Concept, Structures, and Decision Factors of Open Innovation
5.4 The Difference of Open Innovation According to Product Life Cycle
5.4.1 Product Life Cycle
As illustrated in Fig. 5.5, Chesbrough divided the product life cycle (PLC) into an emerging stage, growth stage, maturity stage, and decline stage. He also divided the relevant intellectual property life cycle model into the following: “the initial stages of a new technology,” where the technology is secured and its protection system is provided; “the next phase,” where the technology is applied to manufacturing and internal technological capability is promoted through partnership; “the third phase,”
where the industry can obtain profit positively through open innovation (OI); and finally “the final phase,” where the inside-out open innovation through which obtained profit overlaps with the outside-in open innovation strategy in order to secure new and alternative technology.
From the perspective of IP management strategy, Chesbrough showed that the industry needs to maximize its profits by positively utilizing its technologies through a more direct open innovation when the technology reached its maturity stage.
If we divide product innovation and process innovation, such as in Fig. 5.6, life cycles of the two are different from each other. During the early stage of a life cycle, product innovation can be bigger than process innovation. But in the late stage of a life cycle, process innovation is bigger than product innovation. The sources of innovation are provided from various subjects as well as from the inside in the over- all stages of the product life cycle (Utterback and Abernathy 1975).
Emerging
Growth IP 1st
Create Protect
IP
IP 2nd Deploy Tech. + Partnership
Architecture IP 3th Harvest Tech Open Inn.
Architecture IP 4th New tech Inside-out
Fig. 5.5 Four product life cycle and the IP life cycle model (Source: Chesbrough (2006a, pp. 90, 92–93))
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Also, according to the product life cycle, the location of the idea source of open innovation is different. That is, they argue that open innovation in the emerging and growing stages results from external users’ need; in the mature and declining stages, new and innovative ideas result mainly from the internal developer of the product (Ettlie 2006, p. 256).
5.4.2 Level of Open Innovation According to the Product Life Cycle at Sectorial Innovation System Level
The technological and market uncertainty in any sector at the beginning of the prod- uct life cycle is usually accompanied by increased knowledge exchange between firms in which experts develop a common language, which is not yet codified (Rosenkopf and Tushman 1998; Rowley et al. 2000). It is also common practice to interact with a wide variety of external factors, such as customers, other firms, sup- pliers, research institutes, etc., to strengthen the installed base of the firm’s technol- ogy (Ozman 2011). It argues that in the beginning of a sector life cycle, open innovation policies usually serve the dual purpose of exploring distant knowledge sources and exploiting potential network effects to strengthen the installed base of a technology. But in the later phases of the sector life cycle, after the emergence of a dominant design, open innovation incentives and effects depend largely on the product system architecture (Ozman 2011). In the mature phases of the industry life cycle, a dominant design emerges, and firms gain familiarity with the dominant design and complementary products, which support the existing dominant design, emerge (Abernathy and Utterback 1978).
Through previous studies by Chesbrough, it can be expected that a considerable relationship exists between product life cycle and open innovation. In the case stud- ies, it was shown that open innovation is more actualized when a sector grows into new areas, and investment increases (Chesbrough 2003); examples include when IBM advanced into the system software area and reinforced its new capability
Product Innovation Process Innovation
Time
Rate of Innovation
Fig. 5.6 Utterback–Abernathy model in product maturity and innovation (Source: Utterback and Abernathy (1975, p. 639))
5 Concept, Structures, and Decision Factors of Open Innovation
beyond the existing computer area and also when Intel continuously developed new areas, such as the flash memory area.
Microsoft’s operating system was a derivative of one created by another com- pany that Microsoft obtained a license from, and many of the major software appli- cations Microsoft created were based on products invented elsewhere, such as Google, which is spending a lot of its money to buy new mobile platforms from all over the world, even though it is now a global top firm in that sector (Brandt 2009, p. 194). Not only Microsoft but Google also did not hesitate to adopt “outside-in”
open innovation in order to create new software or new products. In fact, a consider- able part of the success of these sectors depended on open innovation. In particular, it cannot be underestimated that Google is trying to create a profit model through maximized utilization of external knowledge and technology of all individuals and sectors through the maximization of open innovation of the entire world.
Based on several cases and literature reviews of product life cycle, we can estab- lish a research model for the relationship between product life cycle and level of open innovation at sectorial innovation system, as shown in Fig. 5.7. Figure 5.7 shows that the level of open innovation has an inverse relationship with product life cycle in the sectorial level. That is, open innovation mainly occurs in the emerging and growing stage product life cycles at the sectorial innovation system. Furthermore, when the product life cycle reaches the maturity and declining stages, closed inno- vation will lead the situation, surrounding the relevant product’s technology at the sectorial innovation system.
The mobile industry is considered to be in the growth stages compared to the automotive sector. However, it is closer to the maturity-stage sector compared to the new-growth sector such as the IT medical care subsector, IT robot subsector, solar energy subsector, and fuel cell subsector.
The open innovation level of emerging and growing stage sectors and that of post growth-stage sectors are different in open innovation with university channels. The level of open innovation with the university channel will decrease when the product
Emerging Growing Maturing (Decling)
Open
Closed
Fig. 5.7 Relationship between product life cycle and level of open innovation in the sectorial level (Source: Yun et al. (2013))
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life cycle grows from the emerging stage (new-growth sector) through the growth sector (mobile sector) to the mature stage (mobile sector).
5.4.3 Difference of Open Innovation Effect According to the Product Life Cycle at the Firm Level
The breadth and depth of open innovation do not unilaterally increase the firm’s performance, but they have an inverted U-shape relationship (Laursen and Salter 2006). There are several managerial factors promoting firms’ performance through open innovation, such as those included in the establishment of extensive networks of interorganizational relationships with a number of external actors, in particular, universities and research institutions, organizational systems focused on accessing and integrating the acquired knowledge into the firm’s innovation processes, new evaluation criteria to focus more on external sources of innovation, and the use of knowledge management systems, which are able to support the diffusion, sharing, and transfer of knowledge within the firm and within the external environment (Chiaroni et al. 2010).
In the meantime, as shown by Chesbrough in his IP management strategy on the product life cycle or by Utterback in his sources of innovation based on the product life cycle, the open innovation effect is expected to exist in all stages of the technol- ogy life cycle (Chesbrough 2003; Ettlie 2006; Utterback and Abernathy 1975).
Even in the developing process of a business model, there exists an open innovation effect in all steps of the open business model (Chesbrough 2006a, p. 111). As shown in Fig. 5.8, there is an open innovation effect in all stages of the product life cycle from the emerging and growing stages to the maturity and declining stages at the firm level. This means that open innovation of any firm produces innovative perfor- mance. Commitment to learning, shared vision, and open-mindedness is positively related to product innovation performance (Yoon 2004, p. 86). This means that open innovation has a high positive effect on every stage of the product life cycle to the performance of the firm.
Open innovation shows a statistically significant effect not only on growth stage firms but also on mature stage firms.
5.4.4 Rethinking the Relationship Between Open Innovation and Product Life Cycle
Classical PLC theory argues that many new products are initially discovered and produced in developed countries and exported to developing countries, but as tech- nology for production becomes more standardized, production shifts to developing countries due to lower labor costs (Vernon 1966). In the PLC theory, the rate at which an individual firm discovers and successfully markets new products is either treated as exogenously given (Krugman 1979) or as a “deterministic function of the firm’s expenditures on new product development” (Jensen and Thursby 1986). In
5 Concept, Structures, and Decision Factors of Open Innovation
contrast, Schumpeter stressed that firms compete with each other to successfully introduce new products (Schumpeter 1942).
Sustained product innovation in developed countries enables workers to earn higher wages than comparable workers in the in developing countries (Segerstrom et al. 1990). According to the PLC theory, patent protection or internal R&D trig- gers an increase in R&D cost and a decrease in the revenue of developed countries.
Hence, if open innovation is activated in developed countries for product innova- tion, revenues of products will be extended. Congruently, under the knowledge- based economy, most products will fall into a commodity trap, after a product is introduced to the market (Chesbrough 2011, p. 124). Thus, an ordinary introducer of new products in a developed country cannot continue to obtain revenue from the product. Three kinds of commodity trap, the deterioration trap, the proliferation trap, and the escalation trap, decrease the PLC of new and innovative products and diminish the competitive advantage of the firm dramatically (D’Aveni 2010, p. 56;
Lina and Dalim 2013). In today’s rapidly changing business landscape, new sources of sustainable competitive advantage can often only be attained from business model reinvention that is based on disruptive innovation and not on incremental change or continuous improvement (Voelpel et al. 2004).
Sustained product innovation by open innovation will maintain the revenue of the product for developed countries. The Vernon effect from the PLC is not mani- fested in several developed countries presently, but the open innovation effect for escaping from commodity trap is sure.
The structural relationship among open innovation, commodity trap, PLC, and trade is summarized in Fig. 5.9 based on open innovation theory, the commodity trap concept, and product life cycle theories. If open innovation is actualized, the product of the firm does not fall into the commodity trap. A postponed or prevented fall into a commodity trap motivates the decrease of the product life cycle. The
Emerging, Growing, Maturing (Decling)
High Yes
Low No
Product Life Cycle
The Effect of Open Innovation
Fig. 5.8 The relationship between the effect of open innovation and PLC in the firm level (Source:
Yun et al. (2013))
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decreasing speed of the product life cycle triggers an increase in trade, and increased trade actualizes open innovation through the trade process itself.
Nowadays, the requirements for reinvention of capitalism are growing. Creating shared value (CSV) is integral to a company’s profitability and competitive position (Porter and Kramer 2011). The main way to acquire CSV or dynamic energy of sustainable development in or out of firms is open innovation (Christensen 2012).
5.5 The Role of Internal Open Innovation Attitude