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Open innovation in SMEs, including low tech SMEs
1. 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)
1
2. Outside in OI: Filling the gaps with external
technology
New
Market
Internal
Technology
Base
Current
Market
External
Technology
Base
External research projects
Technology in-licensing
Venture investing
R
Technology
acquisition
Technology Insourcing
D
Source: H. Chesbrough, Sloan Management Review, Spring 2003
Inside out OI: Profiting from others’ use of your
technology
Other Firm’s
Licensing
Market
Technology Spin-offs
Internal
Technology
Base
New
Market
Current
Market
External
Technology
Base
R
Technology Insourcing
D
Source: H. Chesbrough, Sloan Management Review, Spring 2003
2
3. Some observations
n
n
n
n
Main focus on:
•
High-tech industries
•
Large manufacturing (and now also services) companies
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
OI in high high SMEs by CVC
“OI in SME”- project: conclusions of an in depth study of OI
successes in 10 European SMEs in different industries
12
Managing OI between
a large company and
a high tech start-up?
3
4. 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
Is it an interesting investment?
Yes? Then a minority participation
XYZ-V
Once there is a financial
participation there is no ex ante
deal how to handle the transfer
of technology!
XYZ-BU
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
1.
Option creation:
Is it an interesting investment?
DSM-V
Start-up
2.
Option exercising:
Can the new technology create
a new business in the future?
DSM-BU
4
5. How to organize for OI?
External Venturing at DSM
Six reasons not to start a power play with
external ventures:
1.
2.
Bad reputation: when the large, investing firm is looking
for interesting start-ups as a recurrent practice
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.
4.
5.
6.
Might kill the spirit of good cooperation.
Kill entrepreneurial spirit by creating another "corporate
puppet on a string"
Could limit exit possibilities and exit value for other
shareholders (by lock-in to/dependency on corporate)
Could result in litigation if perceived as abuse of
economic power
5
6. Isobionics :
F & F business
n
Isobionics produces Valencene:
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.
Isobionics is producing Valencene based on a biotech
process: 50% cheaper
u
n
6
7. Inside out OI: KSFs
n
n
Collaboration between small and large companies is only
successful if the relationship is managed in an appropriate
way.
Start-up manager has extensive experience as a senior
manager in a large firm
u
u
n
n
Credibility
Knows the decision making processes in large firms
Homework for the start-up before it starts collaborating:
who is a trustworthy innovation partner
…
Inside out OI: KSFs
n
Manage problems in the MNE related to licensing unused
technology:
u
u
u
n
A start-up relying on a large firm’s technology is in an
advantageous position w.r.t. financing:
u
u
n
NSH syndrome
There is no incentive to license a technology (use or lose strategy)
Licensing to small firms: a lot of work for small licensing revenues
use the large company’s reputation to acquire external financing.
the large firm may invest, local governments will subsidize or
invest more easily, and banks will grant loans.
Entrepreneurship and speed of start-up open the eyes of
scientists / technologists in DSM’s IC. How to instill
entrepreneurship in an MNE?
7
8. Philip’s Airfryer
n
n
n
n
Airfryer: patented Rapid Air technology of small company
French fries with up to 80% less fat, yet maintaining a
great taste.
The Airfryer was launched in September 2010 in several
European markets
Frying fries and snacks has to be relearned
u Guidelines / recipes
u Partnerships (Mora?)
8
9. Philip’s Airfryer
n
Philips developed already a technology internally in 2006:
u
u
n
n
Too complex and too expensive: Philips could not translate the
technology into a consumer product that fits the Philips promise of
“sense and simplicity”
“A perfect appliance”: engineers create a perfect application with
latest technology and commercial people express their wishes
leading to more features
External engineering company developed and patented a
very simple technology allowing Philips to sell it below
€ 200.
In a market with price ceilings, start innovation from the
perspective of price restrictions (frugal innovation, cheap
innovation, reversed innovation)
Philip’s Airfryer
n
n
n
n
Manager of the engineering company has been senior
manager at Gilette.
NDA / later exclusive licensing deal for the B2C market /
right to buy the technology after 5 years at a predetermined
price.
Engineering company has the right to sell in the B2B
market and in countries where Philips is not active
Win-win outcome: Let your partner pursue business
opportunities in areas that do not fit your business model.
9
10. Open innovation in
“low tech” SMEs
Main take-aways: don’t copy OI
lessons for large companies
1.
2.
3.
4.
Start with the growth strategy or broader
strategic objectives of small firms
t BMI (VC2)
The entrepreneur is crucial in driving the
realization of that growth / change
OI : key resources to be sourced from external
partners to relaize the growth
OI-network management = key process
10
15. Curana: combining innovation
and industrial design
n
n
The old situation:
u Steel mudguards and fenders
u Belgium as market (10 million inhabitants)
u Family owned business
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
15
16. Curana: innovation combined with
industrial design in low-tech markets
n
Advantages:
u
u
u
u
u
n
Lighter mudguard (25% less weight than plastic mudguards).
Production cost are low enough to be competitive with standard mudguards
Installation of the mudguard is easier
Nice design
Aluminum separated by plastic can be used as a conductor for electricity (no
more wires required for lights)
IP
European patents
Curana also applied for a patent on the production process
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)
u
u
n
Curana: Spectacular results
19/11/13
Wim Vanhaverbeke
46
16
17. Curana:
a small company in transformation
OEM
>
Original
Equipment
Manufacturer
ODM
>
OSM
>
OBM
Original
Design
Manufacturer
Original
Strategic
Management
Original
Brand
Management
• price setting
• technology driven • design driven
• added value
• no added value
• vision driven
• Image driven
• price pressure
19/11/13
• proactive design • Reliability &
solutions
authenticity
• Innovative
• Market pull from
customers
Wim Vanhaverbeke
48
How innovation is processed at Curana?
Design
Exploration
Promotion
Realization
19/11/13
Wim Vanhaverbeke
49
17
18. Some JAGA products
56
Jaga
n
n
n
Differentiation vs. competition through:
u Eco-radiators
u Design-radiators
The company is not selling products but
experiences, ideas, values, etc….
Differences:
u radiators as heating machines
u radiators to reduce carbon-footprint
u radiator as a creative part of the house, heating
the "soul"
18
19. Some JAGA products
Jaga Oxygen :
controlling temperature,
moisture and oxygen in the
house
Wearable heating?
Open innovation # 1
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
19
20. Open innovation # 2
JAGA products days
• 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
61
Example: Play radiator
19/11/13
Wim Vanhaverbeke
62
20
21. Example: The play radiator
Open innovation #3
Uchronians and the Burning Man
•
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
21
23. 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
23
24. 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
24
25. Provider of healthy sleep
n
Vision:
Not a textile company.
u … but providers of healthy sleep!
u
n
Sleep is a major problem
u
u
u
u
u
We sleep less than we did 50 years ago
More than 70 million Americans do not sleep well (309 mill
inhabitants or 23% )
The lack of sleep is costing the American society billions of
dollars annually.
It is estimated that 56.000 car accidents in the United States
happen because the driver falls asleep behind the wheel.
Danish teenagers sleep too little and have difficulties attending
early lectures.
How to improve sleep?
n
n
In order to become a provider of healthy sleep, QOD
needed to know which factors are important for a good
night’s sleep:
They started a cooperation with external experts:
Sleep scientists (Glostrup hospital)
u Danish Asthma & Allergy Association
u Physiotherapists
u
n
Temperature (variation) rapidly emerged as one of the
major determinants of a good / bad sleep
25
26. How to find the required technology?
n
n
n
Lot’s of trials (and errors) with different technologies
H-E Schmidt finds a solution reading an article in a
scientific journal about phase change technologies
developed by Nasa
Contacts Nasa & Outlast
Phase change materials
26
27. How to develop the required technology?
n
n
n
n
Outlast was mainly interested in building material
applications
Gradually shifted attention towards textiles when it
saw the economic opportunities while collaborating
with QOD
Outlast invented the microcapsules with PCMs
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
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…
u
n
Sublicenses lead to easy price erosion, insufficient
control, brand damage
u
Outlast deal: grow and internationalize fast – too many
sublicenses
27
28. A framework for OI in SMEs:
Strategy/Business model as
starting point
THE STRATEGIC DIMENSION
BM as starting point for SMEs
analysis
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
…
n
85
28
29. BM as starting point
for your analysis (after Johnson. 2010)
87
The start: vision of the
entrepreneur
THE ENTREPRENEURIAL DIMENSION
88
29
30. How value creation starts?
n
Vision / basic insight of the entrepreneur:
• Diverse: From the obvious to hard to articulate:
•
•
•
•
BM conception: from days to years
•
•
•
•
Curana: developing bike accessories with sleek modern design
QOD: A provider of a healthy sleep
I styling : virtual shopping for fashion goods
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)
89
Creating and sharing value with partners:
How open innovation fits into the picture?
THE RELATIONAL DIMENSION
90
30
31. 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)
Managing your external
network (partners) as a
key process
92
31
32. Managing your innovation
network (key process)
n
n
n
n
n
•
Connecting partners (SMEs and other knowledge partners) is
based on strong personal ties between the main partners
Trust + transparency about the objectives of the partners
Time and money have to be invested
• Does everybody want to take risk?
• Important that the different firms are prepared to grow
together
Cooperation is easier between companies of the same size
• But cooperation with large ones is possible too (different
logic)
Over time assimilate the knowledge of different partners.
Become smarter by knowing more partners (knowing who) and
knowing more than your partners
…
93
Managing your innovation
network (key process)
n
Project management (central partner) with partners is quite
different from internal project management
u
n
n
n
Each one is busy with a part of the project : costs easily raise
excessively
Diplomacy and mutual respect
Same corporate culture
Tensions will pop up after a while
u
u
u
u
u
Good relationship may become under pressure
Open innovation? Open communication!
Organize (mutual) evaluation session with partner(s)
Open bookkeeping with main partners (their problems will be
yours)
Set out rules for disloyal behavior
94
32
33. Managing your innovation
network (key process)
n
IP?
•
•
•
•
n
n
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?
Make sure that all partners are better off than
when they would not join / stay in the network
Open innovation: benefits should be a multiple
of when companies work on their own.
95
Some conclusions
1.
2.
3.
4.
5.
6.
Open innovation only makes sense when integrated in broader
strategic objectives of small firms
Therefore, start with the business models and business model
innovation (CVP, profit formula, key resources (external and
internal) and key processes (external network management))
BM: Customer Value Proposition is crucial and comes first
Value is created in different ways : no one fits all “open
innovation strategy”
Value capturing by creating a unique strategic position through
OI (unique differentiation ; blue ocean strategy; offering
valuable / authentic experiences; unique positioning)
OI can be a valuable strategy for many SMEs: it is not the
result of a long term grand vision – discovery driven strategy
96
33
34. Some conclusions
6.
7.
8.
9.
Open innovation enters into the picture through “key resources” that a
firm needs to create value.
OI requires network management by a central firm – the network
itself is source of competitive advantage (relational view)
Network management in SMEs is still embryonic. Most SME
managers fail in managing their partners – required skills are different
from internal management
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?
34
35. 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
103
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
104
35
36. 2006
2011
2003
A new wave
of researching
open
innovation
OUP
2011
2006
2013
Exnovate as a network of excellence
for OI-practitioners and scholars?
n
www.exnovate.org
u
n
Projects
u
u
u
u
n
n
An international network for excellence in managing Open and
Collaborative Innovation
CE and OI Masterclass (10 times Philips / ESADE) – May 2014,
Barcelona
PhD course open innovation at ESADE (5th time in January 2014)
Open innovation metrics
Using best practices to improve OI in SMEs
Open Innovation Community on Facebook and
Linkedin
MOOI-project
36
