January 2011

"Man was born to be rich, or grow rich by use of his faculties, by the union of thought with nature. Property is an intellectual production. The game requires coolness, right reasoning, promptness, and patience in the players."

Ralph Waldo Emerson

Abstract

Many innovators (companies or individuals) opt for a private innovation model. This model uses resources to create a product whose intellectual property (IP) is protected by the firm. At the opposite end of the scale is the collective innovation model, in which innovators collaborate and expend resources to produce a public good. Many free/libre open source software (F/LOSS) projects rely on collective innovation. Some innovators are now combining the two models into a private-collective innovation model, in which an innovator may chose to collaborate with other innovators and spend private resources while still keeping some IP private. For example, a company may release its product’s source code to the public in the hope of attracting a community of contributing developers. Such a company commits its own resources to a project, but may still hold on to the intellectual property.

The success of private-collective innovation is dependent on many factors including: project interest and value, company reputation, and project status. There are benefits and risks to private-collective innovation which must be carefully weighed before making a decision to employ this model. Private-collective innovation involves the sharing of knowledge and, in some cases, the sharing of IP that may or may not be patented.

Introduction

During private innovation, an innovator such as a company or individual, commits private development resources and keeps all artifacts private regarding the development of a good. In contrast, collective innovation involves collaboration and resource sharing between several innovators to develop a public good. Private-collective innovation is a blend of the two models; an innovator collaborates and expend private resources to create a public good. However, an innovator may choose not to release all IP to the public. There are both advantages and disadvantages to the private-collective innovation model and these will be discussed further in this article.

As an alternative to private software development, a company may chose to make a project public and F/LOSS. IBM did this when it created an Eclipse consortium, which later became the Eclipse Foundation. Instead of releasing all source code, a company could elect to only make portions of a project open source and keep the remaining software private. This is usually done to maintain control over a project or to protect IP. The knowledge dissemination in private-collective innovation includes IP and know-how in process, architecture, and software. The sharing of knowledge during collaboration can lead to higher-quality products, decreased time to market, and maximized revenues.

In today’s globalized economy, competition is harsh and the average life expectancy of a company is short. In order to survive, participants have to come up with new processes and innovative ideas to create appealing products and deliver them in a timely manner. Of course, private-collective innovation does not just happen on its own. To attract individual contributors or contributing companies, a project must be deemed of value and worthy of investing time. It takes effort by the originating company (the innovator) to convince others that its intention is for all to benefit from a project. However, those who benefit are not necessarily contributors because the project is public and therefore available to anyone. Beneficiaries may be competitors, therefore the benefits and risks to private-collective innovation must be carefully weighed before making a decision to do so.

Benefits and Costs of Private-Collective Innovation

The private-collective innovation model has two components: private and collective (public). The private component is supported by private investment, which is usually protected through patents, copyrights, and trade secrets. The collective component relates to the provision of public goods that are defined by non-excludability and non-rivalry. Non-excludability means that any person or organization that uses the public good freely cannot withhold it from others (von Hippel & von Krogh, 2003). Innovations arising from the public model are supplied to the public at no charge. By combining features of public and private models, a new innovation model is created in which participants invest in knowledge and disseminate it to the public free of charge. An example is F/LOSS that is disseminated to the public by companies that invested in creating it. This type of knowledge sharing has become very common in the software world and it is notable that all the participants benefit from it.

As long as the cost of making knowledge public is less than the benefits, it is appropriate to disseminate knowledge (von Hippel and von Krogh, 2003). Normally firms protect their knowledge by creating processes and firewalls that are costly. However, even though the risk of this knowledge being exposed is reduced, it is still present. By disseminating knowledge, the cost of knowledge management is reduced significantly (Stuermer et al., 2009). Moreover, knowledge sharing also has benefits for the company releasing it, including the enhancement of its reputation and positioning it as a source of expertise in the domain or industry. These effects promote trust among customers or end users and provide a competitive edge against potential competitors (Stuermer et al., 2009). Another argument for sharing knowledge is cost savings. The cost of innovation is reduced since other organizations and individuals share labour costs and contribute previously developed components.

A well-researched example of private-collective innovation is the development of the Nokia Internet Tablet. After studying this project, Stuermer and colleagues (2009) identified seven benefits of private-collective innovation:

  1. Enhanced company reputation: Nokia’s reputation was enhanced among F/LOSS developers by its willingness and expenditure in making the Internet Tablet software F/LOSS.

  2. No source protection costs: releasing software as F/LOSS eliminates the costs involved in trying to protect the source. And as mentioned earlier, source protection might be in vain since for some products source code leaks out to the public eventually.

  3. Innovation without high R&D costs: F/LOSS may enable easier, faster, and lower-cost product development.

  4. Leader advantage: being first to come out with a new device can be an advantage if public involvement goes viral. The product technology can become the standard.

  5. Opportunity to learn from others and by doing: collaboration in software development provides many opportunities for learning. For example, developers can learn from experts in other domains. Also, junior developers have an excellent opportunity to learn from more experienced developers.

  6. Reduced development cost: greater productivity can be achieved despite reductions in paid labour. Also, code written for one F/LOSS project often can be integrated into other F/LOSS projects, which further reduces development costs.

  7. Improved quality and maintenance: with greater numbers of individuals involved with F/LOSS code and a greater number of individuals contributing to testing efforts, software quality is likely to be better than an in-house alternative. Software defects are identified and fixed sooner in F/LOSS.

Although the research was specific to the Internet Tablet project, many of these research findings have also been corroborated by authors studying other private-collective innovation projects.

Stuermer and colleagues (2009) identified five hidden costs of private-collective innovation projects. These costs are:

  1. Enabling others to contribute: an innovator needs to make the tools, training, and infrastructure available to allow easy entry for new contributors.

  2. Releasing control: F/LOSS projects are controlled by a community. An innovator's control is limited after releasing software as F/LOSS.

  3. Lack of product differentiation: competitors can use the publicly available software to create products similar to the innovator’s product. This reduces the ability of an innovator to create a unique product.

  4. Protecting business secrets: since a development community has to have some idea of a product's direction to enable them to contribute to it, a business may have to carefully divulge sufficient information to empower the community, without tipping off a competitor.

  5. Organizational inertia: an innovator has to check any third-party software for hidden IP. This takes time and resources and has an effect on F/LOSS project progress.

How Firms Manage Private-Collective Innovation

Most of the research into open source innovation has focused on the participation and contributions of individuals in F/LOSS. Now, firms choose to disseminate knowledge by releasing open source products and then find alternative ways to increase their revenues, either through hardware or complementary software. It is useful to explore the characteristics of those firms that give out knowledge free of charge and examine how they can be profitable at the same time.

According to a study conducted by Fosfuri and colleagues (2008), the way companies disseminate knowledge is not by charity. They have full control over the process to avoid product deviation. Interestingly, those who have numerous software patents or copyrights are more likely to disseminate knowledge and F/LOSS products. A key reason is that because they have complementary products, they still have other sources of revenue. Good examples are services or products sold on top of F/LOSS products. Another reason is that companies that disseminate knowledge manage to conduct the evolution of products either by having full development and feature control or by enforcing rights and patents to prevent contributors from complementing existing knowledge. For instance, IBM has shown strong support for F/LOSS by granting licenses for more than five hundred of its patents to any open source initiative in the hope that other patent holders join the effort to create a "patent commons."

Firms that have an array of patents have stronger bargaining power and are in a better position to deal with infringed patents held by other entities. Conversely, firms that have numerous trademarks have less incentive to release knowledge and innovation (Fosfuri et al., 2008). The reason is that considerable investment has been made toward branding and image creation. It is part of the intangible assets of a firm. Therefore switching business models can be costly and can confuse existing customers who have adhered to a certain brand (Fosfuri et al., 2008). Lastly, those who have trademarks on hardware are more likely to disseminate knowledge since they have the incentives to do so. For example, firms that have built a reputation in hardware are more likely to disseminate knowledge on their software product since it complements their hardware; it is cheaper to assemble and bundle existing F/LOSS products. It also reduces the bargaining power of specialized suppliers of software by providing a more customizable alternative (Fosfuri et al., 2008).

How Knowledge is Created and Disseminated Among Teams

It is instructive to draw a parallel between private-collective innovation and collective knowledge sharing. Collective knowledge sharing is the process of transferring innovation from one innovator to another, and it is a common attribute of open innovation teams. Inter-organization collaboration can bring considerable value to products and can decrease the time needed to bring innovations to market. A good example of this type of collaboration is a strategic alliance, such as the SCOPE alliance which regroups major software and hardware vendors and service providers. By elaborating upon open specifications, all products offered by the alliance provide added value to customers by ensuring stability, interoperability, and flexibility. When people from different companies have to work together and share knowledge, the process becomes complicated. The diversity of the teams can be a source of creativity but can also lead to social and communicative dilemmas (Chatenier et al., 2009). Therefore, it is important to know how this collective knowledge is created and disseminated.

Chatenier and colleagues (2009) reviewed the literature on the process of collective knowledge creation. They split the affecting factors into three main categories: team emergent states, team composition inputs, and team-level inputs. Team emergent states refer to cognitive, motivational, and affective states that occur when team members work together. For instance, group efficiency is a factor that measures the team capability and reciprocal commitment. In essence, those firms that participate in open innovation must find a way to be good partners and openly share information and prevent strategic spillover of knowledge to competitors.

The learning climate is another important factor, which includes team culture, atmosphere, and the qualities of environment that facilitate learning and collaborations. There must be a balance of trust between different teams. Too much trust brings high levels of information sharing but can also diminish innovation if it causes teams to neglect checking each other's work. Insufficient trust can bring other forces such as the loss of knowledge transfer, suspicion, and skill depreciation. Similarly, power distribution represents another dilemma and teams must find a good balance of power; its absence could result in loss of ownership and impact the knowledge-sharing process.

The above factors can affect the outcome of an innovation and they are directly related to knowledge sharing. It is important to consider both the practical (strategic) and the cognitive factors that lead to knowledge dissemination. When firms decide to disseminate information and knowledge in a private-collective model, they must ensure that their strategies are clear on what they intend to perform. They must also consider the human factors at an early stage.

Conclusion

Private-collective innovation has been a success for some companies. Companies like Nokia and IBM put in a considerable effort to maintain private-collective innovation. Their involvement to commit physical and financial resources into collaboration does not go unnoticed and helps build a good company reputation. All companies that opt for private-collective innovation learn from their experiences and will be better prepared for any future collaboration.

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