Knowledge exploration vs knowledge exploitation
Contemporary research indicates the more or less obvious conclusion that knowledge acquisition is important for innovation processes. Maybe two of the most widely recognized concepts in connection with (individual) knowledge and innovation are ‘knowledge exploration’ and ‘knowledge exploitation’ (March 1991, p.71). Knowledge exploration refers to the search for new knowledge and is usually signalled by such terms as ‘search’, ‘variation’, ‘risk taking’, ‘experimentation’, ‘play’, ‘flexibility’, ‘discovery’, ‘innovation’, etc. By contrast, exploitation includes such things as refinement, choice, production, efficiency, selection, implementation, execution, etc. Exploration refers to the search for new useful adaptations, and exploitation refers to the use of propagation of known adaptations.
Most research suggests that firms tend to overemphasize exploitation at the expense of exploration because exploitation provides more immediate and certain results. Nevertheless, irrespective of how the optimal balance can be reached, our knowledge about learning practices and how they can be managed and organized is of crucial importance not at least when it comes to open innovation designing processes.
Hence, in light of this classic distinction between exploration and exploitation, it is generally relevant to ask the question of how open networks can influence an organizational learning process and how, if at all, this learning affects organizational activities. Previous research has pointed out that the nature of learning resulting from knowledge that flows between entities is dependent upon the nature of the relationship between the parties involved (Kang et al., 2007).
One way to encapsulate this phenomenon is in terms of strong or weak ties. There is strength in weak ties, as the sociologist Mark Granovetter has observed. Our acquaintances—not our close friends and partners —are our main sources of new ideas and information. The reason is that our close friends tend to move in the same circles that we do, the information they receive overlaps considerably with what we already know. Nevertheless, this does not mean that new ideas and new perspectives will be of major importance when it comes to designing new products.
Networks vs organizational structures - being inspired but acting strategically
As Gladwell (2010) elegantly point out “No one believes that the articulation of a coherent design philosophy is best handled by a sprawling, leaderless organizational system. Because networks don’t have a centralized leadership structure and clear lines of authority, they have real difficulty reaching consensus and setting goals. They can’t think strategically; they are chronically prone to conflict and error” and finally Gladwell asks the question; How do you make difficult choices about tactics or strategy or philosophical direction when everyone has an equal say?”
We are back to explorative and exploitative knowledge and how this distinction can be used to elucidate the problem at stake. We may say that networks with its weak ties are good at generating knowledge flows that maintain explorative knowledge. But when it comes to exploiting knowledge, i.e. refinement, choice, production, implementation, etc. execution weak ties are not enough. Our acquaintances cannot help us in this tricky matter. We, as a separate unit, need to take the lead. We need to balance both explorative and exploitative knowledge. We have to believe in the strength and density of the network, the mutual concerns, shared understanding and systems of meaning by the networks´ members, but first of all on our strength and abilities to think on our own and act strategically.
Recommended reading
Gladwell, M. (2010) “Small Change - Why the revolution will not be tweeted.” The New Yorker online - Annals of Innovation.
Granovetter, M.D. (2004). “The Impact of Social Structures on Economic Outcomes.” Journal of Economic Perspectives (Vol 19 Number 1, pp. 33-50).
Kang, S-C., S. Morris and S. Scott (2007). “Relational Archetypes Organizational Learning and Value Creation: Extending the Human Resource Architecture.” Academy of Management Review, Vol. 32, No 1, (2007), pp. 236-256.
March, J. G. (1991) “Exploration and Exploitation in Organizational Learning”. Organization Science, Vol. 2, No. 1, pp. 71-87.
After having defined the boundaries and channels for openness in a firm in my previous article, it is now time to review the next important factor that influences the level of openness; The requirements and appropriateness for opening up will vary depending on the phase of the innovation process we are currently in, since some phases are more suitable for openness than others. Traditionally, the further through the stage-gates an idea has passed, the more effort has been invested in improving it and the more valuable it has become. Hence later-stage ideas are less prone to be open for external interference. Yet, this is not entirely correct – we will take a quick look at the stages and their appropriateness to open up innovation activities.
Four phases of innovation
A general high-level innovation process can be divided into four general phases – Idea Generation, Idea Evaluation, Experimentation and Commercialization. This is how we perceive each of the four phases:
1. Idea Generation
This phase manages the inception, production, refinement, and comparison of submitted ideas. Outputs from this phase are user-generated and fine-tuned ideas on how to improve things that will increase value of the firm’s activities for the user.
2. Idea Evaluation
The evaluation phase concerns for the firm to evaluate the proposed business value of the submitted idea. It will take into account the existing production process, the strategic value of the idea with regard to the cost of testing and implementing it, how it fits in to the firm’s current and future innovation portfolio, etc. The output is a business document describing the proposed investment, its anticipated future value, its risks, and other business aspects of the idea. There is also a go/no-go flag, announcing whether the idea should pass to the next stage or be dropped.
3. Experimentation
This phase includes testing and evaluating new innovations. For incremental innovations, this step can often be bypassed, since such “innovations” can usually simply be incorporated into the existing infrastructure. With brand new ideas the process is more complicated and commonly includes main steps such as prototyping and piloting. The output of the experimentation phase is often a functioning prototype and a document describing lessons learned from the pilot(s) and recommendations for its implementation.
4. Commercialization
In the final phase the innovation is incorporated into the established production process (if relevant), then produced, marketed and launched.
Openness in the idea generation phase
During the first phase only small investments are made by the firm, whereas the biggest one is actually the establishment of the system itself (both the technical and organizational) for allowing users to submit ideas. Ideas may or may not be of high value, so openness is not unnecessarily restricted at this point. Openness in this phase may induce activity from the submitting community that will add business value to the firm, while reducing openness in the early stages may rather minimize input and hence the likeliness of innovation.
Openness in the evaluation phase
The evaluation phase practically consists of two sub-phases – the user evaluation phase and the business evaluation phase. The user evaluation phase usually takes place iteratively during the idea generation phase, but borders to idea evaluation since its parameters are important input to the business evaluation process. User evaluation usually displays itself as various forms of “rating”. Ideas are promoted or demoted by the users, indicating to the firm whether the idea is worth evaluating or whether it should be left in the oven a little longer. This part should definitely be wide open, since more interaction means better decision support for the business evaluation phase.
The second part concerning business evaluation must usually utilize the firm’s strategic business information which is traditionally not viable for public exposure, thus business evaluation is most often conducted in-house. In theory though, business evaluation could very well be crowdsourced, allowing external participants to give their input to the business value of an idea, but in reality it seldom happens.
Openness in the experimentation phase
Experimentation gives several opportunities for openness. Prototypes are usually built by dedicated resources within the firm, but may just as well be given to an outside community. When we are this far into the development process, firms prefer to have better control over the process, to secure its pace, and when responsibility is given to volunteers, there is very little guarantee that they perform within a decent timeframe.
Pilots may also be more or less open. For control purposes pilots are mainly pursued with a representative portion of the intended target group. This way the firm are in much better control of measuring relevant criteria. Another form of piloting is “beta releases”, where prototypes are given to the user community for actual use, but with beta disclaimers. Neither of the various forms of pilots must exclude the other, the amount of pilot needed depends on the results of the prior pilots and the cost of pursuing new ones.
Openness in the commercialization phase
The commercialization phase is probably the most traditionally bound. Marketing and production has always been managed by internal departments. Still, there are some pretty good examples of how even this phase is opening up. For instance, in a user-generated product business model such as Threadless’s the production phase is definitely open, and with viral marketing and social media strategies openness is the foundation.
Conclusions
Openness is more appropriate at certain levels of the innovation process than it is at others. What firms need to do is to initially clarify their own innovation process and then define what level of openness that is most aligned with the firm’s innovation strategy. The “correct” level of openness will vary depending on the firm’s business strategy, culture, organizational structure, etc. The firm must also decide at what phases to open up and to what target groups. In the next and third article on openness we will look into conceivable target groups of relevance at various stages.
Recommended reading
Phillips, J. (2008) Make us more Innovation: Critical Factors for Innovation Success. iUniverse Inc.
Utterback, J. (1971) The Process of Technological Innovation Within the Firm. The Academy of Management Journal; Vol 14, No 1.
Lack of a common definition
Some while ago I was on the 22:nd annual ISPIM conference in Hamburg where one of the research tracks concerned levels of openness in open innovation. After the presentations, discussions flourished and it was my clear understanding that there is currently little consensus to a common view on openness within the research community. So this is the first of three articles where I would like to give my view on the matter.
Defining openness
To begin with I would like to start this manifesto by defining what we mean by “openness” in open innovation. Chesbrough is commonly cited on this topic with regard to his definition of the “boundaries of the firm”. When ideas, or the property right of ideas, flow inside or outside the innovation funnel of the firm - where the “funnel” represents the stage-gate process of evaluating and reducing the amount of less valuable ideas - innovation opens up. Traditionally, every phase in the innovation process, from idea generation to experimentation and commercialization, has been performed internally at firms. So, by that dispute, openness is relative to assets controlled by the firm.
Assets for openness
But what are the assets actually owned, or controlled, by the firm? To begin with, the restricted value is rarely with regard to physical objects. Even though a single instance of an object might be relatively valuable to a firm in terms of transaction value, it is seldom as valuable as the blueprint to producing such objects. For instance, in comparison to owning the world’s only box of anticarcinogens, which would be highly valuable, it is even more valuable to own the recipe for anticarcinogens, or even the patent rights to them. With the right resources you will then be able to keep reproducing anticarcinogens as long as they are valuable to you.
Hence, there are two things that are much more valuable to the innovative firm than the object itself - and that in the long run may even be invaluable - and those things relate to the sources of product/process/service reproduction, namely data and people - or by their more value-enhanced descriptions - information and knowledge. The right information, complemented with the right knowledge to utilize that information, together form the two most valuable assets of the information era. Thus the interest from firms to control and restrict such assets from competitive access.
Boundaries to, and channels for, openness
Another significant distinction of openness is that it is not static. If the required asset remains statically on either side of the boundary of the firm, and the boundaries are closed for transfer, the firm itself is consequently non-open. Note that information does not need to be physically transferred from point A to point B to be shared (or stolen, if not shared intentionally), it just needs to be accessed and viewed at point A from point B. Importance lies with the accessibility across the boundaries. With information, in contrast to physical objects, moving an asset from one location to another does not necessarily mean that it is deleted in the first location; it might just as well be copied. Regardless of the form assets are made of (tangible or non-tangible), there needs to be channels to transport them for the firm to be open. If ideas stay within the innovation funnel, innovation is not open. So clearly, the firm’s funnel needs channels to communicate with resources outside its boundaries. This leads us to two distinct necessities for defining openness in open innovation – transparency and connectivity.
By transparency we refer to opening up the visibility of data resources, be they information or knowledge (databases or people). Firms traditionally restrict access to its data resources by i.e. firewalls, passwords, regulations, policies, locked doors, etc., depending on the form, or value, of the information the resource contains. As with most policy concerns privacy must be protected. Certain data is by no means meant to be publicly accessible, such as personal consumer information, strategic business metrics, etc., and thus requires restrictions. But data that is not classified as confidential may be candidates for exposure to support innovation.
By connectivity we refer not only to allowing the data to be exposed, but to the creation and acceptance of channels to retrieve, publish and communicate with the data. It becomes even more evident with open innovation, since sharing information and knowledge may help create new business value, while restricting it may create – nothing.
From value chains to value networks
With the transition from viewing a firm’s value enhancements as a secluded sequence - a value chain - to a multiple set of parallel, and possibly asynchronous, cross-functional processes - a value network - the amount of “nodes” (in which the product/process/service value increases) will amplify radically. As will the order in which the nodes are accessed. Moving from a controlled process to a dynamic self-regulatory system has its implications for a firm.
Porter’s sequential value chain and a value network map (12manage.com, 2011; valuenetworksandcollaboration.com, 2011).
Most importantly each node-to-node connection, especially those that connect with outside nodes, has four gateways which must be in a proper state. First of all the out-reaching node must be allowed to access the channel. Secondly and thirdly there must be a channel between the nodes and it must be available and open in both ends. Finally the recipient node must be accessible - meaning its location, or address, must be publicly available and its recipient connector must not reject incoming signals. From a general node-perspective, the node - whether it contains information or knowledge - must be open for in- and outgoing connections.
A “node” in a value network is any employee, customer, partner, system, database, document archive/etc., which contains information or knowledge that is of value to another node, and that collaboratively improves the value of the product/process/service of interest for innovation. A “channel” is any transmission line (telephone line, Internet system, email route, postal service, meeting space, or similar) between two nodes in a value network which supports the exchange of information or knowledge between them. There must also be a common language for communication, such as English, XML, etc.
From the firm’s internal perspective it can only influence the information and knowledge in which it has possession. To interact with external data sources - outside the funnel - the firm must establish channels to support it. Yet, the firm will be reliant on other firms’ transparency. One way to accelerate this is to engage in innovation partnerships where mutual rules for transparency and connectivity are established, thus reinforcing communication with nodes outside the funnel. For traditional open innovation the use of ideation systems, patent licensing platforms and innovation marketplaces such as InnoCentive are common ways of approaching this.
In the next article in this series of three we will cover various target groups to consider when opening up and levels of openness in various phases in the innovation process.
Recommended reading
Allee, V. (2011). ”Value Networks and the true nature of collaboration.” ValueNet Works and Verna Allee Associates.
Paasi, M. & Valkokari, K. (2011). “Levels of openness in open innovation.” Proceedings of the XXII ISPIM Conference.
West, J. & O´Mahoney, S. (2008). “The Role of Participation Architecture in Growing Sponsored Open Source Communities”, Industry & Innovation 15, 2 (April 2008): 145-168. Taylor & Francis.
Co-creation evolves as markets change
In traditional terms a “market” is a place where sellers present goods and buyers purchase them when they find one they want or need. In the traditional case a buyer has a few pre-made standard products to choose from. In the information age the conditions of market places are shifting from meeting points of two processes (the production process and a separate purchasing process) into collaborative systems of co-creation. New business models are evolving and companies are realizing that consumers are not incompetent illiterates, but rather well-informed, highly skilled users. The combination of their intelligence, skills and product competence may be of major value to the company.
Hence the focus is changing from a product-centric market where firms produce stuff they want to sell, toward a market where personalized consumer experiences are becoming dominant. Consumers today have a variety of goods to choose among and are often able to tailor them to personal needs (as with new cars or with software services). With the impossibility for companies to cost-efficiently deliver individualized products to each consumer - at least not at a reasonable rate - a new approach to consumer experience is necessary.
The value creation process redefined
The main driver for co-creation is actually a combination of a few changing market phenomena. The first one is the changing attitude of consumers. Stemming from, among others, the open source movement consumers have started to become more involved in the evolution of products and services - especially those consumers who are lead users and/or professionals in the area of the product or service. Users today are generally better informed and more engaged due to the increased access to information and new improved business communication channels over the Internet. And equally important - they are all connected, meaning they do not only co-create with the company (B2C) but also with each other (P2P or C2C). Porter’s definition of the “value chain” is diminishing with respect to new “value networks” - with an exponentially growing number of nodes.
Businesses perspectives on co-creation
As stated by Prahalad and Ramaswamy (2003) it is often futile for a company to try to manage individuals’ experiences. Companies have continuously been trying for decades, mostly by various consumer insight programmes, but the trend is now shifting toward viewing products and services as “platforms for user interaction”. Companies need to not only understand consumer behavior and needs, but also create environments in which consumers can tamper, explore and experiment with products and actively participate in their development. And the value network doesn’t end there; when consumers define uses that are out of the company’s traditional scope they need a partner network to help offer the solutions required by the consumers. Co-innovating with partners in the value network to increase the consumer experience will strengthen the company’s market position compared to those who don’t.
Co-creation or mass customization?
User experiences will vary with regard to several factors, some of which are context, mood, background, former experiences, etc, and all of these may vary for each occation. Since companies are not likely able to foresee every separate situation, they have three general options; to create an offering that is general enough to fit most situations, to create such a variety of offerings that every situation is covered, or to create a modifiable general offering which can be adapted for each situation and/or in collaboration with others. The latter option mirrors a situation where a consumer receives a product or service that is adjustable to each present situation – a concept also commonly known as “mass customization”. Mass customization is a form of co-creation which combines the economic benefits of mass production with the flexibility of individual customization. Mass customization does not exclude initial co-creation, they are complementary and may both be incorporated into the innovation process. As co-creation often refers to participating in defining products and services, mass customization usually refers to the possibility of modifying the products/services and their content.
Note that many times, especially in services, co-creation may occur in the production process as well. At those occasions co-creation and customization are intertwined. A rule of thumb is usually that the more flexible the solution the more difficult it is to develop. Hence the need for mass participation in the concept development phase to provide a greater body of experience and knowledge to the innovation process.
Recommended reading
Bhalla, G. (2010). Collaboration and Co-creation: New Platforms for Marketing and Innovation. Springer.
Prahalad, C.K. & Ramaswamy, R. (2003) The New Frontier of Experience Innovation. MIT Sloan Management Review.
Ramaswamy, V. (2010). The Power of Co-Creation: Build It with Them to Boost Growth, Productivity, and Profits. Free press.
The interest in video technologies has surged as IT infrastructures and network capacities have improved. We have conducted a study with Q-Med, a medical device group, and Populate, a digital media company. We explored how such technology can stimulate open innovation, in our case the sharing of ideas among employees by discussing videos. Our case company, Q-Med, introduced an interactive website with functionality that is similar to YouTube. Videos that present the company’s history and give a background to and describe the core values of the company have been produced and published on the website.
The reason for focusing on the core values was that the management wanted to keep the original spirit of the company and have the unique success factors in focus even during a period of fast growth and global expansion. By reinforcing company core values with the overall focus on the entrepreneurial spirit, they wanted to affect employee’s attitudes, behavior and commitment. The management conducted a series of workshops and forums to discuss and strengthen the company’s core values and the interactive website was a continuation of this effort. In each video the employees were encouraged to share their reflections on the values and how they can be implemented in practice, by submitting comments on the website.
Our study focused on how the use of the video website affected the awareness of the core values and whether this also influenced the behavior of the employees. We were interested in exploring whether or not the use of the video website supported contribution and sharing of ideas, which is one of the key dimensions of open innovation. Two web surveys were designed for the study. The first survey was conducted prior to introducing the video website and the second survey after introducing it. As a complement, we also conducted interviews, focus groups and observations of how the video website was used.
We identified a slightly negative effect on awareness and behavior in relation with the vision by the employees, which can partly be explained by that the project took an unexpected turn because of organizational turbulence and downsizing. Employees that felt like active participants were more likely to prefer video, were more satisfied, and perceived greater positive effect on awareness and behavior. Our study extends findings from traditional organizational change communication research by showing that participation is a key success factor also when using a video website. We also found that there was unequal access to the internet, which made it difficult for the operators, working with production in the production line, to find and access the interactive video website.
In the future, the employees of Q-Med see a number of potential applications of this technology: communicating with subsidiaries, presenting the company to new employees, presenting the work of different departments and presenting new members of the management team.
