Open Innovation In SMEs: Towards Formalization Of Openness
University of HalmstadSchool of Business and EngineeringMaster in Management of Innovation and Business DevelopmentOpen innovation in SMEs: towardsformalization of opennessJulien Dufour – 851010-T713Pierre-Etienne Son – 850305-T677Supervisor: Jonas RundquistSpring 2011
AbstractOpen innovation has been widely debated in management literature. However, little attention has been given tohow small and medium sized enterprises manage to open up their innovation process. Consequently, variousquestions remain unanswered. In particular, we want to shed light on the following issue: how small andmedium-sized enterprises manage organizational changes in their journey from closed to open innovation. Aliterature review examines how small and medium-sized enterprises open up their innovation process based onnine perspectives. Then, the reference framework addresses the organizational changes embedded in evolvingfrom closed to open innovation. In this sense, we use acknowledged concepts on organizational change researchto carry out an in depth-case study on a small and medium-sized enterprise evolving in the sports equipmentindustry. The results demonstrate that, in its journey from closed to open innovation, the small and medium-sizedenterprise has had to stimulate and to manage changes to four company’s dimensions i.e. corporate culture,networking, organizational structure, and knowledge management systems. The paper concludes by highlightingthe diverse organizational changes undertaken by the company on these four dimensions. Based on this paper’sconclusion, managerial implications and discussion for future research are drawn.resources and externalization of internalones. He coined it open innovation whichtends to provide a holistic view of thephenomenon. Even though some argue thatopen innovation is comparable to abovecited theories (Elmquist et al., 2009;Aylen, 2010), most acknowledge thatChesbrough’s approach adds a moreholistic dimension (Gassmann et al., 2010;Huizingh, 2010), and emphasizes therelevance of IP (Huston & Sakkab, 2006;Piller & Walcher, 2006). Chesbrough et al.(2006) define open innovation as “the useof purposive inflows and outflows ofknowledgetoaccelerateinternalinnovation, and expand markets forexternal use of innovation, respectively”(p. vii). By reflecting on Chesbrough etal.’s (2006) definition, one can say that thedefinition is vague and wide. If everyaspect of the above definition must befullfilled, based on current empiricalstudies, only few companies are engagedinto “real” OI. On the other hand, if thedefinition is taken apart (Gassmann &Enkel, 2004) then most companies couldbe considered to be engaged in OI.However, researchers need to bear in mindthat not every form of collaboration is OI.For instance, Sony Ericsson collaboratesbut is not engaged into OI, because theyIntroductionOpen innovation is a growing field ofinterest among practitioners and scholars(Chesbrough&Appleyard,2007;Gassmann et al., 2010). Since newphenomena emerge from leading industriessuch as software, pharmaceutical, previous theories such asCorporate Strategy (Ansoff, 1965),customer active paradigm (von Hippel,1978), absorptive (Cohen & Levinthal,1990)/ receptive capacity (Hamel, 1991)/dynamic capabilities (Teece et al., 1997)seemed to be limited to fully explain theactivities undertaken by those companies(Chesbrough, 2003). In fact, theseindustries expand on opening up theirinnovative process using external resourcessuch as networks, innovation communities,volunteer contributors and ecosystems assources of value creation (Chesbrough &Appleyard, 2007). Companies such asUNIX (Linux), IBM, and LEGO (LegoMindStorm) among others have beenlargely investigated by academics.Consequently, academics started to studythose industries. Chesbrough (2003)elaborates on that phenomenon of valuecreation through integration of external1
purposely use internal resources forinnovation with some contact with externalsources only; while Android purposelygives access to its technology for anyone toopenly collaborate. Those examples beingextremes, there might be other companieslying between those extremes. Taking intoconsideration the latter and that OI’sdefinition is vague and wide, OI might takedifferent forms and might appear todifferent degree.study from Lee et al. (2010) suggests theparticipation of intermediaries facilitatingthe implementation of open innovation inSMEs.However, during our research we were notable to find published studies focusing onopen innovation in SMEs that study theform of the organizational changes boundwith SMEs evolving from closed to openinnovation perspective. This goes alongwith Chiaroni et al. (2010) stating that “anissue that deserves further attention is theanatomy of the organizational changeprocess through which a firm evolves frombeing a Closed to an Open Innovator.” (p.1). Moreover, previous studies (e.g.Chesbrough, 2003) show that companiesengaged in open innovation are far morecompetitive than others – e.g. UNIX(Linux), Procter & Gamble (Connect andDevelop), LEGO (Lego MindStorm) – thusthis increases interest in seeing whetherSMEs could reap the same benefits.Consequently, this paper wants to addressthe knowledge gap existing betweenimplementing open innovation and SMEstheories. As a first attempt to understandhow SMEs implement open innovation, thefollowing research question is formulated:Since academics focused most of theirstudies on large and multinationalenterprises, small and medium sizedenterprises (SMEs) were left on the side.Furthermore, Gassmann et al., (2010) statethat “while most of the firms described inearly works on open innovation were largemultinational firms, it has become apparentthat smaller and medium- sized firms arealso opening up their innovation process”(p. 215). Consequently, a few academicshave focused their OI research on SMEs.van de Vrande et al. (2009) quantitativelytested trends, motives and challengesembedded in open innovation in SMEs;their results demonstrate that openinnovation is widely spread among SMEsand more importantly keep on spreading.van de Vrande et al. (2009) also pinpointthe main issues related to opening up theinnovation process for SMEs as beingorganizational and cultural barriers. In linewith van de Vrande et al. (2009)conclusion, academics examine whatSMEs can do to reduce the cultural andorganizational barriers to open innovation.As a result, Ramos et al. (2009) address theopen knowledge and technology transferissue. Mogollon et al. (2010) concentrateon the importance of open-mindedness forimplementingopeninnovationtoovercome cultural barriers in SMEs. A“How do SMEs try to overcome theorganizational and cultural barriers whenevolving from closed to open innovation?”The aim is to describe how SMEsimplement open innovation by addressingthe issue of organizational and culturalbarriers needed to be overcome whenSMEs evolve from closed to openinnovation. In order to understand thiscontext and to further develop the languageof SMEs empirical data are collectedthrough a case study.2
The article is structured as follows: thesecond section consists of a review ofrelevant literatures on OI. The third sectiondevelops a reference framework for thisstudy, derived from the literature review,to be used as a guide to gather and analyzedata. The fourth section consists of ananalysis of collected data. The final sectionconcludes this article and launches adiscussion for future researches.commercializing internal and externalideas thanks to internal and external tools.As Chesbrough (2003) puts it: “in this newmodel of open innovation, firmscommercialize external (as well asinternal) ideas by deploying outside (aswell as in-house) pathways to the market”(pp. 36-37). In this approach, Chesbrough(2003) argues that closed innovation –traditional internal innovation – is not thestrategic asset it was before. Companiescould not carry out innovation on their ownwhile remaining competitive, because ofincreased complexity of products andtechnologies (Chesbrough, 2003). As aconsequence, companies were forced tofind new ways for innovating. Chesbroughand Appleyard (2007) add that ownership,entry barriers, switching costs, and intraindustry rivalry were of great importancein closed innovation whereas they aresecondary items in OI; in other words,closed and open innovation present crucialgeneric differences. Chesbrough (2003)identifies that the main difference residesin the internal-external dualism. On the onehand, Chesbrough’s closed innovationphilosophy requires everything to be donein-house. On the other hand, Chesbrough’sOI philosophy advocates for opennesstowards other actors (Chesbrough,2007).The above discussion indicates thatwe consider Chesbrough’s definition frombefore to be considered as if a firm is usingOI if they are open in only one or a fewparts of their innovation activities. In thisstudy we connect to this view.Literature reviewAs previously stated, most of researchcarried out on open innovation (OI) useddata from MNE’s. Consequently, due tolimited amount of study on SMEs thefollowing proposition has been made: inorder to understand the challenges faced bySMEs in their journey from closed to openinnovation, both closed and openinnovation perspectives (Chesbrough,2003) need to be discussed. ThroughGassmann et al.’s (2010) nine perspectivesalong with research on OI streams inMNEs, the challenges faced by MNEs areidentified. By combining the challengesfaced by MNEs in opening up theirinnovation process and theories on SMEsintrinsic characteristics, we pinpoint thechallenges faced by SMEs – for moredetails read Dufour & Son (2011).From closed to open innovationChesbrough (2003) introduces openinnovation as an alternative to traditionalinternal innovation in large companies. HedescribesOIasameansfor3
Table 1: Contrasting principles of closed and open innovationClosed innovation principlesOpen innovation principlesThe smart people in our field work for us.Not all of the smart people work for us so we mustfind and tap into the knowledge and expertise ofbright individuals outside our company.To profit from R&D, we must discover, develop andship it ourselvesExternal R&D can create significant value; internalR&D is needed to claim some portion of that value.If we discover it ourselves, we will get it to marketfirst.We don’t have to originate the research in order toprofit from it.If we are the first to commercialize an innovation, wewill win.Building a better business model is better thangetting to market first.If we create the most and best ideas in the industry, wewill winIf we make the best use of internal and externalideas, we will win.We should control our intellectual property (IP) so thatour competitors don’t profit from our ideasWe should profit from others’ use of our IP, and weshould buy others’ IP whenever it advances ourown business model.Inspired from “The era of open innovation” by Chesbrough, 2003, Sloan ManagementReview, 44(3), p. 38.Table 1 underlines, among other things, theinternal-external duality existing betweenChesbrough’s closed and open innovation.There is a high self-reliance level in closedinnovation; for instance, discovering,developing, shipping, commercializing,creating are actions that should beconducted in-house in an extreme closedinnovation setting. On the contrary, anextreme open innovation setting advocatesactions taken in-house as well as externallyto cope with current products andtechnologies complexity. In other words,OI is about tapping into knowledge ofexperts outside companies to complementcompanies’ internal knowledge; balancinginternal and external R&D; takingadvantage of others’ discoveries; carefullythinking business model instead of beingfirst on the market; balancing internal andexternal ideas; taking advantage of others’use of owned IP and taking advantage ofothers’ IP when it embraces companies’business model. Those two innovationmodels are extreme pictures; consequently,some scholars end up believing that thebest chance to sustain open innovationrelies on balancing traditional businessstrategy with open initiatives (Chesbrough& Appleyard, 2007; Enkel et al., 2009;Pontiskoski & Asakawa, 2009; Chiaroni etal., 2010). Thus, we can extrapolate thatcompanies also evolve between those twoextremes. That is; basically every firm isinvolved in OI to some extent, even if mostfirms are involved to a very low degree.Only a few innovation projects (e.g.LINUX, LEGO MindStorm) could beconsidered to be assessed with a highdegree of OI.Review of open innovation and empiricalfindings in MNEsAs a consequence to Chesbrough’s (2003)research, scholars have been studying OIunder different streams in order to identifywhat MNEs do in order to achieve andsustain OI. By studying those streams,4
team sport” (p. 24). This is meant toincreasecompetencesharingandinnovation efficiency. The user perspectiverelates to the integration of users in theinnovationprocess.Thisenablesorganizations to know users’ requirementsthanks to, for instance, toolkits or earlyinvolvement of users in the innovationprocess (von Hippel, 1986, 1988; vonHippel & Katz, 2002; Gassmann et al.2010). The supplier perspective relates tothe involvement of suppliers in theinnovation process (Gassmann et al.,2010). Early involvement of suppliers ionperformance(Hagedoorn, 1993, 2002). The leveragingperspective relates to the use of externaltechnology and IP in order to leverageinternal technology and IP, and vice-versa.Technology and/or IP neglected by anorganization can be useful to another one(Gassmann et al., 2010). The processperspective relates to the three processes inopen innovation. (1) Outside-in processwhich consists of seeking out technologiesoutside the organization. (2) Inside-outprocess which consists of selling outtechnologies. (3) Coupled process whichgathers the two previous ones (Gassmann& Enkel, 2004). The tool perspectiverelates to the set of tools that are requiredin order to integrate users and/or integrateexternal problem solvers to the innovationprocess (Gassmann et al., 2010). Theinstitutional perspective relates to the freerevealingofinventions,findings,discoveries and knowledge in order toaccelerate innovation and get it moreefficient (von Hippel & von Krogh, 2003,2006). The cultural perspective relates toorganization mindset. In open innovation,the not-invented-here mindset (Katz &Allen, 1982) is something that must bescholars have brought practical solutions tothe scientific world through empiricalstudies. Gassmann et al. (2010) groupthose different streams under nineperspectives. We choose to base ourreflection on Gassmann et al.’s (2010)perspectives because he has been studyingOI for years. Moreover, he has beenworking with influential scholars in the OIfield such as, among others, HenryChesbrough, Wim Vanhaverbeke, andEllen Enkel. Consequently, he has a broadtheoretical standpoint over OI that hasallowed him to design a rather objectiveliterature review on the topic. Thanks toGassmann et al.’s (2010) theoretical frame,we draw a both theoretical and practicaloverview of open innovation. First of all,the nine perspectives i.e. spatial,structural, user, supplier, leveraging,process, tool, institutional, and cultural aredefined. Secondly, table 2 gathers whatMNEs are recommended to do in order tosucceed at opening up their innovationprocess.The spatial perspective relates to theglobalization of innovation. Thanks toaccess to markets and resources (Gassman,2006), as well as new communication andinformationchannelsincreasinginformation sharing, innovation can becarried out by different parties located atdifferent places in the world (Gassmann etal., 2010). This leads to the need ofimproved information sharing systems. Thestructural perspective relates to theincreasing division of work in innovation.More complex technologies engenderspecialization. Specialization engendersalliancesandR&Doutsourcing(Hagedoorn & Duysters, 2002; Gassmannet al. 2010). As Chesbrough in Allio(2005) puts it: “innovation overall is a5
overcome (Chesbrough, 2003). Thisimplies that value must be given to outsidecompetence and know-how (Gassmann etal., 2010) to cope with increasing productsand technologies complexity.solutions elaborated by MNEs on thechallenges they face to sustain openinnovation. Those solutions were broughtby scholars to the scientific world thanks toempirical studies. In order to avoid thepitfall of over-generalization we presentthe right column as what is recommendedin order to succeed in implementing OIinstead of what must be done in order tosucceed.Table 2 below gathers recommendationsbrought to respectively each perspective onOI in MNEs. The left column displays thenames of the perspectives on openinnovation. In the right column lay theTable 2: Perspective on OI vs. recommendations to succeedPerspectives on open innovationThe spatial perspectiveThe structural perspectiveThe user perspectiveThe supplier perspectiveThe leveraging perspectiveThe process perspectiveThe tool perspectiveThe institutional perspectiveThe cultural perspectiveWhat is recommended in order to succeed Codification of information Information and communication systems Keep core competencies and outsource the rest Have partners at disposal Adjust organizational structure Early integration of users in innovation process Tool kits Virtual platforms Early integration of suppliers in innovation process Balancing internal and external knowledge Building networks Act as knowledge brokers Creation of external business units Development and/or use of tools such as users’ toolkits,networks and problem solving platforms Licensing Open initiatives Train employees and install checkpoints Acceptance of openness From DIY to NIH Integration of innovation mentality and support ofinnovationIt can be assumed what MNEs carry out inorder to succeed in implementing OI isinherent to their intrinsic characteristics.Equally, what SMEs are likely to carry outin order to succeed in implementing OI isinherent to their intrinsic characteristicstoo. As a result, drawing from results ofempirical studies on OI in MNEs, it ispossible to theoretically elaborate on whatfeatures of OI are likely to be achieved bySMEs and what features are not. Thus,after defining what SMEs are in EuropeanUnion, it is interesting to look at thediffering characteristics that exist betweenMNEs and SMEs. This helps us to identifywhat the challenges to OI are for SMEs.Open innovation in small and mediumsized enterprise (SME)In Europe, small and medium sizedenterprises represent the majority of allenterprises by 99%. There is no doubt that6
SMEs play a central role in the Europeaneconomy. They are the main source ofentrepreneurial skills, employment andinnovation. In 2005, within the 25 EUcountries, there are 23 million SMEsproviding approximately 75 million jobs.SMEs and MNEs, Ghobadian and Gallear(1997) elaborate a comparative tablehighlighting the major differences betweenboth kinds of enterprises. Table 3 belowhighlights the factors that, according to us,are most relevant concerning opening upthe innovation process in SMEs.Ghobadian & Gallear’s (1997) originaltable is designed for analyzing total qualitymanagement (TQM) but it still has generalvalue for analyzing other aspects, as OI, inSMEs. Some non-relevant factors to studyOI in SMEs have been excluded comparedto the original table from Ghobadian &Gallear (1997).Among practitioners and scientist no doubtsustains under which SMEs and MNEsconduct their business differently inseveral aspects. This is because differencesexist in policy making procedures,structure, and utilizations of resources(Ghobadian & Gallear, 1997). In anattempt to clarify and compile theories onTable 3: comparison between SMEs and MNEsStructureProcedureBehaviorProcessesSmall and medi
the implementation of open innovation in SMEs. However, during our research we were not able to find published studies focusing on open innovation in SMEs that study the form of the organizational changes bound with SMEs evolving from closed to open innovation perspective. This goes along with Chiaroni et al. (2010) stating that “an
innovation. Primarily, there is evident from this longitudinal study; open innovation has so far been adopted mainly in high-tech and multinational enterprises. There is evidence that a few studies have demonstrated that open innovation also exists in the SMEs (Wynarczyk, 2013). Open innovation is becoming a popular issue in innovation management.
example, in Netherlands, open innovation practices are increasingly being adopted by SMEs as shown by a study on 605 innovative SMEs. These SMEs are using a combination of several key variables, such as venturing, outward licensing of intellectual property (IP), the involvement of non-
Open innovation, SMEs, motives for and barriers to cooperation . 4 Open innovation in SMEs: Trends, motives and management challenges 1. INTRODUCTION . product life cycle has turned intellectual property (IP) into an increasingly perishable asset. As a result, a growing number of large MNEs have been moving from an .
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