Innovation models

In organizational science there are two prevalent models of innovation:

(1) Private investment model
(2) Collective action model

Open source contains elements of both models, and represents private-collective model

The private investment model
In the private investment model an innovator earns from private goods thanks to intellectual property protection. Intellectual property laws are simply the innovators’ rights to their work. They are an incentive to create new knowledge for the innovators. However, intellectual property protection diminishes knowledge dissemination.

The collective action model
The collective action model works under conditions of market failure, where innovators collaborate in order to produce a public good.

Provision of public goods implies that if any user consumes it, it cannot be feasibly withheld from other users. This infers two main problems:

(1) Free riding problem
(2) Incentive problem

General solution to those problems is to provide monetary and reputation-based rewards to innovators.

Private-collective model
Private-collective model comprises of both models where incentives for private investment and collective action coexist.

First of all, software users rather than software manufacturers are the typical innovators; a fundamental incentive is using the software. Secondly, innovators freely reveal the proprietary code they developed. This implies (1) an increase of innovator benefits (e.g. sales of complementary goods) and (2) private losses will typically be quite low, rivalry with potential adopters is low – but the reward may be significant (e.g. reputation, reciprocity, building a community)

In private investment model it is assumed that free revealing of code leads to a loss of private profits. Conversely, in OS projects free revealing can result in net gains for the company. For example, free revealing can increase innovation diffusion and so increase an innovator’s profits through positive network effect.

Collective action model assumes a free rider can obtain equal benefits to those a contributor can obtain. Conversely, in OS projects contributors gain private benefits which are stronger than those available to free riders, e.g. learning and enjoyment, sense of ownership and control over the work, they can choose the project, the task and the technical approach to suit their own interest, and last but not least participating in a community. These rewards reduce the free riding problem.

It is worth noting, that free riders can be good for the company. There are two reasons for that (1) their adoption of the software increase its market share and help to set it as a standard in a marketplace, (2) some users do not write code – but contribute by reporting bugs.

Source: Eric von Hippel and Georg von Krogh (2003) "Open Source Software and the 'Private-Collective' Innovation Model: Issues for Organization Science" Organization Science 14, 209-223.

Who’s affraid of a big bad wolf? Introduction to Internet competition

Radical innovations create economic growth in the long term while some of the well established firms decline. In Internet world no leadership position is secure or sustainable.

Schumpeter & the Austrian school described the innovation as a process of creative destruction. Innovation is a dynamic market process by which firms engage in a race to get ahead of one another. Creative destruction imply that:

• innovative actions undermine the competitive advantage of established competitors 
• firms commit resources to develop new products, new technologies and distribution channels 
• the success of these innovations provokes competitive responses from existing firms and new entrants 

Competitive Actions

Are the primary mechanism that the firms deploy to establish and protect their advantage, as well as erode the advantage of competitors

Competitive action can be defined as all action that are taken in the pursuit of discovered profit opportunity

As a rule, a leader that carry out more actions will exploit more opportunities and, hence, close the potential for challengers. Firms undertaking more competitive actions have superior performance. Continous innovation may be more important to competitive advantage than protection of assets.

Competition

Internet market is always in disequilibrium. Large firms are swept into a turbulent competitive rivalry that creates winners and losers. We can observe an inevitable destruction of the competitive status quo through new competitive moves by rivals. They can embrace innovation or immitation. Either or, the leaders will lose to more aggresive rivals if they not undertake any aggressive actions of their own.

Hypercompetition

According to D’Aveni hypercompetition results from the dynamics of strategic maneuvering amongst competitors. It can easily be observed in a fast-paced industries. In hypercompetitive environment all advantages are temporary and no industry position is secure. Competitors can easily copy an advantage from the other firms; it simply becomes the cost and risk of doing business.

Firm performance is an outcome of a continous series of competitive actions. Speed allows companies to disrupt the status quo, because it creates new advantages before competitors are able to preempt these moves. Speed is negatively correlated with complexity, thus there is a danger of simplicity. Simple actions become predictable and can be easily immitated.

Successful firms ”hit” competitors from several different directions at once. Market-leader choosing a complacent strategy may lose its position, being vulnerable to more aggressive challengers.

Competitive Dynamics

The interplay of actions and response and their implications on firms’ performance is defined as competitive dynamics

Firm aggressiveness is the outcome of three factors:

• Timing/speed 
• Frequency 
• Range/complexity 

Timing of action

A company that is first to introduce a new product/service, or first to enter a market, may gain competitive advantage. The advantage may be derived from:

• Monopolistic profits 
• Technological leadership 
• Establishment of brand loyalty 
• Establishment of buyers’ switching costs 
• Economies of scale 
• Learning and experience 

The durability of such advantages is largely determined by the speed of imitation by the competitors. According to Lee et al (2000), "the faster a firm introduces a product, relatively to its rivals, the greater is the impact on shareholders’ wealth". However these advantages can be completely eroded by the sum effect of early and late imitations. Ferrier et al (1999) says that the "industry leaders were more likely to maintain their market share by acting fast against challenges". Challengers who act faster than leaders tend to gain market share.

What about the second mover?

In some cases it is actually the second mover or the imitator who has a better performance. The reason for that is the learning from the first mover mistakes and the ability to create a better product/service through reverse engineering or other methods.

It is very important to note that though the theory stresses the importance of quick reaction/imitation, it is undeceive regarding the benefits of being a pioneer.

Number of actions

Firms take actions in the pursuit of profits and untapped market opportunities. Generally, firms taking more actions are expected to exploit more opportunities and have better performance.

According to Ferrier et al (1999) "market-share leaders were more likely to be dethroned by challengers or to lose market share when they are less competitively aggressive". We expect aggressive firms, those carrying out more competitive actions than rivals, to have better performance than their competitors.

Competitive repertoire

To gain advantage, firms should constantly develop new types of actions. Firms carrying out a broader variety of actions are expected to perform better because they will be perceived as more capable and may be less predictable. On the other hand, a simple repertoire of actions may be too predictable and may erode a firm’s competitive position.

As Ferrier et al (1999) has found in his research "market leaders using a narrower set of actions (relatively to their challengers) experienced market share erosion and dethronement".