Firm's strategies and business models for growth based on open innovation

Kuzmin Sergey Sergeevich PhD in Technical Science General Director, "Sphere" LLC 129110, Russia, g. Moscow, ul. Olimpiiskii Prospekt, 16s5 bn@s-fera.ru Other publications by this author

Introduction

The importance of innovation for economic growth has been analyzed by many economists, but the horizon of such analysis has significantly expanded with the advent of the concept of open innovation (OI) in the 2000s, which made it possible to establish new rules in the competition for the innovative growth path of the firm. The novelty of the situation is that success here is determined not by the volume of investments in own R&D, not by the number and skills of employees engaged in the development of product, technological, organizational, marketing and other innovations, but by the skills of working in an external information field that allows you to choose, acquire, borrow, assimilate ideas, technologies, specific solutions to production problems and much more from the experience of competitors, stakeholders, and other organizations conceived far removed from the sphere of activity of a company choosing an innovative path of development.

Over the past two decades, a whole layer of literature has emerged devoted to the description of this new phenomenon, the use of OI to solve various growth problems based on innovations, conditions, conditions for their effective use and organizational changes necessary for the successful inclusion of a firm in a new paradigm of corporate growth [see, for example: 2-4, 7, 8, 15, 16, 18, 26, 27, 33]. Many firms that have chosen this paradigm for development provide empirical data for drawing up tips and recommendations leading to success ^[6], however, there is no less data indicating errors, problems with the introduction of OI technologies, their low efficiency or even lack of noticeable progress in connection with their use. Such problematic aspects of the use of OI, as it seems to us, are no less important for the promotion of OI than successful experience, therefore, this work will consider certain difficulties and problems that stand in the way of using OI and outline the prospects for the adaptation of organizations to new opportunities provided by their environment of existence.

The first problem that I would like to draw attention to is related to the definition of OI. Currently, there is no single and universally recognized definition of OI, although the definitions formulated by different authors have a number of common features. In particular, the founder of the theory of OI, G. Chesbro, defined OI as "the use of targeted knowledge flows to accelerate internal innovation and expand markets for external use of innovation" ^{[13, p.1]}. O. Gassmani E. Enkel understands OI as the openness of company borders in order to "... ensure the flow of valuable knowledge from the outside in order to create opportunities for cooperation in the field of innovation processes with partners, customers and/or suppliers" ^{[19, p. 2]}. According to M. Perkman and K.Walsh, innovations can be considered as open, "since they come from distributed interorganizational networks, and not from individual companies" ^{[30, p. 259]}. G.I. Kurcheeva and V.A. Hvorostov define OI as "free and voluntary interested interaction of many independent participants (both individuals and organizations) in a highly competitive and dynamically globalizing market environment" ^{[5, p. 3]}. Such examples of definitions of OI can be multiplied. But, nevertheless, despite the considerable diversity of opinions regarding the essence of OI, there are some general characteristics of OI that most often appear in such definitions.

 Firstly, OI is considered as two types of knowledge flows – incoming and outgoing. If incoming flows are evaluated and determined from the point of view of using their innovative potential within the organization, then outgoing flows are outside it.

Secondly, the condition for the effective use of OI is the presence of permeability of organizational boundaries, the creation of a mechanism for the accumulation and systematization of information received from outside (technologies, knowledge, data, etc.), which requires certain efforts on the part of the company's management and specific management skills.

Thirdly, the successful use of OI requires an assessment of the validity of innovations, the possibility of building a hierarchy of their value to gain advantages when using them by this particular company.

Fourth, the definitions allow us to classify a large number of significantly different processes and objects into the category of OI. For example, these include various methods of scanning the external environment for detecting technologies of interest to the firm, organizing crowdsourcing, innovation contests, creating joint ventures or absorbing external firms in order to acquire the technologies they use, creating alliances in the field of R&D, membership in networks for coordinating innovation activities, financing research in university laboratories, and much more.

It is this complex, systematic understanding of OI that we will adhere to in the future.

Research methodology

The work was based on the use of both general scientific methods and special ones developed to clarify the problem and describe the specific characteristics inherent in OI. We refer to the general scientific analytical method and modeling method, as special methods that allow us to identify possible strategies for the use of OI by a firm – a method for determining the breadth of coverage of OI sources and a method for assessing the degree of concentration on a particular source.

The method of assessing the breadth of coverage involves determining the number of sources of OI in all their diversity – by type, size, level of fame, ease or complexity of knowledge extraction, etc. An example of the maximum breadth of coverage is crowdsourcing, which involves the use of ideas, knowledge and technologies of any individuals, groups, organizations that have shown a desire to participate in this process. And the minimum latitude will be in the case, for example, of concluding a contract with a university for the development of a specific technology.

The method of determining the level of concentration involves an assessment of the intensity with which knowledge is drawn from external sources. It is inversely proportional to the number of external partners integrated into the company's innovation activities. This means that a high level of concentration implies deep integration in innovation activities with a small number of external partners. It is typical, for example, for scientific and technical alliances or in the case of complex, complex projects based on cooperation.

Results: archetypes of strategies for using OI

The use of the above methods makes it possible to distinguish four archetypes of strategies for using OI by the firm (see Figure 1). Let's give them characteristics.

Fig. 1. Typology of company development strategies based on OI (developed by the author)

1). Archetype A.OI market strategy (low concentration/low coverage). It is typical for most strategies of using OI and involves the acquisition of knowledge, licenses, know-how, technologies, databases, etc. necessary for the company on the market. Strategies related to this archetype are characterized by a small breadth of coverage of OI sources (one or two of the most easily accessible sources are most often used, for example, the proposals of a well-known company in the industry selling the latest high-performance equipment) and low concentration, that is, an insignificant degree or even lack of "immersion" of OI sources in the innovative problems of the company. In practice, this looks like the acquisition of all the innovative solutions, knowledge and technologies necessary for the implementation of the company from the developer company, which ensures a high speed of solving the company's problems.

Examples of using such a strategy are diverse. So Procter & Gamble Corporation acquired the innovative SpinBrush company in 1987, which invented a new generation electric toothbrush. This acquisition laid the foundation for one of the corporation's most successful product lines. Another example is the acquisition of Skype technology by Microsoft to strengthen its position in the field of communications ^[17].  As an example, we will also give R&D outsourcing used by Dell ^[18]. This method is also widely used by companies working in the pharmaceutical industry ^[13]. 

2). Archetype B.OI strategies based on crowdsourcing (low concentration/large breadth of coverage). Crowdsourcing involves asking a broad, random, chaotic gathering of individuals and groups of people to take part in solving the company's problem, i.e. to all those who will be reached by the company's message, made, for example, via the Internet, specialized print publications, through exhibition contacts or otherwise ^[21]. Crowdsourcing is based on the belief that the combined knowledge, experience and problem-solving skills of a large, formally unorganized group of people surpass the knowledge of any individual or even small professional groups of people, both in terms of the diversity of ideas and in terms of the total amount of information relevant to solving the company's innovative problem.

When developing an OI strategy based on crowdsourcing, it should be borne in mind that there are types of crowdsourcing that differ in a number of important characteristics, each of which requires modification of the innovative behavior of the firm. This can be explained on the basis of the classification proposed by R. Hopkins. He cites the characteristics of four types of crowdsourcing ^[25]: "collective intelligence" — a survey of the opinions of a large number of people regarding a problem requiring an innovative solution, for example, through a chat created specifically for this purpose; "collective creativity" — a collection of proposals to solve the problem by interviewing stakeholders, i.e. interested persons and organizations; "people's voting" – attracting a large number of people, both professionals and amateurs, to evaluate alternatives to solving a particular problem; to crowdfunding — using the "crowd" in order to raise funds for the implementation of innovative projects using Internet platforms specially created for this purpose.

3). Archetype V.Partner strategy of OI (high concentration/low coverage). The OI strategy, built on partnership, involves the conclusion of the company's cooperation agreements with several "knowledge-intensive" partners, such as universities, research institutes, laboratories and centers, organizations specializing in R&D. The inclusion of external partners in innovation processes ensures their close and frequent interaction with the departments of the company responsible for innovation, promotes the development of mutual trust, which facilitates the transfer of implicit, informal knowledge to the organization.

4). The archetype of G.Network strategy of OI, (high concentration/wide coverage). This archetype of strategy is often implemented as part of a joint innovation strategy of two or more companies. It involves deep integration with external partners to ensure effective joint development on an innovative basis and the dissemination of knowledge among network participants. Since innovative knowledge is widely distributed beyond the organizational boundaries of the companies that are members of the alliance, each of them has the opportunity to implement a network strategy to attract and maintain relationships with their external partners. The company becomes part of a large innovative "ecosystem" consisting of individuals, groups and other organizations ^[22]. It is this ecosystem that is the source of knowledge and technology – this is the difference between a network strategy and innovation strategies based on the market and crowdsourcing, where the sources of knowledge are also located in the external environment. This difference imposes a limitation on the company: it has the ability to make choices about the sources of knowledge in the limited space of the ecosystem to which it belongs.

Discussion: the need for a business model, a complementary OI strategy

The archetypes of OI use strategies identified above allow us to support the idea that a simple, uncritical borrowing of well-proven methods of using OI applied by a particular firm at a particular time carries risks of mismatch between the conditions and requirements for the success of using OI and specific practices of implementing business processes that individualize a particular firm.  In this case, the generalizing, generalizing idea is the problem of developing an assessment of the effectiveness of using OI to achieve the strategic goals of the company. A variety of parameters can be recorded as the basis for such an assessment. For example, as suggested by E. Almiroll and R. Casadesus-Masanell, this may be the level of technological complexity of the product ^[9]. K. Larsen and A. Salter associate efficiency with the level of research potential of the company's R&D department ^[28], and K. Grimple and V. Sofka link the efficiency of using OI to a particular industry ^[23]. R. Rajavendra defines efficiency as the ability of an organization to develop its strategies to use the capabilities of OI technologies ^[32], and J. Jung and co-authors see efficiency in the successful application of OI to achieve corporate goals ^[37].

If we take into account that all the above performance parameters are related to organizational characteristics combined in the concept of "business model", then we can put forward a hypothesis according to which the effective use of an OI strategy related to a particular archetype implies the presence of a business model complementary to this archetype. At the same time, by the business model we mean a set of ways of doing business in an organization that provides optimal conditions for achieving organizational goals.

To confirm the validity of this hypothesis, it should be noted that a number of researchers have put forward and justified the assumption that the effective use of the capabilities of OI requires a transition from traditional business models focused on achieving results "inside" the organization to business models oriented "outside", where the knowledge, skills and technological capabilities of stakeholders are perceived as key resources for growth. In particular, M. Geisdorfer, D. Vladimirova and S. Evans, discussing the features of business models for joint innovative creativity, emphasize that they should be designed in such a way that external agents can participate in specific company activities and change the processes of knowledge delivery in order to solve the often acute problems of adapting innovative ideas and methods to practice implementation of business processes in the company ^[20].

Let's consider how the requirements for the design of the content, structure and management of business models should be taken into account in relation to the four archetypes of OI strategies highlighted above.

Designing a business model for the OI market strategy.The business model, focused on the company's use of "market" sources of knowledge, reduces the volume of the company's own efforts in the field of R&D and, accordingly, costs. However, the complete or mostly displacement of R&D beyond organizational boundaries, as noted by J. Petroni and co-authors will already require a change in the business model: it will focus on the organization of interaction and coordination of work with external agents, and success in this case will be ensured by the centralization of the main technological innovation programs ^[31].

Due to the fact that the company's use of external technologies often requires changes in the functioning of its individual workshops, departments, services, it may be necessary to create new centralized units to manage planning, financing and coordination of work on the implementation of the received technologies. Structural and managerial changes are also likely to be required, since the business model determined by the choice of a market innovation strategy assumes an increase in dependence on external supplies and on the integration of external knowledge and technologies. However, here it is necessary to bear in mind the threat of reducing the value of the company's own R&D and further their degradation.

Another problem requires attention, which generates the need for organizational changes when choosing a market strategy for OI. We are talking about new skills and roles of managers, the most important of which are to assess trends in the development of the innovation market, develop and apply criteria for their selection, select the best external partners to solve the problem of innovative development. Thus, in order to ensure effective integration of external knowledge and technologies, traditional ideas about the functions of R&D in the organization must be significantly modernized. In particular, the market strategy for acquiring innovations requires that R&D personnel have sufficient competencies to classify, evaluate, accumulate and use knowledge presented on the market, have the skills to build communications with knowledge owners. The solution of this problem, as noted by a number of authors, leads to the emergence of new professions, may require the creation of new positions [see, for example: 16,35]. Processes of this kind have been investigated and presented in the literature. For example, by studying the innovative activity of Procter Corporation & Gamble, M. Dodson and co-authors substantiate the existence and describe the roles of the so-called "T-employees" (T-men), whose function is to deliver external knowledge to the company's specialists. These people have scientific and technical education, managerial and communication skills necessary to assess the essence, potential, as well as the cost and prospects of using external technologies for the company's innovation activities ^[17].

Designing a business model for an OI strategy based on crowdsourcing.Adopting an innovation strategy based on crowdsourcing involves adapting an organization to work with a wide variety of knowledge sources. The business model should assume the following mechanism for transferring knowledge to the organization: firstly, ensuring the involvement of a wide range of external experts, specialists, practitioners with diverse experience and skills, and in general everyone who wants to participate in the competition for the nomination of new, innovative ideas to solve the problem formulated by the organizers of crowdsourcing. Secondly, there is a mechanism for perception, selection and systematization of the necessary information extracted from the flow of ideas generated by crowdsourcing participants. Thirdly, the development and implementation of a system of incentives and incentives for participants. It is expected that this approach will provide a rich range of new ideas, and companies can only choose the best solutions for further development and commercialization, while their authors are awarded in one form or another.

It should be borne in mind that crowdsourcing does not provide ready-made technological solutions. Rather, it is "a practice that, as a rule, refers to the stage of generating key, basic ideas of the innovation process in order to gain inspiration for the development of a new product in order to solve a particular technical problem or uncover new market trends" ^[36]. However, adopting an innovation strategy based on crowdsourcing and counting on its effective use, the company must evaluate and, if necessary, develop its existing managerial potential and technological capabilities in order, firstly, to launch the process of transferring information from many crowdsourcing participants to the center for its collection, and secondly, to organize stimulation of this kind of activity, to ensure its motivation, and thirdly, to create mechanisms for selection, systematization and processing of information received from external participants. These new management tasks will lead to a modification of the existing business model.

Designing a business model for an OI partner strategy.By adopting the OI partner strategy, the company selects external partners to develop innovations of mutual interest. This strategy requires the development and implementation of a business model that ensures close interaction and cooperation of the company with partners in the field of R&D in order to create optimal conditions for the exchange of knowledge between the parties. A typical form of such interaction is the conclusion of contracts between companies on the joint development of a new product, new technology, new technical standards, norms, regulations.

Usually these types of OI arise on the basis of so-called "breakthrough" innovations, which can lead to new package offers focused on the creation of fundamentally new products and markets. For example, as V. Sangar points out, this behavior is typical for Nestle Corporation, which has managed to significantly expand the scope of its innovation portfolio by creating a series of R&D alliances with companies such as BASF, DSM, DuPont and Tetra P ak.The creation of these alliances required an investment of more than 200 million US dollars ^[34].

Another form of implementing the partner model of OI is the joint development of innovative products and services. The dominant practice here is to identify a group of highly technologically advanced and advanced consumers of the company's products on the basis of a systematic approach in order to jointly develop requirements for a new breakthrough innovative product. At the same time, as noted by a number of researchers, it should be borne in mind that the adoption of a joint innovation strategy may affect the structure of the company's business model, as it requires the establishment of official relations with external partners in order to jointly create innovations ^[10]. On the other hand, studies have shown that external partners can become key assets in the company's innovation activities that need to be managed, which puts forward appropriate requirements for the structure and functioning of its business model. So, for example, as reported by F. Matters ^[29], Apple has created an alliance to work in the field of R&D with manufacturers of liquid crystal displays in order to consolidate its leadership in the development of low-temperature technology for their manufacture, providing high resolution of small-sized cell phone screens.  To this end, Apple has created a research unit, closely integrated with suppliers from South Korea, for the design and development of displays with the required characteristics, having invested over $ 500 million in the development of their production facilities in order to ensure the supply of the required products in the future.

The success of the partnership strategy is possible only taking into account the fact that joint innovative activities allow for the mutual exchange of knowledge between participants. This means that the company's business model should ensure the development of new skills and processes that contribute to the effective interaction of employees of those of its departments whose functions do not involve regular contacts with external stakeholders.

Designing a business model for OI network strategies.Companies choosing an OI network strategy create a network consisting of a number of heterogeneous external partners. The difference from the partner strategy of the OI is that the network members are so deeply integrated into the innovative activities of the company that they often cannot exist independently, since they receive tasks and resources for their implementation from the "parent" company. The high diversity of knowledge sources combined with the deep integration of these sources into the innovative activities of the company allows the latter to get the maximum benefit from the knowledge provided by the network participants, who, in turn, also receive a number of advantages, primarily stable economic benefits from their activities in the network.

The business model built on the OI network strategy acts as an open innovation platform that provides the company's communications with individuals, organizations, communities that make up the network. As an example, we can cite well–known smartphone app stores - Apple, Google or Huawey, which accumulate innovative third-party products and ensure the functioning of the virtual end-user market. Given the complexity of managing such platforms and a variety of external stakeholders, this OI strategy requires the most significant changes in the design of the company's business model compared to other strategies.

Designing a business model for the OI network strategy involves the creation of appropriate structures that ensure monitoring, identification of problems and management decisions to maintain the network in working order. The effectiveness of this activity, according to some authors, can be ensured by creating an internal communication network that provides better coordination of the work of individual departments of the organization on the incorporation of relevant knowledge, skills and technologies ^[24].

Leading organizations in the field of creating innovative network structures create special units whose main function is to build an optimal network architecture through its changes (primarily by including new useful elements in its composition) in such a way as to increase the return on network interaction in the form of more valuable information. American researchers L. Houston and N. Sakkab, using the example of Procter & Gamble Corporation, showed how these ideas work in practice. So, in particular, the corporation has created new positions – integration experts, with the task of constantly being in touch with numerous participants of the innovation network, evaluating the results of their work and their proposals for the possibility of implementation, as well as offering them recommendations for finalizing technologies in the interests of the company. Integration experts have the opportunity to communicate and interact with researchers and managers from other industries, as well as to promote the integration of external knowledge in various divisions of the corporation ^[30].

Summarizing, it can be noted that the OI network strategy assumes a business model design that creates optimal conditions for systematic meetings and constant exchange of information between a variety of partners participating in the network. Therefore, such a business model has received the name "open platform" ^[1].

Conclusions and conclusion

The conducted research allows us to formulate the following conclusions. Firstly, different OI strategies require different business models. And vice versa: the current business model of the company can create insurmountable obstacles to the implementation of the strategy of OI. The solution to this problem is to change the business model.

Secondly, a systematic study of the impact of various OI strategies on the development of business models should be continued in terms of concretization of such influence, depending on the scope of the company, its size, structure, specifics of business processes, cultural traditions, methods of stimulating the susceptibility of personnel to OI, leadership styles, communication systems and organizational power structure

Thirdly, the tasks of redesigning, reconfiguring the company's business model vary depending on the adopted strategy of the OI. Certain open innovation strategies require a radical restructuring of business models, while others require less significant changes.  At the same time, the result of the strategy implementation depends on the ability of the business model to provide the required level of perception of OI.

Fourth, OI strategies should focus on a wide variety of sources of knowledge, on processing a huge amount of information. The main objective of the OI strategy is not to implement a deep integration of external sources into the activities of an innovative company, but to provide opportunities for the development and implementation of a business model that ensures close cooperation of the company with its external partners and mutual exchange of knowledge between them.