Open Innovation - Lego - Case Study Example

Open Innovation Contents Contents 2 Introduction 3 Discussion 3 Conclusion 10 References 11 Introduction This study would be centred towards analyzing the concept of open innovation. In recent time period open innovation has gained great deal of significance. Open innovation is adopted by all innovating companies that utilizes external sources so as to implement innovative strategy. Closed innovation models were originally followed by majority firms. This model indicates utilizing internal capabilities and resources by a single firm. All business activities are encompassed in order to facilitate generic innovation process. Closed innovation is often regarded as corporate innovation form. Open innovation rise is aligned with decline of closed innovation phase. Flexibility can be stated as a major element which initiates open innovation. This is because open innovation is closely knitted to acquiring new ideas from external sources and also realizing potential within in context of generating innovative ideas. In this particular study open innovation would be critically analyzed and it shall be referred to process followed by Lego. Lego is a well known brand that manufactures toys and is a Danish organization. The company was established in 1932 and through wide array of innovations it has transformed into a global business. Lego basically means “play well”. In initial stage products developed by the firm were wooden pull toys, cars, trucks, piggy banks, etc. Innovation at Lego resulted into product range diversification including robotics, train sets and model cars. Discussion Five models of Rothwell’s are closely linked with the approach of closed innovation. The model of closed innovation is described as a single company utilizing internal capabilities and resources to govern overall business activities that results into generic innovation process. These firms are generally vertically integrated. However in recent times more emphasis is given to open innovation as external sources are utilized by firms to carry out innovation process. Network model can be described as an open innovation form since more importance is given to externalization in order to accomplish innovative business activities. The discoveries or rather ideas are internal to an organization (Smith, 2010). While developing these ideas into innovations external firms might play a critical role in relation to fulfilling certain activities. For instance, Marks and Spencer developed chilled ready meals upon innovative ideas contributed by external organizations. The network model’s logic is totally incorporated within open innovation system. External resources are utilized in two different ways such as taking internally generated discoveries and then adopt external route so as to market it through third party organization. The latter than transform those ideas into products or services that can be marketed (Rothwell, 1994). Other way is sourcing discoveries or ideas from external source with internal development based on firm’s own facilities and resources. The concept of open innovation has been further illustrated in figure1. Figure 1: Open Innovation Closed innovation models were mainly associated with technology based mechanisms that was undertaken by vertically integrated companies. These companies are dependent on huge R&D operations and other internal sources. This closed model of innovation was new innovation source and success was dependent on tight control of intellectual property. Network based models are a framework that is used for open innovation. This concept has been able to strongly challenge the approach of closed innovation models. Change in innovation models has resulted due to certain major changes. The first change is greater knowledge mobility. This type of mobility is because of research capabilities and growth in number of universities (Wintzer, 2007). Mobility of staff base has also increased in recent years and this has caused significant impact on firms as staffs are not in favour of being with a particular organization. The other change which has occurred is greater capital mobility. Increase in venture capital has facilitated capital mobility. It has even led to big growth of technology based new start, spin-off and spin-out companies. Open innovation is a major shift from vertical integration based innovation to vertical disintegration. In this form of model innovation tends to become much more flexible (Koners and Goffin, 2007). This is both in terms of sourcing new discoveries or ideas and potential realization of internally generated discoveries or ideas. Organizations that focus on route of open innovation are much more flexible and fluid with discoveries, inventions and ideas. These elements efficiently flow within and out of an organization. There are certain major components of open innovation such as networking can link to external knowledge, one firm cannot possess all forms of expertise, other innovation strategies exist apart from first mover strategy, and intellectual property management is essential for value maximization. These circumstances often results into obtaining knowledge from all possible external sources. Open innovation basically possesses two forms such as external routes and external sources. External sources comprise of technology brokers, large companies, universities and start-up companies. Large companies have significant research facilities and intellectual property much beyond normal product portfolio. Start-up firms are highly specialized enterprises that consists of research capability but do not have resources to bring products or services into the market. Universities are those bodies encompassing intellectual property that is derived from wide array of research activities. On the other hand, technology brokers are actively involved in linking owners with users of intellectual property. External routes are a kind of new venture creation or licensing agreement through a spin-off or joint venture company. Closed or open innovation models cannot be stated as mutually exclusive choices (Lasserre, 2012). They are not mutually exclusive since firms which implements open innovation model are also inclined towards utilizing closed innovation model. For instance, Proctor and Gamble is described as one such company that has well adopted the concept of open innovation. A desirable percentage of its innovative activities are acquired from wide range of external sources. The company still sustains its own research capabilities and in present scenario it has been supported by externally sourced technologies (Lüthje and Herstatt, 2004). Open innovation is not only about sourcing external information but it also needs to be well integrated with current business activities. This type of innovative model does not guarantee success or growth of a firm. At times existing research capabilities or skills present within a firm might be more advantageous in comparison to externally sourced knowledge. Open innovation also makes a company highly dependent on external information source. A firm’s strength usually lies on internal resources or capabilities. In current scenario these factors are not given much importance by firms since the trend has shifted to open innovation system. However there are many firms which give more importance to closed innovation system and consider enhancing internal capabilities or skills to be essential. It can be stated no firm completely implements open innovation system as it needs to regulate externally based technology or information. Combination of both innovation models are mostly observed within firms and a balance between two enables a firm to sustain innovation for long term. Lego is known for manufacturing toys for children. Innovation has been at the core of business strategies of Lego. The company initially used to design wooden pull toys, cars, piggy banks and trucks. Wooden toys later were replaced by developing plastic brick toys for children. Lego had implemented innovative measures in terms of adding wheels, eliminating cellulose acetate and focusing on acrylonitrile butadiene styrene plastic, instruction manual addition, etc. For younger children Lego manufactures Duplo comprising of large bricks and Technic Builders for older ones. Innovative measures have always been encouraged by Lego since it was operating in a highly competitive market. The major competitors of Lego were low cost toys and rapidly emerging computer based games. Its innovative strategy has set a market position and even given the firm title of “toy of century” (Franke and Piller, 2004). Open innovation process has been implemented by Lego and its innovation starts from Lego users. The company considers its users to be a critical component in the overall innovation process. It can be stated that innovation mechanism is all about generating new ideas and implementing them within business process. Lego in order to stay competitive in the market place works in collaboration with users. Small number bricks as potential configuration of Lego have enabled users to be a part of the overall business concept (Simerson, 2011). Lego toys are usually purchased by users to develop cars and houses which are later reassembled in own ways of user created approach. User linked approach is at the centre of business strategy of Lego. The company had even implemented digitalized manufacturing process so as to increase manufacturing efficiency and reduce overall operational costs. A brand new option for customizable toy was also introduced within the market place. Lego Mosaic was the most innovative concept that was launched by the firm. It was the first step undertaken by the firm to initiate open innovation process. Lego Mosaic provided a platform to users through which they are able to upload pictures on company’s website. The firm on basis of these ideas calculates bricks and manufacture multi-colour wall hanging. It even facilitates user configurable toys where from scratch users are able to modify and develop toys. Users are even allowed to develop their own ideas through design tools provided on the website. This allows firm to engage with users so as to develop innovative ideas. It’s ultimately users designing product line and Lego acts as a basic service provider. MindStorm is a mind game that was introduced by Lego for competing with computer games. Their codes related to such programs were hacked by users but still no security measures had been adopted (Chesbrough, 2003). Experience shared by users on a common platform supported the firm with a competitive edge. Lego was focused towards identifying key developers and incorporated interest of users. The source code was made available to wide array of users with the right to hack. This kind of open innovation procedure helped the firm to initiate leverage of original design. 40 recipe books are now available with add-ons of different hardware and software. The company secretly hires some key developers and they are actively involved within MindStorm user panel (Hienerth, Keinz and Lettl, 2011). Open innovation plays a major role in overall innovation process of Lego. This is because the firm explores knowledge and skills of outsiders and then incorporates them within project design. It can be outlined as a lead user behaviour that the company focuses on for long term success or growth. Lego even encouraged more users by providing them with airfares and expanded its developer base to more than 100 citizens. They were not only involved in NXT project of Lego but even inclined towards other new project development. The company was able to identify a user community who purchased products of Lego and then made suitable modifications. As a result 20 lead users were identified by the firm who delivered almost 76 designs. These designs were transformed into innovative product line and eventually sold in the market place. Open source software can be highlighted as a turning point in Lego’s approach. This software not only resulted into innovation but even developed a wide base of loyal customers. There were some additional advantage too such as designs developed by one user might appear to be interesting to another. This was a kind of vanity publishing and an extension of design or marketing (Chesbrough and Socolof, 2000). LUGNET even proved to be one such innovative approach adopted by Lego based on open innovation strategy. LUGNET is an independent user network of Lego. An online war game Lego universe was designed where children usually structured those characters. Customizing toys was not the only option available to Lego users but this creativity was even transformed into digital characters appearing in such war games. Community based model is usually not implemented by firms that are not open-minded. This is simply because outsiders gain full access to business knowledge or information. Traditional business approach is completely different from community based model. Later model focuses on shared knowledge and interest, community growth and sustainability, and protocol or infrastructure facilitating collaboration (Henry, 2011). Lead user entrepreneurs are basically selected by the firm. These users work in collaboration with other developers of Lego. This kind of open innovation mechanism has saved the firm during the time period of global recession. Innovation is a major driver behind company’s success and open innovation enables Lego to earn high profit margins. Instead of stopping software hacking the firm engages more into testing and research of product developments. Conclusion As per this study, open innovation strategy is a tool to develop business sustainability. Innovation forms the basis of business strategy formulation. There are different mechanisms adopted by companies so as to survive in highly competitive business environment. Lego operates in a competitive market place. The products initially developed by Lego were more focused on preferences of children. However in later stage new product developments had made business scenario more complex for Lego. Innovation proved to be a key to Lego’s success and this effectively contributed towards business growth and success. Lego was in a bankruptcy stage and open innovation strategy supported the firm to regain its market position. Open innovation procedure was a way through which lead users were identified by the firm. These users were then involved in designing process so as to deliver innovative products. In the initial stage toys manufactured by Lego did not satisfy maximum users but design contributed by lead users enhanced level of customer satisfaction. These users were not only engaged in a particular project but even were involved in wide range of other projects. It can be stated that innovation process at Lego were totally based on open innovation mechanism. The entire procedure was more of user involvement and designing best product line. Lego’s success is greatly dependent on creative skills and ideas contributed by lead users. References Chesbrough, H., 2003. Open innovation: the new imperative for creating and profiting from technology. Boston: Harvard Business School Press. Chesbrough, H.W., and Socolof, S. J., 2000. Creating new ventures from bell labs technologies. Research Technology Management, 43(2), pp. 13-18. Franke, N., and Piller, F., 2004. 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