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The growth of business innovation

According to Schumpeter (1934), Innovation is defined as the construction of new combinations. Innovations may involve in new means of production, new services or products, new basis of supply, the utilization of new market place, or new methods to manage business. They can be very new, radical innovations, or adaptation of an existing product or service. Innovation is the most important driving force for companies and firms to grow up, flourish, and maintain a high profitability (Drucker, 1988; Christensen 1997; Thomke, 2001).

There has been a swing in business innovation. Leaving after a once internalised system, firms are becoming more sustainable and resourceful by teaming up with external resources for Research & Development, a practice called as “open innovation” (Brez, 2009). In 2008, Google declared a $10 million project to seek ideas from anyone about how to make the globe a better place. Rather than drawing only on the intelligence of its twenty thousand employees, Google looks at normal people to generate innovation. As the company states on its Website, “never in history have so many people had so much knowledge and information, so many tools at their disposal, so many ways of producing good ideas come to life. However, at the same time, so many people, of all walks of life, could use so much help, in both little ways and big” (Google, 2008). Google is not the only firm that searches outside its own organisational boundaries for innovative ideas. Netflix opened up its database to innovators in a search to discover new ways to foresee a person’s movie preferences in 2006 (Netflix, 2008). Procter & Gamble’s objective is to source half of its innovation outside the boundaries of company and capitalize on start-up firms and entrepreneurs (Chesbrough, 2003). Not only have ordinary citizens or users of innovation become important innovators but also universities. For example, Intel has established “Intel tablets” to connect with academic researchers across the world and draw on basic research that its in-house engineers and scientists may not focus on, given their more short-term orientation.

These examples highlight new ways in which firms innovate: Rather than investing in in-house corporate Research and development (R&D) laboratories—such as Bell Labs or XeroxPARC—companies are increasingly interested in searching outside their organizations for new ideas. Harvard Business School scholar Henry Chesbrough contrasts the old paradigm, which he refers to as closed innovation, with the “new era of open innovation” (Chesbrough, 2003a, 2003b). This research field became popular among scholars after Chesbrough (2003) launched his seminal book on Open Innovation (Salmi et al, 2007). Open innovation refers to a new model of innovation whereby firms seek ideas from a variety of sources such as product users, universities, startup companies, and so on. In addition, the open innovation paradigm acknowledges that many ideas that originate inside corporate boundaries never commercialize and that firms need to develop more proactive strategies to reap benefits from these hidden assets by licensing to other organizations and finding ways to leverage ideas outside the firm’s boundaries (through corporate entrepreneurship, for example).

Also, Innovation is not confined to a specific industry type. It is a most seen process in all the industries and sectors like manufacturing industry, software industry and many others. Open Innovation appears to have taken strong grip in software sector (West and Gallagher, 2006). The attractiveness of open innovation depends on the industrial and technological perspective (Chesbrough, 2006). This innovation model is possibly most common in the Information and Communication Technology (ICT) segment, as it facilitates companies to deal with the global competition, accelerating innovation cycles, complex services and products that integrate several technologies, and the difficulty of handling all the intellectual possessions and skilled professionals required for innovation (OECD, 2008). Nevertheless, open innovation is also established in industries such as pharmaceuticals, benefiting from biotechnology. At the same time as big pharmaceutical companies hold major internal research potential, they increasingly depend on external sources to extend their product range (OECD, 2006). Evidence on Innovation openness can also be found in industries like automotive industry and aerospace industry where first-tier and second-tier suppliers play an increasing role in the process of innovation. Producers in these industries have changed a lot of innovative actions to their supplier firms over the years, and these have influenced the improvement of their actions to carry out further activities on a global level (OECD, 2008).

Purpose and Research Approach

This research report aims at giving an outline of the research area of open innovation and it’s influence on Software industry. The purpose of this report is to portray the main tendencies of publications through recognizing the major themes in literature and exploring the research frontier. This report is based on two main studies. First, a literature overview of the publications on open innovation available in main databases until August, 2010 was carried out. In the second study, a questionnaire survey is sent to the employees involved in R&D and innovation activities of software firms. Their opinions and responses were used as an additional contribution when trying to discover the future directions.

This research looks at the driving forces and returns of the open innovation in software industry. I am particularly interested in finding the drivers that lead software firms to adopt the open innovation and firm’s ability to gain the returns. This research asks the following questions:

What are the main factors that are leading a software firm to adopt open innovation as an Innovation strategy?

How does the open innovation affect the firm’s ability to earn returns?

Structure

This research report starts with the introduction about the open innovation in software industry. In chapter 2, a structured review of open innovation publications is given. Chapter 3 gives the research methodology used in this research. Chapter 4 gives the findings and analysis of the research results. In chapter 5, Conclusions of the research are given. At the end of this report, a detailed list of references is provided.

Limitations

In this report we have primarily chosen to focus on the publications like journals and books that clearly use the words open innovation. We have also confined our search to a limited number of participants in a few companies. Also we have not incorporated industry reports and conference papers.

Literature review

In this chapter, the literature on open innovation is summarized. Initially, the method for conducting a structured review of open innovation publications is explained. Finally, a thematic analysis of the publications is presented.

A Structured Review of Open Innovation Publications

To get a better understanding of research done on open innovation, a systematic literature search of publications until August, 2010 was performed in major databases of management journals:

Science Direct – database

ABI Global – database

EBSCO HOST: Business Source Premier

Harvard Business Review

All the databases are searched by the term ‘Open innovation’ in title, keywords or abstract. Research policy, International Journal Of Innovation Management, Strategic Management Journal are the journals used to find the articles that support the open innovation literature.

In addition, a search for books with “open innovation” in the title was made on ‘Google Books’ to identify books published in the field. Two books were found and one book by Chesbrough (2003) and one edited book from him (Chesbrough, Vanhaverbeke, West, 2006). All books are included for the literature review. This study allows a broad analysis of the journal articles published in the databases and the books available on open innovation. The most cited and published author is Henry Chesbrough, Professor at Haas Business School University of California Berkely, who coined the term “Open Innovation” in 2003.

Open Innovation Paradigm

Innovation can be classified as Open and Closed Innovation. Closed Innovation refers to a state in which all innovation activities are held internally and kept within the company. There is no flow of knowledge into or out of the company (Christensen et al, 2005). Companies could stop rivals from emulating their products, methods of production or services, and maintain competitive advantage in the marketplace. Nevertheless, successful innovations ultimately appeared not only to be dependent on the interactions inside the company, but also on external interactions with the surroundings (Fagerberg, 2005 ; Edquist & Hommen,1999). Globalization is a vital primary cause for the need to team up with external sources in innovation. This development has resulted in augmented competition, augmented mobility of skilful workers and, subsequently, smaller product life cycles, lesser profit margins and higher risks. In order to meet up these consequent challenges, firms must spread the risks and build up new products and services rapidly and efficiently, which they have frequently achieved by concentrating in a single domain (Chesbrough, 2003). The open innovation paradigm maintains the importance of both external and internal knowledge equally. The fundamental assumption of this innovation model is that the landscape of knowledge has transformed. Valuable knowledge and information can be available from several external resources, from colleges and universities and government laboratories to novice companies, and from individual innovators to PhD students (Lippoldt et al, 2009). The open innovation that give emphasis to more open approach in the firm’s innovation process, collaborating with external sources and alternative ways to market, is implemented as an innovation strategy in many industries (Viskari, 2006). The company has to discover its own technique to tap external sources of knowledge or take advantage of their intellectual property. They should possess the capability to look beyond their limits and boundaries and even industries (Miller et al, 2010).

The definition given to the term “open innovation” differs to some extent, according to the different research streams that have contributed to the concept: insights arising from the analysis and study of the outsourcing of Research & Development, globalization of innovation, integration of suppliers’ network, external commercialisation of technology and user innovation (Gassmann, 2006).

Table 1 gives a rapid overview of some of the definitions proposed.

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