Open Innovation Modeling Using Game Theory

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INTRODUCTION

Open innovation approach is a paradigm for sharing the new technologies resulted from research and development by collaborators and partners. This approach treats research and development as an open system and assumes that firms can and should use both external and internal ideas as they advance their technology (Chesbrough, 2003a). The shift from closed to open innovation is a result of many changes occurring in the today's business world. These changes include the increasing availability and mobility of skilled workers, the growth of the venture capital market, the external options for ideas sitting on the shelf, and the increasing capability of external suppliers (Chesbrough 2003b).

From a risk perspective, the paradigm of closed innovation assumes that successful innovation requires control. Traditionally, companies would protect their own ideas during all stages of the new product development cycle: research, development, production, as well as marketing, distribution, servicing, financing, and supporting. The closed innovation approach leads companies to create their own research and development departments to be able to control their innovation process. Google is an example of understanding the risk-averse nature of closed innovation. Google does not share details about its search algorithms, "which is the single most important body of code at the company" (Gralla, 2010). Simultaneously, Google understands the significance of open innovation. Jonathan Rosenberg, Google's Senior Vice President for Product Management noted in a recent memo about "the meaning of 'open' as it relates to the Internet:

Open systems win. This is counter-intuitive to the traditionally trained MBA who is taught to generate a sustainable competitive advantage by creating a closed system, making it popular, and then milking it through the product life cycle. The conventional wisdom goes that companies should lock in customers to lock out competitors ... A well-managed closed system can deliver plenty of profits--but eventually innovation in a closed system tends towards being incremental at best ... Complacency is the hallmark of any closed system (Rosenberg, 2009).

On the other side, anxiety is the hallmark of any open system. In an attempt to gain advantages of new technologies at lowest possible cost and shortest possible time, firms which implement an open innovation approach have to take additional risks. There is always less control and more uncertainty when scientific community outside an organization becomes involved in the research and development of the organization's potential next technology. Open innovation approach is no longer designed around self sufficient "islands" to produce all the components of a final product. Instead, open innovation firms allow other firms to start producing some of the components that are required in their final product. Open Innovation approach is a development process that is highly open to ideas from many players and at all stages (Orszag and Holdren, 2009).

In his book about open innovation Henry Chesbrough (2003a, p. 13) compares the process of developing new technologies to a poker game. He quotes the phone interview with James McGroddy, an IBM research director:

   When you're targeting your technology to your current business,
   it's like a chess game. You know the pieces; you know what they can
   and cannot do. You know what your competition is going to do, and
   you know what your customer needs from you in order to win the
   game. You can think out many moves in advance, and in fact, you
   have to, if you're going to win. In a new market, you have to plan
   your technology entirely differently. You're not playing chess
   anymore; now you're playing poker. You don't know all the
   information in advance. Instead, you have to decide whether to
   spend additional money to stay in the game to see the next card. …