OPEN INNOVATION STRATEGY AS A SOURCE OF FIRM COMPETITIVE ADVANTAGE

With the increasing market competition companies are paying more attention to the development and sustainability of their competitive advantages. Open innovation strategy can be seen as a source of firm competitive advantages as it influences the company competitive position and increases the speed of innovation processes driving the effectiveness of R&D and product development. The concept of “openness” is not completely new and it is preformed through outsourcing, licensing, industry clusters, strategic alliances and joint ventures. However, nowadays the notion of open innovation is developing in the new context with the growth of IT and internet coverage, complexity of technology and new forms of competition. Open innovation main idea is to facilitate the combination of internal and external resources to address a mutually beneficial outcome

The paper examines the concepts of competitive advantage and open innovation, analyses benefits and challenges of open innovation strategy, provides a case study on the topic and investigates the connection between application of open innovation strategy and development of firms’ competitive advantages.

The term competitive advantage refers to the ability gained through attributes and resources to perform at a higher level than others in the same industry or market [9]. "A firm is said to have a competitive advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential player" [2, p. 121].

Successfully implemented strategies will lift a firm to superior performance by facilitating the firm with competitive advantage to outperform current or potential players [10]. Superior performance outcomes and superiority in production resources reflect competitive advantage. Viable business strategy may not be adequate unless it possesses control over unique resources that have the ability to create such a relatively unique advantage.

There could be identified two main ways to achieve competitive advantages from external environment and internally inside the company which are shown in figure 1.

Picture 1. Ways to achieve competitive advantages

Michael Porter has identified the main competitive strategies in correspondence to type of competitive advantage that is pursued by the firm. This 5 strategies are depicted in figure 2.

Picture 2. Porter’s competitive strategies

Being in constant search for sources of competitive advantages on all stages of company lifecycle in the past, internal Research and Development was recognized as a highly valuable strategic asset as a part of superior knowledge that diversifies the company from competition. Moreover, internal R&D was even creating an entry barrier to competitors in various markets. Large corporations kept development of products and services in-house and invented considerable resources into their own research labs and institutions in order to succeed. However, nowadays even leading enterprises that were very powerful in the past are facing strong competition from emerging start-ups. Furthermore, a lot of industry newcomers conduct little research on their own and still are successful in getting new ideas to the market [4]. These companies can use different innovation process which is called open innovation.

Open innovation main idea is to facilitate the combination of internal and external resources to address a mutually beneficial outcome. Open innovation is addressing leveraging collaboration with external participants who exist outside the internal organization environment and are ready to contribute to a common project at any stage of development. Moreover, it includes monetization of internal projects, ideas as well as patents to external world.

The concept of open innovation was formalized in scientific world by Professor Henry Chesbrough (UC Berkeley) in the book “Open Innovation: The New Imperative for creating and Profiting from Technology” published in 2003. To understand the concept of open Innovation it is important to study it in comparison with characteristics of closed Innovation.

In modern market conditions of shared economy and digitalization we see a fundamental shift of the idea generation process and bringing them to the market commercializing them. The old model was closed innovation when companies adapted the following philosophy – successful innovation requires control. This means that firms must generate, market, distribute it on their own. This approach lies in reliance of internal sources (investing huge in R&D, attracting best talent inside the company, etc.) [3].

Open innovation differs from closed innovation model in the principle that ideas can easily enter and leave innovation funnel at different stages and via many routes. This model gives the company opportunity to share existing unused internal ideas with others and take advantage of external knowledge resources to increase firm competitiveness.

Open innovation model is typically characterized by [4]:

• leveraging both internal and external initiatives;
• constant inflow of external ideas and outflow of internal;
• IP is not the most important source of income when developing a product
• using different competitive strategies;
• faster reaction to the environment change, flexibility in R&D.

We can create 4 main groups of benefits of open innovation models:

1) Increasing company profitability. Open innovation can:

• reduce costs;
• accelerate time-to-market of product or service;
• increase differentiation in the market;
• create new revenue streams for the company.

2) Developing competitive advantage. Open innovation in general can be connected with both external and internal ways of achieving competitive advantage. It fastens the process of R&D and helps to find decisions that already exist on the market to apply in the company business model combining with internal resources. An open innovation community can give your company a competitive advantage. Modern speed of operations and increasing competition does not leave a lot of time for company to generate resources and develop a product and communication with external environment is a huge resource of competitive advantage.

3) Minimizing innovation risk: Open innovation allows your company to expand the “breadth of ideas, opportunities, and know-how while minimizing the technical and market risks associated with innovation.” [3, p. 49]. This is connected to the differentiation of risks that the company operations possess.

4) Evolving of business model. Open innovation is fundamentally changes the company’s business model, it helps to timely response to changes in the marketplace through leveraging external and internal ideas. Internet solution and platform allow us to communicate despite of distances and boarder which changes the nature of competition and process of product development. Company is operation in the new environment and it relies on the ability to asses, analyse and apply the ideas in accordance with corporate mission and strategy.

Common challenges that are faced by companies applying open innovation modelas can be distributed in 4 groups and described in figure 3.

Picture 3. Challenges of open innovation models

During the history of P&G development, the company was ensuring its growth heavily investing in internal R&D laboratories and efforts. This model was very successful, however, by 2000, the company understood that their “invent-it-ourselves” model was not capable to sustain high levels of their top-line growth. Explosion of new technologies made a lot of pressure on the P&G innovation budgets [6]. At that time the company discovered that important innovations was increasingly being done at small and midsize entrepreneurial level. Moreover, individuals were ready to licence and sell their intellectual property. University and government labs had become more interested in forming industry partnerships, and they were hungry for ways to monetize their research. And finally the Internet had opened up access to talent markets throughout the world.

At this stage P&G understood that external connections could produce highly profitable innovation and that these relations will be key to their future growth. Thus, Connect and develop innovation model was created with idea to identify promising ideas throughout the world and apply company’s R&D, manufacturing, marketing, and purchasing capabilities to them to create better and cheaper products, faster. This model works reaching 35 % share of P&G products generated by this program and 45 % of the initiatives in their product development portfolio had key elements that were discovered externally.

Success of P&G open innovation model lies in some critical guidelines.

1) Where to play? Focusing the idea search on three environments

• Top ten consumer needs (obtained though annual survey)
• Adjacencies (new concepts that can help to take advantage from existing brand equity)
• Technology game boards (how technology acquisitions in one areas can affect other product categories).

2) How to network? Identifying company core networks

• Proprietary networks (exclusive for P&G)
  • Technology entrepreneurs
  • Suppliers

• Open networks
  • NineSigma
  • InnoCentive
  • YourEncore
  • Yet2.com