CHALLENGES OF OPEN INNOVATION: THE PARADOX OF FIRM INVESTMENT IN OPEN-SOURCE SOFTWARE Course: Strategic Management of Technology Professor: Deok-Joo Lee, PhD. Presented by: Pablo Rosales and Aida Mercado

Presentation contents Goals of the presentation Introduction to the paper Paper Analysis Conclusions Questions ?

1. Goals of the Presentation

Goals of the presentation To make an analysis of the paper considering the following aspects of it: Goals Research design Contribution of paper’s authors The link to the contents of the course To make a presentation of the results of our analysis

2. Introduction to the paper

Title Authors Publisher Year General facts Challenges of open Innovation: the paradox of firm investment in open-source software Authors Joel West and Scott Gallagher Publisher R&D Management, Blackwell Publishing Year 2006

Goals of the paper 1 How do firms embrace open innovation approaches as part of their R&D efforts? 2 Why would firms commit their IP and outgoing human resources to an effort that they know will benefit others, including competitors ? 3 Why do individuals contribute their IP to a project that benefits firms without receiving financial remuneration?

Research Design Research methodology Based on qualitative data Sources of data Primary Secondary Interviews to for-profit firms Industry conferences and seminars 800 news articles from: Trade Journals Business press Websites

Contributions Open Source Software in the context of the Open Innovation Paradigm 4 strategies used to deal with the challenges of the Open Innovation Paradigm 1. 2.

3. Paper Analysis

Analysis framework Challenges of OIP Strategies Maximizing internal Background Challenges of OIP Strategies Maximizing internal R&D 1. Pooled R&D 2. Spinouts 2. Incorporating external innovations Address 3. Selling complements 3. Motivating spillovers 4. Donated complements

Analysis framework Challenges of OIP Strategies Maximizing internal Background Challenges of OIP Strategies Maximizing internal R&D 1. Pooled R&D 2. Spinouts 2. Incorporating external innovations Address 3. Selling complements 3. Motivating spillovers 4. Donated complements

Background In this paper, what does Open Source Software (OSS) mean ? Examples of relevant OSS projects The link between Open Innovation (OI) and OSS

In this paper, what does Open Source Software (OSS) mean ? OSS that complies with criteria Free Redistribution Source Code No Discrimination Against Persons or Groups … Set of licenses GPL MIT License Apache License Dev. Method Geographically dispersed programmers collaborate to jointly produce software

Examples of relevant OSS projects GNU/Linux, OS Firefox, Web Browser Apache, Web Server OpenOffice, Office Suite

The link between Open Innovation (OIP) and OSS Paradigm Open-source Software Shared rights to use the technology Represents a Strategy that helps to deal with Collaborative development of technology

Analysis framework Challenges of OIP Strategies Maximizing internal Background Challenges of OIP Strategies Maximizing internal R&D 1. Pooled R&D 2. Spinouts 2. Incorporating external innovations Address 3. Selling complements 3. Motivating spillovers 4. Donated complements

Challenge 1: Maximizing internal R&D Feeding the company’s product pipeline Licensing of IP Building absorptive capacity and use it to identify external innovations Giving away technology

Challenge 2: Integrating Scanning Absorptive capacity, Political willingness to incorporate the external innovation

Challenge 3: Motivating How can firms work to insure that a stream of external innovation is replenished ? Why would firms contribute IP that was going to be made available to their rivals This is the Paradox !

Analysis framework Challenges of OIP Strategies Maximizing internal Background Challenges of OIP Strategies Maximizing internal R&D 1. Pooled R&D 2. Spinouts 2. Incorporating external innovations Address 3. Selling complements 3. Motivating spillovers 4. Donated complements

Strategies categories 1st Category: Structural approach, driven by relationships between contributors 1. Pooled R&D 2. Spinouts 3. Selling complements 2nd Category: Product centric, driven by value proposition 4. Donated complements

Structure to study each category The basic idea behind the strategy Main characteristics Strategy variants Example projects

1. Pooled R&D The basic idea: Firms donate IP to the open- source while exploiting the common benefits of all contributors to facilitate the sale of relates products

1. 2. 1. Pooled R&D Main characteristics: Allow non-members to accrue many of the same benefits as members Technical contributions to these projects extend beyond the sponsoring companies to include user organizations, academics, individual hobbyists and other interested parties 1. 2.

1. Pooled R&D Example projects: GNU/Linux, OS Mozilla, OS

2. Spinouts The basic idea: Firms transform internal development projects to externally visible open- source projects

1. 2. 2. Spinouts Main characteristics: The donated IP generates demand for other products and services that the donor continues to sell Firms maintain an ongoing involvement on the project 1. 2.

3. 4. 2. Spinouts Main characteristics (…continued): Makes sense for technologies that either are not yet commercialized, or that will eventually become commoditized Help firms to establish their technology as de facto standards 3. 4.

5. 6. 2. Spinouts Main characteristics (…continued): Attract improvements and complements that make the technology more attractive The innovation and complements enable the sale of related products 5. 6.

7. 2. Spinouts Main characteristics (…continued): Generates mindshare and goodwill with the same audience that includes the potential customers for these related product 7.

2. Spinouts Example projects: Eclipse Tools

3. Selling complements The basic idea: a pre-existing code is available; firms build internally complements to the product that includes products and services. Pre-existing code (for free) Complements (payed)

3. Selling complements Variants: Selling complements 2. Pre-existing code is internally developed 1. Pre-existing code is externally developed Variants:

1. 2. 3. Selling complements 1st variant characteristics: Pre-existing open-source being developed without the intervention of the focal firms Firms were willing to contribute back to the existing projects on an ongoing basis to: assure that the technology continued meet their respective needs, to maintain absorptive capacity to avoid discouraging external innovators 1. 2.

3. 3. Selling complements 1st variant characteristics (continued …): The firms could continue to yield returns for internal innovation by combining the internal and external technologies to make a product offering that was not directly available through open source. 3.

1. 2. 3. Selling complements 2nd variant characteristics: A firm creates and sponsors an open-source project with their own software. The firm continues to provide development resources to develop and improve that software. 1. 2.

3. 3. Selling complements 2nd variant characteristics (continued …): Firms use a price discrimination (versioning )strategy. 3.

3. Selling complements Example projects: 1st Variant 2nd Variant Apache Web Server MySQL DB IBM WebSphere Oracle DB

4. Attracting donated complements The basic idea: Firms make their money off of the core innovation but seek donated labor for valuable complements Core innovation: Internally developed Payed Complements: Externally developed Donated

4. Attracting donated complement Main characteristics: Publishers release editing tools for their products to encourage contributors to participate. Complements extend the demand period for the product. 1. 2.

4. Attracting donated complement Main characteristics (…continued): Practices to motivate contributions: Availability of dev. tools Creating infrastructure to facilitate collaboration Recognition for contributors 3.

4. Attracting donated complement Example project: Half Life game

Analysis framework Challenges of OIP Strategies Maximizing internal Background Challenges of OIP Strategies Maximizing internal R&D 1. Pooled R&D 2. Spinouts 2. Incorporating external innovations Address 3. Selling complements 3. Motivating spillovers 4. Donated complements

Pooled r&d Strategy Addressing the Challanges Challenges of OIP Participants jointly contribute to shared effort Maximizing internal R&D Pooled contributions available to all 2. Incorporating external innovations 1. Pooled R&D 3. Motivating spillovers Ongoing institutions establish continuity

Spinouts Strategy Addressing the Challanges Challenges of OIP Seed non-commercial technology To support other goals Maximizing internal R&D 2. Incorporating external innovations Supplants internal innovation 2. Spinouts 3. Motivating spillovers Free access to valuable technology

Selling Complements Strategy Addressing the Challanges Challenges of OIP Maximizing internal R&D Target highest value part of whole product solution External components Provide basis for internal development 2. Incorporating external innovations 3. Selling complements 3. Motivating spillovers Firms coordinate ongoing supply of components

Donated Complements Addressing the Challanges Challenges of OIP Provide an extensible platform For external contributors Maximizing internal R&D Adding variety and novelty to established products 2. Incorporating external innovations 4. Donated Complements 3. Motivating spillovers Recognition and other Non-monetary rewards

4. Conclusions

Conclusions Companies adopt OSS strategies because they allow them to deal with Open Innovation challenges. Individuals contribute to OSS projects because they can obtain benefits from them: Recognition Valuable tools Knowledge about a technology Personal satisfaction

Goals of the paper 1 How do firms embrace open innovation approaches as part of their R&D efforts? 2 Why would firms commit their IP and outgoing human resources to an effort that they know will benefit others, including competitors ? 3 Why do individuals contribute their IP to a project that benefits firms without receiving financial remuneration?

5. Questions ?