Maturity in Innovation Network Management
TerraForum Consulting, Brazil
TerraForum Consulting, Brazil
TerraForum Consulting, Brazil
Companies are focusing increasingly on the creation and maintenance of external networks for innovation. The purpose of this chapter is to introduce the reader to the concept of network management and demonstrate the principal attributes that impact the formation and optimization of innovation networks, based on the network's objectives, the combination of the characteristics of the network’s participants as well as the network’s organizational format to attract and maintain the partnership. To reach this purpose, we present the results of a benchmark study undertaken in Brazil, the United States of America and Europe between March and June 2009. In this study, we interviewed executives at 24 leading companies known as innovators in their industry. Through the results we were able to identify a maturity model consisting of four levels for innovation network management: initiators, explorers, established and world class.
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The complexity of current Research, Development and Innovation activities (R, D&I), ever increasing cost of these activities, more sophisticated customer demands and shorter product life cycles, have raised the gap between the need for innovation and what companies can deliver internally.
This situation has stimulated companies to create innovation models based on collaboration with external sources, such as universities, clients, companies from other sectors, or even competitors, searching to improve their innovative capacity and performance. This new framework is being referred to as “Open Innovation”.
With the concept of open innovation becoming common, companies are focusing increasingly on
the creation and maintenance of external networks for innovation. Unfortunately, this often occurs without using a holistic approach to the architecture of networks and individual participants. Companies often look at specific competencies that need development and do not evaluate the network composition and its effectiveness based on the specific network’s objectives and its contribution to the overall company strategy. This can create malfunctioning of the networks, not being able to obtain the network’s goals and thereby not having the impact as expected on the companies strategic objectives.
Much has been written about innovation networks and their management. Literature includes discussions of how management of external networks differs from the more traditional way of managing strategic alliances (a. o. Gulati, 1998) as well as how to measure the effectiveness of specific networks (a. o. Segil, 2004). We identified an opportunity to research more extensivily how organizations link different types of networks to organizational strategic goals and define methodologies to optimize network composition and architecture. It requires a portfolio view of networks, as already indicated by Vanhaverbeke e Cloodt (2006).
For this research we developed a theoretic framework on the ways companies are managing the composition and structure of their innovation networks, measuring the fit between the network’s objectives and the management activities of the company in regards with the network. To develop this theoretical framework, we combined and adapted several theoretical models developed in books and articles from renown authors in this area. The main references we used were: “Alliance portfolios: designing and managing your network ofbusiness-partner relationships” (Parise & Casher, 2003), “Open innovation: researching a new paradigm” (Chesbrough & Vanhaverbeke,
2006) and “Effective practices for sourcing innovation” (Slowinski, 2009).
Our research was undertaken amongst 24 Brazilian, European and American based firms. Our method was based on testing our theoretical framework mainly through structured, partially qualitative, partially quantitive interviews. This study was for a large part concluded in 2009 and preliminary results of the research were presented during the International Society of Professional Innovation Management (ISPIM) conference in Austria in 2009.
Our research amongst the 24 international organizations, showed that some common good practices exist among companies when it comes to open innovation management. Although some practices partly depend on the company’s industry or R, D&I investment levels, we see that many practices are common and their use depends on the company’s level of maturity regarding open innovation networks. The main results from our study therefore was the construction of a maturity model for open innovation, based on four dimensions: strategic, relational, support and organization.
We hope this study will contribute to a better understanding of how innovation networks work and how to develop them. The maturity model should contribute to the debate around best practices in network management for open innovation.
Traditionally, Research and Development at large organizations have been handled internally. Large R&D organizations were seen as important assets to their companies and focused on discovering, developing and commercializing technologies and products internally. This type of R&D is called “closed innovation” (Chesbrough & Vanhaver - beke, 2006).
However, the complexity of current Research, Development and Innovation activities, ever increasing cost of these activities, more sophisticated customer demands and shorter product
life cycles, have raised the gap between the need for innovation and what companies can deliver internally (Slowinski, 2009; Chesbrough, 2007; Van de Vrande, 2007).
This situation has stimulated companies to create innovation models based on innovation networks: a set of external sources, such as universities, clients, companies from other sectors, or even competitors that collaborate to improve their innovative capacity and performance. This new framework is being referred to as “Open Innovation” (Chesbrough, 2007). Networks refer to inter-organizational relationships and can range from sparse dyadic, to dense multilateral relations where actors tend to cluster in alliance blocks (Lemmens, 2004).
Innovation networks can be formed through various forms of cooperation, as stated by Terra (1999):
• Joint ventures and research corporations
• Shared agreements for R&D
• Agreements for technology exchange
Figure 1. Complexity in intra and inter organizational relationships (Fonte: Vanhaverbeke e Cloodt (2006))
• Direct investments: minority shareholding driven by technology factors
• Licensing agreements
• Networks for Subcontracting
• Research associations
• Joint research programs sponsored by
• Computer databases and networks for
exchanging technical and scientific information
• Informal networks
• Other networks
Since open innovation primarily refers to establishing of intra and inter organizational relationships, Vanhaverbeke e Cloodt (2006) suggest that the analysis of such relationships should be undertaken in five different levels, with growing degrees of complexity between them, as demonstrated in the following figure.
The first level treats the relationship between individuals of the organization for innovation. This level permits us to understand how companies organize themselves internally to take the most advantage of external knowledge acquired and referes to the internal culture of the company which either stimulates or prevents the usage of
this knowledge and technologies from outside of the company.
The second level treats the benefits that a company can obtain with open innnovation and is related to the types of partners and the company’s strategic objectives in relation to its open innovation model.
The third level considers the benefits and interests between two or more companues to create links between them. This level is quite well discussed in academic literature about strategic alliances by authors like Gulati (1998), Parkhe and Miller (2000), Arino, de La Torre e Ring (2001), and Parise and Casher (2003). They discuss how to select partners for innovation, evaluate risks and returns, evaluate strategic alignment between two partners and how to generate a strategic alliance over time.
The fourth level considers inter organizational networks and studies how a leading company integrates its external relationships within a coherent strategy and manages this over time. This level of analysis takes in consideration that every specific alliance is part of a network of interactions that can either optimize or restrict diadic relationships. Literature by authors such as Das and Teng (2002), Ozkan (2007), Wixted e Holbrook (2008), e Vanhaverbeke et al (2009, focuses on how to manage the portfolio of alliances and partners.
The fifth level consists of understanding how innovative companies are embedded in institutional arrangements and are able to leverage and optimize the innovative efforts of a group of companies gathered in an innovation system that can be can be of local, regional, national, supranational or sectorial dimension.
When discussing innovation networks one should contemplate and manage relationships at all five levels, a systemic approach to open innovation.
Some authors pledge that networks connect naturally, that they are emergent - a ‘network of organizations’ perspective, others argue that they are created intentionally and therefore can be managed to some extent - a ‘network organization’ perspective (Moller & Rajala, 2007). Our research was undertaken based on the latter view and focuses specifically on the capabilities of the firm to manage its networks. We tried to use a more holistic approach to the management of networks, or what might be called a portfolio view, taking into consideration the five levels as described by Vanhaverbeke e Cloodt (2006), with emphasis on the fourth and fifth level, or what we called, a portfolio view.
Different innovation processes and innovation activities demand different type of innovative capacities. Therefore, typically a company is involved with various partners in different alliances or contracts. Increasing sharing of knowledge and information between these different alliances is a great challenge. The various alliances with multiple partners, form interdependent networks that often compete with each other - both internally and externally - for limited resources (Parise & Casher, 2003). In this situation it will be necessary to develop a portfolio approach to successfully implement innovation network management.
A portfolio of partners can be defined as a collection of direct partners of a company that are the central components of a collaborative network. In knowledge-intensive sectors, they have become significant drivers for innovation (Dyer & Nobeoka, 2000; Doz; Olk; Ring, 2000; Das; Teng, 2002; Oskan, 2007).
To be able to define a preferred portfolio ofpart - ners one should answer the following questions:
• For which part of the innovation process a partner is required?
• Which type of partners would be ideal to obtain the companies objectives within the specific part of the innovation process?
• Which combination of partners and commercial type of relationships will optimize knowledge exchange and results within the network?
The portfolio approach provides a clear view of how to manage the network of partners - formed both by allies and rivals. It allows minimizing and diversifying portfolio risk and leveraging synergies of the network of partners as it permits the reflection on the future needs of potential partners and developing processes that enable the sharing of information and knowledge among the network participants.
Innovation network management refers to a systematic approach to work with external partnerships along the innovation processes. It includes monitoring and managing the network created by all these relationships, evaluating its performance and results and formulating strategies to improve their performance (Harbison & Pekar, 1998; Man; Duyster, 2002; Nielsen & Mahnke, 2003). With greater involvement and collaboration in the innovation process, a more strategic approach to management of innovation networks becomes necessary, since the agreements governing the relationship between the partners can bring significant risks to the company.
There are many challenges of managing a network of collaboration among partners. According to Parise and Casher (2003) the principal challenges are to:
• Understand the collaborative and competitive dynamics between partners
• Monitor and understand changes in the business environment which may alter these dynamics
• Establish different strategies for each type of network collaboration
• Understand how each partner selection and its position in the network will affect both individual relationship and overall network performance
When it comes to managing partner networks for innovation, and management of individual partnerships and alliances, one must take into account that these agreements lead to the creation of dense networks of partners linked by direct and indirect relations. External collaboration with different organizations brings with it a high level of complexity related to culture, organizational characteristics and trust. Partnerships are difficult to manage, especially when there are cultural differences between partners (Arino et al, 1997; Camison; Boronat, Villar, 2007). Understanding the concepts and implications of the formation of strategic alliances to find the best setting and the appropriate partners for the innovation network is a major challenge for open innovation (Van de Vrande, 2007; Lichtenthaler, 2008).
One of the factors of complexity in managing partnerships and alliances is that it involves non - hierarchical relations between different institutions and demands an unusual combination of skills from traditional managers: entrepreneurship, business intelligence, cross-cultural diplomacy, and the ability to establish mutual trust and interdependent relationships (Arino; De la Torre & Ring, 2001). In the next few paragraphs we will explore four dimensions of innovation network management one needs to take into consideration to guarantee that these critical and strategic factors are handled correctly: strategy setting, relationship management, support and services and organizational structure.
To make open innovation successful, it is necessary that its objectives are aligned with company strategy and innovation strategy. Five main business objectives are common in the development of partner networks for collaboration, as shown in the Table 1 (Chesbrough & Schwartz, 2007).
There are some steps in developing the strategy for the formation of innovation networks (Schlange & Juttner, 1996 apud OJASALO, 2008):
• Understanding of the context: what is the strategic situation to be reviewed?
• Definition of the actors: which types of actors the network should focus on?
• Creation of an interdependent matrix: who determines the nature of network relationships?
• Creation of the desired portfolio of partnerships: where must each partner act?
• Creation of a strategic matrix: what potential must each actor possess for directing or leveraging the network?
Table 1. Objectives for external collaboration in research, development and innovation
Once having determined the strategic objectives for open innovation, companies should define what partners are best to reach their goals and targets. Some partners are better in helping to reduce risks whilst others are better in bringing cost of development down. Another decision that will direct which partners to choose, is the determination in which technology or business areas to collaborate for innovation. For example, some firms might be reluctant to open up their innovation process in technologies that are strategic to the company, while others do exactly the opposite with the objective to diminsh risks.
External collaboration can be used in different parts ofthe innovative process, from the generation of ideas through the development of solutions and commercialization of products and technologies, as shown in the following model adapted from Chesbrough (2003).
Specific partners work better in different parts ofthe innovation process. For example, universities are good at scientific and basic research normally, but not considered the right partners for commercialization of technologies.
Last, but not least, companies should take into consideration the strategic impact of adding certain partners to their portfolio. For example, a current partner could become a future competitor. It will be necessary to evaluate the risks that accompany the decision to involve this partner in once’s network. Also, companies will need to understand the dynamics and the potential issues that a combination of certain partners might bring (companies of different size, different culture etc.).
Figure 2. Framework for open innovation
Part of the innovation network strategy, is the decision on where to locate innovation activities. The logic behind the decision on where to locate is to be either close to innovation competencies, when one seeks more radical innovation and closer to manufacturing when it comes to incremental innovations (so as to be able to quickly deliver small improvements to existing products). Also, innovation activities could be near the customer
so to understand trends and needs. Therefore, the decision on where to locate innovation activities must take in consideration, besides the network strategy, some other factors, such as: access to research structure, ease of recruitment and selection of skilled labor, potential R&D cooperation with Universities, access to new consumers, access to equipment, promoting the image of the company, among others (Westhead & Batstone, 1999).
So, defining clearly what the company objectives are and what it wants from its portfolio of partners is central to the success of the network, because only then the process for search and selection of partners can be successfully implemented (Slowinski, 2009). Defining the strategy forms the basis for the next steps, including the definition on how to manage relationships between company and its partners and between partners.
Diversified portfolios, rich in resources and diverse capabilities enhance the innovative capacity of a company (Ozkan, 2007; Vanhaverbeke et al., 2009). There is a positive relationship between the most innovative companies and the existence of a complex portfolio of partnerships, with many different elements and geographic locations. In this sense the diversity of partners is even more important to the success of innovation than the number of partnerships (Duyesters & Lokshin, 2007). However, the greaterthe variety and number of elements in a portfolio of partners the complexity of their management increases (Duyesters & Lokshin, 2007).
Although the criteria for inclusion of a partner in the network should be related to the company’s strategic obj ectives, it is also important to examine potential synergies between different partners that can be leveraged and how network limitations and conflicts can be reduced through development of partners or termination of partnerships. The objective behind these criteria is to ensure that the portfolio value is greater than the sum of the values created by each individual alliance (Parise & Casher, 2003).
Mutual trust between partners is a central aspect in the management of partnerships (Parkhe & Miller, 2000; Arino, De la Torre & Ring, 2001; Suseno & Ratten, 2007). However, its constitution is not immediate, it occurs gradually, as the interactions between partners happens. This process of building mutual trust is called “relational quality” and is considered the foundation of a successful partnership (Arino, de la Torre, Ring 2001).
During the process of partner search and selection for participation in the innovation network and even before the partnership has really developed, confidence is more related to the sense of security, or reliability. Only with time and several interactions confidence will increase and take the full meaning of faith in one’s partner, or trust. The level of trust in a partnership is directly related to previous experiences of partners in other alliances, as well as their organizational capacities and technical skills. The relationship of integrity, reputation and ethical behavior are also extremely important in building trust between partners. This “relational quality” is constantly measured by participants and plays a significant role in the process of building mutual trust (Arino et al., 1997).
Another attribution of portfolio management is to understand and manage synergies and constraints that may be generated by the relationship between the partners themselves, also called the interdependencies (Parise & Casher, 2003).
Interdependencies exist when one partner is not fully in control of all the conditions necessary to achieve the expected result and is dependent on other partners to gain access to resources, capabilities and competencies. (Vasudevan et al., 2001). Interdependencies can be facilitators when they bring positive impacts to the network and are directly related to the success of the portfolio and can be restrictive and bring negative impacts on other partnerships. Table 2 shows possible facilita - tive and restrictive interdependencies.
These reflections on the ideal design of a partnership portfolio and understanding of possible impacts of the relationship of partners between them should be the basis for the search and selection of partners. On the other hand, mechanisms for attracting and retaining participants should be created, enabling the development and maintenance of optimal innovation network. The need to attract and keep the partner interested to continue participating in the network requires the analysis of other two dimensions for network management as shown next.
Innovation practitioners constantly disagree about the importance of physical location for fostering innovation. Nevertheless, no one neglects the fact that innovation and knowledge transfers occurs in space (Polenske, 2007).
Oerlemans, Meeus e Boekema (2003) when discussing the reasons why innovative companies involve themselves in innovation networks state the following motives:
• Get access to complementary resources (knowledge, information, financial and physical resources);
• Share risks;
• Create synergies through the sharing of resources;
To be able to attain these goals, it is important that the company offers the potential partners the necessary conditions for sharing ofknowledge and experience to happen smoothly (Kratzer, 2007).
For this reason, leading innovative companies have ended up focusing on specific geographic areas, because proximity makes it easy and less expensive to provide access to physical space, components, machinery, personal and business services, knowledge and information and also offers quick access to institutions and public services. In addition, a population of companies and organizations geographically interconnected facilitates complementarity between the activities ofnetwork participants. It also facilitates the understanding of the needs of partners and increases face-to - face contacts (Oerlemans, Meeus, & Boekema,
2003). In summary, geographic proximity affects
Table 2. Partners interdependencies
the ability to receive and transfer knowledge and improve network performance.
However, to attract potential partners for a specific geographic space, the arrangement should offer facilities and services that complement the partners’ capacities for innovation, to facilitate joint technology development and transfer of knowledge and enable the development and commercialization of innovations.
The Support and Services dimension consists of defining the type of infrastructure and services necessary to attract and complement skills and capabilities of potential partners as well as to create conditions that facilitate learning, creativity and sharing of information and knowledge.
In this dimension are included: the supply of buildings and facilities to host partners, laboratory infrastructure, equipment, communication systems, technical services, finance, management and technology. When taking into consideration the support and services dimension, companies will make sure that the physical and virtual structures are designed to encourage the flow of knowledge and creativity.
To decide which set of infrastructure and support services to offer to their network partners, companies that lead innovation networks will need to consider:
• The network’s strategic objectives;
• Characteristics of the participants that they
want to attract;
• Activities that they wish to facilitate or
Table 3 shows some types of support services utilized to attract, develop and retain partners in innovation networks.
Clearly, all these services and support, physical facilities, as well as the management of the individual and network relationships require processes, governance and legal structures, as we discuss in the following paragraph.
After deciding which partners to work with, what for and where (Strategy), defining the working relationship with individual partners and the network as a whole (Relational), developing the services, physical structures and support required to attract and retain the preferred partners (Support and Services), a company needs to organize management of the network to guarantee systematic and sustainable results.
With a wide range of potential services available to support their network and with a number of partners located in the same area, it will be necessary to establish governance capable to manage relationships, offer services to partners and maintain the infrastructure created to support the network.
Type of Service
Companies that lead innovation networks can offer a suite of technology services to its partners, such as support for testing and technical analysis and help for partners to obtain certifications or technical documentation, among others.
Access to capital
Given that funding for innovation is still faced as a challenge to companies, leaders of innovation networks can promote conditions for the partners to become fit and attractive to receive investment funds from Venture Capital (Romera, 1998) or government. To do so, the leading company offers aid to the development of business plans, business meetings and submissions of projects to government funds for innovation.
Intellectual Property support
Since the transfer of technology is a goal for the network, it is necessary that the network leader offers services to support such activity (Gower, Harris, 1996). Such services are usually performed by specialized partners such as offices or agencies for innovation. The objective is to assure the protection and commercialization of intellectual property for the network.
The network leader can also provide business, technical or technology training directly or through partnerships with educational institutions, according to specific demands presented by the partners (Gower, Harris, 1996).
Support services for business development
Services such as management support - strategic planning, business plans, management, marketing, sales, finance and accounting, human resources management, project management and legal counseling can also be provided by network leaders in order to develop the business skills of its partners (Gargione; Louren9ao; Plonski, 2005; Figlioli, 2007).
Although there are many innovation networks that work without an established physical structure, the proximity of the partners facilitates knowledge and technology transfer and business development. In order to increase this capability it might be necessary to build a specific structure to host not only the partners, offering offices or structure for the operation of business, as well as spaces and infrastructure to conduct its projects and research.
According to Bibliardi et al (2006), a single model of governance does not seem appropriate,
since networks with different obj ectives and different players, such as the innovation network leaders, network partners, governmental institutions and investment companies, will have different characteristics and therefore different requirements. A large Innovation network with a lot of partners and innovation projects requires forms of governance capable of promoting the interests of the participants. The definition of governance for the network partners must take into account, primarily (Figlioli; Porto, 2007):
• The partners’ leadership;
• The objectives of the partners;
• The intensity and importance of
• The legal solution found to accommodate
the interests of the actors of the initiative.
Important here is that, although the leader has a central role in the network, it should see itself as part of the network and therefore will need to understand the objectives of the various participants, so to optimize gains for itself as well as for the network as a whole.
The legal form or arrangement between the players ofthe network is important because it will be able to influence and limit the strategic objectives of the network and influence directly the relations between partners. The type of legal form will also influence its governance, how the arrangement will be evaluated and the indicators to be used (Bigliardi et al, 2006).
According to these authors, to facilitate leading and managing a company’s network, different types of legal structures might be required or preferred. Many legal and administrative formats are possible, such as: managing organizations without legal personality - being tied to a department of the organization leader - associations, foundations, private companies (publicly traded and privately held) and public companies.
The leader of the network might become the single shareholder of this separate legal entity or might divide the ownership with some of its principal partners, or even governmental institu - tions. All depending on the interest ofthe different parties involved, regional or national government incentives and regulations and optimization of long term value.
The great variety of formal legal structures and consequently of governance in innovation networks is explained by Arranz, Fdez. de Ar - royabe (2007) as a result of two main factors: the level of applicability of the type of activity (how easy it is to deploy the technology in the market) and the network’s goals.
Activities as applied research and product development possess a high degree of applicability (easiness to deploy the technology in the market) and their evolvement through R&D networks can lead to opportunistic behaviors among the network participants. In this case, formal structures are established due to the fact that new products and patents can be implemented immediately. In the case of activities with low applicability such as basic research or pre commercial applied research, and activities related to the diffusion of knowledge such as training, scientific publications and research databases, formal structure mechanisms do not seem to be as important (Arranz, Fdez. de Arroyabe, 2007).
Networks should be governed by adequate mechanisms and roles to ensure the achievement of desired outcomes (Rampersad et al, 2010). Managing networks will require the implementation of a wide variety of processes and involve the following roles and responsibilities:
• Prospecting of potential partners;
• Managing partnerships in R&D projects including issues of intellectual property and commercialization of technology generated by the project;
• Managing partnerships, including evaluation, feedback, development and eventual disconnecting from partners
• Management of support services offered
- such as management services, finance, marketing and project management to the participants of the network;
• Management of technology services offered to network members and support for
intellectual property protection, the valuation and transfer of technology.
• Management of the innovation network
portfolio - aligning the partner portfolio with corporate and innovation strategy.
In general, financing of innovation networks in literature discusses cases of projects promoted by public institutions, either directly or through universities, foundations, among others. According to Rosenblum (2004), the most common sources of funding for innovation networks are universities, banks, government grants, philanthropic funds and venture capital.
Regardless of the nature of the promoter of the venture, opportunities for financing of innovation is influenced by both the legal framework that supports innovation network and by the goals, business model and the results expected by the network: the prospect of future income, the guarantees offered and the revenue stream (Figlioli, 2007).
In order to attract potential new partners, to receive government support and community approval, it is desirable to promote the innovation network through marketing actions. These might include propaganda via different media, but also promoting debate around the networks objectives at regional or national level, as well as sponsoring of specific events and initiatives related to the networks’ focus.
Also, efficient communication between players is crucial to the effectiveness of the innovation network. It can be obtained making information and knowledge available to all network collaborators (Rampersad et al, 2010), besides promoting collaborative forums and network meetings.
The important aspects discussed above led to the construction of a theoretical model which summarizes the main points for the formation and maintenance of networks for innovation. This model, with four dimensions is shown in Figure 3.
The dimensions Strategy, Relational, Support & Services and Organizational were used in our research to determine how companies and institutions organize their innovation networks.
The study aimed to determine how companies and institutions organize management of their innovation networks within the four dimensions. We visited and interviewed managers responsible for innovation networks to describe the practices of companies in Brazil, Europe and the United States, verifying the network strategy ofthe group leader, the structure of the network of partners, their physical infrastructure and services and the solutions used for organizational governance, roles and responsibilities of actors and their legal, managerial and financial formats.
During our research we searched to understand the following questions:
• How do renowned companies form and develop their networks for innovation?
• Are there common practices among the companies that lead to success (a common ground)?
• Are there logical phases when building one’s open innovation practices (common building blocks)?
Our study was undertaken between March and June 2009. The study involved 24 companies, of which twelve in Brazil (three Brazilian companies, nine Brazilian based foreign multinationals), five based in Europe and seven based in the United States of America. The companies for our research were selected based on the following criteria:
• Known as innovators in their industry;
• Possess their own research center; and
• Work together with several partners.
All of them where large companies and they invested between 1,5% and 6,5% of their revenue in R, D&I. Various sectors were represented in the research, such as the energy, agribusiness, automotive, computer, chemical, electronic consumer goods and telecommunications sectors. These companies, in 2008, all together spent more than US$ 18 billion on R, D&I, employed around 85,000 people in technology development and worked together with over 2,000 partners in their R, D&I processes. Four ofthe companies (Philips, Nokia, Siemens and DuPont) were ranked among
Figure 3. Innovation network management model
The role of innovation in strategy Open Innovation Objectives Open Innovation Strategy Localization
Use of partners on innovation stages
Support & Services
Infra-structure and services Business support
Partners and Network Management Collaboration incentives
• Organizational Structure 1 Governance for Open Innovation
■ Open Innovation Processes
■ Marketing of Open Technology Innovation Systems
©TerraForum Consulting 2009
the most innovative companies as selected by Business Week (2008).
Although our selection process focused on companies with research facilities and large networks, very few companies in Brazil have a long history of extensive and intensive external collaboration. All Brazilian based companie s showed a tendency towards more investment in research and more intensive external collaboration along the various phases ofthe innovation process, even outside Brazil within the near future.
In this dimension we endeavored to understand the role of innovation in a company, the objectives for partnering in R, D&I, the areas in which the company partnered and the type of technology deployed in the partnership. Furthermore, we discussed where the company located its R, D&I activities and the rationale for such placement.
In each of the companies we examined, innovation plays a key role. The purpose of innovation is sometimes to support current operations; more often, though, companies have loftier purposes for innovation. For many, innovation is the motor of the company’s future, with pioneering innovations being sought to generate groundbreaking, high-impact products and services that facilitate entering new markets. Partnering plays a vital role in this process.
Objectives for corporate partnering are myriad, but one stands out: companies partner to obtain
specific competencies and technologies that they do not possess. The reasons are twofold. In some cases, companies seek outside competencies and technologies because they do not recognize any strategic reason to develop them internally. On the other hand, there are technological competencies that companies want to master but do not possess. By partnering, a company can acquire these competencies and knowledge.
The second-most cited objective for partnering is to enhance the execution capacity of the company’s R, D&I. It is well known that companies seek partners to aid them in bringing technologies and products to market more rapidly. This partnering practice is closely related to another significant driver: the search for complementary capabilities in the R, D&I value chain. We touch more upon this below, but for now we can confirm that, as companies position themselves within the R, D&I value chain, they focus their partnering activities mostly on less-strategic parts in that chain.
Firms mentioned risk reduction as another partnership objective, but did so less often than expected, given that it is well established that partnering can reduce risk substantially. However, this may be because most interviewees are not especially capital-intensive in their R, D&I investments and no pharmaceutical companies, which ordinarily make major investments in R, D&I, were included in the study.
A more surprising outcome from our findings was that various companies recognized important benefits in partnering with universities and institutes, such as being known as an innovative and collaborative company. This reason was especially cited by Brazilian companies, where collaboration in the innovation process is still reasonably new to many.
The reasons for partnering and the frequency they were mentioned can be seen below, distinguishing between Brazilian based companies and European and American based firms.
Over the course of our study, we used the basic definition of research and development as set forth by the OECD, which includes basic research, applied research, and experimental development. To that definition we added scientific research while also expanding the other side of the R&D equation to include advanced development and commercialization. This brings together all the fundamental aspects of the technology innovation process.
In examining the stages of the innovation process in which companies opt to partner, we discovered that all interviewees collaborate with partners in various parts of the R, D&I process, with most focusing on basic and applied research to develop breakthrough technologies. Some interviewees focus on partnering in development and testing to accelerate implementation of technolo - gies. A few partner with competitors in technology research in the pre-competitive stage but not in the more competitive developmental stages. One of the companies interviewed mentioned that its approach to initiating research is to join or partner with research being conducted at one of the major research institutes to see what is “hot”. That way, the company shares the risk while working on research projects that are industry-strategic. None of the companies interviewed collaborates in scientific research, nor does any even contemplate investing in this type of research with third parties (or at least none explicitly acknowledged doing so). Only a few interviewees partner in the stages of commercialization and licensing of technologies.
Figure 4. Main reasons for partnering
In terms ofpartnering in technology, companies largely do not outsource research and development of strategic technologies because of the potential risk in loosing legal control and technological know-how. However, there is one particular exception: companies do outsource research and development of their strategic technologies so
long as their staffs monitor their partners closely, allowing the firms to acquire beneficial knowledge while maintaining control of intellectual property matters related to their technologies.
Our interviewees revealed that the location of their R, D&I activities differs widely. Some companies’ R, D&I locations have been determined historically, usually near their production facilities. Other companies take a more deliberate approach, preferring development to be close to their factories in order to be able to fine-tune solutions for production, and research to be close to world renown universities or world-class technology parks. Technology monitoring normally occurs closer to the end customer. For example, one ofthe companies interviewed spoke about its “antennas” across the globe to monitor what local competitors are developing in their field and what local universities are working on.
In general, most companies distribute their R, D&I activities over multiple locations. Some have created their own technology parks beside their own research laboratories. These companies are doing more than just searching for competencies worldwide; they prefer to have them located nearby, thus creating their own local technology innovation systems with third parties close at hand. It seems counterintuitive in today’s highly connected world with ready access to people and information anywhere around the globe, but research, development and innovation still seem to function best with face-to-face real-time interaction.
The strategy dimension gives direction to all other key dimensions. For instance, partnering objectives define the type of partners sought, the infrastructure and services necessary to support them, and the format for collaboration. The configuration of the other three dimensions depends on what is practiced in this dimension.
It can be concluded that all the interviewed companies seek to optimize their decision making based on strategic objectives, business constraints (such as budget) and open innovation logic. Not every company has the opportunity to define exactly how to set up its Open Innovation System, but all are well aware of the many potential opportunities.
In this dimension we explored the composition of the R, D&I networks, specifically with how many and which type of partners the companies collaborate, the role and location of partners and the nature of the partner relationship, and the handling of intellectual property rights.
Companies work with a wide range of partners. The firms we interviewed cited partnerships with universities, research institutes, clients, suppliers, consultancies, specialists in technology development, companies that commercialize technologies and governments. Several companies also leveraged “virtual” networks, such as Innocentive, as partners. The most common partners are universities and research institutes. Collaboration with other types ofpartners often depends on the length of time the company has been working with open innovation. Firms that have a longer history of open innovation collaborate with partners across a wider range of categories.
Firms tend to have an abundance of partners when they collaborate in several different stages of the R, D&I process and when they outsource research and development activities for a range of technologies. Our research unveiled some companies that accumulate hundreds of partners, with one company even boasting more than 1,000 partners (including international research programs). Although a vast quantity of partners may seem very impressive, having many partners does not necessarily ensure a more effective network. On the contrary, some interviewees mentioned the importance of having fewer network partners with whom they could execute a wider range of projects.
One can argue for either many or few partners. Many partners can facilitate direct access to technologies by creating more choices and fewer difficulties in targeting specific competencies when needed. But a larger network also brings the complex task ofmanaging many relationships. On the other hand, a network with fewer partners gives the firm more control over its network, allowing for more fine-tuned relationships and less intellectual property risks. Although both models have their advantages and disadvantages, collaborating with fewer partners is preferable for strategic technologies because trust and control are critical in such situations. Less strategic technologies can be outsourced to a wider range of potential partners to capture more extensive benefits
In terms ofthe location ofpartners, even though some companies prefer a local country partner, most partners are global. Companies seek partners that are “best in class” and may in fact be on the other side of the globe. To locate the best partners, our findings indicate that various interviewees use patent and article databases to initiate their searches. Based on their initial findings, they converse via telephone to secure worldwide recommendations in the target technologies.
Nevertheless, most of the interviewees reiterated the importance ofbeing close to their partners. One of the interviewees claimed that interaction with the university improved significantly when they moved close to the university, instead of having to travel 20 miles, because of the ease of having face-to-face meetings with students and professors. This again indicates the relevance of proximity and real-time interaction.
Figure 5. Types of partners
Partners can play varied roles in the R, D&I process. As expected, universities and research institutes are increasingly utilized for basic and applied research. Universities are primarily sought for their infrastructure, their exceptional competencies in research, and their ability to generate graduates with master’s degrees and PhDs. Institutes are targeted for their specialization and expertise on general technological industry challenges.
In research partnerships, companies also turn to major corporations as development partners. In the context of pre-competitive research, these partners at times may even be competitors. In such cases, the overriding objective is to share risks. Competitors also are selected as partners at national or international consortia that are convened to set industry standards.
Companies exhibit certain strong preferences in collaborative habits. One of our interviewees explicitly mentioned that it prefers working with other multinationals, since it finds them more reliable than universities. When partnership obj ectives are more profit-oriented, partnerships seem to be more effective. Nevertheless, there remain those that still prefer universities for their deep-rooted research expertise.
Partners also are sought as potential sources for ideas and insights, although very few companies in our study rely on this approach. They are more focused on searching for solutions to their research or operational challenges than receiving new ideas from their partners.
Virtual networks, like Innocentive, increasingly are being leveraged to solve specific, targeted problems in applied research and early development. Suppliers also play a role by providing new instruments for laboratories and at times can be co-developers. In a few instances clients themselves are co-developers. Consultancies also are enlisted at various stages of the process, depending on their expertise in R, D&I.
Companies that partner in the commercialization of technologies rely on a wide variety of actual and virtual partners.
Firms that are more advanced in open innovation go further and utilize “supporting” partners, such as venture capitalists, intellectual property agencies, and the government in support of a broader open innovation effort.
The types of relationships vary widely: there are one-off contracts, master agreements, j oint development contracts, licensing agreements, equity participation and co-participation in national and international programs, among others. The type of commercial relationship logically is defined by the type of relationship sought (for example, strategic or non-strategic, formal or informal) and the objective ofthe relationship (such as research, solution provisioning, investment, commercialization of technology, etc.)
A valuable insight here is that some companies seek out a close relationship with their strategic partners not only through master agreements but also through involvement in their daily affairs in order to facilitate their partner’s understanding of their business. In fact, one of our interviewees calls together its key suppliers to share its strategic “top needs list.”
All companies generally place great importance on protecting intellectual property rights. Companies that are more sophisticated in their open innovation efforts not only have clear policies in place but also have educated their employees on these policies. This reduces R, D&I employees’ hesitation to participate in open innovation and helps them define what to share and what to withhold.
In terms of distributing intellectual property rights, most companies focus on protecting only strategic property rights. According to one of the interviewed firms, “We must guard strategic technology, but non-strategic technology can be made available to generate extra value for the network.”
Finally, patents also play a role in negotiating co-development projects when the various parties are expected to leverage some of their own patents to develop a new technology.
Best practices in this dimension are mainly a function of a corporation’s maturity (time and experience) in partner relationships. Therefore, the more mature a company is in its relationships, the more types of relationships it normally will have in the various stages of the process, the better it usually defines its relationships and its intellectual property policies, and the more it will broaden its horizons in search for potential partners.
In this dimension we discussed with the companies how they attract partners and develop the network as a whole. What support and services do they offer their partners? Do they give partners access to their laboratories and/or invest in their partners ’ infrastructure? Do they provide business support and other services to their partners? Do companies proactively manage their networks? And do companies stimulate collaboration and learning between participants in the networks?
To attract new partners, the interviewed companies generally rely on their strong reputations, which they all possess in their respective industries. Some use their top-tier facilities to attract partners, whereas others attract partners via ongoing public relationships, for instance through articles authored by individuals within the company. Some companies also open their research departments to interns during the summer months of school vacation.
Companies rarely invest in the development of their partners. Except for investing in infrastructure and sponsoring some research projects, there is little evidence that they intentionally aid in developing their partners’ capabilities. Longer - term relationships certainly benefit partners, but even those companies that seek out longer-term relationships remain reluctant to set up plans for developing their partners.
Nevertheless, companies in more advanced stages of open innovation occasionally possess a clear partner-development strategy that usually encompasses infrastructure projects, IP policies, business services and other activities, as explained below.
All companies generally support their partners with some degree of access to their laboratories. This seems to be a basic, given provision in partnership agreements. Most also offer engineering know-how or other expertise to assist partners in executing their projects. One of the interviewees trains its customers in its laboratory so that they learn to use the laboratory on their own.
Many companies invest in the infrastructure of their partners, especially universities. Some firms also invest directly in their partners’ equity, mostly in the case oftechnology-based companies. During our study in Brazil, several companies mentioned to face some problems with investing in Universities, since many of the universities do not have the funds for maintenance of the investments.
Business support and services is the area in which companies most differ in innovation management. On one hand, there are companies that only provide their partners with basic access to laboratories. On the other hand, there are companies that construct a comprehensive local technology innovation system by bringing together, within one physical space, suppliers, consultants, patent offices, venture capitalists, governmental research organizations, contractors, research specialists, etc. In an example of the latter case, one interviewed company offers its partners office space (for a fee), an incubator for technology startups, and a laboratory to conduct experiments and test equipment (in the case of suppliers). In addition, some companies also provide access to a restaurant, a fitness center and childcare facilities to stimulate a sense of community and to facilitate collaboration and well-being onsite.
Other companies also provide partners with apartments and comprehensive support for foreign specialists. Overall, however, the majority of companies do not provide advanced business support and services to their partners.
In terms of partner collaboration, companies that are focused more on generating a network than on a simple set of individual relationships generally maintain, at a minimum, periodic meetings often informal meetings with their network partners. Most companies invite their partners annually, but some companies organize events several times a year. Also, some companies have “technical meetings” in which a technical expert on a certain subject gives a presentation to the partnership network. Some firms even go further by promoting “Dream Days” with their partners, prompting them to think together about the types of products that might be relevant to the future.
Some firms - two in this study - specifically attempt to stimulate collaboration through the physical layout of their facilities and campus regulations. Since transportation on campus is on foot or by bicycle because cars are not permitted, the partners benefit from interaction through spontaneous encounters. Furthermore, with only a single central restaurant, because restaurants are not allowed in other buildings, people inevitably meet one another. Similarly, large, centrally located meeting rooms also promote collaboration and interaction.
Encouraging participation in and leading regional, national and international research initiatives is another approach companies employ to stimulate collaboration among partners. One of the interviewees, for example, encourages the formation of groups to collaborate on important societal priorities, with the objective of promoting knowledge exchange among partners. These groups assemble in meeting rooms and virtual spaces, and their work often earns the approval and appreciation of the government. Another firm gives their partners access to wikis and other collaborative tools to stimulate interaction and knowledge exchange via a virtual platform.
Overall, companies provide basic support to their partners and networks. The maj or distinction between companies that give strong support and companies that do not appears to be a function of their experience and confidence in open innovation, their ambition and their resources to invest. Certain best practices, such as access to laboratories and office space and periodic meetings, are practices to which any firm can commit. However, firms that aspire to offer a higher level of partner support will need to invest not only financial but also human resources and possess a passion to strengthen their open innovation systems.
In this dimension we focused on the various organizational structures to support the innovation networks as well as governance and processes to manage open innovation. We also looked briefly at how companies promote their open innovation initiatives.
There appear to be basically two different types of legal organizational structures. Some R, D&I organizations are a department within their mother company while others are a separate legal entity but remain part of the business group. There are reasons for choosing a specific format. One is the quest for tax benefits; another is the desire for the R, D&I organization to function as a profit center; and a third relates to the organization’s objective to serve a variety of clients. There does not appear to be a single preferred practice, because the choice depends on national laws and corporate structures and policies.
Only a few companies have specific organizational structures with open innovation objectives. Organizational structures to seek and select partners and manage and support partnership networks are generally rare. Most companies embed roles in their routine R, D&I organizational chart. In organizations with larger structures and headcounts, searching for partners seems to attract more focus (i. e., more staffing resources) than managing partnerships. The latter seems to be handled principally through proj ect relationships.
In order to identify new partners, some companies deploy a dedicated team. Technical experts inside the firm, for example, can be responsible for targeting potential new partners in their fields. One of the interviewed companies, in fact, has set up a scouting group that searches globally for new technologies and, consequently, new partnerships. Another firm has developed a worldwide network through which it seeks external partners to complement and accelerate its innovation efforts. In addition, there are companies that have established a dedicated M&A department to invest in technology-based firms.
Few companies allocate exclusive full-time resources to partnership management. One company that has partnered with a university provides extensive staff to facilitate the relationship between the university, the company’s internal business units, and students by offering technical support to all parties in the partnership.
The strategic management of open innovation, including open innovation strategy and partners selection, normally rests with the Chief Technology Officer, with business unit heads maintaining a degree of involvement as well.
Very few companies have official open innovation management processes. With the exception of contractual and legal processes, the selecting, developing and evaluating of partners and the network as a whole are all done informally.
Selecting partners is normally done on a case by case basis. Companies can sometimes be selected for an individual project, but as well to build long term relationships. However, our interviewees did not mention that they selected their partners based on a portfolio view of their network, specifically where one evaluates if the current network supports the company’s strategy, not only in technical terms, but in structure, culture and results.
A good management practice, as stated by one of the interviewees, is mapping the entire R, D&I partnership’s requirements for a technology, not just by partner for an individual proj ect. This company, when starting a new research project, looks practically from the start at what partners might be involved in development and commercialization.
The evaluation of partners is generally done quite informally by companies. Most companies have year-end reviews with their partners, often discussing informally their project(s), the progress and results. There also are companies that conduct a more formal review on agreed upon objectives and results within contracts. But it appears rare that a company (only one company interviewed) would evaluate their partner using a quantitative approach, such as based on grades. This company also put a high premium on cultural alignment as an important evaluation point.
Regarding the funding origins, much of the funding for projects developed by the network of innovation comes from their own network leader. Although few would consider the use of venture capital, the search for subsidized funding and local government incentives were quite common in both surveys. The participation in national and international research programs is quite common, especially in innovation networks outside Brazil.
The result of this study shows different practices adopted by companies in regard to open innovation around the world. The analyses of these results were consolidated and the practices observed adopted a pattern.
Therefore, with the data gathered on this study was possible to develop a Maturity Model regarding Open Innovation activities grouping and classifying the practices around the world into four different maturity stages.
The maturity stages describe good practices adopted by companies’ taking in consideration the different stages of development considering four groups: beginners, explorers, established, world class. These stages are described next.
These companies are at the very beginning of open innovation. They are at times reluctant to advance with Open Innovation Systems because of worries about intellectual property rights, a strong belief in the old closed innovation model, or only waking up to the benefits of open innovation. It does not mean that these companies have never worked with partners, for they never did this deliberately to systemically explore external knowledge and competencies. The objective ofthe companies in this stage is to create cheaper and faster ways to generate incremental innovation for their current markets.
Characteristics of companies in this stage:
Partnering focus on improvement in existing products;
Using partners for particular knowledge, mainly suppliers, and sometimes clients or universities;
Engaging when required (per project) with few partners;
Worrying excessively about loss of Intellectual Property;
Majority are one-off contracts;
Some partner access to company infrastructure;
Resistance from within the company to the open innovation model;
No specific governance model set up to manage partners;
Searching for external funding just starting.
These companies are deliberately searching to utilize all the opportunities of open innovation to their advantage, seeking partnerships in their various technology needs, especially focused on being able to generate innovation with an impact on the company. The objective ofthese companies is to search for partners that help them create technologies that are substantially or even radically innovative to support the company’s future competitiveness.
Characteristics of companies in this stage:
Using open innovation to search for substantial and radical innovations;
Partnering mainly with universities and research institutes;
Mapping technology needs and potential partners (technology strategy);
Adapting umbrella contracts are increasingly common;
Intellectual Property policies clearly defined and shared with staff;
Accessing infrastructure and some engineering support;
Setting up the management for individual partnerships;
Looking across borders for potential partners (outside the country).
These companies use open innovation as a strategic tool in their technology development process. They manage their open technology innovation system in an organized and structured manner, utilizing a number of strategic partnerships in the various parts of the R&D& I process. The objective of these companies is to maximize value generation from a wide range of partnerships.
Characteristics of companies in this stage:
• Searching for breakthrough technologies together with partners;
• Partnering in long-term contacts with universities, research institutes and other partners;
• Pre-competitive research with competitors, suppliers and universities;
• Investing in the infrastructure of partners;
• Use of external venture funds to invest in technology based companies;
• Business support for partners, including management and patent advisory;
• A governance structure in place with individual partnership management and development, while scouting for new partners;
• Commercializing technology with partners;
• Participating in national and international research programs.
These companies are the leaders in open (technology) innovation, managing their systems deliberately to grow in value over time. These companies look beyond their own short-term benefit, instead searching to optimize the value of the whole system by giving strong support to their partners and encouraging constant collaboration and learning within the system. In this manner they are creating a self-regenerating and expansive system that interconnects across other innovative networks. Characteristics of companies in this stage:
Creating their own physical structure instead of just participating in collaborative systems and infrastructure;
Leading national and international research programs;
Maintaining strong services to attract, support and develop new partners;
Stimulating constantly the collaboration and learning between participants; Searching for network expansion, services and clients of the R, D&I center; Governance to manage partner portfolio, besides individual partnership development;
Strong feedback mechanisms and evaluation.
The results of the research show a diversity of approaches, practices and maturity levels between the interviewees, but we are able to identify some key findings.
There are some common practices utilized by the interviewed companies, in all very much in line with what one can find in published literature about open innovation.
There were clear differences, however, among companies concerning the following: the business model for a partnership; the location of research and development facilities; the processes outsourced; the number and type of partners; the working format; the commercial relationship with partners; the investment in partners or base technology companies; the use of intellectual property rights; the business support for partners and access to infrastructure; the legal format and level of organizational preparation to manage the partnership networks.
We found that the differences were primarily related to the following forces:
Maturity in open innovation practices (the time period in which open innovation has been practiced);
Need for open innovation (how much the company needs to involve 3rd parties in the innovation process);
• Due to quick and major changes in the technological environment;
• Relevance of technology as a competitive differentiator;
• Nominal investments in technology innovation or the ability to invest more in innovation and thereby open innovation.
• Ambition to be a technology innovation leader.
In summary, we found that the longer the company works with open innovation, the more the company needs to innovate, the more money the company has available to innovate and the more ambitious the company is in relation to innovation. Consequently these companies invest more in open innovation, involve more partners in more parts of the R, D&I process, and develop better support and governance structures. It all sounds logical, but it became more explicit after our research.
Using the results of this research we can identify four different levels of development of innovation networks: initiators, explorers, established and world class. The initiators are, as the name implies, reasonably new to open innovation and are only waking up to its opportunities; the explorers try to find the best model to work for them; the established are companies that have been working with open innovation for some time and are using it to their advantage; and the world class are those that lead the practices in open innovation, breaking paradigms. Most of our interviewees are explorers and established, whereas only a few can be considered world class and only one can be viewed as a beginner.
We need to point out that these classifications are entirely conceptual and should not be used in a rigid manner, but rather be used to help one understand the complex world of open innovation management. An advanced stage of open innovation is not necessarily better, for it can depend on the company’s characteristics: size, market and availability of resources. In some cases, the world class stage is too far stretching for companies, since it requires large investments and complex organizational structures. It may even be unnecessary given the competitive environment in which the company is working. And if well managed, companies can obtain benefits from all of the stages.
This research was developed for the “Companhia Paulista de For? a e Luz” (CPFL), within the Aneel R&D Programme in Brazil.