Managing The Ecosystem For Innovation

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The term describes the various organizations and individuals that directly or indirectly support or live off a particular business, technology or standard. Globalization and rapid technological advances have increased the size of overall markets, making more niches sustainable. The consequence of this specialization is that strategies for innovation have evolved.</div> <bR> <div> Failure to pay attention to the assessment of and exploitation of other firms' ecosystems, or ignoring the construction and management of an ecosystem is a common source of strategic failure in high tech companies. It is a particularly common error among foreign firms launching the US market. These new entrants rarely understand the difference between “Sales” and “Bus Dev” (the business development function).</div> <bR> <div> HBS professor, Chesbrough writes a useful book about innovation and management of innovation ecosystems. He contrast two types of innovation: the more traditional “Closed Innovation” and the increasingly important “Open Innovation” approach.  </div> <bR> <div> Companies pursuing a Closed Innovation strategy perform a wide range of research, They then select the successful innovations that have immediate implementable impact upon the current business. Other innovations are “put on the shelf”. A Closed Innovation approach works best for companies that have monopoly or dominant market positions (e.g. early Xerox document processing, IBM's System 360, Bell Laboratories). Their high level of profits permit investment in a wide range of basic and applied R&D and barriers to entry (patents in the case of Xerox, market, standards dominance in the case of IBM, and regulatory barriers in the case of AT&T) slow the transfer of knowledge to potential competitors.</div> <bR> <div> Open Innovation involves managing innovations that occur inside and outside a company and at customer sites. It tends to be typical of companies with more narrowly focused non-vertically integrated business models. </div> <bR> <div> Intel is portrayed as one example. It is a company that has done little R&D of the type done by Xerox, IBM or Bell Labs. Rather it has focused its research efforts primarily on manufacturing improvements. All researchers actually spend 6 months in manufacturing roles before they are allowed to pursue R&D projects.</div> <bR> <div> Intel has then enhanced its R&D via selective funding of external research projects, the use of venture capital to achieve strategic objectives in developing the Intel ecosystem, three internal small R&D centers and participation in consortia such as Sematech.</div> <bR> <div> Chesbrough argues that increased job mobility in US, changed patterns of education, imported foreign technical talent, and increased availability of venture capital over the past 25 years have reduced the ability of many industries to capture the full benefit of their research and innovation. And at the same time, the failure of centralized R&D organizations such as Xerox PARC to capture shareholder value from fundamental innovations in new business areas has highlighted the need to manage innovation in a different way.</div> <bR> <div> He illustrates this last conclusion by reviewing the performance of companies such as 3-COM (Ethernet) and Adobe (laser printing fonts), companies that were spun out of PARC. He documents how, contrary to the popular wisdom that Xerox failed to capture the value in its innovations spun out of PARK, other factors required spinning out technologies for them to evolve and become successful. Two issues were key:</div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Additional innovation was required to make the spin-out companies successful.</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">The spin-outs needed to alter their business model from the proprietary, fully vertically integrated strategy of Xerox.</div> <bR> <div> The successful spin-outs were more narrowly focused in their efforts and generally succeeded by pursuing a business model that was the opposite of Xerox dominant business culture. Because they were not fully vertically integrated, they were dependent upon strategic alliances, license agreements and the ecosystems of other firms. </div> <bR> <div> This contrast in business models between Xerox and its spin-outs is then paralleled with the evolution that IBM began in 1992 under Lou Gerstner. IBM moved away from its prior vertical integration strategy; it began to refocus its R&D higher in the value chain; and, it began to exploit a new role as vendor of components and licensor of intellectual property to other firms (a group that included existing and potential competitors).</div> <bR> <div> The driver for IBM's aggressive component sales was the rapid rate of innovation in technology, and although not directly stated in the book, an attempt to seek major cost advantages from ramping up volume. But just as importantly the speed of innovation today is such that rapid exploitation is frequently more valuable than protecting discoveries. And in some cases giving away innovations (as has been done by Intel by publishing its research) can enhance an ecosystem, and leverage the efforts of the innovator.</div> <bR> <div> But IBM is not alone in feeling the pressure to scan, manage and source external sources of innovation. Merck, one of the preeminent research-oriented pharmaceutical companies has now required its researchers to think in terms of scanning and managing research internal and external to the company.</div> <bR> <div> <B>Table: The “Open Innovation” Model</B></div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <TABLE BORDER="2" CELLPADDING="1" CELLSPACING="1" WIDTH="605" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=TOP HEIGHT= 58 ><NOBR><div> <B>Source of Innovation</B></div> </NOBR></tD> <tD VALIGN=TOP WIDTH="195"><div> <B>Value creation </B><I><B>within</B></I><B> business</B></div> </tD> <tD VALIGN=TOP WIDTH="195"><div> <B>Value creation and capture </B><I><B>outside of </B></I><B>business</B></div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 134 WIDTH="195"><div> <B>Internal</B></div> </tD> <tD VALIGN=TOP WIDTH="195"><div> Traditional “Closed Innovation” e.g. AT&T/Bell Labs. Technologies developed internally. Most relevant technologies are then commercialized. Rest sit on shelf.</div> </tD> <tD VALIGN=TOP WIDTH="195"><div> Early outbound licensing of technology, e.g. IBM licenses components to competitors to gain volume and drive down costs.</div> <div> Xerox spins off technologies but retains minority interest.</div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 76 WIDTH="195"><div> <B>External</B></div> </tD> <tD VALIGN=TOP WIDTH="195"><div> Required in areas with exploding innovation and short development cycles e.g. film business, Intel.</div> </tD> <tD VALIGN=TOP WIDTH="195"><div> Venture capital firms and strategic investments made by existing companies.</div> </tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 115 ><NOBR><div> <B>Internal and external</B></div> </NOBR></tD> <tD VALIGN=TOP WIDTH="195"><div> Building an ecosystem e.g. Sun with Java where core R&D is done inside and outside the business.</div> </tD> <tD VALIGN=TOP WIDTH="195"><div> Shaping the direction of the ecosystem to support your strategies, e.g. Microsoft Tablet PC design release to third party hardware vendors.</div> </tD> </tR> </TABLE></div> <bR> <bR> <div> Take-aways from Chesbrough's <I>Open Innovation</I> are that management teams need today to consider the following issues:</div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Explicitly consider your business model and ruthlessly focus upon most important areas of the value chain necessary for the business model, <I>e.g. IBM licensing its 2.5 inch drives to Apple;</I></div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Scan the external environment for complementary intellectual property, products, services and partner ecosystems, <I>e.g. Intel investing in research projects at universities.</I></div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Establish a framework for managing a portfolio of internal and external innovation via e.g. intellectual property licensing, cross patent licensing, academic research, venture capital, spin-outs, spin-ins and strategic alliances, <I>e.g. Merck's refocusing of its research organization upon combining internal external research.</I></div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Refocus your R&D organization to value external complementary sources of innovation that may include customers, competitors and suppliers<I>, e.g. IBM programs to encourage first of type innovations at customer sites.</I></div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Set strategic objectives for measuring, exploiting, expanding and managing the players in the full ecosystem that support your business, e.g. Intel research, design publication and standard setting.</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Speed of innovation is a key competitive weapon and an Open Innovation strategy can speed innovation and create barriers to entry, <I>e.g. Microsoft publishing specifications for a Tablet PC.</I></div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Seek to create advantage from construction of a business ecosystem and selectively investing in a portfolio of academic research, venture capital, spin-outs, spin-ins and R&D alliances to obtain maximum leverage.</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Use different business models to exploit different innovations rather than attempting to fit every innovation into a Procrustian bed of a dominant business logic.</div> <bR> <div> <I>Note: If you are not convinced by Chesbrough's argument, it may be wise to consider the success of the open source version of the UNIX operating system, LINUX. While not cited in the book, the success of LINUX based upon an extreme form of Open Innovation is proving a major competitive problem for firms such as Sun Microsystems and Microsoft. With HP and IBM adopting LINUX, the size of the LINUX ecosystem is now changing the shape of the software market. The rationale behind open systems development is described in “Eric Raymond's </I><FONT SIZE="3" COLOR="#0000FF" FACE="Arial" ><A HREF="http://www.amazon.com/exec/obidos/ASIN/1565927249/alistadavidsshom" TARGET="_top" TITLE="http://www.amazon.com/exec/obidos/ASIN/1"><U><I><U>The Cathedral and the Bazaar</U></I></U></A></FONT><I>, O'Reilley & Associates, 1999 and 2000 and also available free at http://www.firstmonday.dk/issues/issue3_3/index.html</I></div> <bR> <div> <I>February 24, 2003</I></div> <bR> <bR> <bR> <div>   <script> var page_name = ''; var invisible = ''; function sE(){return true;}window.onError=sE;var lp=0; function clr(){lp++;if(lp==1){document.ctr.src="http://64.49.222.57/0.gif";} else {clearTimeout(myT);return true;}} var myT=setTimeout('clr()',120000);var rn=Math.random(); document.write('<a href="http://www.web-stat.com/stats.shtml?alistairdavidson"'); document.write(' target="new"><img name="ctr"'); document.write(' src="http://www.web-stat.com/count.cgi?'); document.write('alistairdavidson::'+top.document.referrer); if (window.screen){ document.write('::'+screen.width+'x'+screen.height+'::'); document.write(screen.colorDepth+'::'+page_name+'::'+invisible+'::'+rn); }else{document.write('::::::page_name::'+invisible+'::'+rn);} document.write('" onError="clr();" onAbort="clr();"'); document.write(' onLoad="clearTimeout(myT);"'); document.write('border=0 alt="Web-Stat hit counter"></a>'); </script><noscript> <a href="http://www.web-stat.com/stats.shtml?alistairdavidson" target="new"> <img src="http://www.web-stat.com/count.cgi?alistairdavidson::NoJavaScript" border=0> </a> </noscript>   </div> </td> </tr></table></body>