>> Collaborative Strategies

Realizing The
Power Of
Innovation Webs
Traditional enterprises give way to new models where innovation
is collaborative, distributed, and open

H E R E ’ S A F U N DA M E N T A L C H A N G E

T
occurring in how companies innovate and cre-
ate value. For most of the 20th century, innova-
tion happened inside the business. Companies
worked internally to turn the latest scientific
and technological breakthroughs into products
and services the market wanted. They rarely
looked outside for new ideas or inventions—
and they didn’t need to. All innovations were
fiercely protected through patents, trademarks, and copyrights. When any-
one infringed on these rights, the lawyers came out swinging.
This classic model worked fine so long as innovators worked alone on dis-
crete and entirely novel inventions. But it’s no longer reality. Industrial-econ-
omy knowledge monopolies are breaking down. The means of creation are
proliferating, and open, interoperable standards and infrastructures are be-
ginning to replace proprietary systems and technologies. In turn, companies

B y D o n T a p s c o t t a n d A n t h o n y W i l l i a m s

PHOTOGRAPHY BY HAMIN LEE

optimizemag.com December 2005 55

>> Collaborative Strategies
are rethinking how they create and manage intellectual
property (IP).
Some businesses are resisting the changes, but smart en-
terprises recognize that innovation increasingly begins at the
fringes. Science and technology now evolve at great speed
and delve into ever more complex domains. Even the largest
companies can no longer research all the fundamental disci-
plines that contribute to their products. Nor can they control
an end-to-end production process or seek to retain the most
talented people inside their boundaries. In most industries,
innovation increasingly depends on dense networks of public
and private participants and large pools of IP that routinely
combine to create end products. Firms can even tie into self-
organizing networks of value creators like the open-source
movement to co-create or peer-produce value.
To realize this innovation potential, companies need an
ecosystem that includes lots of partners, and people developing
designs and putting them together as customer solutions. That’s
why vertically integrated R&D is yielding to joint ventures, li-
censing, outsourcing, and peering. And it’s the reason hierar-
chical enterprises must adopt business-web models, where in-
novation is collaborative, distributed, and open.
Sound futuristic? It’s not. Dozens of emerging enterprises
like CollabNet and NineSigma are making strides in this area,
When To Open IP, When To Say No
Though the general trend
and imperative is to pursue open, collaborative
use of intellectual property (IP), there are situa-
tions where core competencies and business
protections overrule. Consider the following
rules of thumb:
Open IP when:
• It can boost demand for complementary of-
ferings and provide new opportunities to create
additional IP.
• You need to lower barriers to entry or en-
large the pool of talent addressing a particular
R&D problem.
• The advantages of pooling competencies
and reducing R&D costs outweigh the benefits
of having exclusive rights to the knowledge
produced.
• A shared infrastructure will encourage in-
novation and interoperability with ecosystem
partners.
56 December 2005 optimizemag.com
as are giant pharmaceutical companies and established brands
such as BMW, P&G, and Lego. They all realize the potential
benefits of innovation webs (I-webs).
V
ALUE INNOVATION drives the
unbundling of the vertically inte-
grated corporation, as authors Don
Tapscott, David Ticoll, and Alex
Lowy argue in Digital Capital: Har-
nessing the Power of Business Webs
(Harvard Business School Press,
2000). The book explains how
business webs (B-webs) enable firms to conceive and create
new value where vertically integrated corporations typically
can’t. Thanks to the Internet and plummeting transaction and
collaboration costs, the global market of abundant knowledge
and capability is becoming available to every company.
What B-webs we weave
In the most elegant of B-webs, each participant focuses on a
limited set of core competencies that it does best. Some B-webs
focus on integrating value: facilitating the production of specific
product/service offerings—cars, computers, and consulting
services, for example—by orchestrating value contributions
• A latent pool of knowledge could be
tapped with a modicum of organization.
• Reciprocal-sharing relationships will develop
relationship capital with collaborators.
• Pre-empting the property rights of competi-
tors shifts the locus of competition or enhances
your freedom of action.
• Openness removes unnecessary friction in
collaborative projects.
Keep your IP closed when:
• Your end products—and particularly your
crown jewels—are at stake.
• Proprietary IP gives you needed leverage in
cross-licensing and trading relationships.
• IP rights are essential to stimulate and re-
ward investment, particularly when investment
in the next generation of technology would oth-
erwise be underfunded.
• Your technology or IP alone provides the
gold standard for your industry. O
>> Collaborative Strategies

from multiple sources. Others, like retailers and financial mar-
kets, aggregate discrete value offerings from a variety of sources.
Our new “Information Technology and Competitive Advan-
tage” investigation (see “Methodology,” p. 64) shows that
through the lens of innovation, the parameters of economic
control and value integration define a taxonomy and new lexi-
con of four primary types of I-webs: ideagoras, aggregations,
peer-production communities, and value chains (see chart
0 10
below). Each is discussed in detail as follows.
• Ideagoras. In ancient Greece, agoras were public com-
mercial centers where citizens assembled to debate and barter.
Modern-day agoras such as eBay enable buyers and sellers to
freely negotiate and assign value to goods.
Ideagoras, on the other hand, are open markets for innova-
tion. Early-stage ideagoras are springing up in many industries,
A New Taxonomy
Innovation webs can be categorized into four types of collaboration
Ideagora Peer-production Community
Innovation Relay Centers
Self-
orga- Yet2.com Linux
nizing Apache
NineSigma
Human Genome Project
Innovation Xchange Network Lego Mindstorms
Control
dustry is taking advantage of licensing opportunities to develop
complex biogenetics. (see “When To Open IP, When To Say No,”
page 56.)
This new marketplace for innovation has tremendous com-
petitive and economic advantages. An organization that can’t
successfully market all the good ideas it creates can license
them. Companies with no competitive advantage in innovation
can access leading-edge technologies for much less than it
20 30 40 50
would cost to develop them in-house. With the right approach,
industries can cross-fertilize. One industry’s technologies may
create unanticipated efficiencies in another industry. The licen-
sor gains a virtually free revenue stream, and the licensee gains
a welcome efficiency.
• Aggregations. In an aggregation B-web, one company—
say, Amazon.com—leads in hierarchical fashion, positioning it-
self as a value-adding intermediary between pro-
ducers and customers. The lead aggregator takes
responsibility for selecting products and services,
targeting market segments, setting prices, and en-
suring fulfillment.
I-web aggregations are similar—they’re what
you might call innovation supermarkets. A central
aggregator collects ideas, innovations, human capi-
tal, patents, and other relevant resources, then offers

Aggregation Value Chain them for sale with or without a fee.

CableLabs Consider, for example, the growing number of
Scientific journals
InnoCentive Ideo Corp. human-capital networks that seem set to revolution-
eCademy
Gerson Lehrman Group ize the way most companies conduct R&D. Many
Herman Miller
Hier- companies now realize that they can no longer rely
archical
High solely on their own employees to keep up.
Value Integration
New online services like InnoCentive meet the
DATA: New Paradigm challenge by aggregating human capital and mak-
ing it accessible to innovation-hungry companies.
presenting an unprecedented opportunity to harness innova- This visionary matchmaking system links experts to unsolved
tion outside the enterprise. Consider, for example, the increas- R&D problems, allowing companies to tap the talents of a
ingly active trade in technology components and IP rights. global, scientific community without having to employ every-
Companies used to seek patents to protect their physical prod- body full-time. Companies anonymously post R&D problems,
ucts. Today, growing numbers recognize that new and poten- and successful problem-solvers receive a cash prize. CollabNet,
tially lucrative revenue streams can flow from IP as intangible as on the other hand, lets companies integrate self-organizing
2
E=mc . communities into their rigorously structured product-develop-
That’s why patent licensing is evolving into a high-margin ment processes. It provides work-flow and collaboration tools
and highly scalable business. Worldwide licensing revenue in to harness the contributions of thousands of open-source pro-
2002 was estimated to exceed $150 billion. And with a growth grammers.
industry emerging to facilitate patent licensing across indus- Aggregations also provide shared infrastructures for collabo-
tries and regions—including many new online marketplaces, rative activities. Consider the growing adoption of an idea we call
such as NineSigma, Yet2.com, and IP management advi- the “pre-competitive information commons”— a common pool
sories—revenue will grow even more. Many companies are of knowledge and processes upon which new innovations are
taking advantage: mining their portfolios, looking for out-li- built. Sometimes these knowledge pools get clouded and
censing opportunities, and taking technologies off the shelf dammed up by blocking patents that hinder the ability for
that can bring in revenue. At the same time, businesses are ecosystem participants to observe, learn from, and build on the
searching the world for the greatest and most complementary work of others. But when companies make efforts to aggregate
technologies. Even the fiercely competitive pharmaceutical in- some of this knowledge in the public domain, they can consider-

60 December 2005 optimizemag.com

>> Collaborative Strategies
ably boost the productivity of downstream product development.
New Paradigm has looked extensively at the life-sciences in-
dustry, where pharmaceutical companies abandoned their propri-
etary projects to back open collaborations such as the Alliance for
Cellular Signaling and the SNP Consortium. Both projects aggre-
gate genetic information culled from biomedical research in pub-
licly accessible databases. And they both use their shared infra-
structures to harness resources and insights from the for-profit
and not-for-profit research worlds. These efforts are speeding the
industry toward fundamental breakthroughs in molecular biology.
While these collaborations aren’t producing end products,
they are providing the scientific infrastructure that will enable
companies to get there faster than they could alone. Better still,
they help focus proprietary efforts downstream, closer to the ul-
timate source of customer value. Similar collaborative infra-
structures can be found in the software industry and even in fi-
nancial services—for example, the Open Invention Network.
• Value chains. In value chains, the context provider struc-
tures and directs an I-web to produce a highly integrated value
WHEN COMPANIES SEE PAST THEIR
RIVALRIES, INDUSTRYWIDE
I-WEBS LET PARTICIPANTS SHARE
THE COSTS AND RISKS OF PRE-
COMPETITIVE RESEARCH
proposition. The output meets a customer order or market op-
portunity—it can range from a company buying office furniture,
or an individual purchasing a Jeep with custom trim, to Procter
& Gamble manufacturing 20,000 case lots of Crest, or IBM im-
plementing an e-commerce infrastructure for a client.
The value chain I-web resembles the old vertically inte-
grated model of innovation in its command-and-control orien-
tation, except that a mix of open and proprietary collaboration
is replacing the earlier emphasis on ownership and integration.
In the current, more complex marketplace, everything
from a Nokia mobile phone to an Airbus A380 or an Intel
chipset combines components from multiple enterprises. De-
veloping and bringing innovations to market now means
working with a business web of companies with complemen-
tary skills and capabilities.
Businesses in an upstream-downstream interaction, for in-
stance, may produce complementary goods and have different
but highly complementary expertise. Airframe manufacturers,
for example, cooperate with electronics companies and engine
manufacturers to design and develop aircraft. Biotech busi-
nesses blend their strong research capabilities with the comple-
62 December 2005 optimizemag.com
mentary production and marketing machines of established
pharmaceutical companies.
Even ardent competitors can collaborate on certain areas of
research, especially where results are hard to keep proprietary
or where certain objectives are widely shared. When companies
see past their rivalries, industrywide innovation-webs let partic-
ipants identify and act on scientific discoveries with commercial
potential more quickly, share the costs and risks of pre-compet-
itive research, and lower the transaction costs associated with
technology exchange by placing these cooperative development
activities under a unified governance structure.
Naturally, there are barriers to overcome. Problems related to
ownership and exploitation of IP can make proprietary research
consortia and joint ventures difficult. Participants may find it tough
to clearly define the boundaries of their intellectual contributions.
Concerns about public disclosure of proprietary information and
disputes over future patent rights can create friction. Avoiding
these problems—not to mention trouble with the antitrust au-
thorities—is one reason a growing number of companies are em-
bracing more open models of collaborative innovation.
• Peer-production communities are I-webs that self-or-
ganize to create tightly integrated value propositions. They
strive for high-value integration with limited or no hierarchical
control: Participants design goods or services, create knowledge,
or simply produce dynamic, shared experiences. In a growing
number of cases, customers or users play a prominent role in
value creation, as contributors or product designers.
We like to illustrate peer production with the story of Second
Life, currently an anomaly among multiplayer games. Most
multiplayer games are centrally architected with tightly con-
trolled assets. Linden Lab, the company behind the concept, has
gone to the other extreme, opening up Second Life’s gaming
environment in radical new ways. It produces almost none of
the game content (less than 1%). Instead, it makes powerful
content-creation tools available for users to create characters,
environments, and actions.
The company estimates it gets up to 6,000 hours of“free”de-
velopment effort from its users every day, roughly equivalent to
the work of 100 engineers. Participants own all the IP in their
creations and can buy and sell game assets to earn real money.
>> Collaborative Strategies

Total traffic in virtual goods created by users of games is valued
at more than $100 million per year.
The Second Life collaborative approach offers advantages
that traditional, hierarchical models can’t replicate. It makes a
big impact with fewer resources. It scales in ways that centrally
designed systems cannot. It benefits from positive feedback
loops that are difficult for competitors to reverse. And it inno-
vates more rapidly, and engages stakeholders in loyal commu-
nities because the players create the rules of the game, own
their IP, and even volunteer to provide customer support.
Meanwhile, creators at Linden Lab make money by taxing the
virtual real estate owned by game “residents”and selling “newly
issued land”to new residents as the community of users grows.
Lego toys with Mindstorms
Then there’s Lego Mindstorms. Best known for making little in-
terlocking plastic bricks, Lego increasingly focuses on high-tech
toys. When Mindstorms made its debut in 1998, marketing of-
In another case of peer-production communities, BMW
released a toolset on its Web site to encourage customers to
design telematic features for future cars. Thousands re-
sponded and shared ideas with company engineers, some of
which are now turning into valued initiatives. In fact, 15 par-
ticipants were subsequently invited to work with BMW engineers.
Ideagoras, aggregations, value chains, and peer-produc-
tion communities define ideal types. Real-world I-webs,
however, often blend features of several types. Our research
suggests there’s no single winning model for managing inno-
vation. Business design entails crafting a competitive I-web
mix that draws on the many shades of this typology, and in
fact, a portfolio of models works best. Diverse innovation
challenges and industry conditions require diverse configura-
tions of human, financial, and intellectual capital. Strategic
business factors drive companies to adopt one model or an-
other in different circumstances.

C
ficials were surprised to discover that the robotic toys were pop- IOs AND CHIEF TECHNOLOGY
ular not only with teens, but also with adult hobbyists eager to officers (CTOs) can lead in the
improve on them. Within three weeks of their release, user shift to collaborative innovation.
groups had sprung up, and tinkerers had reverse-engineered We suggest starting your planning
and reprogrammed the sensors, motors, and controller devices process with a comprehensive
at the heart of the Mindstorms robotic system—and sent their map of your innovation ecosystem
suggestions to Lego. that positions your value creation
The company, at first uncertain about how to respond, and assesses the interdependen-
cies that will determine the flow of benefits and your ability
threatened to launch lawsuits. When users rebelled, however,
to capture a significant share of them. This is not a traditional
Lego finally came around and eventually created a Web site
competitive landscape or value-chain analysis, but an analy-
where customers can co-create products. Now each time a cus-
sis of the participants creating knowledge pertinent to your
tomer develops and posts an application for Mindstorms, the
toys become more valuable. existing and future business. While this includes business
partners and competitors, it extends to
academia, public research institutes,
think tanks, creative communities or

Methodology communities of practice, and contract re-

The New Paradigm research into innovation
webs was part of a $4 million investigation titled “Information
Technology and Competitive Advantage.” The program was
funded by a number of businesses that are users and suppliers of
IT and IT services, including the Ameritas Acacia Companies,
AT&T, BCE Inc., Best Buy, Blue Cross Blue Shield of Louisiana,
Canadian Tire, Cisco, Citigroup, Cognos, DaimlerChrylser, FedEx,
General Motors, Herman Miller Inc., IBM, MetLife, Procter &
Gamble, Roche Diagnostics, SAP, Sobeys Inc., Sutter Health, and
TD Financial Group.
Some of the nonproprietary insights from one of the 48 proj-
ect reports were made available to readers of Optimize. The next
phase of the investigation begins in January. O
search organizations. The map needs to
be global and cover all relevant disci-
plines that intersect with your strategy.
This map will help resolve important
questions. For example: Are there poten-
tial patent thickets or fences that could
block our entry into key markets or in-
crease our R&D costs? Where are our
competitors innovating, and how should
we focus our R&D resources to increase
freedom of action across our business
lines? Are there potential partners we
should be cross-licensing? Are our em-
ployees plugged into the right knowledge-
creating networks? Could we invest in
open infrastructures or academic partner-
ships to reduce R&D costs and enhance

64 December 2005 optimizemag.com

>> Collaborative Strategies

our access to knowledge resources? pants build. To extract long-term

Next, balance your IP portfolio.
Opening up IP can provide a Did benefits from shared resources,
you may need to identify or help
powerful tool for spurring innova-
tion. Sometimes valuable follow- You create this critical mass yourself.
Strategies rooted in collaboration
on innovations will come from
customers, the way Lego’s Mind-
storms products became more
Know
Collaborative innovation is already under way:
and self-organization succeed be-
cause they’re uniquely attuned to
the current technology and busi-
valuable after the company ness environment. As more eco-
• IBM saves about $1 billion in annual development
opened up the source code. Other costs by peer-producing value in the Linux community. nomic value shifts to information
times, innovations will come from • Procter & Gamble is on track to obtaining up to and information-enhanced prod-
collaborators in a community of half of its product and service innovations from out- ucts and services, collaborative
practice, the way IBM and others side the company in the next few years. business webs will add value and
leverage contributions from the • To shed costs, Big Pharma is outsourcing 20%- alter the dynamics in all industries.
30% of worldwide clinical research to India and China.
open-source community. None of Companies that ignore this trend
• The deal-closure rate for online IP marketplace
these innovations will occur if all will find themselves behind the
Yet2.com has doubled since 2004; 1,000 deals are
IP is hidden. now under negotiation. curve, unable to innovate fast
Remember: Just as good per- • Of the 21 million online teens, 12 million, or enough to keep up with competi-
sonal-investment strategies diver- 57%, create their own content, says the Pew Internet tors—or, on occasion, with their
sify assets across a range of low- & American Life Project. • D.T. and A.W. own customers.
and high-risk opportunities, good For many managers, the new,
innovation strategies diversify IP networked age of collaboration will
holdings across a range of open and closed offerings. seem complex and uncertain. However, embracing openness and
Use IP licensing and cross-licensing opportunities to play to collaboration doesn’t mean companies must abandon control of
your core strengths and harness external innovation. Concen- their destiny. What it does mean is having well-developed and
trate R&D in areas where you have the greatest competitive well-understood internal goals to guide external engagement
advantage, and use partnerships and cross-licensing to acquire strategies. Companies will need unique capabilities to work in
the rest. Plugging into Internet-enabled marketplaces such as collaborative environments: capabilities to develop relationships,
Eureka Medical, Pharmalicensing.com, and Yet2.com will ease sense important developments, add value, and turn nascent
the process of finding buyers and sellers of IP. But bear in mind knowledge into compelling customer-value propositions. O
that internal R&D and external acquisitions are complements,
not substitutes. DON TAPSCOTT is CEO of New Paradigm and author of 10
books about IT in business and society. ANTHONY WILLIAMS is

S
USTAINING an open-innovation ecosystem
also means cooperating to supply the open
standards, shared IP, and collaborative infra-
structures that will kick-start the open-inno-
vation process. Cooperating means over-
coming the problems of motivating and
coordinating collective action. The secret to
collective action and collaboration webs is
building a critical mass that will attract more participants. In-
deed, research shows that behind just about any successful in-
stance of collective action are a few highly interested and highly
resourceful actors who contribute to a common resource.
This investment may take different forms—for example,
large, IP-rich companies with the incentive and resources to
make contributions to the public domain such as IBM’s re-
cent nonassertion pledge for 500 patents, or companies that
invest in startup costs and adopt ongoing administrative and
maintenance responsibilities. These actors provide the social
capital and technical infrastructure on which other partici-
a senior analyst at New Paradigm who’s teaching at the Lon-
don School of Economics. They’re writing a new book, Wiki-
nomics: Competing in the Age of Collaboration (Portfolio,
2006). > How extensive are your collaboration efforts? Tell us at
optimizeletters@cmp.com.
See Related Articles: “The Power Of Shared Knowledge,” May
2005, p. 63; www.optimizemag.com/issue/043/technology.
htm • “The Shifting Industrial Landscape,” April 2005,
p. 30; www.optimizemag.com/issue/042/innovation.htm
• “The Invisible Hand Of Commerce,” July 2004, p. 29;
www.optimizemag.com/issue/033/cs.htm • “How Exposed
Are You?” December 2003, p. 28; www.optimizemag.com/
issue/026/cs.htm • “Selling Soap, Razors—And Collabora-
tion,” www.informationweek.com/1064/pg.htm.
MORE ONLINE
Wanna know what companies are already ahead of the pack
when it comes to collaborative innovation? Read the full lists
at www.optimizemag.com/issue/050/csside.htm.

68 December 2005 optimizemag.com