Open Innovation

Corporations to sustain and improve their production output, led to an increase in R&D activities
in many industries (Chandler, 1990). As more new technologies were developed and brought to
market, the more importance was given to corporations and their R&D labs to achieve
innovation (Shumpeter, 1942).
On one hand, the development of new products was benefiting from the economies of scope
promoted by internal R&D, on the other hand, external innovation was difficult to incorporate
due to economies of scale, created by large R&D labs entrenched in a vertically integrated
innovation model. (Chandler, 1977; Teece 1986; Chandler, 1990) Even though, during most of
the 20th century, under the regime of picking a man of genius, giving him money, and leaving
him alone (Conant, 2002) led to many technological advances and innovations.
Most of the times, technological advances will not necessary become or generate an innovation
(Freeman, 1982). In order to be considered one, the idea or invention created must have the
capability to be converted into a useful application or invention (Roberts,1988). In the vertical
integration model, it has to pass all innovation stages on a linear way, basic research, invention,
development and production (Freeman, 1982), while in the open innovation model, the firm can
use the market to commercialize knowledge, inventions or innovations, not only to increase their
internal innovation rate and develop their technology but also, deliver internal ideas to the
market, so as to create more value. With open innovation, external knowledge is given the same
importance as internal knowledge (Chesbrough, 2006).
Another key aspect is the ability of the business model in creating and capturing commercial
value. Due to spillovers costs of the firms intellectual property and not-invented-here
syndrome (Katz and Allen 1985), vertical Integration avoids solutions from external sources,
especially from the development phase, (Enkel, Kaush and Gassmann 2005). On the contrary,
in the open innovation, spillovers are treated as business opportunities (Chesbrough, 2006). If
the first one, used Intellectual Property Protection (IPP) to control and minimize spillovers
(Chesbrough, 2006) the latter, relies on the IP regime in order to monitor the knowledge
exchange and define ownership (Granstrand, 2000; Arora, Fosfuri & Gambardella, 2001), so as
to profit from spillovers (Chesbrough, 2003a; West, 2006)
These flows of knowledge can occur at various stages of the new product development process.
In the ideation, product development and launch stage (Chang and Taylor, 2016). Not only it
was recognized as abundant (Hayek, 1945), but also it is generally highly valuable (von Hippel,
2005). As the process of innovation opens, intermediate markets appeared, allowing
transactions that were only done inside the firm to occur at different stages. (Chesbrough,
2006).
Open innovation, empowers the company innovation rate. By simply searching, the newest
breakthroughs, it is able to lower risk in the new product development process, leveraging their
internal innovation resources with external capabilities. Why invent something that it was
already invented?
The digital communication revolution, made consumers more proactive, informed and
connected (Ind, Iglesias and Schultz, 2013). With connected individuals on networks and
communities, an alternative source of information and perspective led firms to be subject of a
constant process evaluation. Even though, firms communication may have an impact on their
decisions, consumer empowerment has led them to have a special connection with the brand
based on their views and how value can be delivered to them. (Prahalad et al., 2004)
As customers become more knowledgeable about what are their desires and expectations from
the firm, the more they are able to compete with firm in the value capture process. In case,
companies continued to follow traditional models of the value creation process, the final result
will be the customer see no differentiation among the different value propositions offered.
(Prahalad et al., 2004)
Therefore, firms can no longer act alone, if they want to be innovative and develop new sources
of competitive advantage (Prahalad and Ramaswamy, 2004). In fact, the value creation is
becoming more a jointly interaction process between customer and firms, rather than solely by
the firm (The future of the competition, HBSP, 2004) and as the importance of co-creation is
gaining managerial relevance, The most successful organizations co-create products and
services with customers, and integrate customers into core processes.IBM, Capitalizing on
Complexity1, the view that value for customers was in products, which are outputs of the value
chain of the firm, is being confronted by value for customers always emerges in the use they
intend to give to the product (Normann and Ramirez, 1993; Holbrook, 1994; Ravald and
Gronroos, 1996; Vandermerwe, 1996; Wikstrom, 1996; Woodruff and Gardial, 1996; Normann,
2001; Vargo and Lusch, 2004; Gronroos, 2006). So, the consumer under co-creation paradigm,
assume always a predominant role, being a proactive agent in the firms value creation process
(Vargo and Lusch, 2006),
It also important to stress, this co-creation relation firm-consumer to be sustainable, must be
mutually beneficial (Vargo et al., 2008). From the firm point of view, it can lead to new business
opportunities and innovations as well as, reduce the risk of new product development failures
(Ind et. al, 2013). From the consumer point of view, the more they participate in brand
development and to create new products and services, the more they feel closer to the brand,
and demonstrated a shared meaning, leading to higher level of customer satisfaction and brand
trust (Ind et. al, 2013).
Since value is a function of human experiences and, experiences come from the interactions
(Ramaswamy, 2011), the interactions become the locus of value creation. This has implications
for the market, which can no longer be seen as a target but as a forum of co-creating
experiences (Prahalad et. al, 2004). These interactions can also occur at any stage and with
consumer communities or the firm, and since customers cannot predict their experiences, co-
creation of value give rise to some challenges. (Prahalad et. al, 2004)
Firstly, the traditional conception of market matching supply/demand, in which the price paid
reflects all information about cost and value of the good/service (Marshall, 1991) shifts to an
emergent supply/demand which is contextual, in other words, it depends on the user
environment experience (Grnroos, 2012).
Secondly, the ability of the firm to recognize what consumer experiences are worth to explore.
For example, in technology-based products, the use of average customers can have a
negative impact on innovation outcomes (Knudsen, 2007). Other example, some customers
with lead user profiles, may improve the originality of co-created knowledge (Mahr et al., 2014).
Therefore, consumers may have a different output rate of innovation (Kristensson, Gustafsson,
and Archer, 2004).
Finally, it also important to note the extent to which products may be designed outside the firm
or jointly. Since co-creation occur through the integration of resources and knowledge of the firm
and consumer, in contrast, we have, at the macro level, open source software which is only
developed by users or a community of users or, at the micro level, Lead User innovations or
nonmarket innovations which do not involve the firm.
Despite services have a major role in the most.
The research about a definition of value is not new, and it can be separated into two different
perspectives: exchange value and use-value (Aristotle 4th century B.C).
The first one, supports a goods-dominant(G-D) logic. (Vargo and Lusch, 2004; Vargo and
Morgan, 2005) The firm create value by adding it in goods which will be exchanged by money in
the market. In this case, the roles of producer and consumer are distinct. (Vargo, Maglio and
Akaka, 2008).
The second one, is used by service-domintant (S-D) logic to explain value creation. (Vargo and
Lusch, 2008a). In this perspective the firm and consumer roles are blurred and through the
integration of resources and application of knowledge from both parties, value is co-created.
(Vargo et. al, 2008)

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