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Strategic Openness

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1) The document discusses strategic openness, where firms selectively open their technology and innovations to gain competitive advantage, as opposed to involuntary openness. 2) Strategic openness can benefit firms by growing the overall market size if the firm controls an open ecosystem. It also allows firms to experiment with different dimensions of openness like access levels and transparency. 3) Examples are provided of Apple using both closed strategies at times, as well as strategic openness through outsourcing manufacturing, enabling third-party app complements, and open sourcing some technologies.

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1 Strategic Openness Joel West Keck Graduate Institute, Claremont Colleges blog.OpenInnovation.net Program on Open Innovation UC Berkeley, Haas School of Business 10 Oct 2011 Take-Home Message 1. Many choices of closed vs. open v Most are continuous, not bifurcated v Partly open is most common condition 2. Two sources of openness v Exogenous (involuntary) v Endogenous (voluntary): strategic openness Implications for competitive advantage

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2 Traditional Competitive Advantage Competitive advantage=control Traditional sources of advantage: • Monopoly/oligopoly (Tirole 1988) • Vertical integration to control inputs and outputs (Chandler 1977) • Inimitable resources (Barney 1991) Manifest by economic rents

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3 Lack of control is bad Teece (1986): 1. First mover firms often unable to control the returns from their inventions • Typically due to lack of appropriability • Particularly true for small companies 2. Partner (e.g. with big companies) to overcome this lack of control And yet… • Firms build on open technologies v Apache, Linux open source software v Open standards v University science • Firms open their own technologies v Eclipse development tools platform v WebKit open source mobile browser

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4 IBM’s forays into openness • Greatest success came from proprietary vertical integration (Fisher et al 1983) • But today… v An exemplar of inbound and outbound open innovation (Chesbrough 2003) v Leading champion of OSS (West 2003) v Gave away IP to gain advantage (Alexy & Reitzig, 2010) Prior Research on Openness

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5 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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6 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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7 Limits to openness • Open standards v Need some closedness for value capture (Simcoe 2006; West, 2007) • Open source v Choice of open parts vs. partly open (West 2003) • Open innovation v Too much inbound OI is suboptimal (Laursen & Salter 2006) v Costs of inbound OI can exceed revenues (Faems et al, 2010) Involuntary Openness

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8 Origins of involuntary openness • Low appropriability (Teece 1986) • Value chain specialization (Grove, 1996; Langlois 2003) • Open standards v Formal de jure standardization (e.g. GSM) v Open de facto platforms (iPhone apps) v Most “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) v And cost of these rights (e.g. royalties) • Range of openness on each dimension Thus “many shades of gray” (West 2007)

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9 Open source not equally open • Involuntary openness v Community owned source (e.g. Linux, Android) • More open than open standards (West, 2003) • Strategic openness v 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 execution v Dynamic capabilities, arbitrage of information asymmetries, economies of scale, … v Hope for first-mover advantage v Often transient competitive advantage • Partner/license for scarce resources • Niche-ification (i.e. focus differentiation)

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10 Results of involuntary openness • Leads to excess entry v Little or no differentiation v Price-based competition, commoditization • Reward low-cost producers • Typically few winners, many losers ∴When openness is exogenous, v producer firm doesn’t make the rules v odds of success are not very good Strategic Openness

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11 Strategic openness • I define strategic openness as “the selective opening of a firm’s control of its technology, innovations and other outputs in order to gain competitive advantage” • Builds on prior research on open standards, open source software, open innovation Growing the pie vs. slicing the pie • Value creation vs. value capture (Simcoe 2006) • Proprietary control vs. attracting adoption (West 2003) • Control vs. attracting collaboration (West & O’Mahony 2008)

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12 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 the ecosystem accrues to sponsoring firm • Modular economies of substitution (Garud & Kumaraswamy 1993) • Faster time to market, technological progress (Bresnahan & Greenstein, 1999) • Upstream scale economies (West & Dedrick, 2000) • Downstream variety (Boudreau 2010)

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13 Other reasons for openness • Undercut competitor profits • Create reputation(Henkel 2004) • Facilitate search for external technology or 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’Mahony 2008) • Need to study combining multiple forms of openness (Dahlander & Gann, 2010)

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14 Examples: Apple Inc. Apple [Computer] Inc. • Apple’s image: exemplar of proprietary • Actually used all 3 strategies v Closed v Involuntary openness v Strategic openness

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15 Closed Apple: Cloning • Prosecuted Apple II clones (Apple v. Franklin) • Mac cloning debate (West, 2005) v Blocked Mac clones (1985, 1992) v Allowed, then cancelled clones (1994-7) Exogenous openness: components • Early pioneer of component-based business models (cf. West 2006) v Integrated standardized components v Sourced CPUs from MOS Technologies, Motorola, Intel v Also other key components • Increasingly, standardized peripherals

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16 Strategic openness: outsourcing • Once traditional approach to manufacturing v Automated Fremont Mac factory (1983-1991) v Ireland (1980), Singapore (1981) factories • Outsource all manufacturing to suppliers v 1996-7: sold factories to SCI (later Sanmina SCI), National Steel v 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 v Apple II: VisiCalc v Macintosh: software “evangelists” v iPhone/iPad • App store: enables market entry

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17 Strategic openness: open source Multiple experiments: • FreeBSD/Darwin: operating system • CUPS: printing • WebKit: v Safari (Mac/iPhone/iPad) browser v Android/Chrome browser v Also Nokia, Research in Motion Conclusions

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18 Closed vs. open strategies • Firms prefer closed strategies v More predictable v More control, appropriation • However v “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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19 Strategic vs. involuntary openness • Involuntary openness impacts all firms • In strategic openness v Firms control the nature of openness v Align to firm strengths, competitor weaknesses v Possibly forestall disadvantageous openness v Usually requires some sort of initial advantage Unresolved questions • How do we measure costs, benefits? • What/where are the moderators? • Which firms will choose openness? v Do some have more choice than others? v Are some more capable than others? v Constrained by business models?

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Strategic Openness

  • 1. 1 Strategic Openness Joel West Keck Graduate Institute, Claremont Colleges blog.OpenInnovation.net Program on Open Innovation UC Berkeley, Haas School of Business 10 Oct 2011 Take-Home Message 1. Many choices of closed vs. open v Most are continuous, not bifurcated v Partly open is most common condition 2. Two sources of openness v Exogenous (involuntary) v Endogenous (voluntary): strategic openness Implications for competitive advantage
  • 2. 2 Traditional Competitive Advantage Competitive advantage=control Traditional sources of advantage: • Monopoly/oligopoly (Tirole 1988) • Vertical integration to control inputs and outputs (Chandler 1977) • Inimitable resources (Barney 1991) Manifest by economic rents
  • 3. 3 Lack of control is bad Teece (1986): 1. First mover firms often unable to control the returns from their inventions • Typically due to lack of appropriability • Particularly true for small companies 2. Partner (e.g. with big companies) to overcome this lack of control And yet… • Firms build on open technologies v Apache, Linux open source software v Open standards v University science • Firms open their own technologies v Eclipse development tools platform v WebKit open source mobile browser
  • 4. 4 IBM’s forays into openness • Greatest success came from proprietary vertical integration (Fisher et al 1983) • But today… v An exemplar of inbound and outbound open innovation (Chesbrough 2003) v Leading champion of OSS (West 2003) v Gave away IP to gain advantage (Alexy & Reitzig, 2010) Prior Research on Openness
  • 5. 5 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)
  • 6. 6 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)
  • 7. 7 Limits to openness • Open standards v Need some closedness for value capture (Simcoe 2006; West, 2007) • Open source v Choice of open parts vs. partly open (West 2003) • Open innovation v Too much inbound OI is suboptimal (Laursen & Salter 2006) v Costs of inbound OI can exceed revenues (Faems et al, 2010) Involuntary Openness
  • 8. 8 Origins of involuntary openness • Low appropriability (Teece 1986) • Value chain specialization (Grove, 1996; Langlois 2003) • Open standards v Formal de jure standardization (e.g. GSM) v Open de facto platforms (iPhone apps) v Most “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) v And cost of these rights (e.g. royalties) • Range of openness on each dimension Thus “many shades of gray” (West 2007)
  • 9. 9 Open source not equally open • Involuntary openness v Community owned source (e.g. Linux, Android) • More open than open standards (West, 2003) • Strategic openness v 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 execution v Dynamic capabilities, arbitrage of information asymmetries, economies of scale, … v Hope for first-mover advantage v Often transient competitive advantage • Partner/license for scarce resources • Niche-ification (i.e. focus differentiation)
  • 10. 10 Results of involuntary openness • Leads to excess entry v Little or no differentiation v Price-based competition, commoditization • Reward low-cost producers • Typically few winners, many losers ∴When openness is exogenous, v producer firm doesn’t make the rules v odds of success are not very good Strategic Openness
  • 11. 11 Strategic openness • I define strategic openness as “the selective opening of a firm’s control of its technology, innovations and other outputs in order to gain competitive advantage” • Builds on prior research on open standards, open source software, open innovation Growing the pie vs. slicing the pie • Value creation vs. value capture (Simcoe 2006) • Proprietary control vs. attracting adoption (West 2003) • Control vs. attracting collaboration (West & O’Mahony 2008)
  • 12. 12 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 the ecosystem accrues to sponsoring firm • Modular economies of substitution (Garud & Kumaraswamy 1993) • Faster time to market, technological progress (Bresnahan & Greenstein, 1999) • Upstream scale economies (West & Dedrick, 2000) • Downstream variety (Boudreau 2010)
  • 13. 13 Other reasons for openness • Undercut competitor profits • Create reputation(Henkel 2004) • Facilitate search for external technology or 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’Mahony 2008) • Need to study combining multiple forms of openness (Dahlander & Gann, 2010)
  • 14. 14 Examples: Apple Inc. Apple [Computer] Inc. • Apple’s image: exemplar of proprietary • Actually used all 3 strategies v Closed v Involuntary openness v Strategic openness
  • 15. 15 Closed Apple: Cloning • Prosecuted Apple II clones (Apple v. Franklin) • Mac cloning debate (West, 2005) v Blocked Mac clones (1985, 1992) v Allowed, then cancelled clones (1994-7) Exogenous openness: components • Early pioneer of component-based business models (cf. West 2006) v Integrated standardized components v Sourced CPUs from MOS Technologies, Motorola, Intel v Also other key components • Increasingly, standardized peripherals
  • 16. 16 Strategic openness: outsourcing • Once traditional approach to manufacturing v Automated Fremont Mac factory (1983-1991) v Ireland (1980), Singapore (1981) factories • Outsource all manufacturing to suppliers v 1996-7: sold factories to SCI (later Sanmina SCI), National Steel v 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 v Apple II: VisiCalc v Macintosh: software “evangelists” v iPhone/iPad • App store: enables market entry
  • 17. 17 Strategic openness: open source Multiple experiments: • FreeBSD/Darwin: operating system • CUPS: printing • WebKit: v Safari (Mac/iPhone/iPad) browser v Android/Chrome browser v Also Nokia, Research in Motion Conclusions
  • 18. 18 Closed vs. open strategies • Firms prefer closed strategies v More predictable v More control, appropriation • However v “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
  • 19. 19 Strategic vs. involuntary openness • Involuntary openness impacts all firms • In strategic openness v Firms control the nature of openness v Align to firm strengths, competitor weaknesses v Possibly forestall disadvantageous openness v Usually requires some sort of initial advantage Unresolved questions • How do we measure costs, benefits? • What/where are the moderators? • Which firms will choose openness? v Do some have more choice than others? v Are some more capable than others? v Constrained by business models?