Monday, May 19, 2014

Absorption and open innovation

The desire for development and the need for constant adjustment to the dynamic circumstances of life lead individuals and companies into new forms of organisation, cooperation and (co)creation. Open innovation is one of the forms of generating (added) value. The concept was first introduced in a comprehensive manner in 2003 by prof. Henry Chesbrough in Open Innovation: The New Imperative for Creating and Profiting from Technology. Due to it's applicability, the concept is being rapidly integrated within the business world, but it is also drawing interest in scientific circles, which are applying systematic research to fill in the gaps in understanding, behaviour, and nature of open innovation and contribute to the development of its new forms.

Vibacom has been actively participating in the introduction and development of open innovation models in Slovenia since 2005. In order to acquire the latest knowledge in the field, we joined the national "Young Researchers from the Business Sector" programme initiated by the SPIRIT Slovenia - Public Agency of the Republic of Slovenia for the Promotion of Entrepreneurship, Innovation, Development, Investment and Tourism. We supported Kaja Rangus' doctorial research, entitled »Proclivity for open innovation: construct development, determinants and outcomes«. We are very proud of her successful path of development, which will set a new milestone with the presentation of her work in July 2014. She presented the results of her initial research project at the Academy of Management 2013 international scientific conference and will present the results of her second and third research projects in the coming weeks, namely at the IAMOT 2014 in R&D management 2014 international scientific conferences, thus reinforcing a Slovenian presence in the global treasury of knowledge. This is her story.

V: How would you define the concept of open innovation?
It’s a new method for developing products and services, which in addition to employees' knowledge and ideas, also includes external partners: from customers/users, suppliers, universities, laboratories, individuals (developers and inventors) to companies from different fields, and even competitors. Open innovation opens
Open innovation - inclusion of external partners in the process of innovation: from customers/users, suppliers, universities, laboratories, individuals (developers and inventors) to companies from different fields, and even competitors.
numerous new possibilities for cooperation to a company, ensuring the availability of ideas for developing new and improved products, services and solutions, as well as opportunities for entering new markets. Prof. Chesbrough introduced this process in the form of a "tunnel" (Figure 1).

Figure 1: The concept of open innovation
Source: Rangus, 2010 (adapted from: H. Chesbrough (2003). Open Innovation:
The New Imperative for Creating and Profiting from Technology)

Figure 1 shows that ideas for a new or improved product/service/solution in any phase of its innovation development process can come from internal technological and non-technological bases, as well as from external sources. A company can: 1) invite external partners to cooperation as early as  the initial stage of collecting ideas, or 2) in the development phase, recognising the need for an additional component (level of knowledge, ideas for the intermediate or final product) that is less costly and quicker to obtain if purchased or licensed from an external partner. It can also occur that a company through its own development generates a by-product that is not suitable for its core activity and thus decides to sell or license it out (for a licensing fee) to another company. Open innovation nowadays often leads, as a consequence of the need for quick product launches or entries to new markets, to new partnerships in the form of a brand (trademark) or joint-venture.

V: Does his mean that the concept of open innovation is not only about receiving ideas and knowledge from the outside, but also involves mutual transfer/sharing of knowledge?
Absolutely. It's a two-phase process: one phase of open innovation concentrates on acquiring new knowledge and ideas from outside, while the second phase involves sharing a company's knowledge and ideas with external parties. The key concern for a company is to find the appropriate balance between which ideas, knowledge or technology they need to acquire externally and to what extent they want to share their knowledge with external parties. What is most important is that a company focuses on its core abilities while involving external partners in other, less important activities and products/services. The key criteria in making such decisions are cost-effectiveness, quicker launches and the potential of entering new markets.
Photo 2: Vibacom team, from the left
(Violeta , Kaja, Barbara)
Source: Vibacom
V: How would you summarize the advantages of open innovation?
The main advantage is obtaining a broader spectrum quantity of new ideas, particularly ideas with high market attractiveness as one of the sources are also end customers, access to knowledge and technologies a company is lacking, shorter time to product launches, entry into new markets and lower costs of developing the final product.

V: Does this concept have any negative aspects?
Unfortunately, every positive thing has a negative side to it. The negative aspect of open innovation is often the reluctance of employees when it comes to cooperating with external partners, the so-called »Not-Invented-Here« syndrome, meaning that the developers in a company do not accept technology/knowledge/solutions that are not developed internally. Furthermore, employees are accustomed to their routines which makes it difficult for them to adjust to a new way of obtaining ideas, new models for their development and a new frame of mind. With respect to business partnerships, the main area where problems arise is defining contractual obligations and ownership of the final product/service.

V: Are there any concrete examples of implementing open innovation?
There are several activities for implementing open innovation. For example, a company can obtain external knowledge/ideas based on:
•    cooperation (networking) with different external partners,
•    outsourcing research and development services from universities and laboratories,
•    involving customers/users,
•    joint investments (start-ups, spin-offs) with external partners,
•    purchasing/in-licensing external technology and knowledge.

A company can develop and share its internal potential with external parties through:
•    establishing new companies (venturing),
•    selling/out-licensing its proprietary technology and knowledge,
•    involving all employees in the search for ideas and development of new products and services.

V: Could you illustrate this with an example from practice?
The most common form/method of open innovation is including users in the development of new products/services. Companies often obtain ideas from users regarding new or improved products/services in the "traditional way", e.g. through questionnaires in stores, forms for submitting ideas on web pages, etc. More and more companies are starting to establish dedicated web platforms/communities for users, where they can submit their ideas for new/improved products/services and mutually comment, like and rate them. Dell has been maintaining such a platform for several years (Dell Idea Storm), and so has Starbucks (my Starbucks Idea). Some take it a step further offering the development of a personalized product, such as NikeID and miAdidas products, or Lego's  (preko Lego Create and Share).
Technologically more complex projects utilize platforms that enable exchange of technologies and finding appropriate partners for developing specific technologies (the so-called "Open innovation Marketplaces"), such as Nine Sigma, InnoCentive, Yet2, etc.

Photo 3: prof. Henry Chesbrough and Kaja Rangus
Source: Kaja Rangus' personal archive
V: Your doctorial research analyzes the absorptive capacity of companies. Could you please explain this concept?
The absorptive capacity is the ability of a company to "absorb" information from external sources. It represents its ability to detect, adjust and integrate external information into its own operations. Clearly, a company's absorptive capacity greatly depends on the absorptive capacity of individuals/employees and their ability to detect external information and transfer it into the company.
»The absorptive capacity is the ability to detect, adjust and integrate external information into a company's operations.« 
V: What are the key elements of your doctorial work?
The first chapter is dedicated to developing measurement criteria for assessing open innovation in a company. The main challenge of researching the said concept lies in the fact that existing scientific research primarily deals with defining the concept itself and presenting case studies of large multinationals that have successfully implemented open innovation in their business operations. My aim was to verify on a large sample of companies whether the concept actually improves the level innovation in the company. To this aim I developed a measurement tool, which assesses a company's  tendency to utilize open innovation and includes all of the above activities of open innovation. Such a measurement is interesting from the scientific point of view since it allows an in-depth analysis of the concept with respect to researching the influence of open innovation and its relationship with other organisational correlates on large samples. From the practical point of view, the measurement is interesting for it describes the various methods of implementing individual aspects of open innovation. The measurement was developed on a sample of over 300 Slovenian companies and additionally tested with a sample of 100 Italian companies.

V: So, the second chapter must be focusing on studying the influence of open innovation?
Correct. The second chapter uses structural modelling to verify the model of relationships between open innovation, absorptive capacity and a company's level of innovation. The results of a new survey with a sample of 450 Slovenian companies verified the theoretical concept of the model, in which absorptive capacity plays the role of a mediator in the relationship between open innovation and innovativeness of a company. In other words, open innovation and absorptive capacity directly positively influence the innovativeness of a company; similarly, open innovation directly positively influences absorptive capacity, and through it indirectly also the company's innovativeness. My research shows that the cumulative effect of open innovation and the absorptive capacity on a company's innovativeness is greater than the sum of each individual factor, thus indicating the power of mutual influence of different organisational abilities.
The survey shows that all aspects/activities of open innovation positively influence the innovativeness of a company, wherein the key factor is employee involvement. This means that internal organisation and the human factor play a key role in the implementation of open innovation. Particularly  managers' open-mindedness. 
V: And what are the key findings of your third survey?
My third survey, with a sample of nearly 700 companies from Slovenia, Italy and Belgium, studies the influence of individual aspects of open innovation on the innovativeness of a company and highlights several steps for the successful implementation thereof. The survey shows that all aspects/activities of open innovation positively influence the innovativeness of a company, wherein the key factor is employee involvement. This means that internal organisation and the human factor play a key role in the implementation of open innovation. This particularly requires managers to have an open frame of mind if they decide to implement this method of innovation, but employees also need to be aware of the importance of exchanging information and cooperation, both with colleagues and with external partners. Based on the implementation of the various aspects of open innovation, I classified companies into four groups using cluster analysis. I named such identified groups as follows: Open innovators (actively performing all activities of open innovation); Systems engineering companies (actively performing all activities of open innovation, except for contracting research and development services from universities and laboratories); R&D outsourcers (actively utilizing contracting research and development services from universities and laboratories), Customer-oriented companies (only actively involving customers in the innovation process). The survey showed that the group of open innovators is the most innovative compared to the other three.

Photo 4: Kaja Rangus
Source: Kaja Rangus' personal archive
V: And your final message for companies…?
The research I conducted for my doctorial dissertation clearly proves the positive effects of open innovation. Naturally, not all companies are suitable for implementing all aspects of open innovation. I believe that it is of utmost importance that a company determines which activities are specifically suitable for implementation without significant efforts and costs. More than the effort to implement all activities of open innovation, I believe that the key is in open-minded managers and employees and knowing what can be gained from cooperation, sharing and exchange. Thus, open innovation is established spontaneously.

Kaja, thank you for opening a new dimension of understanding the nature of innovation in (business) systems. It will support our efforts to translate our insights about open innovation into new value in small, medium and large companies, as well as in local communities, the civil society and personal development. May these multiplicative effects be manifested in your environment, too.


»Operation part- financed by the European Union, European Social Fund.«

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