BALANCING
ORGANIZATIONAL CAPABILITIES
A case study on how an innovation hub enables startups to balance
exploration and exploitation capabilities
Tobias Enlund, Christoffer Lorentsson
Department of Business Administration
Abstract
The world is changing. With more complex products and services available, shortened life cycles, and shifts in customers behavior due to the increased availability of information, companies needs to explore new capabilities and organizational practices to effectively preserve a competitive advantage through new innovations. A competitive advantage is said to be difficult to create and sustain in today’s markets. Many startups and corporates, are therefore, changing their innovation processes from a traditional linear process to more of an open process. Many scholars have studied this phenomenon from a corporate perspective, leaving a gap in existing literature on how startups are contributing with their innovative and entrepreneurial mindset to the context of open innovation. It is visible that startups are possessing an extensive amount of exploration capabilities, while lacking capabilities related to exploitation. Finding a balance between exploration and exploitation capabilities is an issue for startups due to its limitations of resources. Therefore, the purpose of this study is to distinguish how an innovation hub enables startups with balancing exploration and exploitation capabilities. For this study, the innovation hub of our choosing is Ignite. Based on the literature review and the identified research gaps, the following research question has been formulated to investigate the phenomenon of balancing organizational capabilities from a startup perspective:
RQ: How can an innovation hub help startups find a balance between exploration and exploitation capabilities?
To properly answer the research question, the chosen research approach was selected as a qualitative research method. The empirical findings were gathered from 11 semi- structured interviews, where nine interviews have been with managers from startups active in Ignite and two interviews with team members from Ignite. In addition to the empirical findings, we developed a proposed framework that explains the whole process of startups being active in Ignite from pre-intervention, addressing challenges related to startups and the reasons why they should engage in being active in an innovation hub, to post-intervention, addressing the possible outcomes received by being active in Ignite.
To conclude, this thesis contributes with an understanding on how startups may use a third party, such as Ignite, to get help with the balancing act of exploration and exploitation capabilities. The findings show that the third party is helping the startups with balancing their organizational capabilities in an indirect way. This is done through Ignite’s accurate matchmaking process and their deep understanding about which capabilities the big corporations are looking for, which Ignite gathers from a needs analysis together with the big corporation. From this thesis, startups as well as big corporations, will understand the importance of involving a third party for the purpose of creating and sustaining a competitive advantage by balancing their exploration and exploitation capabilities.
Key Words: Collaborations, Exploitation, Exploration, Innovation Hub, Open Innovation, Organizational Capabilities, Partnerships, Startups, Strategic Decision- Making, Strategic Entrepreneurship
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Acknowledgement
We would like to begin by thanking the members of Ignite who have been participating in interviews and provided us with the material needed to develop an understanding about the concept of Ignite. We would also with gratitude thank all the interviewees who participated and shared their valuable knowledge and experiences about the startup world.
The respondents' insights have been sincerely inspiring and beneficial for our study.
A special thanks also goes to our supervisor Medhanie Gaim for providing us with guidance throughout the entire project. We are grateful for all the information he has provided and also allowing us to get the opportunity to be part of a more extensive research project that Umeå University has with Ignite.
Umeå University, May 25, 2020
Tobias Enlund Christoffer Lorentsson
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Table of Contents
1 Introduction ... 1
1.1 Background ... 1
1.2 Problem formulation ... 3
1.3 Research Gap ... 4
1.4 Research question ... 5
1.5 Research Purposes ... 5
1.6 Delimitations ... 6
2 Literature review ... 7
2.1 Closed innovation ... 7
2.2 Open innovation ... 8
2.2.1 Open innovation from a startup perspective ... 9
2.2.2 Open innovation from a big corporation perspective ... 10
2.3 Strategic entrepreneurship ... 11
2.4 Organizational capabilities ... 12
2.4.1 Exploration and exploitation capabilities ... 13
2.4.2 Balancing exploration and exploitation capabilities ... 15
2.4.3 Building organizational capabilities ... 17
2.4.4 Strategic decision-making ... 18
2.5 Innovation hub ... 19
2.6 Partnerships ... 20
2.6.1 Knowledge sharing ... 22
2.6.2 Trust ... 22
3 Overview of the literature review... 24
4 Selected case ... 26
5 Research methodology ... 29
5.1 Research Philosophy... 29
5.1.1 Ontological assumption ... 29
5.1.2 Epistemological assumption ... 30
5.1.3 Axiological assumption ... 30
5.1.4 Literature search ... 31
5.1.5 Research Approach ... 32
5.1.6 Research Design ... 32
5.1.7 Summary of our methodological position ... 34
5.2 Practical Methodology ... 34
5.2.1 Data collection ... 35
5.2.2 Sampling technique ... 36
5.2.3 Interview guides ... 38
5.2.4 The interview process ... 39
5.2.5 Data analysis ... 40
5.3 Quality criteria ... 42
5.3.1 Transferability ... 43
5.3.2 Credibility ... 43
5.3.3 Ethical considerations ... 43
6 Empirical Findings ... 46
6.1 Contextual information ... 46
6.2 Innovations ... 47
6.3 Innovation activities ... 48
6.3.1 Outside-in ... 49
6.3.2 Inside-out ... 50
6.3.3 Organizational environment ... 51
6.4 Organizational capabilities ... 51
6.4.1 Exploration capabilities ... 53
6.4.2 Exploitation capabilities ... 54
6.4.3 How Ignite enables startups to find new capabilities ... 55
6.4.4 The challenge of balancing organizational capabilities ... 57
6.4.5 Partnerships ... 59
6.4.6 Potential challenges among the partnerships ... 63
6.4.7 Minimizing the risks ... 64
7 Discussion ... 67
7.1 Pre-intervention ... 67
7.1.1 Organizational environment ... 67
7.1.2 Startups organizational capabilities ... 68
7.1.3 Potential challenges among partnerships ... 70
7.2 Intervention ... 71
7.2.1 Open innovation through Ignite ... 71
7.2.2 Ignite as an enabler of balancing organizational capabilities ... 72
7.2.3 Minimizing the challenges before entering a partnership ... 74
7.3 Post-intervention ... 75
7.3.1 Partnerships ... 75
7.4 Proposed framework ... 76
8 Implications and concluding remarks ... 79
8.1 Research findings ... 79
8.2 Theoretical contributions ... 80
8.3 Managerial implications ... 80
8.3.1 Implications for startup managers ... 81
8.3.2 Implications for Ignite ... 81
8.4 Societal implications... 82
8.5 Limitations and Future research ... 83
8.6 Concluding remarks ... 83
Reference list ... 84
Appendix 1: Interview Guide in English – Startups ... 92
Appendix 2: Interview guide in English - Ignite ... 94
Appendix 3: Intervjuguide på svenska – Startups ... 96
Appendix 4: Intervjuguide på svenska - Ignite ... 99
List of Figures Figure 1. Core process of open innovation in R&D. (Inauen & Schenker-Wicki, 2011, p. 502). ... 9
Figure 2. Inputs-processes-outputs model of strategic entrepreneurship (Hitt et al., 2011, p. 60). ... 12
Figure 3. The four dimensions of a core capability (Leonard-Barton, 1992, p. 114). .... 13
Figure 4. General approaches of dealing with competing demands. (Gaim & Wåhlin, 2016, p. 36). ... 16
Figure 5. Different types of partnerships. (Minshall et al., 2010, p. 54). ... 21
Figure 6. Literature review summary. ... 25
Figure 7. The Ignite Process. ... 26
Figure 8. Ignite’s needs analysis model... 27
Figure 9. Summary of methodological standpoints. ... 34
Figure 10. Coupled process used by startups active in Ignite. ... 72
Figure 11. Proposed framework. ... 77
List of Tables
Table 1. Characteristics of exploitation and exploration capabilities (O'Reilly &
Tushman, 2004, p. 79). ... 14
Table 2. List of search words... 31
Table 3. Sources of data. ... 35
Table 4. Overview of respondents. ... 37
Table 5. Phases of thematic analysis. (Braun & Clarke, 2006, p. 87) ... 42
Table 6. Summary of the four ethical challenges (Bell & Bryman, 2007, p. 67) ... 45
Table 7. Overview of the interviewed startups. ... 46
Table 8. How startups are currently working with exploration and exploitation. ... 53
Table 9. Partnerships through Ignite... 62
List of Abbreviations
AI - Artificial Intelligence
API - Application Program Interface CEO - Chief Executive Officer CSO - Chief Science Officer COO - Chief Operating Officer
COVID-19 - The official name for the disease caused by SARS-CoV-2 IoT - Internet of Things
MNC - Multinational Corporation m.L - Machine Learning
R&D - Research & Development
SME - Small and Medium Sized Enterprises
1 Introduction
Chapter one is an introduction to this master’s thesis. It presents the background, problematization, research gap, purpose, research question, delimitations, and expected outcomes of this master’s thesis. The research question is based on the research gap that was identified through a literature review on relevant scientific articles. The literature review is the second chapter of this thesis.
1.1 Background
The world is changing. With diminishing life cycles, more complex products and services, as well as a shift in customers behavior in market demand, companies needs to explore new capabilities and managerial practices in order to effectively preserve competitive advantage by developing new innovations (Dess & Picken, 2000, p. 18;
Magadley & Birdi, 2009, p. 315; Rauter et al., 2018, p. 226).
An invention is the process of transforming an intellectual thought into a tangible new product or process (Trott, 2017, p. 15), while an innovation is when an invention is implemented and taken to market (Chesbrough, 2003, p. 1). Tidd et al. (2005, p. 66) defined an innovation as the “process of turning opportunities into new ideas and of putting these into widely used practice”, while Schreyögg & Kliesch‐Eberl defined it as
“the creation of any sort of novelty which, focusing on capabilities, means the creation of novel problem-solving patterns”. Crossan and Apaydin (2010, p. 1155) defined innovation in a more complex way as “production or adoption, assimilation, and exploitation of a value-added novelty in economic and social spheres; renewal and enlargement of products, services, and markets; development of new methods of production; and establishment of new management systems. It is both a process and an outcome. It is both a process and an outcome”. The innovation process has shifted from a closed process to a more open process, where companies involve a set of actors allocated up and down the supply chain (Trott, 2017, p. 382). Chesbrough introduced the concept of open innovation in 2003, by stating that valuable ideas may come from either inside or outside of the company and can also be commercialized from the same perspective (Chesbrough, 2003, p. 43).
In the last decades, lots of influential innovations have been created by firms that operate in a different way in comparison to large corporations, namely startups (Mocker et al., 2015, p. 5; Spender et al., 2017, p. 4; Ojaghi et al., 2019, p. 1063). The phrase startup is often recognized as a team of youngsters performing in the high-technology industry in which they disrupt the current market (Mercandetti et al., 2017, p. 24). However, according to Ries (2011, p. 27-28) the industry sector and the size of the company should not belong to the definition of startups, but rather having the focus on innovation as the main objective. A startup brings new ideas to the market and transforms them into economically sustainable enterprises in which forming relationships with partners from outside the firm is key for its success (Spender et al., 2017, p. 4). Thus, startups are continuously seeking new ways to redefine, turning unknowns into knowns (Mercandetti et al., 2017, p. 25). Nevertheless, even though startups are considered to be the heart of innovation (Mocker et al., 2015, p. 5), challenges related to the commercialization stage is said to be visible (Usman & Vanhaverbeke, 2017, p. 173). These challenges are focused
around its shortage in resources, in particular within operational expertise, market access, distribution infrastructure, technical know-how, and funds supporting their development processes (Michelino et al., 2017, p. 112-115). Forming a relationship with external actors is therefore of high importance for startups in order to successfully implement their product or service to the market (Spender et al., 2017, p. 4). With the intention of forming a relationship with an external partner, startups need to carefully evaluate which partner to collaborate with. Freytag’s (2019b) study highlighted that a collaboration can only be successful over the long term if both firms' interests are considered. The author further explained that it is important that both parties have a clear understanding of what the other hopes to achieve from a collaboration.
One way of forming a collaboration with external partners is via an innovation hub. It serves as a mechanism for companies to interact on a deeper level with the external environment (Giaccone & Longo, 2016, p. 100). Giaccone & Longo (2016, p. 102) defined an innovation hub as being a center of research and development of ideas that are seen as being innovative and acts as a catalyst to transform these ideas into commercializable products or services. It supports businesses to exchange knowledge with other members within the innovation hub with one common goal, to nurture innovation in an early stage (Longo et al., 2013, p. 145). An innovation hub acts as a base for open collaboration, putting emphasis on the similarities towards the concept of open innovation (Longo et al., 2013, p. 145). Looking at open innovation, retrieving knowledge from the other party is essential for a successful collaboration. Managers are relying on two strategic orientations in organizational learning when they are involved in innovation associated activities. These strategic orientations are exploration and exploitation (Wang
& Dass, 2017, p. 128).
To gain knowledge, investments on either exploration or exploitation capabilities are essential (Camison et al., 2018, p. 1559). Exploration capabilities assists the process of radical innovations (Camison et al., 2018, p. 1562), while exploitation capabilities are focused on existing knowledge within the firm associated with refinement, productivity (Lannon & Walsh, 2020, p. 10), and the implementation of incremental innovations (Greve, 2007, p. 947). Radical innovations are associated with new technologies, while incremental innovations are correlated with improvements on existing technologies (Greve, 2007, p. 947). To remain competitive, it is in the heart of every organization to find a balance between these two capabilities (Auh & Menguc, 2005, p. 1653; Greve, 2007, p. 946; Ireland & Webb, 2007, p. 58).
Strategic entrepreneurship refers to a wide range of important entrepreneurial innovations or activities that are adopted in a firm that is seeking to get a competitive advantage, which can lead to both radical and incremental innovations (Mazzei, 2018, p. 657). Schuh et al. (2017, p. 1) stated that firms need to implement radical and incremental innovations successfully because both of these innovations are equally important. Firms should therefore not spend more time and resources on one of exploration or exploitation activity at the expense of the other. Firms should instead try to find a balance between these capabilities. The reason why the balance is important is that without it, a firm risks losing their current position in the marketplace due to the fact that exploration deals with a firm's long term success whereas exploitation is needed for the success in the short run (Auh &
Menguc, 2005, p. 1653). Seen in the literature, startups are said to be more in-line with having their focus on exploration while big corporations tend to focus on exploitation (Freytag, 2019a, p. 26; Ojaghi et al., 2019, p. 1065). Having a favorable capability such
as seen above, may be related to the concept of daedalian risk in which one alternative is favorable over the other, which can be costly and even lead to negative outcomes for the companies (Gaim, 2018, p. 498).
1.2 Problem formulation
Attention has been drawn to the importance of collaborations between startups and corporations (Diestre & Rajagopalan, 2012, p. 1115; Freytag, 2019a, p. 32; Mocker et al., 2015, p. 7; Prashantham & Kumar, 2019, p. 408; Weiblen & Chesbrough, 2015, p. 67).
Weiblen & Chesbrough (2015, p. 66) argues that both parties are scarce with the capabilities the other one possesses. For startups, the capabilities imply organizational agility, effective idea generation, risk taking abilities, and a passion for rapid growth, whereas big corporations’ capabilities are focused around efficiency such as having resources and developed routines. In other words, even though startups often possess the most promising ideas, the way how to commercialize their inventions is interrupted by limited resources (Mercandetti et al., 2017, p. 25; Lee et al., 2010, p. 299), leading to a need for collaborations with bigger corporations. Thus, the importance of forming relationships with external actors is crucial (Spender et al., 2017, p. 4). However, one could argue that existing literature lack sufficient explanation of how to successfully implement these collaborations from a startup perspective. Even though startups are seen as creators of innovations, Rogers (2004, p. 143) argues that one cannot simply measure innovations by quantity but should rather focus on the quality of innovations. The author further states that in spite of startups having more innovations per se, the average value of these innovations may be lower than innovations created by larger corporations.
Sinha (2015, p. 313) mentions that it is becoming more and more crucial for startups to find a balance between their exploration and exploitation activities because of the increasingly dynamic environment startups are operating in. Sinha (2015, p. 317) further argued that the phenomenon of ambidexterity is as important for startups as it is for big corporations. Ambidexterity is explained by Wooldridge & Cowden (2020, p. 10) as realizing that having their internal strategy is not enough, but rather that it is a balance between having its own strategy and find ways to cooperate and understand that strategies outside of the firm are equally, if not more important for a company’s overall strategy.
Startups are more in-line with exploration activities than they are with exploitation activities (Freytag, 2019a, p. 26; Ojaghi et al., 2019, p. 1065). Big corporations on the other hand usually possess more exploitation capabilities rather than exploration capabilities (Freytag, 2019a, p. 26). Gaim & Wåhlin (2016, p. 35) mentions that decisions are made by favoring one alternative over the other. This may be explained by a decision maker’s emotional attitudes, in which alternatives are based on the likes or dislikes from previous experience (Wooldridge & Cowden, 2020, p. 8-9). Taking this perspective, we assume that a managers’ emotional attitude plays a role in whether or not they find collaboration through an innovation hub as something positive or negative. For this thesis, we assume that as startups mostly possess exploration capabilities, their decisions are made in favor of these capabilities, and vice versa for corporations. Gaim & Wåhlin (2016, p. 35) further argues that decisions are similar to the concept of dilemmas, in which a dilemma occurs when a company needs to choose between two equally important elements, in our case, exploration and exploitation. As stated by Longo et al. (2013, p.
145), an innovation hub acts as a platform to support startups and big corporations with the exchange of knowledge and to foster innovation. Thus, the focus of this thesis will be
on how an innovation hub can help startups to solve the problem with finding a balance between exploration and exploitation activities.
1.3 Research Gap
The importance of having a collaboration between big corporations and startups is something that previous research has addressed (Diestre & Rajagopalan, 2012, p. 1115;
Freytag, 2019a, p. 32; Mocker et al., 2015, p. 7; Prashantham & Kumar, 2019, p. 408;
Weiblen & Chesbrough, 2015, p. 66). Existing research has, however, mostly focused on the consequences from these collaborations from a corporate perspective (Brunswicker
& Chesbrough, 2018, p. 35; Prashantham & Kumar, 2019; Simon et al., 2019, p. 164;
Weiblen & Chesbrough, 2015), leaving a gap in which one addresses the benefits and challenges from a startup perspective. In order to have a successful collaboration, both parts in a collaboration are in need of a clear understanding of how startups and big corporations differ from each other (Freytag, 2019a, p. 26). As mentioned by Simon et al. (2019, p. 167), collaborations between startups and big corporations do not come without risks, the most visible one being the power difference in which decisions are made. By using a startup perspective, we will gain knowledge on how these collaborations should be arranged in order for startups to feel that collaborating with corporations is something positive. Visible when entering the website of Ignite, which is this thesis’ selected case, is that their main focus is to increase the pace of innovation and economic growth between corporations and startups. Therefore, we can assume that the corporations that choose to be part of Ignite are willing to have a collaboration with startups. However, the underlying assumptions on how these collaborations should be organized is something that will be understood by having a startup perspective due to the limitation of literature focusing on startups point of view (Brunswicker & Chesbrough, 2018, p. 35; Prashantham & Kumar, 2019; Simon et al., 2019, p. 164; Weiblen &
Chesbrough, 2015).
An abundance of existing literature on open innovation has had an SME perspective (Brunwicker & Vanhaverbeke, 2015, p. 1241; Gassmann et al., 2010, p. 215; Lee et al., 2010; Nieto & Santamaria, 2010; Vrgovic et al., 2012) instead of a startup perspective.
Startups are different from SMEs because startups are always bound by the liability of newness (Usman, & Vanhaverbeke, 2017, p.173). Startups are also small firms, however, they do not have a clear structure and have most of the time a shortage of tangible and intangible resources (Ojaghi et al., 2019, p. 1065; Weiblen & Chesbrough, 2015).
Startups can, however, overcome the liability of smallness by implementing open innovation in their business models (Gassmann et al., 2010, p. 216). This can be done by joining an innovation hub. Although extensive literature addresses the topic of innovation hubs as directly linked to open innovation, the understanding of the hub’s effectiveness in the value co-creation process as well as the policies to coordinate them is relatively unknown (Longo & Giaccone, 2017, p. 882). This leaves a gap in current literature about the importance of understanding innovation hubs on a deeper level.
According to Usman & Vanhaverbeke (2017, p. 184), there is a need to investigate the role of managers in startups when organizing and managing open innovation. Hence, it is of great importance to find the link between startup’s managerial decisions and open innovation processes (Spender et al., 2017, p. 5). Here, we believe that the concept of strategic decision-making will provide a further understanding of the link between startups managerial decisions and their innovation processes. Ceci & Iubatti (2012, p.
575) mentioned that the structure of how to organize and manage open innovation collaborations needs further studies from a startup perspective. Even though Brunswicker
& Chesbrough (2018, p. 44) had a perspective on big corporations, they mentioned that more research is needed on how firms can handle the flow of knowledge received by other participants and how to implement the knowledge within the organization.
Chesbrough (2012, p. 25) highlighted some certain conditions that managers need to be aware of in order to successfully implement an open innovation strategy, one being the importance of workforce mobility. Even though moving people between different projects and organizations is of great importance, we argue that there is a need to investigate other factors that managers need to be aware of for a successful implementation of open innovation. This study is focusing on the reasons for collaboration rather than what happens post-match-up, in which a gap is identified in what the main reasons are to find the right partner to collaborate with.
Further, we believe that another reason for collaborations between startups and big corporations is to find a partner that can help to balance exploration and exploitation activities. Sinha (2015, p. 320) argued that the concept of balancing exploration and exploitation capabilities has been studied by several authors, but the phenomenon of how to balance these capabilities from a startup perspective in the growth stage needs further studies. By using startups that are involved in an innovation hub, we are going to explore if it enables them to balance exploration and exploitation capabilities by being active in an innovation hub. As mentioned above, the effectiveness of an innovation hub as well as the link between startup’s managerial decisions and open innovation processes needs further studies.
As we have identified multiple gaps in current literature, we believe that these can be linked together by investigating how an innovation hub can help a startup to find a collaboration in which they may manage to balance exploration and exploitation activities to get a competitive advantage. Sinha (2015, p. 320) mentions that such a study will be beneficial for startup managers’ in a way that it will help startups to manage the dual challenges of survival and growth ambitions. Even though this study has the perspective of startups, it will help to clarify the differences of startups and corporations and most importantly, define what startups believe is key for a successful collaboration with a bigger firm.
1.4 Research question
Based on the research gap in the previous chapter that was identified through a literature review, the study at hand aims to answer the following research question in line with our research purpose:
• How can an innovation hub help startups find a balance between exploration and exploitation capabilities?
1.5 Research Purposes
Finding a balance between exploration and exploitation capabilities is an issue for startups with limited resources. Therefore, the purpose of this study is to distinguish how an innovation hub enables startups with balancing exploration and exploitation capabilities.
For this study, the innovation hub of our choosing is Ignite. Ignite is an innovation hub
that acts as a platform for startups to engage in collaborations with big corporations. Their mission is to increase the pace of innovation and economic growth between big corporations and startups. By having Ignite as our selected case, it will help us to determine the reason(s) for collaboration, and how startups may use Ignite to find collaborations, and how these collaborations enable startups with the balance of exploration and exploitation capabilities.
To respond to our previously stated research question in an appropriate manner, a qualitative research design will be conducted through semi-structured interviews with startup managers. By using managers from startups as our interviewees, we seek to shed light upon the phenomena of balancing exploration and exploitation capabilities while engaging in an innovation hub. This will also bring awareness of how startups organize and manage collaborations with big corporations through an innovation hub. The findings will create knowledge that is useful for startup managers, specifically what there is to gain from these collaborations with bigger firms. Semi-structured interviews will also be conducted with two team members from Ignite as they are the starting point for establishing tighter bonds between startups and big corporations. The acquired empirical material from both startup managers and members of Ignite will enable us to develop an extended framework from the existing literature. The existing frameworks are presented in our conducted literature review. At first, we will portray the theories around open innovation, both from a startup perspective and corporate perspective, in order to understand collaborations that an innovation hub is trying to establish.
Secondly, strategic entrepreneurship theory will support us to understand how startups explore opportunities with the aim to develop novel innovations, which according to Hitt et al. (2011, p. 60-63) is a way to gain a competitive advantage. Thirdly, organizational capabilities, including the concept of exploration and exploitation. These capabilities are said to be important concepts within the theory of strategic entrepreneurship in order for a firm to create and sustain a competitive advantage. Then, strategic decision-making literature is addressed as the base to grasp the concept of ambidexterity, which stresses the importance of balancing exploration and exploitation capabilities. Fifth, literature about innovation hubs is included in order to create a deeper understanding of innovation hubs and how they empower collaborations between startups and big corporations. This is followed by literature about partnerships in which the framework from Minshall et al.
(2010, p. 54) will act as a base to understand how different partnerships are constructed.
As these partnerships demands both parties to share knowledge, knowledge sharing is presented to understand how knowledge is transferred in a collaboration and what types of risk and challenges that may exist when collaborating with big corporations.
1.6 Delimitations
The focus of this thesis, especially in the theoretical point of departure is on startups and not on SMEs. The difference between startups and SMEs is that startups main objective should always be on innovation and is often bound by the liability of newness (Usman,
& Vanhaverbeke, 2017, p.173), while a SME can be an old firm that does not have their main objective on innovation processes. As most of existing literature address the topic of open innovation from a corporate perspective, this thesis will emphasize the concept from a startup perspective meaning that less research is provided about the topic at hand.
In order to understand the concept of open innovation and the importance of innovation
hubs, the literature review includes literature from a corporate perspective as well as the limited amount of literature from a startup perspective.
2 Literature review
Our literature review will assess the existing literature on closed and open innovation from both a startup and a big corporation perspective followed by the concept of strategic entrepreneurship. Further, organizational capabilities are explained and how startups can build and balance their organizational capabilities. Afterwards, strategic decision- making is presented as how it is connected to open innovation and the importance of strategic decision-making when deciding to enter an innovation hub. Subsequently, the explanation of the innovation hub concept is explained together with literature about organizational sponsors. Lastly, different types of partnerships are presented to get an overview of which partnership is most integrated in the partnering firm. In this section, an overview of different challenges when collaborating with a big corporation is also explained.
2.1 Closed innovation
Innovation is seen as one of the most important factors for economic and social expansion (Rogers, 2004, p. 141) and it allows firms to creatively compete and improve in an ever changing and competitive environment (Mazzei, 2018, p. 659). In order to understand the concept of open innovation, it is vital to explain the concept of closed innovation, which is seen as the traditional innovation process. When firms have a closed innovation process, innovations are invented internally by their research and development (R&D) departments and later commercialized through the firm’s own channels (Inauen &
Schenker-Wicki, 2011, p. 496-497). It is from the science and technology base of the firm that research projects are launched, and where the projects later progress through the development process where just a few of projects are being selected for further work (Chesbrough, 2012, p. 22). Chesbrough (2003, p. 1) explained closed innovation as a vertical integrated model, where Inauen & Schenker-Wicki (2011, p. 496-497) stated that no external knowledge or technology integration exists. The whole innovation process is financed internally, all the way from the idea generation process to the commercialization stage (Chesbrough, 2003, p. 1).
Closed innovation began to reach its limit approximately a decade ago (Inauen &
Schenker-Wicki, 2011, p. 496-497). This because of the increased mobility of knowledge and highly qualified workers, rapid change in consumption behavior, and production functions. These are some of the factors why R&D within firms were experiencing a shift toward participating open innovation instead of closed innovation (Inauen & Schenker- Wicki, 2011, p. 496-497). Even though numerous firms have started to use open innovation approaches, there are still some firms and projects that require closed innovation methods (Boscherini et al., 2012, p. 229). A closed innovation approach is required in some innovation projects because the outcome is vital to these firms’
competitive advantage (Christensen et al., 2005, p. 1535). This can occur where there are no collaboration partners who hold capabilities required for the exploration and exploitation of the technology or where there is a high risk of knowledge spillover from the invention (Almirall & Casadesus-Masanell, 2010, p. 28). For instance, when
complexity of the new invention is high, a closed innovation process can provide a better development opportunity (Almirall & Casadesus-Masanell, 2010, p. 33).
2.2 Open innovation
Chesbrough introduced open innovation in 2003, where he stated that the process of innovation has shifted from a closed system, internal to the firm, to a more diffused open system where a range of actors are allocated up and down the supply chain (Chesbrough, 2003, p. 93). Enkel et al. (2009, p. 312) implied that organizations should not only put emphasis on open innovation activities, they should invest simultaneously in open and closed activities. Thus, to invent products and services at a faster pace than their competitors. Enkel et al. (2009, p. 312) also pointed out that organizations should at the same time protect their intellectual property rights and encourage the development of core competencies. West et al. (2014, p. 805) explained open innovation by stating that it is more of an open system rather than a traditional vertically integrated model. Chesbrough (2012, p. 20) defined open innovation as "the use of purposive inflows and outflows of knowledge to accelerate internal innovation and expand the markets for external use of innovation". In other words, the process of open innovation enables collaborations between a range of different actors, such as startups, big corporations, universities and organizational sponsors (Usama & Vanhaverbeke, 2017).
Moreover, an increased amount of companies is technology concentrated and characterized by globalization (Gassmann, 2006, p. 224). Therefore, it seems suitable for companies to reinvent their business model towards processes that require open innovation systems. The use of open innovation enables knowledge to come from internal and external sources, as not all smart people are inside a firm (Chesbrough, 2012, p. 23).
This also applies for projects, in which they may be launched either from internally or externally (Chesbrough, 2012, p. 23). Thus, there are three core processes of open innovation, inside-out, outside-in, and coupled processes, which can be seen in figure 1.
Chesbrough (2012, p. 21) explained that firms practicing inside-out open innovation allows unused and underexploited ideas to be used by other firms. Outside-in open innovation on the other hand implies organizations to open up their innovation processes to bring in ideas, external inputs and contributions (Chesbrough, 2012, p. 21). The third core process, coupled process, is when both the inside-out and the outside-in process is combined (Inauen & Schenker-Wicki, 2011, p. 502). Firms that are practicing the coupled process, work together with supplementary partners or are somehow involved in other firms, which can result in joint ventures and alliances (Inauen & Schenker-Wicki, 2011, p. 502)
Rauter et al. (2018, p. 226) addresses the need for collaboration between firms due to the everchanging complexity of services and products. If not dealt with carefully, the authors argue that companies will find it hard to remain competitive on the market. Chesbrough
& Brunswicker (2014, p. 24) argued that open innovation is not an easy process to implement because of the organizational and cultural barriers that can be difficult to overcome. This implies, to move from closed innovation to open innovation, firms have to make organizational changes on several levels of the firm to succeed with the integration of open innovation (Chesbrough & Brunswicker, 2014, p. 24).
Figure 1. Core process of open innovation in R&D. (Inauen & Schenker-Wicki, 2011, p.
502).
2.2.1 Open innovation from a startup perspective
In order to understand open innovation from a startup perspective it is important to understand how a startup is defined. Even though we mentioned in the introduction that the industry sector and the size of the company should not belong to the definition of startups, they are, however, often defined as being small firms with few personnel and financial resources (Michelino et al., 2017, p. 115). The liability of smallness, can however, be overcomed by implementing open innovation in the startup’s business models (Gassmann et al., 2010, p. 216). Michelino et al. (2017, p.115) further argued that startups often lack the needed resources to commercialize a new product, service, or technology. A startups main focus should, however, be on innovation as the main objective (Ries, 2011, p. 27-28). As mentioned by Ojaghi et al. (2019, p. 1064) “Startups are newborn and naturally suffer from a variety of weaknesses, especially the shortage of resources. They need external support and appropriate environmental conditions for their survival and growth”, which is addressed by numerous authors (Michelino et al., 2017, p. 115; Spender et al., 2017, p. 4; Usman, & Vanhaverbeke, 2017, p. 172). Further, Brunwicker & Vanhaverbeke (2015, p. 1241) mentioned that open innovation is often studied from an MNC perspective, even though startups are seen as the engine to innovation (Michelino et al., 2017, p. 112; Mocker et al., 2015, p. 5). As mentioned above, startups rely on external partners due to lack of certain resources and it has been explained that there are, however, fields to be further studied in the open innovation literature, especially in the startup context.
Limited research has been made on the partnership of startups and larger corporations, however, Simon et al. (2019, p. 167) grasped upon the topic in which they found some implications for these collaborations. Firstly, the authors imply that these collaborations may endanger the continuance of startups as the corporation has more power. Secondly, finding the appropriate person within big corporations could lead to great misunderstanding of what they want to achieve with the collaboration. Lastly, the negotiation power from startups may not be seen as valuable as it is seen from the corporation perspective.
As previously mentioned, something that is highly stressed when looking at startups is the limitation of resources. Lee et al. (2010, p. 299) mentioned that startups especially lack sufficient resources in the commercialization stage. By involving themselves in a collaboration with a corporation, a startup may overcome these obstacles as resources will be provided by the bigger corporation (Simon et al., 2019, p.167). For instance, startups can get access to customers, production capacity and technologies through a collaboration with big corporations (Freytag, 2019a, p. 30). This allows the startup to focus on creating a competitive product or service instead of putting emphasis on the commercialization aspects, which is provided by the collaborating firm. Startups hold certain specific knowledge about their invention, however, due to the limitation in resources they often find themselves unable to advance these products or services into an innovation (Simon et al., 2019, p.167).
A clear example of how a startup can support innovation and growth was demonstrated by Freytag (2019a, p. 27-32). The example is the development of Siemens’ extremely successful Digital Factory business, which is a global leader in digitalization. The Digital Factory began in 2006 when Siemens acquired UGS, which was a big corporation with a revenue over a billion US dollar. This acquisition had many benefits for the automotive manufacturer business because UGS had developed a software platform, which controlled digital management of a product’s life cycle. Further, in 2014 the Digital Factory made a collaborating agreement with a startup called Polaroin. Polaroin had invented a software platform that supported workflows for the development of hardware and software products. The collaborating agreement was done through a minority venture capital investment in Polaroin. The Digital Factory hypothesized that the solution Polaroin had invented could be attractive for Siemens customers as an extension to Digital Factory’s own software platform. They also thought from the beginning that Polarion’s software might prove to be valuable for further innovative growth in Digital Factory’s existing business. Therefore, in 2016 the Digital Factory acquired all of Polaroin’s business.
Freytag (2019a, p. 29) explained that Polaroin is now a major part of Siemens digitalization strategy. This explains the importance of collaborations from both the startup perspective as well as from a big corporation perspective.
2.2.2 Open innovation from a big corporation perspective
As have been mentioned earlier, open innovation has mostly been studied through the lens of corporations (Brunswicker & Chesbrough, 2018, p. 35; Prashantham & Kumar, 2019; Simon et al., 2019, p. 164; Weiblen & Chesbrough, 2015). Open innovation is a common concept within big corporations. Chesbrough & Brunswicker (2014, p. 23) found out through their survey that 78 percent of big corporations reported that they are practicing open innovation and not a single firm answered that they were about to relinquish from open innovation. Big corporations benefit from practicing open innovation with startups because startups have resources that corporations lack, such as a willingness to innovate and being flexible (Weiblen & Chesbrough, 2015, p. 66). At the same time big corporations possess resources that startups have an absence of. These resources are access to valuable resources and assets, brand reputation, fixed organizational routines, and scale (Weiblen & Chesbrough, 2015, p. 66). Big corporations are also more likely to acquire freely revealed information than they are to give information for free to other organizations (Chesbrough & Brunswicker, 2014, p. 16).
Freytag (2019a, p. 30) mentioned that big corporations are strategically interested in
collaborations with startups because they can become familiar with markets, technologies, business models, and to have the possibility to test hypotheses for growth strategies.
Big corporations are practicing the outside-in open innovation more than the inside-out open innovation (Brunswicker & Chesbrough, 2018, p. 35). Brunswicker & Chesbrough (2018, p. 35) further argued this is because big corporations rather obtain ingoing knowledge flows because they are afraid of intellectual property leakage for outgoing knowledge. The results from Chesbrough & Brunswicker (2014, p. 16) survey also showed that informal networking, university grants, and customer co-creation were the three most important outside-in practices for big corporations. The most important inside- out practices for big corporations were selling market-ready products, joint ventures and standardization. In regard to open innovation, authors argue that there are two types of organizational capabilities, namely exploration and exploitation capabilities (Camison et al., 2018, p. 1559; Greve, 2007, p. 945), which will be discussed further in section 2.4.
2.3 Strategic entrepreneurship
Strategic entrepreneurship is a theory that explains how firms can create and sustain a competitive advantage by exploring and exploiting new opportunities in the firm’s environment (Hitt et al., 2011, p. 57). Strategic entrepreneurship involves advantage- seeking and opportunity-seeking behavior that contributes to value for organizations, individuals and/or societies (Hitt et al., 2011, p. 57). Hitt et al. (2001, p. 481) defined strategic entrepreneurship as “the integration of entrepreneurial (i.e., opportunity seeking behaviour) and strategic (i.e., advantage seeking) perspectives in developing and taking actions designed to create wealth”. It also concerns the actions a company undertakes in exploiting new innovations, which comes from the company’s commitment to continuously explore opportunities, such as new products, new organizational forms, new processes, to name a few (Ireland & Webb, 2007, p. 52). Further, strategic entrepreneurship also implies taking entrepreneurial actions with a strategic management orientation, which examines the firm’s effort to create sustainable competitive advantages as a factor of the firm’s ability to generate wealth (Ireland et al., 2003, p. 964). Effective strategic entrepreneurship supports a firm to position themselves to be capable of responding to the types of environmental changes a firm can face in today's markets.
Additionally, it helps the firm to create comparatively sustainable competitive advantages (Ireland & Webb, 2007, p. 50).
Luke et al. (2011, p. 319) stated that when firms are practicing strategic entrepreneurship, they bring something new to the market, relying on a combination of opportunity identification, innovation, and growth. A proposed framework with four key aspects was additionally presented by Luke et al. (2011, p. 319). The framework consists of entrepreneurial activity as the first aspect, which should be applied in the strategic context of a business, which is seen as the second aspect. The first and second aspect should then create expertise within the firm's core resources and skills. Lastly, effective strategic entrepreneurship should help to achieve an advantage from applying and transferring the acquired knowledge from the developed skills and resources to new products, services, or markets. Both the central entrepreneurial elements and the four strategic aspects can together be seen as the base for strategic entrepreneurship (Luke et al, 2011, p. 320). Luke et al. (2011, p. 320) further stated that strategic entrepreneurship can range from incremental to radical innovations, with deliberate to new approaches.
Furthermore, Hitt et al. (2011, p. 60) presented a multilevel input-process-output model, which is created to improve the understanding of the strategic entrepreneurship constructs. The strategic entrepreneurship model presented in figure 2 has three dimensions; resource or factor inputs, resource orchestration processes, and outputs.
Figure 2. Inputs-processes-outputs model of strategic entrepreneurship (Hitt et al., 2011, p. 60).
Moreover, environmental factors affect the firm’s potential to exploit opportunities that can lead to competitive advantages (Hitt et al., 2011, p. 60). External environmental factors may also affect the performance and the long-term survival of the firm. Hitt et al.
(2011, p. 64) argues that competitive advantage is a result for a firm who controls valuable and rare resources. Resource orchestration is defined by Hitt et al. (2011, p. 64) as “the actions leaders take to facilitate effort to effectively manage the firm’s resources”.
Structuring, building, leveraging, value creation and appropriation are the four major resource orchestration actions within strategic entrepreneurship. Acquiring resources is the most important subprocess of structuring for a startup because young firms and startups often operate at a resource disadvantage. It is also important for firms to develop resources internally. Existing research indicates that it is more important to reduce weaknesses than it is to increase the firm’s strengths to achieve a positive performance (Hitt et al., 2011, p. 65). Accumulating resources, such as knowledge, reputation, and skills allow firms to create rare resources portfolios (Hitt et al., 2011, p. 65).
The best possible outcome for a firm that is practicing strategic entrepreneurship is to achieve competitive success or to form a new venture firm. In order to achieve some of these major outcomes, firms are likely to first achieve several critical provisional outcomes, namely developing innovations with value-creating potential or creating new technologies (Hitt et al., 2011, p. 66). Thus, managing resources is an activity that is critical to achieve competitive advantage.
2.4 Organizational capabilities
How organizations collect new capabilities is something that has been considered as a central problem on organizational evolution (Greve, 2007, p. 945). The concept of organizational capabilities has been conceptualized in many ways. Leonard-Barton
(1992, p. 114) outlined a knowledge-based view with four different dimensions that can differentiate companies strategically. The dimensions of a core capability are visualized in figure 3. The first dimension, employee knowledge and skills are mostly associated with the organization’s core capabilities. This is also the capability that is most relevant to new product development. The second dimension, knowledge embedded in technical systems, is a result from quality training. The third, being managerial systems, are guiding control processes and knowledge creation. The last dimension, values and norms, are seen as being connected with the mentioned processes and the incorporated knowledge above (Leonard-Barton, 1992, p. 113).
Figure 3. The four dimensions of a core capability (Leonard-Barton, 1992, p. 114).
2.4.1 Exploration and exploitation capabilities
Organizational capabilities can also be outlined with the concept of exploration and exploitation. Both exploration and exploitation are crucial elements for innovation (Rosing et al., 2011, p. 958). Exploration is defined as being the more uncertain of the two, in which search for new knowledge, creating products or services with unknown demand, and the usage of unknown technology, is present (Greve, 2007, p. 945).
Exploration capabilities can also be translated to innovation capabilities and Francis &
Bessant (2005, p. 172) defined innovation capability as “the underlying capacity to gain advantage by implementing more and better ideas than rivals”. Whereas, Assink (2006, p. 219) defines innovation capability as “the internal driving energy to generate and explore radical, new ideas and concepts, to experiment with solutions for potential opportunity patterns detected in the market’s white space and to develop them into marketable and effective innovations”. A study by Wang & Dass (2017, p. 127) found out that managers who are focusing more on exploration activities are more likely to strengthen their innovation capabilities.
Furthermore, exploration activities are also seen to challenge existing ideas by being entrepreneurial and innovative in their ways of working (Auh & Menguc, 2005, p. 1653).
Thus, innovative managers are prepared to take risks and have a higher chance to explore new opportunities in the market. The willingness to take these risks is of higher importance if the company operates in a new market where an established market structure is missing and where a company has to meet new needs instead of fulfilling those needs met by traditional marketing offerings (Wang & Dass, 2017, p. 132). Be that as it may, March (1991, p. 85) stated that the outcome of exploration activities is said to be complicated to evaluate in the short run due to the fact that the return on these activities are hard to grasp in the nearest future but rather in the long term. Thus, the return of using these activities is said to be uncertain, distant, and often negative (Auh & Menguc, 2005, p. 1653).
Further, looking at exploitation capabilities, one could argue that it is the complete opposite to exploration in which these activities have more assured benefits. This may be due to the fact that exploitation capabilities are focused around existing technologies, knowledge and products that the company already possess, rather than on new, unknown resources (Auh & Menguc, 2005, p. 1653; Camison et al., 2018, p. 1559; Greve, 2007, p.
945-946). By having an orientation towards exploitation, managers are often allowed to discover opportunities by using the resources available inside the firm and therefore, its focus is more on the innovation implementation process (Wang & Dass, 2017, p. 128).
Auh & Menguc (2005, p. 1654) explained that through exploitation capabilities, a firm may improve its efficiency. The central aspect of exploitation is the possibility of a firm to secure its position in the market by looking at the competitors and its own usage of existing resources. This means that the firm is committing sufficient resources in relation to its competitors in order to assure their own competitiveness (Auh & Menguc, 2005, p.
1653). Hence, emphasizing on operational efficiency to make use of the firm’s resources in a better way instead of trying to develop new resources. The authors also stated that the outcome from exploitation activities are usually immediate, predictable and positive.
Table 1. Characteristics of exploitation and exploration capabilities (O'Reilly &
Tushman, 2004, p. 79).
