Principle and theory behind DNPD:
Distributed new product development (DNPD) facilitates companies to develop new products by harnessing the innovation from both internal and external resources. The internal resources include company's own capability and R&D. And the external resources may include volunteer contributors, innovation communities & ecosystems and surrounding networks, which help in value creation (Henry and Melissa 2007). With the emergence of ICT, DNPD has become prevalent through global collaborations, enterprise data management and process automation capabilities. In today's competitive business scenario companies strive to develop new products and services to keep up with market trends and consumer requirements, which might not be always possible from internal resources. DNPD allows the aggregation of best practice solution comprising of most appropriate people for development and innovation of products.
The DNPD allows companies to locate their designing, engineering and manufacturing teams wherever the expertise is resident and available in cost effectively. “A semiconductor company saved nearly 60% on its design costs by locating its design and layout engineering resources in India” (Siemens 2008). In this open innovation model better products at lower cost can be developed utilizing knowledge of a pool of innovators rather than a just small number of innovators bounded in a company.
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Some of the standard practices in DNPD are licensing in, co-development and contract research. Further in DNPD partners get benefited by sharing their world class human resources, valuable internal resources and financial resources.
For any single organisation developing internal capability for all areas of operation and technology is not only time consuming but also requires huge financial resources. By engaging in distributed innovation companies not only save on R& D expenditures but also grow their innovation capability exponentially. Organisations are increasingly embracing DNPD to share risk, reduce cost and access readily available technology.
Most of the drugs those are currently in the pipeline in Pfizer (31 ranks in Fortune 500 companies) are originated from outside (Chesbrough 2003). Cisco relies on external resources for its major R&D, however, has been able to compete with Lucent, a spin off from Bell Labs, which is known to be pioneer in communication technology through in-house R&D.
Procter and Gamble makes 35% of its innovations and billions dollars of revenue by fostering the strategic innovation of DNPD (Huston and Sakkab 2006). In 2003 P&G decided to look for innovative ideas from external resources to fuel its growth strategy. Its idea was not to replace its internal innovations but to better leverage them. P&G set a target of sourcing 50% of the innovation from outside the company in next five years (Chesbrough 2003). The radical idea was based on that there are 1.5million potential people whose talent can be harnessed, which will form around 200 potential innovators per one research personnel at P&G.
A quick comparison between closed innovation principle where a company primarily relies on internal R& D and open innovation where a company harnesses external knowledge along with its internal R&D for development of new products.
Many of the important innovations happen in small and mid size entrepreneurial companies and in university and govt. laboratories. Internet and development of ICT have enabled the talent market to sell and purchase innovations across geographic boundaries. TopCoder & Innocentive are such innovative market place, which harnesses collective brain power around the world to solve the problems. Companies and individuals can post their requirements or challenges on the website. Solver organisation or individual can access them and provide innovative solutions and win rewards if their idea is accepted.
DNPD can be organised in two ways; collaborative community or competitive market.
i. Collaborative community:
Open software such as Linux, Open office, Firefox Web-browser & MySQL is developed by global innovation community. Linux itself has contributed $18bn to the global computing market (software and servers) in 2006 and the ecosystem will worth $40bn by 2010 (Kerner 2007). Typically, it takes $500mn to create and sustain a commercially viable operating system, but IBM spends only $100mn for development of Linux. So from strategic point of view DNPD is a very attractive way of product development and innovation (Henry and Melissa 2007).
ii. Competitive market:
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In contrast to collaborative community in the competitive market external innovators develop a variety of complementary products or services to support a primary product. Apple allows individual developers to use its development tool kit and infrastructure to develop applications for the iPhone. In less than a year thousands of external developers have developed 50,000 applications and over 1 billion applets have been downloaded. These complementary applications have enhanced iPhone's value, transforming it to a blockbuster success (Lakhani 2009).
Organisations choose from these two models depending on
a. Where they look for innovations?
b. What is the innovation strategy their competitors are using?
c. What are the products the competitors are developing?
d. Which product will complement their product portfolio or enhance their services?
e. Which are the key technologies they need to acquire?
f. Should they buy the technology or lease for some time period?
g. The type of innovation that will be shifted to external innovators.
h. The motivation of those individuals. (Lakhani 2009)
A comparison between the two models:
Necessary conditions for DNPD:
Objective of collaborators: The compatibility between partner organisations in a network can greatly affect the innovation process and knowledge exchange. There may be possible contradictions in objectives & ethics between the organisations. For example, an organisation developing nuclear technologies for use in development activities may not feel comfortable sharing the knowledge with a nuclear war head manufacturer. So a proper due diligence is required during the partner selection process in order to ensure partner compatibility.
Protecting intellectual property: There should be clear agreement for intellectual property (IP) rights on emerging innovations from the collaboration. Conflicts in IP can cause damage to all parties and lead to termination of collaboration. The share of risk exposures, roles & responsibilities and division of revenue streams should be agreed clearly during due diligence. This will provide a conducive environment for better collaboration and knowledge exchange. Further both internal and external environment is evolving continuously, so the contractual agreement should be flexible enough to evolve with time to match individual and industry requirements. As products are developed across different geographic locations from different external sources protection of intellectual property rights of individual organizations and persons are very much important.
Modular design structure: Component modularity is very important, as many developers are indulged in the development of the product. In modular design, the product specifications are clearly defined, the product development process is linear and the product's components are readily interchangeable.
Geographic distance: Physical distance between partners plays an important role in the innovation process for effective knowledge transformation and success of collaboration (Kiesler 2002). Implementation of collaborative tools such as Siemens PLM software, Microsoft Exchange Server and Microsoft Office Communications Server can mitigate the problems of geographic distance between stakeholders. However, ICT cannot replace the rich experience of in person communication during collaborative experimentations and exchange of tacit knowledge (Dooley L 2007). Organisations need to ensure that all stakeholders are working with the most up-do-date information regardless of their geographic, organisational or technological boundaries. Further the managers should be cognizant of time zone differences and the different activities of various participants should be synchronized regularly.
Shared routine: A key to effective transfer of knowledge across the network is to follow a shared routine and information structure. So that all the stakeholders are on the same page and are updated. For example, in distributed drug discoveries mapping of genome had a disruptive effect on how pharmaceutical companies develop drugs. So if a pharmaceutical company is in collaboration with another company or university, then on-time sharing of technology will help the company in development of drugs. Though geographical distance and financial constraints may not allow meeting often, but meeting in regular intervals will help stakeholders to exchange their tacit knowledge effectively within the consortium.
Information structure: Computing technologies used by organisations are heterogeneous by nature. A proper information management system should be in place and the information structure should be in an agreed format, so that relevant stakeholders can access the information without any difficulties. An effective knowledge management system will dramatically lower the cognitive and geographical distance and will help increasing collaboration and sense of community within the network (Dooley L 2007).
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In the above knowledge management model, all the innovation systems feed their metadata into a repository through the harvester. The repository is accessible to all the stakeholders through a semantic innovation portal.
Governing rules: A well structured governing rule should be constructed to manage DNPD. Eg. Linux rules governing the use of the software ensures that the source code is open for all to see any accepted revisions and improvements. Wikipedia primarily relies on the external volunteer contributors for its development. Two issues with it are ownership and transparency. Wikipedia maintains a log of every article created, edited and deleted so that anyone can trace the origin of the article and changes to the article.
Some additional conditions:
a. Openness facilitates a learning environment for stakeholders and will ease the exchange of information and technology across the network.
b. Organisations need to develop a mechanism to attract the participation of a broad community of contributors, and then how to sustain their participation over time.
c. Proper stage gate process should be to manage the ideas towards product or service development. The company needs to focus on ideas and products that would benefit specifically from application of own marketing & distribution channel or other capabilities.
d. Adjacency: In the adoption of ideas and products company needs to consider adjacency of new product with its existing range of products. For example, a tooth brush company may add oral care products to its portfolio.
Required organisational changes to adopt DNPD:
i. As organisations adopt DNPD, there should be a willing transition of “not invented here” to “proudly found elsewhere”.
ii. Traditionally organisations have been secretive about the emergent technologies developed in-house. So the concept of exchanging information with another entity may not be easily acceptable by employees. So organisations need to develop a shared social context in order to develop trust within the network.
iii. There should be openness to collaborate with competitive organisations.
Protocol for information exchange: Dysfunctions in a distributed development organization often cause product specifications to vary from the project's originally understood market and customer requirements. Significant problems typically arise during the evolution of the development cycle when individual groups make design changes without the knowledge of the project's other stakeholders.
Boeing 787, the latest aircraft from The Boeing Company has been developed by 21 companies, which include 1000+ suppliers from 5 continents worked together to develop the advanced aircraft in the aviation industry. However, as Boeing maintained a long arm's-length relationship with suppliers, problems in modularity were not recognized until the launch of the aircraft and the lunch got delayed by months. So a strong protocol of information exchange & relationship are required to ensure problems are detected and rectified on time.
Cognitive distance: The organisation culture and individual mindset affect exchange of knowledge among stakeholders. So to reduce cognitive distance between collaborative partners organisations need to implement appropriate technological and social infrastructure that facilitates the flow of knowledge across the network (Dooley L 2007).
Some additional organisational changes:
a. Protecting the strategy:
While collaborating with competitors, a very well developed protocol is needed to control exchange of information. As any information that is out of scope of collaboration may endanger the firm's strategic position.
b. Augmenting relationship:
Now-a-days many universities have become the incubation center for innovations, so companies need to ensure augmenting relationship with the academic world through funding and sponsorship in order to access the intellectual rights.
c. Enhanced communication:
Companies executing open strategy needs go through major internal changes to accept outside innovation and at the same time need to work on changing the perception of many outsiders who is a skeptic of working with the company. Very strong communication and change management is required to embrace DNPD.
d. Motivating external developers:
Organisations need to adopt the right type of motivators (extrinsic/intrinsic) to motivate developers depending on the innovation type they have chosen.
Firms which can harness the external ideas to advance their business while leveraging internal innovation can have better strategic competitiveness in this global business environment. Distributed product development enables companies to lower their development costs, access more specialized skill sets, shorten the development cycle, mitigate financial risk and improve their ability to deliver localized product content.
Chesbrough, Henry W. "The Era of Open Innovation." MIT Sloan Management Review, 2003: 35-41.
Dooley L, Sullivan D. "Managing within Distributed Innovation Networks." International Journal of Innovation Management (Imperial College Press) Vol.11, no. No.3 (Sept 2007): 397-416.
Henry, C., and M. Melissa. "Open Innovation and Strategy." California Management Review Vol. 50, No. 1, 2007.
Huston, L., and S. Sakkab. Connect & Develop, Inside Procter & Gamble's new model for innovation. HBR, 2006, 58-66.
Kerner, Sean Michael. "IDC: Linux Ecosystem Worth $40 Billion by 2010." Feb 07, 2007. http://www.internetnews.com/dev-news/article.php/3659961 (accessed Mar 29, 2010).
Kiesler, S and J Cummings. "What do we know about proximity and distance in work groups? In Distributed Work." (Cambridge: MIT Press) 2002.
Lakhani, Kevin K Boudreau & Karim R. "How to Manage Outside Innovation." MIT Sloan Management Review 50, no. No.4 (Summer 2009): 69-78.
Siemens. Distributed Product Development, Siemens PLM Software. Siemens, 2008.