.

(17) In this research all three levels are used. The business model canvas as developed by Osterwalder (2009) is used to outline the overarching business model concept. I will elaborate on this business model canvas and why I chose it for the research further in the next section. After connecting business models with OI, I will study some OI cases (real world companies/practices) and develop their open innovation business models at an instance level (OIBM’s) to verify the propositions (section 2.3). From the results of the case research combined with the literature review, sub-meta models are developed that can guide in the design of open innovation practices.. figure 5: levels for using business models. 2.2.3 Business model canvas; building blocks & elements When investigating business model literature by different authors, most descriptions of conceptualizations of business models present elements which are fairly similar. Osterwalder (2005) compared many different conceptualizations of business models and compared the elements of business models described by different authors. He compared the models mentioned most often and studied their components. From this synthesis, nine building blocks emerged that cover all the business model components mentioned by at least two authors. The nine building blocks are outlined in Table 2 (Osterwalder and Pigneur, 2005 & 2009). These building blocks will be used throughout the remainder of this report as an overarching business model concept to understand, describe and design OIBM’s at the taxonomy and instance level. I chose the business model canvas as it incorporates most other conceptualizations, making it the most comprehensive and up-to-date model presently available. When developing the specific business model of an organization, different (key) elements should be appointed (filled-in) per building block, to create the particular (real-life) business model: “specifying a set of business model elements and building blocks, as well as their relationships to one another, is like giving a business model designer a box of Lego blocks” (Burgi, Victor, et al. 2004). Osterwalder (2005) adds: “[one] can experiment with these blocks and create completely new business models, limited only by imagination and the pieces supplied”. Table 2 shows and describes the business model building blocks and gives some key questions, which help in determining the elements per building block (Osterwalder & Pigneur, 2005 & 2009). Osterwalder modeled the building blocks and their relations in relation to each other (figure 6; appendix 5 shows a more elaborate version of the canvas). This model (figure 6) shows that the value proposition is delivered to customer segments, by a specific relationship and certain channels (arrows). This illustrates that customers comprise the heart of any business model (Osterwalder, 2009). The ‘left-side’ of the canvas serves the purpose of making the value proposition possible; the key resources, activities and partners. The ‘lower-side’ of the model (revenue streams and cost structure) are no ‘variable’ building blocks – they come forth out of (the mix of) the other building blocks (they can however be the starting point for business model innovation; see section 2.2.4). The ‘bottom-side’ of the model reflects whether a business model is viable: a (commercial) business model can only exist on its own if revenue flows ≥ cost structure.. 11.

(18) Business model building block Value propositions. Description. Customer segments. Describes the segments of customers that a company wants to reach and serve (offer value to). Describes the types of relationships/links a company establishes with specific customer segments.. Customer relationships. Describes the bundle of products and/or services that create value for a specific customer segment.. Channels. Describes how a company communicates with and reaches its customer segments to deliver a value proposition.. Key activities. Describes the most important things a company must do to make its business model work (the arrangement of activities and resources that create value). Describes the most important assets required to make a business model work (outlines the competencies (repeatable pattern of actions) necessary to execute the company’s business model). Describes the network suppliers and partners that make the business model work (cooperative agreements with other companies necessary to efficiently offer and commercialize value). Describes (sums up) all costs incurred to operate a business model (monetary consequences of all the means employed in the business model). Represents the cash a company generates from each customer segment (describes the way a company makes money).. Key resources. Key partnerships. Cost structure. Revenue streams. Key questions for determining elements per building block. What value do we deliver to the customer? Which one of our customer’s problems are we helping to solve? What bundles of products and services are we offering to each customer segment? Which customer needs are we satisfying? For whom are we creating value? Who are our most important customers? What type of relationship does each of our customer segments expect us to establish and maintain with them? Which ones have we established? How are they integrated with the rest of our business model? How costly are they? Through which channels do our customer segments want to be reached? How are we reaching them now? How are our channels integrated? Which ones work best? Which ones are most costefficient? How are we integrating them with customer routines? What key activities do our value propositions require? Our distribution channels? Customer relationships? Revenue streams? What key resources do our value propositions require? Our distribution channels? Customer relationships? Revenue streams?. Who are our key partners? Who are our key suppliers? Which key resources are we acquiring from partners? Which key activities do partners perform?. What are the most important costs inherent in our business model? Which key resources are most expensive? Which key activities are most expensive? For what value are our customers really willing to pay? For what do they currently pay? How are they currently paying? How would they prefer to pay? How much does each revenue stream contribute to overall revenues? table 2: business model building blocks. figure 6: business model canvas visualized. 12.

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