OPEN INNOVATION Researching a New Paradigm Chesbrough 2006 and Nokia IBM
Chandler (1977, 1990) Vertical integration from R&D to Distribution Successful innovation requires control Increased mobility of knowledge (manpower) Availability of Venture Capital Interfirm modularity and subdivision of labor Langlois (2003) Open Innovation: the business model utilizes both internal and external ideas to create value, while defining internal mechanism to claim some portion of that value (Chesbrough 2003)
The business model - two important functions, create value within the value chain and capture a part of it for the focal firm. External technologies can leverage a firm s business model through filling the gaps and by creating complementary products that stimulate faster acceptance of the technology. Difficulty of identifying, assessing and incorporating knowledge increased emphasis on managing knowledge and linking knowledge Start-ups carriers of new technologies and explorers of new markets, and represent experiments with business models. IP rights facilitates exchange of ideas and technologies
four generic open innovation strategies: Pooled R&D shared R&D (Require shift in culture) Spinouts a way of escaping large firm bureaucracies Selling complements accepting commoditization or develop differentiated products based on commodities. Donated complements general purpose technologies are sold so users can develop differentiated products (e.g. user toolkits)
Targeting a known market with a new technology it is like playing chess you know the pieces and what they can do all information is known. Unknown technology and unknown markets the path is unknown - unknowable. To play poker, it is argued that companies need to measure their capital and stage their investments in projects upon the receipt of new information (Chesbrough, 2004, p. 25).
Poker strategies include: Observation of what happens internally after the decision to terminate funding Exposure of the failure to outsiders get new perspectives Out-licensing of the rejected project Formation of a spin-off venture In chess you are looking for a fit with the roadmap of future project and the current business model, need a net present value > 0 and minimize the false positives. In poker you want to create options for future business models, leverage or extend the business value, have an options value > 0 and manage false negatives (Chesbrough 2004).
Business Models Use of partners in order to R&D expenses, expand innovation output and open up new markets. Need to: define the business objectives for partnering classify the R&D capabilities of the firm o core (key source of advantage) o critical (vital to success but not key) o contextual ( needed to complete the offering, but not differentiator) align the business models of the two firms
LEVELS OF OPEN INNOVATION Individual and Group level Individual How Open Innovation affects incentives of R&D workers. From innovation creation to system integration External innovations returns or other interest? (own utility Von Hippel, 1988 2005) Groups
Implications for firms Faster time to market? Explorative - Exploitative (March, 1991) Incremental innovative output or faster metabolism of knowledge? Control of spillovers more or less? What circumstances motivate firm to Open Innovation? Industry, size, Management of Intellectual Property from Identification to licensing Conflict between internal and partner s goals External ideas network requires internal network
Inter organizational value networks Alliance Size Management Industry Sector Infant or rapidly changing industries Specialization within firms, degree of technical modularity audio digital components Entry barrier analysis: Amazon and E trade no distribution channels
National Innovation Systems National, EU, US Legal framework Innovation Policy Clusters Sector
ISRAEL SYSTEM OF INNOVATION CHIEF SCIENTIST Ministry of Industry Other Ministries BI NATIONAL FUNDS VENTURE CAPITAL FUNDS YOZMA OTHERS EU R&D FRAMEWORK PROGRAM Grants to Firms MAGNET Biotechnology Satellite Communication US BIRD Technological Incubators TNUFA U.k FRANCE NETHERLANDS
OCS R&D Grants. The grants are a percentage (between 30% and 66%, depending on circumstances) of the estimated R&D expenditure. In cases where the government assisted R&D results in a commercially successful product, the developers must repay the grant through royalties. The MAGNET program allows the encouragement of generic- pre- competitive technological cooperation executed by consortia of industrial companies and academic research institutes.
Multi-lateral Programs European Union - The Sixth Framework Programme of the European Union's Commission on Science, Research and Development EUREKA - the Israeli Liaison Office of EUREKA CELTIC - The European Cooperation in Telecommunications GALILEO - Galileo is a Euro 4B project managed by the EU and ESA for a new Global Navigation Satellite System
Bi-National Research India - Second Call for Proposals India-Israel Initiative for Industrial R&D (i4rd) Finland - Call for Proposals For Joint R&D Projects in Information and Telecommunications Technologies Victoria (Australia) First Call for Proposals VISTECH FUND - Victoria (Australia)- Israel R&D Cooperation Program France MOU for cooperation between the OCS and ANVAR Second Call for Proposals - Israel-France Industrial R&D Cooperation Program FIRAD - The France-Israel Industrial R&D Cooperation Framework new website
Germany - German-Israel Technological & Industrial Cooperation Maryland / Israel Development Fund (MIDF) NEW!! Maryland- Israel call for proposals Italy - Italy- Israel Industrial Cooperation Programs Sweden - MOU for Industrial Cooperation Ireland * The Netherlands Portugal Spain USA: BIRD - Binational Industrial Research and Development Foundation USA: USISTC - US-Israel Science and Technology Commission UK: BRITECH - UK-Israel Industrial R&D Foundation Canada: CIIRDF - Canada-Israel Industrial R&D Foundation
India - MOU for Industrial Cooperation between India and Israel China - THE PROGRAM FOR CHINESE-ISRAELI TECHNOLOGICAL COOPERATION Hong Kong - HONG KONG -ISRAEL TECHNOLOGICAL COOPERATION KORIL-RDF Korea-Israel Industrial R&D Foundation (the web site www.koril-rdf.or.kr is under constraction.) Singapore: SI-IRD - Singapore-Israel Industrial R&D Fund Multinational Corporations
Technological incubators The incubator program is applied in all parts of the country, under the guidance and with the support of the Office of the Chief Scientist of the Ministry of Industry and Trade. The program supports novice entrepreneurs at the earliest stage of technological entrepreneurship and helps them implement their ideas by turning them into exportable commercial products and forming productive business ventures in Israel
Budget Between US $350,000 to US $590,000 per two years. Grant Level of grant: 85 percent of approved budget.
Ownership Regular Incubators General manager directives 8.2 Initial ownership in the Project Company is as follows: At least 50 percent the developer/entrepreneur; At least 10 percent key staff members other than developers/entrepreneurs; Up to 20 percent the provider of supplementary financing (i.e., additional to the State grant) for project implementation. (Of course, this may also be the developer/entrepreneur.); Up to 20 percent the incubator
Privatized Incubators General manager directives 8.3 Initial ownership in the Project Company is as follows: Between 30 to 70 percent the developer/entrepreneur; Between 30-70 percent the incubator (including the provider of supplementary financing) State Support. 1Incubator Project The Grant between US $150,000 to US $250,000 per year for up to two years, i.e., total between US $300,000 to US $500,000. Level of grant: 85 percent of approved budget..2
Incubator Administration Grant of up to up to NIS 729,500 per annum (about $175,000), including the incubator director's salary, administrative expenses, outlays for sorting and studying of ideas, and organizational expenses for project commercialization and marketing.
Results By the end of June 2004, 806 projects had left the incubators (in addition to the 200 that remained). Of these "graduates," 45 percent have continued on their own steam and 55 percent have been discontinued. Most of the ongoing projects have managed to attract private investments. The total private investment obtained thus far is in excess of US $773 million. The technological incubators have become massive repositories of potential ideas for new high-tech venture funds in the future.
European Union 6 th 7 th Framework Agreement An active participant in the European Union s R & D Framework program since 1996 Israel continues to be active in the 6 th Framework Agreement that began in November 2002
Technological Incubator Projects 23 technological incubators operate 200 projects operate currently 735 projects have left the incubators in the last decade 54% have received further private investment
NETWORKING AS A MEANS TO STRATEGY CHANGE. THE CASE OF OPEN INNOVATION IN MOBILE TELEPHONY Koen Dittrich (2005) Exploration is often characterized by opportunistic behaviour and enables a firm to bridge two distinct networks of firms, thereby benefiting from the resources of both networks (Burt 1992). weak ties Non-equity alliances Exploitation of existing knowledge and capabilities on the other hand is associated with refinement, selection, production and execution (March 1991). strong ties longer-term relationships
Companies that follow an exploration strategy will look for partners with distinctly different capabilities Companies pursuing an exploitation strategy will search for companies with similar technological capabilities Exploration networks partner turnover will be higher than in exploitation networks. Exploration networks will make use of flexible legal organizational structures, whereas exploitation alliances are associated with legal structures that enable long-term collaboration
In the late 1980s and 1990s Nokia was one of the forerunners in mobile telephony. During the late 1990s Nokia tried to maintain its prominent market position in the development of 3rd generation mobile telephony, changing from an exploitation strategy towards an exploration strategy.
Nokia Group defines the company s core competencies to be in three fields: mobile handsets, network technology and middleware. Open or closed innovation? First, will Nokia be able to produce the technology fast enough to do it alone? Second, does the company have the necessary competencies to produce it in a short time period?
Core mobile handsets: the largest production volume of mobile phones is still in high-wage countries such as Finland Germany and the USA Network elements (switches, routers and modems, and standardized software platforms ). Nokia buys them from SCI, Flextronics Finland and Elcoteq Networks Oyj, since they can produce them much more efficiently Complementary products, such as integrated circuits, Nokia will simply buy them from e.g. Texas Instruments
Nokia typically joins forces to create a new market, for instance with other mobile phone manufactures like Ericsson, Siemens and Motorola. Market creation was the main goal for entering the joint venture Symbian in 1998. Nokia shifts from pure sub-contracting in production, to manufacturing partnerships, to R&D sub-contracting and ultimately to R&D partnerships.
Exploitation and exploration in innovation networks at Nokia Corporation 80 s First technological trajectory NMT standard initiated by Ericsson 85-96 Second technological trajectory Licensing of technology with Motorola (and Tandy) and a 4-year joint venture for R&D on cellular communication with Alcatel, AEG and Standard Elektrik Lorenz (SEL)
In 12-year period, Nokia only engaged in 25 alliances, mostly in bilateral agreements., 14 were joint development agreements, 6 were licensing and technology sharing agreements and 5 were joint ventures One cross-licensing agreement In 1993 Motorola and Nokia engaged in a cross-license agreement, which allowed the exchange of all future GSM contracts More than half of all alliances were on telecommunications and almost one sixth on both software and microelectronics
Exploration
Third Trajectory Period 1997-2002 48 strategic alliance agreements, of which 25 were joint development agreements, 16 coproduction contracts, six joint ventures and one a standardization consortium. Joint development agreement with Nordea Bank and Visa International. pioneering pilot to test and verify mobile payment services based on dual chip technology
Partnerships with competitors joint development agreement standard setting is a strategic alliance with the Japanese NTT DoCoMo. Nokia and NTT DoCoMo open mobile architecture for WCDMAbased third-generation mobile communication services : browsing, messaging and application execution Agreement between Nokia, CMG Wireless Data Solutions,Ericsson/Sony Ericsson, Comverse, Logica, Motorola and Siemens, founded the Interoperability Group for the Multimedia Messaging Services.
Strategic repositioning by means of alliance networks:the case of IBM UNIX was an open operating system, supported by Sun and Hewlett-Packard, which offered customers the first attractive alternative to IBM s mainframe computers (Gerstner,2002). IBM failed to see that personal computers (PCs) would be widely used by business and enterprises IBM gave control over the operating system to Microsoft and the microprocessor to Intel, and in the early nineties IBM s leadership position started to deteriorate
Fujitsu, Digital Equipment and Compaq were the competitors for hardware components EDS and Andersen Consulting were gaining ground in information services, Intel and Microsoft were more profitable in the PC market than IBM First force: systems integration for business enterprises and bundled software and services for the consumer - market ICT industry would be service-led rather than technology-led.
Second force: the emergence of the networked model of computing that would replace the standalone PCs that dominated the market Computing infrastructure and software would have the future Exit commodity hardware technologies and concentrate on higher-margin software and services, and especially integrated (ebusiness) solutions
IBM's alliance network: 1991-2002 91-92 55 strategic alliances, 23 were in the field of computer manufacturing, mainly in the development of microprocessors, and 23 in the field of software development, mostly related to operating systems and software architecture Two important alliances with Microsoft and Intel. Microsoft and IBM cross-licensed Windows New Technology Intel, IBM had a long-term agreement on the development of microprocessors.
IBM and Apple shared ten strategic alliances, mainly related to the development of microprocessors and software architecture. microprocessors for PowerPCs and mainframe computers
96-97 Exploitation multiple partnerships with Toshiba and Motorola are all in developing microchips, Exploration joint R&D in the development of multimedia and browser software. 6 out of 32 alliance agreements dealt with the Internet, Netscape, Oracle, Sony, Nintendo, Sega Enterprise and NEC Internet browsers, ThinkPad, WebSphere and other e-business applications. e-business solutions
2001-2 Software: Microsoft, Peoplesoft, and Citrix Systems Telecom: Cisco and Nortel Networks, and leading mobile phone manufactures such as Ericsson, Nokia and NTT DoCoMo