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Strategic OpennessJoel West

Keck Graduate Institute, Claremont Collegesblog.OpenInnovation.net

Program on Open InnovationUC Berkeley, Haas School of Business

10 Oct 2011

Take-Home Message

1. Many choices of closed vs. openv Most are continuous, not bifurcatedv Partly open is most common condition

2. Two sources of opennessv Exogenous (involuntary)v Endogenous (voluntary): strategic

opennessImplications for competitive advantage

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Traditional Competitive Advantage

Competitive advantage=control

Traditional sources of advantage:• Monopoly/oligopoly (Tirole 1988)

• Vertical integration to control inputs andoutputs (Chandler 1977)

• Inimitable resources (Barney 1991)

Manifest by economic rents

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Lack of control is bad

Teece (1986):1. First mover firms often unable to

control the returns from theirinventions

• Typically due to lack of appropriability• Particularly true for small companies

2. Partner (e.g. with big companies) toovercome this lack of control

And yet…

• Firms build on open technologiesvApache, Linux open source softwarevOpen standardsvUniversity science

• Firms open their own technologiesvEclipse development tools platformvWebKit open source mobile browser

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IBM’s forays into openness

• Greatest success came from proprietaryvertical integration (Fisher et al 1983)

• But today…vAn exemplar of inbound and outbound

open innovation (Chesbrough 2003)

vLeading champion of OSS (West 2003)

vGave away IP to gain advantage (Alexy &Reitzig, 2010)

Prior Research on Openness

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Ways of being open

• In-licensing external technology (Bresnahan& Greenstein, 1999; Chesbrough, 2003)

• Enabling 3rd party complements (Langlois &Robertson, 1995; Bresnahan & Greenstein, 1999)

• Shared architectural control (West & Dedrick,2000; West & O’Mahony, 2008)

• Information transparency (Lerner & Tirole, 2000;West & O’Mahony, 2008)

• Out-licensing internal technology(Chesbrough 2003, 2006)

Domains of Openness

• Open science (Merton, 1973; David, 1998)

• Open standards (Simcoe, 2006; Krechmer, 2006; West, 2007)

• Open platforms (Garud & Kumaraswamy, 1995; West &Dedrick, 2000)

• Open source software (West, 2003; Henkel, 2006; West &Gallagher, 2006)

• Open innovation (Chesbrough, 2003, 2006)

• Community innovation (von Hippel & von Krogh, 2003;Jeppesen & Frederiksen, 2006)

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What’s so open about…

Domain of openness• Open science• Open standards• Open source• Open innovation

Effect• Open information• Easy market entry• Shared IP, control• Open boundaries

Degrees of (platform) openness

Platform strategy

Sponsor

Multiple hardware vendors

Multiple OS vendors

Source

Licensing

Products

closed Vertically integrated proprietary

Hardware vendors

no no no IBM S/360, DEC VAX, Macintosh

Horizontal proprietary

Microsoft yes no no Windows

Unix AT&T yes no yes System V Open Systems Consortia yes yes yes OSF, X/Open open Open Source none/many yes yes yes Linux

Source: adapted from West (2003)

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Limits to openness

• Open standardsv Need some closedness for value capture (Simcoe

2006; West, 2007)

• Open sourcev Choice of open parts vs. partly open (West 2003)

• Open innovationv Too much inbound OI is suboptimal (Laursen & Salter

2006)

v Costs of inbound OI can exceed revenues (Faems etal, 2010)

Involuntary Openness

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Origins of involuntary openness

• Low appropriability (Teece 1986)

• Value chain specialization (Grove, 1996; Langlois2003)

• Open standardsvFormal de jure standardization (e.g. GSM)vOpen de facto platforms (iPhone apps)vMost “open” are partly open (West 2007)

• Open source (can be involuntary)

Open standards not equally open

Openness has multiple dimensions• For different stakeholders• For different rights (e.g. complement or

implement)vAnd cost of these rights (e.g. royalties)

• Range of openness on each dimensionThus “many shades of gray” (West 2007)

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Open source not equally open

• Involuntary opennessv Community owned source (e.g. Linux, Android)

• More open than open standards (West, 2003)

• Strategic opennessv Firm sponsors open source community, releases

own code (West & Gallagher, 2006; West & O’Mahony, 2008)

• Hybrid:v Strategic/proprietary: gated source (Shah, 2006)

Strategies under these conditions

• Compete on executionvDynamic capabilities, arbitrage of

information asymmetries, economies ofscale, …

vHope for first-mover advantagevOften transient competitive advantage

• Partner/license for scarce resources• Niche-ification (i.e. focus differentiation)

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Results of involuntary openness

• Leads to excess entryvLittle or no differentiationvPrice-based competition, commoditization

• Reward low-cost producers

• Typically few winners, many losers∴When openness is exogenous,

vproducer firm doesn’t make the rulesvodds of success are not very good

Strategic Openness

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Strategic openness

• I define strategic openness as“the selective opening of a firm’s controlof its technology, innovations and otheroutputs in order to gain competitiveadvantage”

• Builds on prior research on openstandards, open source software, openinnovation

Growing the pie vs. slicing the pie

• Value creation vs. value capture (Simcoe2006)

• Proprietary control vs. attractingadoption (West 2003)

• Control vs. attracting collaboration (West &O’Mahony 2008)

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Who benefits from value creation?

Specific firm(s) benefit from growing pie:• General growth benefits firm with most

market share (e.g. Intel, Qualcomm)• When value creation is aligned to

business model (Chesbrough & Rosenbloom, 2002)

• Growing a sponsored ecosystem (West &Mace 2010)

Growing an open ecosystem

If firm controls an ecosystem, opening theecosystem accrues to sponsoring firm

• Modular economies of substitution (Garud& Kumaraswamy 1993)

• Faster time to market, technologicalprogress (Bresnahan & Greenstein, 1999)

• Upstream scale economies (West & Dedrick,2000)

• Downstream variety (Boudreau 2010)

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Other reasons for openness

• Undercut competitor profits• Create reputation (Henkel 2004)

• Facilitate search for external technologyor knowledge transfer (Cohen & Levinthal, 1990)

• Sell internal technology (Arrow 1962)

Different dimensions of openness

Many openness levers to experiment with• Access, participation & cost (West 2007)

• Transparency & accessibility (West & O’Mahony2008)

• Need to study combining multiple formsof openness (Dahlander & Gann, 2010)

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Examples: Apple Inc.

Apple [Computer] Inc.

• Apple’s image: exemplar of proprietary• Actually used all 3 strategies

vClosedv Involuntary opennessvStrategic openness

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Closed Apple: Cloning

• Prosecuted Apple II clones (Apple v.Franklin)

• Mac cloning debate (West, 2005)

vBlocked Mac clones (1985, 1992)vAllowed, then cancelled clones (1994-7)

Exogenous openness: components

• Early pioneer of component-basedbusiness models (cf. West 2006)

v Integrated standardized componentsvSourced CPUs from MOS Technologies,

Motorola, IntelvAlso other key components

• Increasingly, standardized peripherals

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Strategic openness: outsourcing

• Once traditional approach to manufacturingv Automated Fremont Mac factory (1983-1991)v Ireland (1980), Singapore (1981) factories

• Outsource all manufacturing to suppliersv 1996-7: sold factories to SCI (later Sanmina SCI),

National Steelv 1998-2000: outsource assembly to Quanta, LG,

Hon Hai• Anticipates PC industry shift to contract mfr.

Source: West (2002)

Strategic openness: apps

• Provided standardized platform, APIs• Enabled 3rd party complements

vApple II: VisiCalcvMacintosh: software “evangelists”v iPhone/iPad

• App store: enables market entry

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Strategic openness: open source

Multiple experiments:• FreeBSD/Darwin: operating system• CUPS: printing• WebKit:

vSafari (Mac/iPhone/iPad) browservAndroid/Chrome browservAlso Nokia, Research in Motion

Conclusions

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Closed vs. open strategies

• Firms prefer closed strategiesvMore predictablevMore control, appropriation

• Howeverv “pie” may be too small, e.g. mainframe

computers, minicomputers, PCs (Langlois, 1992;Bresnahan & Greenstein, 1999)

v “not all the smart people work for us”(Chesbrough 2003)

Inherent risks of openness

• High entry, competition• Commoditization• Difficulties differentiating, charging a

price premium• Leakage of knowledge to current and

potential rivals

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Strategic vs. involuntary openness

• Involuntary openness impacts all firms• In strategic openness

vFirms control the nature of opennessvAlign to firm strengths, competitor

weaknessesvPossibly forestall disadvantageous

opennessvUsually requires some sort of initial

advantage

Unresolved questions

• How do we measure costs, benefits?• What/where are the moderators?• Which firms will choose openness?

vDo some have more choice than others?vAre some more capable than others?vConstrained by business models?