Open Innovation Modeling Using Game Theory

Article excerpt

ABSTRACT

Companies use open innovation approach to collaborate with external partners in research and development to reach new technologies that otherwise may not be easy or economical to achieve. This collaboration may cause them to lose control of their research, development, and operational processes which may create a higher risk for using open innovation. In this paper, we use the results of previous researches to discuss different aspect of risks in open innovations and specifically, the three risk of Arrow of Information Paradox, Contamination, and Not Invented Here Syndrome. We suggest that open innovation deals must include not only the potential rewards of the partnership for partners, but should also consider the risks involved in the collaboration. We illustrate how n-person game theory can be used as a decision making tool for a fair reward distribution, a tool to justify open innovation strategic alliances, the core value concept to identify the dominating partner, and Shapley value to generate a fair reward distribution which considers both risks and revenues of partnership deals.

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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. …