Chapter 11: Exploiting open innovation and

collaboration.

Learning objectives
After this chapter you should be able to:
• Understand what open innovation is, and the range of strategies and mechanisms
available to apply it in practice.
• Assess the advantages and limitations of different strategies, such as out-sourcing,
licensing, joint ventures and strategic alliances.
• Identify the factors which influence the motives, outcomes and success
of open innovation and strategic alliances.

Class notes:
No company can survive as a technological island – doesn’t bring benefits (e.g different
perspectives or not-in-here syndrome)
Knowledge acquisition focuses on the fact that you want to be a follower or do you want
to be a leader
Objectives can be explicit or implicit
User-centric (use what is needed by the user) perspective:
1. Identify users’ or
supply-centric perspective (supply is based on what is needed by the customer)
openness is more of a win-win approach
JOINT VENTURES AND ALLIANCES
 Innovation requires collaboration
 A strategic alliance is an agreement between independent companies to cooperate
in the manufacturing, development or sale of products and services.

Why collaborate?
Firms collaborate for many reasons:
• To reduce the cost of technological development or market entry
• To reduce the risk of development or market entry
• To achieve scale economies in production
• To reduce the time taken to develop and commercialise new products
• To promote shared learning

 The increase in the complexity of technology leads to firms not being able to
maintain in-house expertise in relevant technical areas
 We consider two things when it comes to buying or making: the transaction costs
(increase when a purchaser knows more about technology) and strategic
implications
 When technology is simple, widely available and mature market transactions such as
subcontracting or licensing are appropriate
 Outsourcing some technologies based on comparative transaction costs can limit
future technological options and reduce competitiveness in the long term
 According to competency development, it requires firms to have policies or use
collaboration as an opportunity to learn rather than minimise costs – thus external
technologies should be used to complement R&D
 For successful technology acquisition, the choice of partner is as important as the
search for the best technology
 Transactions can be lower when dealing with a familiar firm – there is mutual trust,
shared technical and business information and existing personal social links
 External sources of technology help with peer review for the internal R&D function
and challenge in-house researchers with new ideas and different perspectives
 Collaboration lies in the fact that customer needs and market needs are changing
The risks in collaboration are:
1. Leakage of information (highest when collaborating with competitors)
2. Loss of control or ownership

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 3. Divergent aims and objectives, resulting in conflict

 Sourcing technology externally is a superior strategy to entirely relying on

internal capabilities
 More mature markets have less collaboration – like a vertical relationship with
suppliers and customers
 High-tech sectors seek complementary resources – like horizontal relationships
with peers and competitors
 There is more collaboration if the product is new to the market (requires more
input as it is greatly associated with uncertainty) rather than new to the firm
FORMS OF COLLABORATION
 Joint venture is an informal (simple contractual basis for collaboration) or formal
(ownership is allocated based on shares of stock controlled) agreement between two
or more firms to codevelop a new technology or product.
 Strategic alliances involves near-market development projects, it has a specific end
goal and timetable and doesn’t take the form of a separate company
Strategies to exploit strategic alliances:
1. Build critical mass through co-option (co-creation)
- weaker companies come together to dominate the competitor
- common where scale or network size is important like a mobile telephony
- like Bosch, creates its products by co-creating with universities
2. To reach new markets by leveraging co-specialised resources
- Common in systems or complex products and services
- The risk is partners are required to commit to the partner’s technology and
standards
- Technologies are emerging and uncertain and standards are yet to be established
- High risk in the partner’s technology becoming redundant
- Strategic alliances is a flexible form of collaboration in the emerging market thus
later you need more of a joint venture
- Restrictions to where technology is tacit (if not it is cheaper and less risky), expensive
and time-consuming to develop – if it is not expensive then in-house development is
preferable
3. To gain new competencies through organisational learning
There is an increase in alliances overall due to:
Speed: transitory alliances versus careful planning: Under turbulent environmental
conditions, speed of response, learning, and lead time are more critical than careful
planning, selection, and development of partnerships.
Partner fit: network versus dyadic fit: Due to the need for speed, partners are often
selected from existing members of a network or reputation in the broader market.
Partner type: complementarity versus familiarity: Transitory alliances increasingly

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occur across traditional sectors, markets and technologies, rather than from within.
Microsoft and LEGO to develop an Internet-based computer game, Deutsche Bank and
Nokia to create mobile financial services.
Commitment: aligned objectives versus trust: The transitory nature of relationships
makes the development of commitment and trust more difficult, and alliances rely more on
aligned objectives and mutual goals.
Focus: few specific tasks versus multiple roles: To reduce the complexity of managing
the relationships, the scope of the interaction is more narrowly defined and focused more
on the task than the relationship
PATTERNS OF COLLABORATION
Two approaches to studying collaboration: aggregate data and structured case studies.
• Aggregate data studies examine patterns within and across different sectors, providing
insights into how technological and market characteristics affect collaborative activities.
• Structured case studies provide richer insights into problems and management of
collaboration.
• High levels of R&D intensity are associated with high levels of technologically oriented
joint ventures, suggesting they are a viable strategy in industries with high barriers to entry,
rapid market growth, and large R&D expenditures.
• Within a specific sector, joint venture activity is not associated with differences in capital
expenditure or R&D intensity.
• Technologically oriented alliances tend to increase with firm size, capital expenditure, and
R&D intensity.
• Large firms use joint ventures to acquire technology, while smaller firms focus on market
knowledge and financial support.
 A common reason for international alliances is market access
 Interregional is based on technology acquisition
 Networks for collaboration have become more stable
Two dimensions affect companies’ attitude towards technology acquisition:
1. Characteristics of the technology
2. Organisations inheritance
The relevant characteristics of technology include:
 Complexity of the technology
 Credibility potential or political profile of the technology
 Competitive significance of the technology
 Codifiability or how easily the technology is encoded
R&D needs to develop strategies for acquiring technology:
1. Capabilities and existing technical know-how

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 2. Corporate strategy (e.g leadership vs follower position)
3. The culture of the firm and its receptiveness to external knowledge
4. Comfort of management with a given technical area
Competitive significance
Technologies that have the potential to become tomorrow’s key technologies vary.
Some companies do in-house expertise in many technologies so that they will not be wrong-
footed if conditions change or unexpected advances occur
– extensions to existing in-house research: are when you use universities to conduct
fundamental research to get a better understanding of science
- extensions to existing in-house programs are not justified due to higher risk or
limitations to resources
Complexity of the technology
 The increasing complexity of modern technologies necessitates organizations to
leverage their in-house competencies with external resources.
 It can involve alliances between large pharmaceutical firms and smaller
biotechnology firms.
 Pharmaceutical firms seek to extend their technological capabilities through these
alliances, while biotechnology firms seek funding, development, marketing, and
distribution.
 These alliances contribute significantly to new product development and firm
performance.
Codifiability of the technology
 Knowledge about a technology can be easily codified, making it easier to transfer
and diffuse.
 Tacit knowledge, can’t be easily transferred, is more difficult to acquire. In the
absence of strong intellectual property rights or patent protection, tacit technologies
provide a more durable competitive advantage.
 For example, Italian firms' design skills have allowed them to remain competitive.
Guinness's invention of a gas-filled device for canned beer highlights the difficulty of
maintaining a competitive advantage.
Credibility potential
 Companies' acquisition decisions are influenced by the credibility of the technology
or its source.
 Companies value goodwill from governments, customers, market analysts, top
management, academic institutions, and potential recruits. For instance, Celltech's
collaboration with a US chemical firm enhanced its market credibility, while DoCoMo
in Japan partnered with NTT to influence future standards and increase the
credibility of its consumer telephone products in a challenging market.
Corporate strategy

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  The balance between in-house and externally acquired technology depends on a
company's strategy of technological differentiation or leadership.
 Kodak differentiates between strategic and enabling technical core competencies,
with strategic activities retained in-house and enabling skills not controlled
internally.
 Companies adopt a policy of intervention in the technology supply market until the
market becomes competitive, ensuring reliable sources of technology are available
at reasonable prices.
 For example, BP develops key technology items and passes them to suppliers but
stops in-house development once sufficient suppliers enter the market.
Firm competencies
 Internal technical capabilities influence the decision to acquire technology.
 If the capabilities are weak, they acquire them from outside
 strong in-house capabilities favour internal development.
 Speed to market is a key factor in technology acquisition, with firms choosing
methods that provide the fastest commercialization.
 However, if in-house capabilities are lacking, external sourcing is often faster than
internal skill development.
Company culture
 The company has its own culture – the way they do things in their environment
which reflects values and beliefs that are important in acquiring technology policies
 Some companies foster a culture that technical development can occur anywhere in
the world – staff are required to find external developments and internalise
important technologies before competition
Management comfort
 Management's comfort with technology is linked with the R&D manager or team's
familiarity with the technology, confidence in their ability to succeed in new
technical areas, and attitude to risk.
 the higher the company's comfortability is, the more likely it is to be developed in-
house (the technology). For example, Ricardo-AEA Technology's core technologies
are derived from its nuclear industry background.
Managing alliances for learning
 alliances help learn the new market and technological competencies
 Firms' expectations of alliances influence their evaluation of success. Firms that view
product development collaboration as discrete events evaluate success in terms of
project cost, time, and product performance. However, a small proportion views
collaboration as an opportunity to learn new skills and develop long-term
relationships.
 To ensure success, partners must have complementary skills and capabilities, and a
balance of strength.

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  Equal ownership is the most successful structure in formal joint ventures, with 50-50
ownership being twice as likely to succeed.
 Firms must learn to design alliances with other firms, selecting partners who can
contribute what is needed and needs what is offered, with sufficient prior knowledge
or experience to encourage trust and communication.
 Partners should specify mutual expectations, agree on a business plan, and
communicate regularly to share problems.
Trust in the alliances can be defined as:
1. Contractual – honouring the accepted or legal rules of exchange but lowkey indicates
the absence of other forms of trust
2. Goodwill – mutual expectations of commitment beyond contractual requirements
3. Institutional – trust based on formal structures
4. Network – because of personal, family or ethnic/religious ties
5. Competence – trust based on reputation for skills and know-how
6. Commitment – mutual self-interest, committed to the same goals
 Trust is essential for communication and learning in collaboration, but it's not
mutually exclusive.
 Goodwill is a second-order effect based on network, competence, or commitment.
Interpersonal trust is necessary for communication and learning, while inter-
organizational trust is more subtle.
 Organizational trust is defined by organizational routines, norms, and values,
allowing for learning and diversification. It requires a longer time horizon for
reciprocity and may mitigate opportunistic behaviour.
 The primary purpose of collaboration is acquiring new skills or competencies, not
just technology or products. Intent, transparency, and receptivity are three factors
that affect learning through alliances.
 Preferred alliance is dependent on the nature of the knowledge to be acquired
 The outcome is based on the partner’s ability to learn
 The structure of an alliance depends on the knowledge to be acquired and the
partner's ability to learn. Tactical alliances are suitable for migratory knowledge,
while strategic relationships are needed for embedded knowledge.
 Alliances for explicit knowledge provide temporary advantages, while embedded
knowledge requires direct exposure to the partnering organization.
 Knowledge creation in alliances occurs with clear intent and specific goals, but
individual autonomy is important.
 Knowledge networks allow us to get knowledge from outside the organisation, share
it wisely and store it for the future

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COLLABORATING WITH SUPPLIERS TO INNOVATE
Alliances can be horizontal – (include cross-licensing and collaboration with potential
competitors of sources with complementary technological or market knowhow) or vertical
(control key technologies in the value chain, closer relationships with suppliers help reduce
the cost of components, through specialisation and sharing information on costs) – the
timing of involving suppliers in development is crucial.

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  Homogeneous – all potential suppliers have very similar performance
 Differentiated – suppliers differ greatly and superior
 Indeterminate – suppliers differ greatly under different conditions
 The bubbles are the relationships
 With the lean supply relationship, its defining capabilities are:
1. Fewer suppliers, longer-term relations
2. Greater equity – real cost transparency
3. Focus on value flows -the relationship, not the contract
4. Vendor assessment, plus development
5. Two-way or third-party assessment
6. Mutual learning- share experience, expertise, knowledge and investment

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USER-LED INNOVATION
 Lead users are critical to the development and adoption of complex products
 Leader users demand new requirements ahead of the general market of other users
and are positioned to benefit from those requirements being met
Lead user characteristics:
1. Recognise requirements early – ahead of the market in identifying and planning for
new requirements
2. Expect high level of benefits – because of their market position and complementary
assets
3. Perceived to be pioneering and innovative – by themselves and their peer group
4. Develop their own innovations and applications – can identify and their capabilities
contribute to the development of the innovation

EXTREME USERS
 Extreme environments can be a source of innovation, as users in these environments
may have unique needs that can be met by innovative solutions.
 For example, antilock braking systems (ABS) were developed for extreme conditions,
such as stopping aircraft safely under difficult conditions.
 These environments provide new opportunities for innovation, as seen in the
development of stealth technology, which arose from a specific need for an invisible
aeroplane.
 Ceramic fridges have been created in India due to the unreliable supply of electricity
so normal fridges don’t work (Jugaad -innovative fix in Hindu)

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CO-DEVELOPMENT
 Users are increasingly involved in product design and production, with suppliers
harnessing their experiences and ideas to improve their product development
efforts.
 This shift towards more open, democratized forms of innovation is driven by
networks of individual users, not firms.
 Users are now visible in all stages of the innovation process, from concept
generation to development and diffusion.
 They are characterized as consumers, tough customers, or lead users, who can
modify existing products or develop new ones.
 Some forms of user activity represent a parallel system of innovation that does not
share the same goals, drivers, and boundaries as mainstream commercial activity.
DEMOCRATIC INNOVATION AND CROWDSOURCING
 Users in certain communities, known as 'free revealing', share innovations with
peers, driven by intrinsic motivations and peer recognition.
 This knowledge sharing and innovation are more collective than idea competitions
(ideas are invited, and they are rewarded with peer or public recognition and
community status. Rewards can also be seen in free products or cash prizes). Some
user-led innovation involves a community that continually creates and uses
innovative solutions and Apple's iPhone use communities.
 Crowdsourcing approaches are increasingly being shown to co-create innovations,
and Lego and Adidas have adopted this model, encouraging users to cocreate their
own products using a combination of websites and in-store mini-factories.

BENEFITS AND LIMITS OF OPEN INNOVATION

 it is essential to explore different degrees and types of openness and the extent to
which a firm can benefit from external and internal resources and knowledge in the
innovation process.

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Open innovation is achieved through various approaches, depending on the number and
type of sources and partners involved and the stages of the innovation process.
A completely open strategy is not the best option, but different degrees and ways of
openness can be pursued successfully.
Models such as the 'orchestra', 'creative bazaar', and 'Jam central' are emerging to enable
open innovation.
The 'orchestra' model, as seen in Boeing, allows companies to retain autonomy around their
specialist tasks while retaining final decision-making.
The 'creative bazaar' model involves crowdsourcing innovation inputs, while the 'Jam
central' model involves creating a central vision and mobilizing various players to contribute
towards it. These models are found in precompetitive alliances and consortia, where
challenges are used to focus efforts.
Best approach to exploit innovation in practice
1. creation and capture value
2. coordination of knowledge flows
3. control and ownership of resources
4. conditions and context, e.g environmental uncertainty

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