Hybrid models, trying to bridge corporate models with open innovation

Disclaimer: This blog entry reflects the thoughts of the author and does not speak on behalf of the Sensorica OVN.  

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On May 14th SENSORICA and the OVN model were presented (by Tibi) at POINT - Atelier de cocréation et d’innovation. We also actively participated in a workshop where attendees were given the chance to understand the value accounting system and to apply it to a fictional case (see embedded document below). Five workshops were running in parallel on different topics around open innovation. We got great feedback and we were pleased to see that other groups picked up the value accounting system concept and integrated it into their own cases, along with other ideas.  

Among the participants, we had representatives of companies and consortia, as well as academics, all eager to learn more about open innovation. The working definition of open innovation was very broad. I (Tibi) presented the more restricted concept of open source innovation. 

One interesting observation

People are trying to bridge open source with the corporate model by creating hybrid models. It seems to me (Tibi) that the proposed hybrid models were lacking a deep understanding of the organic nature of open communities. Almost all of them featured mechanisms of control and value capture that can compromise the sustainability of the open community, which is narrowly instrumentalized to supply innovation to the box (i.e. a classical entity, corporation or other, that has well-defined boundaries such as a fixed number of employees bounded by contractual relations, limited budgets, limited production capacity, etc.). Arduino, a working hybrid model, seems to work well. But not everyone is able to walk that fine balance between extracting value from an open community and nurture this open community. 

In the end, these people are invested in the box and their natural reaction is to preserve it, while they are trying to rip the benefits of open innovation. The natural state of open innovation is open source. This happens within communities or networks, which are open (access to participation), transparent (access to information), decentralized (allocation of resources) and horizontal (access to governance and decision making). All this is fundamentally incompatible with corporate models. 

During this event I realized that you can have 3 main attitudes with respect to open source innovation (open innovation in its pure sense).

1. tabula rasa - Find a new self-sustainable system of production and distribution that fits on top of open source innovation. This assumes that this new mode of innovation dominates all the other ones and therefore, new modes of production will eventually self-organize around it, leading to a new type of economy. I personally bet on commons-based peer production and more precisely on the OVN model.
2. opportunism - Find a way for existing corporations (or other classical structures or boxes) to capture the value through open source innovation. This leads to a dilution of the open source innovation concept to simply open innovation, and to the creation of hybrid models. This attitude assumes that the corporate model is still viable and that it can co opt the new modes of innovation. I personally think this is the wrong attitude. 
3. pragmatism - Realize that open source innovation is dominating other forms of innovation, and that new modes of production will eventually structure around it (might be the OVN model). But in order to establish flows from the classical economy to the new during the transition period, we can create hybrid structures like Arduino, Adafruit and so on. 

The problem of bridging corporate models with open innovation is a false one, and can only be perceived as a problem during the transition. The new natural state of economic production is, in my opinion, Open Value Networks, because they build on open source.

See also my article Open Source Hardware meets the p2p economy

Value cycle and value equation

Creative Commons (BY NC CA) licence granted by the author(s)

Disclaimer: This blog entry reflects the thoughts of the author and does not speak on behalf of the Sensorica community. Further, the work is built on the work of the Sensorica community on value equation. Moreover, the author has many views on the value equation and this blog represents only of the many perspectives. Lastly, the author assumes that the reader is familiar with concepts of Open-value network.

By Yasir Siddiqui

The current capitalistic economic model was designed in the industrial era to reflect the thoughts, culture, technology, knowledge and processes of that era.  In fact, our current economic model has been optimized to reflect the technological (information processing) capacity of industrial era. The era of internet, however, requires a new economic model and new efficiency mechanisms. In order to understand the notion of value equation, it is important to understand the value cycle and the efficiency mechanisms of the current economy.

Discussion on legal structured and governance

Open value network pedagogical slideshow

Click here for the summary of the document

The future of Marketing

Industrialization was concerned with the production of good as the primary source of economic growth and hence the marketing followed Goods dominant-logic (GDL). In other words, in GDL, “goods are embedded with value, produced away from the market or consumer, and sold through the manipulation of marketing-mix [(including advertising)] decisions that will maximize firm profit. Under this logic, the market and the customer are things to act upon: to segment, to target, to penetrate, to manipulate, and to control.” (Lusch et al., 2006) [i]

Currently, we are seeing the trend moving away from economies of scale to economies of scope in which the major focus is on customization and services than optimal production of goods. Whereas, Services is defined as, “the use of human resources for the benefit of another party.” Fundamentally, this exchange of service for service means that “(1) all humans (and human organizations) have to exchange is their ability to serve other human entities, and (2) even when goods are involved, they are just mechanisms for service provision” (Lusch et al., 2006.) This new trend is defined by Service dominant-logic (SDL) that could provide some insights on the future of marketing.

In SDL, the organizations sell services through goods. For example, Lulu-lemons does not just sell clothing, it offers the experience of Yoga. Ikea does not sell furniture but rather offers well-designed functional homes at an affordable price. This mentality encourages organizations to shift from the manufacturing-first (cost-based) approach to a customer-first (value-based) approach. Yet, the future of SDL would goes beyond advertising to creating new business models around services.

Owyang et al. (2013) presents the modes of value creation in this service-based economy, also called the post-industrialization economy, the collaborative economy or the sharing economy. The modes of value creation or value-chain are: Product-as-a-service, Market-as-a-service, and Platform-as-a-service.[ii]

The basic principle behind product-as-a-service (closely related to Servicizing) is that the customers do not necessarily care about the ownership of the product but rather value (functionality, cost, experience, image, etc.) that they receive from it. Hence, rather than selling the products, the organizations need to create relationships with the customers in order to understand their needs and design solutions that meet these need.

For example, Xerox no longer sells printers to organizations but rather printing services. Xerox engages in services contracts whereby Xerox maintains ownership of the printers but it lends (often for free), installs, maintains and upgrades printers for the clients. Moreover, Xerox reuses and recycles the discarded parts back into the next generation of manufacturing to maximize the lifecycle of the equipment. [iii] Besides the direct solution for a problem, the constant relationship and conversation with the customer has the advantage of recognizing and understanding other opportunities that the organization could satisfy in the future. For example, Xerox successfully expanded its offering to its existing clientele to networking and computer services along with printing services since it already had "a foot in the door."

The next element of the value-chain in the collaborative economy value-chain is market-as-a-service in which the organizations reach customers beyond the first point of sale by enabling its customers to share value in their network and with the organization. For example, Airbnb allows customers to share their houses for rents. However, there is a tremendous opportunity for organization engaging in Servicizing to also engage in market-as-a-service model. For example, Patagonia, an outdoor clothing and gear company, encourages its customers to buy and sell used clothing produced by Patagonia directly from other customers. From a value perspective, the move by Patagonia creates a longer-term relationship with the customers beyond the first point-of-sale and the lifecycle of the product. In fact, by enabling its customers to buy and sell used Patagonia products, the firm increases its brand-value and outreach to new potential customers. [iv] From financial perspective, the cost of cannibalization incurred due to loss of potential sales could be offset by the reduction in the cost of advertising.

The last piece in the collaborative economy value-chain is product-as-a-service in which the customers become a part of the organization. Crowdsourcing, Crowdfundng and crowd-innovation are examples where customers create value (ideas, content, services, finance, etc) with the organization. For example, Quirky engages with crowd to invent new products. The idea is generated and rated by the crowd, whereas, Quirky engineers, manufactures and sells the products while constantly engagement with the crowd. Moreover, Quirky also shares a small portion of the revenue to the participants to incentivize the crowd. In another example, Nokia allows their customers to 3D print their own cases and hence the company shares the manufacturing responsibility with its customers. Arduino co-innovates electronics with the crowd by allowing the innovation to be open-sourced, however, the manufacturing and distribution is done by the private partners of Arduino such as Sparkfun.

SDL is creating new value chains in the business and integrating all three aspects of these value chain would create a strong and lasting brand-value or reputation (ted talk), which is postulated to be the most prominent source of advantage in the post-industrial collaborative economy. While organizations are starting to adopt this new value chain, so far, no one has prominently integrated the three links of the value chain of the collaborative economy. This lack of integration could be primarily attributed to the change in mentality towards SDL that requires fundamental changes to the processes behind value creation.

First, organizations would need to focus on intangibles (services, experience, image) offer through the tangibles (specific product). Second, the process efficiencies need to be focused on the delivery of the services rather than manufacturing. Third, long-term customer relationships in order to truly understand the customer needs become more important than advertising. Fourth, human resources become more than tools to create products or goods to providing services and hence, human capital becomes valuable in itself and is rewarded as per the value provided (rather than human "resources" in which it is treated as fixed costs i.e. salaries). Fifth, customer-first mentality requires thinking in terms of value proposition - end-to-end experience of the customer with an enterprise as well as cradle to grave view of all the resources utilized in the product. Sixth, rather than maximizing profits through higher number of product sales, the financial transactions become signals on the value that the organization provides to its customers and the market in general. Finally, sharing and enabling flow of information (openness and transparency) becomes a source of competitive advantage instead of the protection of information.

It should be noted, however, that just like industrialization did not remove the need for agriculture, post-industrialization would also not remove the need for industrialization. In essence, the GDL would still make sense for basic components (ex: raw materials). Organizations involved in this sector would likely continue to engage in economies of scale and GDL over economies of scope and SDL. Nevertheless, SDL adds a new dimension of value on top of industrialization within the post-industrialization economy.

By Yasir Siddiqui

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[i] Lusch, Robert F., Stephen L. Vargo, and Alan J. Malter. "Marketing as service-exchange:: Taking a leadership role in global marketing management." Organizational Dynamics 35.3 (2006): 264-278.
[ii] Owyand, J, Tran C., and Silva C. "The collaborative economy value chain", Altimeter Research Group, June 4th, 2013 <http://www.web-strategist.com/blog/research/>
[iii] Rotherberd, S. "Sustainability through servicizing." MIT Sloan Management Review 48.2 (2012).
[iv] Reinhardt, F., Ramon C., and HyunJin K., "Pantagonia." Harvard Business School Strategy Unit Case 711-020 (2010).