Opening up: Open Innovation in a closed market?

When Paul Prinsloo asked me if Chesbrough’s funnel could be open on both sides, the economist in me cried NoNoNo!

This initial reaction is caused by schooling in traditional economic thinking. The concise version of this reasoning is as follows. Firms have to invest funds in research and development. Only 20% of the projects started will survive towards the stage of commercialization, where another part will be lost in the implementation stage. This means that, once the final product or service is on the market, the profits have to be large enough to compensate the firm for all initial investments, including failures and restarts. To generate profits of this size, the firm has to have some kind of monopoly power for a given period. This can be guaranteed through some specific competences, materials but mostly through property rights and patents.

The theory tells us that in a world without protection, the firm which makes the initial costs will not earn enough before its competitors enter the market with imitations or even improvement on the initial innovation. Innovative firms will go bankrupt, so there will be too little or even no innovation in this world.

Open innovation still depends on property rights, but it changes the situation in the sense that inventions, patents and innovations are bought and sold. Firms search externally for usable patents and supply their inventions and patents to the market if they deviate to much of the existing business model. Chesbrough assumes that through this mechanism costs will decrease and efficiency will increase as more research is used in innovations and failures will only influence the innovating firm (how these costs are influence the collective wealth is unclear in his model).

So open innovation is about increasing cooperation, but within a market setting. However, cooperation will lead to shared experiences and this can result in shared values, creating more business opportunities.

Collaboration is also necessary because on the output side of the model things are changing. Firstly, there is the influence of ict. For a lot of business, their main function was to select and stock products, produced by others. For example publishers (both of music and books), who selected the writers and bands of good quality, took care of the distribution of their work and made a living by selling these products. In essence, this is the same for super markets, which decide which goods to offer to the consumers, choosing from a large range of alternatives.

 

However, as Chris Anderson described in The Long Tail, in a web based society producers can place their products on websites, whether self published books, music or specialized goods which were normally not chosen by large risk adverse companies. Although some authors, composers, bands and small producers will act purely on their own, others search for collaboration to share sales channels; using each other traffic on the website to generate trade for themselves, see for example the Strange New Products website or Weird Music.Web.

Secondly, the tendency towards co-creation. Accepting the fact that value is created in the use of products, not in the sales transaction, the buyer plays a major role in realizing the full value of a product or a service. To give a consumer the freedom, to adapt the product or service to his or her own wishes, collaboration with other firms is almost unavoidable.

Taking those two tendencies together, the market side of firms is opening up, requiring the input side to open up. Open innovation makes co-creation and specialization possible, but market developments in their turn push collaboration (and by that open innovation): opening up one side of the process will cause the other side to open up too.

Berkeleyan, Hulda Nelson imageOpenness means different things in different fields. Open in the sense of open source means free. Open access in the sense of the British government means that the producer (author) pays for the deliverance of his product, open in open education can mean without start qualifications or gratis. Open innovation means that the research outputs are shared over the borders of the firm, caused by or stimulating co-creation on the output side of the firm; increasing access to knowledge and innovation without fundamentally changing property rights.

Another difference is that –despite the fact that all behaviour is free- the openness in innovation and co-creation is enforced by the market forces, whereas openness in software and education mostly is voluntary. Perhaps a nice subject for another blog?