Part III Open Innovation Strategy of Firm
7 Dynamics of Open Innovation
7.1 Introduction
As the knowledge-based economy develops, the amount of knowledge in the world is rapidly increasing along with the velocity of circulation. Firms are increasingly utilizing not only their own technologies but also external knowledge and technolo-gies. In addition, the open innovation phenomenon is rapidly spreading into indus-try, nationwide, and worldwide, as firms provide their unused technologies to be utilized by others. User innovation, customer innovation, collective intelligence, crowd sourcing, and open source innovations will be open innovation (OI) in that they are innovation based on transfers across the boundaries of knowledge and
This chapter is mainly based on the following paper.
Yun J.H.J., Won D.G., Park K.B. (2016), Dynamics from Open Innovation to Evolutionary Change.
Journal of Open Innovation: Technology, Market, and Complexity. 2(7), 1–22.
technology. The life cycles of cutting-edge products are becoming shorter and shorter, and brand new products of a firm are routinely being imitated by others.
This is called the commodity trap and is increasingly common. Consequently, as a process enabling the relentless innovation of technology, open innovation is receiv-ing more and more attention (D’Aveni 2010). Given this situation, we wanted to answer the following questions:
1. What kind of dynamic effects for business firms can result from complex inno-vation systems and market evolution driven by open innoinno-vation strategies and open business models?
2. What kind of effects can open innovation at the firm level give to and take from complex adaptive systems such as the national innovation system (NIS), regional innovation system (RIS), and sectorial innovation system (SIS) (Nelson and Winter 1982)?
3. How can firms escape falling into the commodity trap and suffering from a harmfully shortened product life cycle when engaged in the dynamic process of open innovation?
4. How do dominant design and technological regime appear, change, and disap-pear in the dynamic process of open innovation?
5. How are specific technologies or other knowledge selected by firms in the mar-ket during the dynamic process of open innovation?
We seek to establish a theory about the whole process by which open innovation is realized at the level of business firm. Speaking concretely, we seek a theory about all the processes by which new ideas or technologies are adopted by a firm, how they are used to create new products or processes, and how, in the end, they are incorporated into dominant design. Entire fields of industry are increasingly con-fronted by the perils of the commodity trap, in which imitation or pursuit of cutting- edge products is made within very short time frames. For this reason, a firm needs to dynamically analyze the impacts of its own open innovation strategy on the intro-ductory stages of new knowledge, technologies, or ideas. In analyzing open innova-tion of a firm, we cannot understand and analyze fully the whole process of open innovation without analyzing the dynamic process of specific open innovation strat-egies. First of all, concrete open innovation strategies of firms, and analysis of the dynamic processes involved, are more important than ever. Open innovation at the firm level is no longer an option but rather a must for the survival of not only cor-porate giants like IBM, 3 M, and Intel but also small- and medium-sized enterprises (SMEs) as well (Yun and Mohan 2012b).
The requirement of a new approach for firms to deal with the increasing open innovation phenomenon in the form of open innovation strategies, business models, user innovation, collective intelligence, and crowd sourcing is increasing. Firms need new ways to escape the commodity trap and to prevent injury from short prod-uct life cycles.
There is also a need for connections between open innovation at the firm level;
complex adaptive systems such as regional innovation system (RIS), sectorial
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innovation system (SIS), and national innovation system (NIS); and evolutionary change in markets. There needs to be a research framework aimed at solving this problem. Finally, we want to understand the total cycle of innovation in firms: from new ideas to new products and from dominant design to choice of technological regime (Lee and Lim 2001). There are already several theories intended to answer these questions as follows (Heredero and Berzosa 2012).
First, resource- and knowledge-based theory treats open innovation as a way to exploit resources and knowledge complementarities (Mowery et al. 1996; Das and Teng 2000; Nonaka 1994; Simon 1991). This resource-based perspective focuses on strategies for exploiting existing firm-specific assets (Teece et al. 1997). Well- known companies like IBM, Texas Instruments, Philips, and others appear to have followed a “resource-based strategy” of accumulating valuable technology assets, often guarded by an aggressive intellectual property policy (Teece et al. 1997). If control over scarce resources is essential for profit, such issues as skill acquisition, the management of knowledge and know-how, and learning become fundamental strategic issues (Shuen 1994). However, this theory cannot explain the dynamic changes that originate from the firm, such as the commodity trap and shortened product life cycles.
Second, according to the transaction cost theory, open innovation will decrease transaction costs by vertical disintegration of firms. This theory was derived from the coarse theorem and new institutional economics (Coase 1937; Williamson 1991;
Kogut 1988). On the other hand, dynamic capabilities and transaction cost coevolve according to examples such as the mortgage banking industry in the USA, which showed a shift from integrated to disintegrated production, and the Swiss watch manufacturing industry, which went from disintegration to integration (Jacobides and Winter 2005). Transaction cost theory can explain the usefulness of open inno-vation in restricted areas such as cost reduction. From the viewpoint of focusing on the coevolution of transaction cost and dynamic capability, a systematic structure with new knowledge and technology should be extended into a firm for reduction of transaction cost, and then coevolution will occur (Jacobides and Winter 2005).
Although this logic does not concentrate on the strategy of a firm, it coincides with the direction of this chapter in that it focuses on establishing and analyzing a model of the dynamic process of open innovation.
Third, the dynamic capability theory is a history-friendly model at the economic level, which can explain changes in the economy from the introduction of new tech-nology or knowledge by firms. This theory is based on Schumpeterian economics (Malerba et al. 1999a, 2001, 2008; Nelson and Winter 1982; Yoon and Lee 2009).
This model can be applied to a simulation model by the history replication method and can then be used to predict and analyze dynamic changes in economic phenom-ena through a history divergent simulation (Malerba et al. 2001). Furthermore, this theory analyzes the process of dynamic change (macroeconomic effect from micro-economic phenomena) through the simulation method. This is similar to the case of competition and industrial policies in a “history-friendly” model of the evolution of the computer industry. Namely, the basic analysis target of the dynamic capability theory is not a firm but an economic phenomenon. Consequently, this theory has
7.1 Introduction
limits for concrete analysis of the process of dynamic change caused by changes at a firm (e.g., business model or strategy). After all, the analysis beyond history rep-lication is left in a black box, because this theory has adopted an approach based on simulation. This chapter focuses on the analysis of the black box itself, the dynamic change which open innovation brings to a firm.
Fourth, again according to the dynamic capability theory, collaborative innova-tion is established to develop the dynamic capabilities of a firm and thus enhances its competitive advantage. This theory was proposed and developed by several firm strategy research groups and Schumpeterian economists (Teece and Pisano 1994;
Teece et al. 1994; Eisenhardt & Martin 2000; Zollo and Winter 2002; Helfat et al.
2007; Teece et al. 1997; Arthur 1994; Chesbrough and Teece 2002). The dynamic capabilities framework analyzes the sources and methods of wealth creation and capture by private enterprise firms operating in environments of rapid technological change (Teece et al. 1997). According to this theory, the competitive advantage of firms is seen as resting on distinctive processes (e.g., ways of coordinating and com-bining) shaped by the specific asset positions of each firm (e.g., portfolio of difficult-to- trade knowledge and complementary assets) and the evolutionary paths it adopted or inherited (Teece et al. 1997). The dynamic capability theory forcefully explains dynamic aspects with which a firm is faced (e.g., having to secure knowledge or technology, managing corporate cooperation, and path dependency resulting from acquisition of new knowledge assets). This theory also sets corporate strategic tar-gets to maintain a firm’s competitiveness by keeping rival firms from imitating and replicating their own creative products. However, it does not include direct mention of concrete corporate strategy aimed at preventing the elements comprising dynamic capability from being imitated and replicated. Dynamic capability theory cannot directly explain the trigger of dynamic capability. There is no sufficient explanation of the starting point of the introduction of new ideas, knowledge, or technology as a dynamic activity performed by a firm. To discuss dynamic capability at a corporate level, this chapter seeks to build up a model of the dynamic processes involved in open innovation to analyze those processes starting from a decision by a firm to adopt an open innovation strategy and then apply it to the current smartphone sector.
Fifth, evolutionary theories of business activity note that some firms struggle to meet the demands of their environments and reside at the margins of survival (Fortune and Mitchell 2012). In turn, selection processes remove struggling firms from the business landscape, if they fail to improve (Nelson and Winter 1982;
Aldrich 1999). According to this theory, firms survive by overcoming the obstacles of dissolving their obsolete skills or assets and of acquiring the new skills or assets required. For example, Cisco personnel suggested that the company used acquisi-tions to overcome market failure in the discrete exchange of organizational capa-bilities as it sought to upgrade its technical and market resources (Fortune and Mitchell 2012). This perspective is significant as a framework to understand eco-nomic phenomena based on the behavior and strategy of firms. At the same time, this theory does not fully explain both radical innovation, which arises frequently and appears in unpredictable ways, and acquisition and dissolution aimed directly
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at knowledge and technology in the knowledge-based age. In other words, what is required is a direct analysis of concrete dynamic processes at a corporate level.
Thus, this chapter seeks to identify how evolutionary technology management and strategy, i.e., open innovation technology management strategy at the corporate level evolves in a complex adaptive system.
For these reasons, we need to develop a theoretical concept model that can explain the processes from open innovation of new ideas or technology, to the appearance of dominant design, and the evolution of national innovation system, RIS, or SIS. The growing body of literature on strategic alliances, the virtual corpo-ration, buyer-supplier relations, and technology collaboration indicate the impor-tance of external integration and sourcing (Teece et al. 1997). Namely, there is a growing necessity to analyze the dynamic process of open innovation, and that is the subject of this study.