Open innovation in SMEs, including low tech SMEs

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Managing open innovation in SMEs

Prof. dr. Wim Vanhaverbeke

Hasselt University ESADE Business School

National University of Singapore

21 October, 2013

How did we define open innovation for large companies? “Open innovation is the use of purposive

inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively.”

Chesbrough, Vanhaverbeke, West Open Innovation: Researching a New Paradigm

(OUP, 2006)

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Current Market

Internal Technology

Base

R D

Outside in OI: Filling the gaps with external technology

Technology Insourcing

New Market

External Technology

Base External research projects

Venture investing

Technology in-licensing Technology acquisition

Source: H. Chesbrough, Sloan Management Review, Spring 2003

Current Market

Internal Technology

Base

R D

Inside out OI: Profiting from others’ use of your technology

Technology Insourcing

New Market

Technology Spin-offs

External Technology

Base

Other Firm’s Market

Licensing

Source: H. Chesbrough, Sloan Management Review, Spring 2003

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Some observations n  Main focus on:

•  High-tech industries •  Large manufacturing (and now also services) companies

n  What do we know about open innovation in SMEs? •  Few articles published so far (e.g. Van de Vrande et al. 2009,

Technovation) •  A few case studies or some survey based evidence •  No systematic analysis yet of OI in low-tech SMEs

n  OI in high high SMEs by CVC n  “OI in SME”- project: conclusions of an in depth study of OI

successes in 10 European SMEs in different industries

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Managing OI between a large company and a high tech start-up?

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How to organize for OI? External Venturing at XYZ §  Pitfall : Large firm invests in a start-up and uses its

financial participation as a power tool to enforce cooperation on terms of the investing company

Start-up

XYZ-BU XYZ-V

Is it an interesting investment? Yes? Then a minority participation

Once there is a financial participation there is no ex ante deal how to handle the transfer of technology!

How to organize for OI? External Venturing at DSM §  Rationale:

§  Strategic return, not a financial return §  One of the BU should benefit from it

§  Therefore: Negotiation is a three way negotiation There are two deals packaged into one

overall deal

Start-up

DSM-BU DSM-V

1. Option creation: Is it an interesting investment?

2. Option exercising: Can the new technology create a new business in the future?

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How to organize for OI? External Venturing at DSM Six reasons not to start a power play with

external ventures: 1.  Bad reputation: when the large, investing firm is looking

for interesting start-ups as a recurrent practice 2.  Pushing too hard for a particular application (based on

the business model and proposed application of the large, investing firm)

u  Market potential of start-up technologies is still very uncertain because of the early stage technology. Keep options open for unintended but interesting applications.

u  limits business potential of start-up (and thereby shareholders value)

….

How to organize for OI? External Venturing at DSM Six reasons not to start a power play with

external ventures: 3.  Might kill the spirit of good cooperation. 4.  Kill entrepreneurial spirit by creating another "corporate

puppet on a string" 5.  Could limit exit possibilities and exit value for other

shareholders (by lock-in to/dependency on corporate) 6.  Could result in litigation if perceived as abuse of

economic power

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Isobionics : F & F business n  Isobionics produces Valencene:

u  Valencene is used as a Flavour and Fragrance ingredient. t  Most applications: Flavours for the beverage

industry t  Also potential in Fragrances applications

u  Taste and odor characteristics of Valencene: orange, citrus, woody.

n  Isobionics is producing Valencene based on a biotech process: 50% cheaper

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Inside out OI: KSFs n  Collaboration between small and large companies is only

successful if the relationship is managed in an appropriate way.

n  Start-up manager has extensive experience as a senior manager in a large firm u  Credibility u  Knows the decision making processes in large firms

n  Homework for the start-up before it starts collaborating: who is a trustworthy innovation partner

n  …

Inside out OI: KSFs n  Manage problems in the MNE related to licensing unused

technology: u  NSH syndrome u  There is no incentive to license a technology (use or lose strategy) u  Licensing to small firms: a lot of work for small licensing revenues

n  A start-up relying on a large firm’s technology is in an advantageous position w.r.t. financing: u  use the large company’s reputation to acquire external financing. u  the large firm may invest, local governments will subsidize or

invest more easily, and banks will grant loans.

n  Entrepreneurship and speed of start-up open the eyes of scientists / technologists in DSM’s IC. How to instill entrepreneurship in an MNE?

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Philip’s Airfryer n  Airfryer: patented Rapid Air technology of small company n  French fries with up to 80% less fat, yet maintaining a

great taste. n  The Airfryer was launched in September 2010 in several

European markets n  Frying fries and snacks has to be relearned

u  Guidelines / recipes u  Partnerships (Mora?)

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Philip’s Airfryer n  Philips developed already a technology internally in 2006:

u  Too complex and too expensive: Philips could not translate the technology into a consumer product that fits the Philips promise of “sense and simplicity”

u  “A perfect appliance”: engineers create a perfect application with latest technology and commercial people express their wishes leading to more features

n  External engineering company developed and patented a very simple technology allowing Philips to sell it below € 200.

n  In a market with price ceilings, start innovation from the perspective of price restrictions (frugal innovation, cheap innovation, reversed innovation)

Philip’s Airfryer n  Manager of the engineering company has been senior

manager at Gilette. n  NDA / later exclusive licensing deal for the B2C market /

right to buy the technology after 5 years at a predetermined price.

n  Engineering company has the right to sell in the B2B market and in countries where Philips is not active

n  Win-win outcome: Let your partner pursue business opportunities in areas that do not fit your business model.

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Open innovation in “low tech” SMEs

Main take-aways: don’t copy OI lessons for large companies 1.  Start with the growth strategy or broader

strategic objectives of small firms t BMI (VC2)

2.  The entrepreneur is crucial in driving the realization of that growth / change

3.  OI : key resources to be sourced from external partners to relaize the growth

4.  OI-network management = key process

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Curana

JAGA

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DEVAN CHEMICALS

DNA INTERACTIVE FASHION

Quilts of Denmark: quilts & duvets with active temperature and humidity control

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++ Patient Room of the Future ++ ++ Personalized Residence of the Future ++ ++ Private-care Room of the Future ++

A consortium of architects, manufacturers, user groups, professional organizations, and educational knowledge institutes

Agentschap Ondernemen - - - Alho

(pending) - - - Anamorf - - - Avantgarden - - - Artesis Hogeschool Antwerpen | Intgrale Productontwikkeling - - - Boeckx Architecture & Engineering - - - Boone International | Boone Projects - - - BSC | Aquaware - - - Buro II & Archi+I - - - BVZD Belgische Vereniging van Ziekenhuisdirecteurs - - - Cubist Creations - - - Devan - - - Elasta - - - Extremis - - - Fedustria - - - Frames & Fields - - - Francovera - - - Haelvoet - - - Hogeschool Gent TO2C - - - IBBT - - - In-Ham Gits - - - InoxLine - - - ISS - - - Modular Lighting Instruments - - - Mondoor - - - Philips (lighting, healthcare, consumer) - - - Groep Sanakor - - - Tele-Signal Electronics - - - Televic Healthcare - - - Van Maele - - - VDB Productions - - - Vink - - - VitraPoint Gent - ARTerior bvba - - - Vlaamse Verpleegunie | Urobel - - - VTDV Vereniging voor technische diensthoofden in de verzorgingsinstellingen - - - Westelec

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Dingens Innovacelli Barometers

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Curana

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Curana: combining innovation and industrial design

n  The old situation: u  Steel mudguards and fenders u  Belgium as market (10 million inhabitants) u  Family owned business

n  Challenge: u  Growing economies of scale and globalization of the industry u  Strategic change:

t  differentiation through innovation t  or price competition with low-cost import

Curana: B"Lite : Mudguard of Curana

19/11/13 Wim Vanhaverbeke 44

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Curana: innovation combined with industrial design in low-tech markets

n  Advantages: u  Lighter mudguard (25% less weight than plastic mudguards). u  Production cost are low enough to be competitive with standard mudguards u  Installation of the mudguard is easier u  Nice design u  Aluminum separated by plastic can be used as a conductor for electricity (no

more wires required for lights) n  IP

u  European patents u  Curana also applied for a patent on the production process

n  Innovation: u  combination of internal and external knowledge (external design

company and polymer extrusion manufacturer) u  Lead-users (bicycle manufacturers) promised to buy B”Lite via an

exclusive deal which is limited in time (Batavus and Sparta)

Curana: Spectacular results


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Curana: a small company in transformation


Original Design Manufacturer

•  price setting •  design driven •  added value

OEM ODM OSM OBM

Original Equipment Manufacturer

•  price pressure •  technology driven •  no added value

Original Strategic Management

•  vision driven •  proactive design solutions •  Innovative

Original Brand Management

•  Image driven •  Reliability & authenticity •  Market pull from customers

> > >

How innovation is processed at Curana?


Exploration

Design

Realization

Promotion

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Some JAGA products

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Jaga n  Differentiation vs. competition through:

u Eco-radiators u Design-radiators

n  The company is not selling products but experiences, ideas, values, etc….

n  Differences: u  radiators as heating machines u  radiators to reduce carbon-footprint u  radiator as a creative part of the house, heating

the "soul"

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Jaga Oxygen : controlling temperature,

moisture and oxygen in the house

Wearable heating?

Some JAGA products

Jaga Experience Lab : JEL - Product: test-facility

- Experience: test and develop your own products

- Jaga invites professors & engineers worldwide

- Low cost form of publicity: new projects as Federation Tower / Telefonica

Open innovation # 1

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JAGA products days

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•  Total number of projects: 119

•  Total number of products created by non professionals: 49

•  Number of Jaga Product days ideas taken into production within 6 months: 6

Open innovation # 2

Example: Play radiator


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Example: The play radiator

•  Burning man festival in the Black Rock Desert in Nevada

•  40.000 people

•  a cross-pollination of art, music, theatre, sensation

•  wonderful creations: go up in flames at the end of the 3 weeks

Open innovation #3 Uchronians and the Burning Man

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www.uchronians.org

Start of the creative (internet) community

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QOD:Vamdrup - Denmark Founded 2000 Founders

•  Søren Løgstrup (Sales and marketing) •  Hans Erik Schmidt (Business development)

Quilts of Denmark: quilts & duvets with active temperature and humidity control

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The bedding textile industry

n Overview late ’90s u Very traditional industry without any

major innovation u Through the 90s there was a trend

towards falling prices (quality). u Price was the only dominating factor!

n QOD wanted to change this !

Changing the industry?

n  Founders formulated two guidelines for the QOD business:

1.  ”to promote a healthy sleep for a better tomorrow”

2.  A dream team : only best people in the industry

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Provider of healthy sleep n  Vision:

u  Not a textile company. u  … but providers of healthy sleep!

n  Sleep is a major problem u  We sleep less than we did 50 years ago u  More than 70 million Americans do not sleep well (309 mill

inhabitants or 23% ) u  The lack of sleep is costing the American society billions of

dollars annually. u  It is estimated that 56.000 car accidents in the United States

happen because the driver falls asleep behind the wheel. u  Danish teenagers sleep too little and have difficulties attending

early lectures.

How to improve sleep? n  In order to become a provider of healthy sleep, QOD

needed to know which factors are important for a good night’s sleep:

n  They started a cooperation with external experts: u  Sleep scientists (Glostrup hospital) u  Danish Asthma & Allergy Association u  Physiotherapists

n  Temperature (variation) rapidly emerged as one of the major determinants of a good / bad sleep

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How to find the required technology? n  Lot’s of trials (and errors) with different technologies n  H-E Schmidt finds a solution reading an article in a

scientific journal about phase change technologies developed by Nasa

n  Contacts Nasa & Outlast

Phase change materials

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How to develop the required technology? n  Outlast was mainly interested in building material

applications n  Gradually shifted attention towards textiles when it

saw the economic opportunities while collaborating with QOD

n  Outlast invented the microcapsules with PCMs n  QOD optimized the technology (getting the right mix)

to have a better sleep u combining the insights of different fields as control

point

How to deal with IP?

n  Outlast licenses the technology to QOD u  Worldwide and exclusive license for quilts & pillows u  Sublicenses to other manufacturers in countries where QOD

is not active / interested u  Outlasts licenses to other firms for other applications

t  Shoes, jackets, underwear, etc… n  Sublicenses lead to easy price erosion, insufficient

control, brand damage u  Outlast deal: grow and internationalize fast – too many

sublicenses

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THE STRATEGIC DIMENSION

A framework for OI in SMEs: Strategy/Business model as starting point

BM as starting point for SMEs analysis n  Studying open innovation in SMEs makes only

sense within the broader framework of a business model (innovation)

n  How to analyze a BMs? •  Renewed attention among management

scholars for BMs and BM-innovation •  Critical remark: BM(I) models do not pay

enough attention to network partners/ OI …

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BM as starting point for your analysis (after Johnson. 2010)

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The start: vision of the entrepreneur THE ENTREPRENEURIAL DIMENSION

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How value creation starts? n  Vision / basic insight of the entrepreneur:

•  Diverse: From the obvious to hard to articulate: •  Curana: developing bike accessories with sleek modern design •  QOD: A provider of a healthy sleep •  I styling : virtual shopping for fashion goods

•  BM conception: from days to years •  QOD:

•  Who can define “what is a healthy sleep?” •  How to translate these insights into technical specs for a functional

quilt? •  Istyling : piecewise development of the BM (body scanner)

•  Articulating a BM may take time: A process view on BM formation

•  There is no grand design – discovery driven growth strategy + experimentation (Rita McGrath)

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Creating and sharing value with partners: How open innovation fits into the picture? THE RELATIONAL DIMENSION

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Curana: open innovation essentials n  Combination of internal and external knowledge (external

design company and polymer extrusion manufacturer) KEY RESOURCES/ COMPETENCIES

n  Collaboration with lead-customers (bicycle manufacturers) in exchange of an exclusive deal limited in time

n  Protecting your invention : IPR

n  Progressively increasing the ecosystem of partners: u  Locus of innovation is in the network u  External network management at Curana u  Growth economic strength ≠ growth firm size

n  Innovation as a tool to shape your company’s destiny and that of the industry (more control points and higher profitability)

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Managing your external network (partners) as a key process

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Managing your innovation network (key process)

n  Connecting partners (SMEs and other knowledge partners) is based on strong personal ties between the main partners

n  Trust + transparency about the objectives of the partners n  Time and money have to be invested

•  Does everybody want to take risk? •  Important that the different firms are prepared to grow

together n  Cooperation is easier between companies of the same size

•  But cooperation with large ones is possible too (different logic)

n  Over time assimilate the knowledge of different partners. Become smarter by knowing more partners (knowing who) and knowing more than your partners

•  … 93


n  Project management (central partner) with partners is quite different from internal project management

u  Each one is busy with a part of the project : costs easily raise excessively

n  Diplomacy and mutual respect n  Same corporate culture n  Tensions will pop up after a while

u  Good relationship may become under pressure u  Open innovation? Open communication! u  Organize (mutual) evaluation session with partner(s) u  Open bookkeeping with main partners (their problems will be

yours) u  Set out rules for disloyal behavior

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n  IP? •  Make proper arrangements with your partners •  Who is the owner? •  How partners can make use of the technology? •  Who is going to court (and who pays) in case of patent

infringement? n  Make sure that all partners are better off than

when they would not join / stay in the network n  Open innovation: benefits should be a multiple

of when companies work on their own. 95

Some conclusions 1.  Open innovation only makes sense when integrated in broader

strategic objectives of small firms 2.  Therefore, start with the business models and business model

innovation (CVP, profit formula, key resources (external and internal) and key processes (external network management))

3.  BM: Customer Value Proposition is crucial and comes first 4.  Value is created in different ways : no one fits all “open

innovation strategy” 5.  Value capturing by creating a unique strategic position through

OI (unique differentiation ; blue ocean strategy; offering valuable / authentic experiences; unique positioning)

6.  OI can be a valuable strategy for many SMEs: it is not the result of a long term grand vision – discovery driven strategy

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Some conclusions 6.  Open innovation enters into the picture through “key resources” that a

firm needs to create value. 7.  OI requires network management by a central firm – the network

itself is source of competitive advantage (relational view) 8.  Network management in SMEs is still embryonic. Most SME

managers fail in managing their partners – required skills are different from internal management

9.  OI in SMEs is about: •  Increasing VC through cooperation •  Capturing part of that share (building control points) •  Managing partners: Fair share of the pie for each partner (his problem

is your problem) •  Network management as a critical^process to create sustainable

competative advantage 10. OI management is different for low-tech SMEs (don’t copy solutions

for large fims) 11. Need to integrate SME strategy – entrepreneurship - OI 97

Speeding up the learning of good OI-practices in low-tech SMEs?

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How do SMEs learn? What does not work? n  Explanations of academia and consultants n  Most government led initiatives to stimulate entrepreneurship

u  FP7 programs (Horizon 2020; Cosme?) are to slow and too bureaucratic for most SMEs

What works? n  Stories of entrepreneurs that have been successful n  Talking to other entrepreneurs with similar ambitions

u  Share experiences and learn from them •  Low profile innovation networks with managers in the lead Some local innovation networks do nice work

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Problems and finding a way out

•  Local innovation network initiatives •  60 km action radius •  Non- or semi professional coaches •  Few good local cases, few managers as speakers (time consuming) •  Reinventing the wheel problem! •  High set up costs!

•  How to drastically improve the situation? •  There are many excellent cases in Europe / world •  Make a YouTube like movies (10-15 min) about these companies with

subtitles in English •  Put these movies on the web together with a syllabus and some (open)

innovation management tools – feedback Web 2.0! Strong impact on the number of companies that learn OI practices and strong improvement in the quality of learning

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A new wave of researching open innovation OUP

2003

2006

2006 2011

2013 2011

Exnovate as a network of excellence for OI-practitioners and scholars? n  www.exnovate.org

u  An international network for excellence in managing Open and Collaborative Innovation

n  Projects u  CE and OI Masterclass (10 times Philips / ESADE) – May 2014,

Barcelona u  PhD course open innovation at ESADE (5th time in January 2014) u  Open innovation metrics u  Using best practices to improve OI in SMEs

n  Open Innovation Community on Facebook and Linkedin

n  MOOI-project

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http://www.exnovate.org/ [email protected]